Wealth and Want
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Buildings, be they residential or commercial, are different from land. While land's value rises over time — with increases in population, with public investment — the value of a building declines over time. (A June, 2006, Federal Reserve Board study pegs annual depreciation on single family homes at 1.5%.) Homeowners at some level know this: they spend their money or their leisure time combatting the deterioration that comes with time to all things manmade — a house's systems deteriorate, the technology and configuration and collection of rooms which may have been the newest and most preferred at the time the house was built are superseded by newer technology, or a different set of rooms, or a better set of materials.

More extreme weather patterns may call for the use of new technologies or new standards in order for buildings to better withstand wind or even earthquake activity. Homes which were built to older standards may tend to be less insurable, as the FIRE sector seeks to minimize its risk.

Neighborhoods change. The central business district of a small city might have consisted of two-story buildings in 1950, but by 2000, they might have been replaced by four-story buildings. The neighborhood diner which might have been highly appropriate 50 years ago now represents an underuse of the site.

When our incentives are such that landholder have no particular encouragement to redevelop obsolete buildings, one of the results is sprawl. Another is a less healthy marketplace, with fewer jobs, fewer products available, fewer competitors, higher prices. Fix the incentives, so that landholders are encouraged, both by carrot and by stick, to redevelop their land, to keep it near its highest and best use. The healthiest cities are those that are being constantly redeveloped. It needn't cost the public sector anything. Just remove the disincentives to redevelop the sites (by reducing or eliminating the millage rate on the buildings) and provide the incentive to put them to their highest and best use (by increasing the millage rate on the land itself).

H.G. Brown: Significant Paragraphs from Henry George's Progress & Poverty, Chapter 4: Land Speculation Causes Reduced Wages

If the land of superior quality as to location were always fully used before land of inferior quality were resorted to, no vacant lots would be left as a city extended, nor would we find miserable shanties in the midst of costly buildings. These lots, some of them extremely valuable, are withheld from use, or from the full use to which they might be put, because their owners, not being able or not wishing to improve them, prefer, in expectation of the advance of land values, to hold them for a higher rate than could now be obtained from those willing to improve them. And, in consequence of this land being withheld from use, or from the full use of which it is capable, the margin of the city is pushed away so much farther from the center. ... read the whole chapter

Nic Tideman:   The Case for Taxing Land

I.  Taxing Land as Ethics and Efficiency
II.  What is Land?
III.  The simple efficiency argument for taxing land
IV.  Taxing Land is Better Than Neutral
V.  Measuring the Economic Gains from Shifting Taxes to Land
VI. The Ethical Case for Taxing Land
VII. Answer to Arguments against Taxing Land

There is a case for taxing land based on ethical principles and a case for taxing land based on efficiency principles.  As a matter of logic, these two cases are separate.  Ethical conclu­sions follow from ethical premises and efficiency conclusions from efficiency principles.  However, it is natural for human minds to conflate the two cases.  It is easier to believe that something is good if one knows that it is efficient, and it is easier to see that something is efficient if one believes that it is good.  Therefore it is important for a discussion of land taxation to address both question of efficiency and questions of ethics.

This monograph will first address the efficiency case for taxing land, because that is the less controversial case.  The efficiency case for taxing land has two main parts. ...

To estimate the magnitudes of the impacts that additional taxes on land would have on an economy, one must have a model of the economy.  I report on estimates of the magnitudes of impacts on the U.S. economy of shifting taxes to land, based on a mathematical model that is outlined in the Appendix.

The ethical case for taxing land is based on two ethical premises:  ...

The ethical case for taxing land ends with a discussion of the reasons why recognition of the equal rights of all to land may be essential for world peace.

After developing the efficiency argument and the ethical argument for taxing land, I consider a variety of counter-arguments that have been offered against taxing land.  For a given level of other taxes, a rise in the rate at which land is taxed causes a fall in the selling price of land.  It is sometimes argued that only modest taxes on land are therefore feasible, because as the rate of taxation on land increases and the selling price of land falls, market transactions become increasingly less reliable as indicators of the value of land.   ...

Another basis on which it is argued that greatly increased taxes on land are infeasible is that if land values were to fall precipitously, the financial system would collapse.   ...

Apart from questions of feasibility, it is sometimes argued that erosion of land values from taxing land would harm economic efficiency, because it would reduce opportunities for entrepreneurs to use land as collateral for loans to finance their ideas.  ...
Another ethical argument that is made against taxing land is that the return to unusual ability is “rent” just as the return to land is rent.  ...

But before developing any of these arguments, I must discuss what land is. ...

As with negative externalities, the fact that labor and capital are not perfectly mobile means that not all of the effects of activities with positive externalities are reflected in land values.  And to the extent that labor and capital are affected, negative effects are likely to be more prominent than positive effects.  Consider structures.  If an existing structure is efficient for the current pattern of surrounding land uses, and if new use of surrounding land raises the value of the land under the structure, then the structure can be expected to thereby become suboptimal.  The pre-existing structure is generally not as intensive a use of land as would have been chosen with knowledge of the new activity.  Therefore the economic life of the pre-existing structure (the time until it is efficient to demolish it) is shortened by the new activity that increases land value.  Even though rent per square foot of built space rises, the rise is not enough to offset the increase in land value, which presumes the newly efficient size for a structure, thereby reducing the amount of the current return that is attributable to the existing structure and pushing the structure toward obsolescence.

A similar phenomenon occurs with respect to the personal value that people attach to locations, what might be called ‘location-specific human capital’.  If all persons had equal demands for all locations, there would be no location-specific human capital.  But incomes, tastes and personal histories differ, leading to differing personal values for locations.  Famil­iarity with a location tends to lead people to attach a special value to it, a value that tends to be lost if the characteristics of the location change.  Thus a change in land use that raises surrounding land values will generally reduce the location-specific human capital of the residents of that area.  One example of this phenomenon occurs when a neighborhood is ‘gentrified’, and the prior residents of modest means can no longer afford to live there and must seek other housing options that are less attractive to them than the opportunities they lost.  This represents a reduction in their location-specific human capital.  Read the whole article
Herbert J. G. Bab:  Property Tax -- Cause of Unemployment  (circa 1964)
... A defect of our property tax system that is seldom mentioned is that it puts a premium on obsolescence and penalizes new housing. This is so because property taxes are ad valorem taxes. Every piece of real estate except land is subject to depreciation. Thus the owners of old and obsolete real estate will pay little in taxes, while newly constructed buildings will bear the brunt of the tax.

This characteristic of the property tax is obscured by the rising trends of land values, which in many cases offset the loss in value of the improvement. Increases in tax rates and differences in assessment procedures and practices further hide the fact that ad valorem taxes favor obsolete real property. ...

As has been mentioned before, ad valorem taxes by their very nature put a premium on obsolescence. It is in the power of the Federal Government to convert the ad valorem tax into an incentive tax, a tax on obsolescence. Read the whole article

Charles T. Root — Not a Single Tax! (1925)

An illustration has already been given of the case of a piece of farm land. Let us take an example in a large city. Let us take a corner lot centrally located in New York City, the title to which lot is held by, say, Mr. John William Rhinelastor. This lot was a part of an old Dutch farm, and is an heirloom. It did not cost the present owner anything, nor his father nor his grandfather. There is a little old building on it, which has always been rented at a figure ten times as large as the taxes imposed, so that the owner has been handsomely subsidized each year for storing his title-deeds during a period of the city's growth in which the increase in population and the expenditure of public money in that neighborhood have raised the value of this corner location to, say, two hundred times its early value. ...

But — and right here is one of the prime advantages of the abolition of taxation — Mr. Rhinelastor, in order to get satisfactory return from his land, must improve it. Unless he is satisfied with a small income from it, to wit, the proportion of the economic rent which the community chooses to leave in his hands, he must put upon his land the best building the location will warrant. The rents of this building will be his in their entirety, not one dollar of them being taken from him by taxation. If he is not prepared or not willing to do this he would probably find it more profitable, before he leaves the country, to sell the land to some one of the many persons who are eager to build upon it. It will always be salable, although not by any means at present figures.

Now imagine for a moment the effect upon the appearance of a city and upon the comfort of its population which would result from the change of fiscal policy which this article proposes. At present, a tempting premium is placed upon keeping land unimproved or inadequately improved, while a heavy penalty is imposed upon improvement. Most land appreciates constantly. All buildings depreciate from the moment of completion. Yet the building is taxed equally with the land.

What incentive does such a system offer the speculative landowner to put up a commodious, well-lighted modern structure in place of the old ruin which now pays him so well? The old one cannot depreciate much more, and while paying a trifling tax because of its physical worthlessness, he is thereby enabled to collect and pocket the economic rent of the ground, which the community is continually rendering more valuable. The new building would absorb a large amount of capital, would begin to run down even before it could be occupied, and would be taxed to the limit. Why then is not the landlord justified in letting well enough alone, enjoying the growing economic rent, and waiting till he can get a fancy price for the right to collect it?

But reverse the conditions. Reclaim for the community its natural income, making it expensive either to keep needed land vacant or to withhold it from the ready and willing to improve it to the full extent of its possibilities.

Does it require severe intellectual effort to foresee the results? Better and better houses, apartments, tenements, offices and stores, more employment for labor in all enterprises now held back by the shadow of the tax-gatherer, an end of all tax-lying, tax-evasion and tax-injustice, and withal, a public revenue adequate to all real public needs.

What a contrast to the existing plan of pouring public money into the laps of individual landowners to their own moral disadvantage and that of their children, as well as the economic disadvantage of their neighbors, while constantly cudgeling the civic brains, straining the public credit, impoverishing widows and orphans, and increasing the exactions from every citizen and corporation that can be caught, in the effort to raise more and more money to bestow upon the same beneficiaries. ... read the whole article

Mason Gaffney: Property Tax: Biases and Reforms

It is equally important to use the "Building-Residual Method" of allocating value between land and buildings. This means you value the land first, as though it were vacant, based on highest and best use. You subtract this land value from the total value of land-&-building as currently improved: the residual, if any, is building value.

Valuing one lot or parcel this way, you have information needed for valuing neighboring and other comparable parcels. Using a map with value contours, you can value a whole city this way with surprising ease and speed.

Using this method, I valued Milwaukee land in 1963 and 1967. The building-residual method nearly tripled the land values reported by the City Assessor, who was using the assessor's usual inconsistent mix of various other methods. How's that again? Did I say tripled? Yes, I really said "tripled." By his methods, buildings on the eve of demolition were carrying values higher than their sites; by the building-residual method these old buildings had no value at all, which of course is why they were being torn down. Besides depreciation and technological obsolescence, many buildings suffered severe "locational obsolescence," owing to shifting demand patterns. The land was re-usable, and had as much or more value without the extant buildings.

Using the building-residual method requires no change in present laws. It is within the latitude of assessing officials, who, in turn, respond to public opinion. The conscientious citizens' move is to educate and bring pressure, just as the old single-tax campaigners like Jackson Ralston did. In the process of "losing" they won over half of what they sought, just by taking a stand and making the effort.  ... Read the whole article

Mason Gaffney: Sounding the Revenue Potential of Land: Fifteen Lost Elements
3. The Land Fraction of Real Estate Value (LFREV) is much higher than standard modern sources show.  On most assessment rolls the value of old “junker” buildings, on the eve of demolition, is listed as higher than the land under them. This betrays the erroneous use of the “land-residual” method of separating land from building values. It should be obvious that the old junker has no residual value: that is why it is being junked. Junking is continuous in enclaves of high value like Kenilworth, Illinois, or Beverly Hills, California. “Locational obsolescence” is the key concept. The high and growing value of the underlying site cannibalizes the residual building value. ...   Read the whole article

Mason Gaffney: The Taxable Capacity of Land
How does one come to so startling a finding? Wisconsin is not a backward state. It prides itself on the high quality of its public administration. What I did was study sites on the eve of demolition.

When you buy an old junker to tear down and replace with a new building, you (the market) are obviously recognizing that the building has no residual value. All the value is then in the land. However, in Milwaukee in 1969 the Assessor was saying the building was worth about three times as much as the land, just before tear-down. That is a good way to measure to what extent land is underassessed.

Try that in Manhattan. When the visitor first gapes at its skyline from afar, it looks like one big modern high-rise. If you poke around on foot much, though, you soon realize those are the exception. Most of the lots are covered with obsolete junk, some of it tumbledown, commanding rents mainly for their location value.

Check the Empire State Building. Old as it is, it is still nearly the tallest building in the world. As to its site, it is in a so-so reach of 5th Avenue (34th Street), many blocks from the 100% location (57th Street, I would guess). Even so, when the site and the building sold in separate transactions a few years ago, the site represented 1/3 of the total value. What does that say about the land fraction on neighboring parcels, covered only with the remains of ordinary old structures? What does that say about the land fraction nearer the 100% location?  ...   Read the whole article

Ted Gwartney:  A Free Market Strategy to Reduce Sprawl
  • Unused land is far more abundant than we realize.
  • End the Public Subsidy of Land Speculation and Sprawl
  • Counterproductive growth limitations and regulations should be abolished.
  • A Strategy for Urban Renewal
  • A Strategy for Economic Development
  • Public Finance by Self-Financing
...What is needed is a continuously self-renewing city and a public policy that can work effectively. Buildings have a limited useful life. Continuous maintenance and frequent retrofitting sometimes extends this life span. Other buildings reach a point where they should be replaced. Some buildings sit vacant for decades even in the city's central business district. Valuable parcels of land are left undeveloped or paved over and used as surface parking lots. The result is a lower tax base and an eyesore.

As urban buildings deteriorate, owners often don't renovate, remodel or make repairs because their property tax may rise. Thus the typical property tax creates suburban sprawl and urban decay. Shifting the property tax off buildings and onto land reverses these processes. Taxing land more than buildings usually reduces taxes for homeowners.  ... Read the whole article

Michael Hudson: The Lies of the Land: How and why land gets undervalued
Turning land-value gains into capital gains
Hiding the free lunch
Two appraisal methods
How land gets a negative value!
Where did all the land value go?
A curious asymmetry
Site values as the economy's "credit sink"
Immortally aging buildings
Real estate industry's priorities
    * Its cost to citizens
    * Its cost to the economy

One obvious problem with the land-residual approach is that many buildings would not be rebuilt in their existing form. Occupancy use changes over time. In Lower Manhattan and many other inner-city areas, industrial factories, commercial loft buildings and even office buildings on Wall Street have been gentrified into residential properties. After New York City's near bankruptcy in 1975 over 40,000 manufacturing spaces in Manhattan were shifted from commercial to residential purposes. A similar conversion of industrial structures to residential or high-density commercial use is found in most large American cities. It is part of the economy's de-industrialization (euphemized as "the postindustrial economy"), as described for instance in Robert Fitch's The Assassination of New York. As formerly commercial and industrial districts have changed their character, site values have skyrocketed. That was all part of the Regional Plan developed early in the 20th century.

Many sites are worth more when they can be delivered vacant, any buildings are torn down, so that developers can start with a bare site. Buildings left standing are given new uses; most people would not want to reproduce these buildings as they are. For instance, Manhattan's highest-rent district until the World Trade Center bombing of September 11, 2001, was Tribeca, the downtown TRIangle BElow CAnal Street into which artists and other individuals (including myself) seeking large roomy spaces at low prices moved in the late 1980s. These buildings had lost their value after New York City almost went bankrupt and industry began to migrate. Many landlords simply walked away from their properties and let them revert to the City, which auctioned them off at distress prices. ... read the entire article

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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper