|Wealth and Want|
|... because democracy alone is not enough to produce widely shared prosperity.|
|Home||Essential Documents||Themes||All Documents||Authors||Glossary||Links||Contact Us|
Property taxes are the most common way to fund many local services. In California in 1978, the voters opted for Proposition 13, which (a) limited the sales tax to 1% of the assessed value of each property; and (b) limited annual increases in assessed values to the lesser of 2% or the increase in the cost of living for the year, with the exception that upon the sale of a property, the assessment would be updated to the transaction price. The effects of this have been widespread and of great impact on the well-being of Californians.
The negative effects are wide-ranging. The injustices produced and the large land fortunes protected, are directly related.
California's schools have gone from being highly respected to being well below the middle of the pack.
Those who own slower-appreciating sites (inland, poorly located) aare carring a larger share of the tax burden than their share of the property value would merit. Those who have bought more recently are carrying a larger share than they should be — and they must also pay income and sales taxes, and parcel taxes, on top of that. Those who own waterfront or waterview properties, which appreciate much faster, are getting fabulous bargains on their property taxes— at the expense of those who own small, poorly located properties. Amazingly, the US Supreme Court has approved this! (One would like to think that, had they had the benefit of an additional 10 years of data, they could not have reached the same conclusion. They ruled in 1992.)
attempted to call attention to the iniquities and inequities of Proposition
13 during the gubernatorial race of 2003, but was ordered to silence,
kept until after the election. Proposition 13 is known as the third
rail of California politics. One would think that with a homeownership
rate of only slightly over 50%, this terribly unjust structure would
be politically vulnerable, especially in view of the evils it has produced.
A May, 2006, Federal Reserve Board study found that in the top 46 metro markets, land accounted for, on average, 50.9% of the value of single-family housing stock, in 2004. The study reported that in the remainder of the country, the corresponding value, for 2000, was about 27%. The 50.9% figure ranged from a low of 23.3% in Oklahoma City to a high of 88.5% in the San Francisco metro. (source: http://www.federalreserve.gov/pubs/feds/2006/200625/index.html; see particularly tables 6a through 6g.)
Proposition 13, and other legislation similar to it, are to be avoided at all costs by states and muncipalities and societies which claim to be run by rationality and/or by the golden rule. They have produced a state in which the poor labor to line the pockets of (1) those who own the land and (2) those who will lend them money to buy that land from them.
We, like you no doubt, are basking in the unearned increment of the land under our house, turbo-charged by tax-exemption. Two of our older children in Marin County are basking, too, and we take comfort in their well-being. We deserve this, right? Are we not of The Greatest Generation (how we love that toadying title)? But how will your grandchildren afford a home at today's prices? We get the increment, but they get the excrement. Oh, well, the plunging dollar, crumbling infrastructure, far-called navies and troops melting away, soaring interest rates, higher taxes, incredible public debts coming due ... it'll all be different soon. We may all grow poor together.
— Mason Gaffney, correspondence (used with permission)
Warren Buffett and California's Proposition 13
... these figures mean that the tax rate on the second house -- same neighborhood, same owner, same ability to pay -- is roughly 10 times the rate on the first house. ...
For example, the statement in the editorial's second paragraph that "no doubt the non-billionaires in Chico will appreciate Mr. Buffett's generosity with their cash flow" would make no sense if the writer had understood that I was criticizing the inequities within California. My sympathies are clearly with the "non-billionaire" family purchasing a $300,000 house in Chico today that faces real estate taxes materially higher than those borne by this non-resident billionaire on his $4 million house in Laguna. This family, because of Proposition 13, has been selected to subsidize me.
The Journal's editorial page was not the only medium that drew incorrect and incomplete inferences from the story. The Omaha-Laguna comparison rocketed around the world accompanied by commentary that I was suggesting raising property taxes in California, with no mention at all that I was arguing they needed to be made more equitable. ... Read the whole articleMason Gaffney: Full Employment, Growth And Progress On A Small Planet: Relieving Poverty While Healing The Earth
Territorial expansion: Regional cross-subsidy, with subeconomic extension of public works and services. George’s critique of land speculation came to be focused on “Speculator Type #1,” who withholds good lands from timely use. Georgists have neglected to condemn the counterpart “Speculator Type #2,” who acquires marginal lands cheaply, and then lobbies public agencies to extend roads, utilities, military and police protection, and other public services to them, below cost.
Some Georgists may even see this as a legitimate way, and an easier way, to combat the artificial scarcity of land that Speculator Type #1 causes – a way of perpetuating the “frontier safety-valve.” However, it unbalances development severely: too much roading, et al., too little use of the land thus “opened up.” Some taxpayer must pay for the roading et al. If the taxes are activity-based or improvement-based (i.e. anything but land taxes) they will sterilize marginal land, and lower the intensity of use of all land. ...
In my political experiences, one collects more cuts and bruises combating Speculators Type #2 than Type #1. I was, for example, able to lead the local countywide campaign against Howard Jarvis’ “Proposition 13” without being seriously punished, but a few years later when I led the campaign against southern California’s favorite public water-works boondoggle, the “Peripheral Canal,” my academic and professional world collapsed about me. Earlier, when I joined the furor against American imperialism (Gaffney, 1971) and the myth of infinite natural resources (Gaffney, 1972), I became persona non grata at Resources for the Future, Inc., where I then worked. In British Columbia, 1975, I learned that the self-styled “socialist” government under Premier David Barrett was unwilling even to consider withdrawing any of its expensive cross-subsidies to speculators Type #2, and resented me for raising the issue. The moose-pastures of northern B.C. “are a mighty empire,” they told me, and the rich retirees on the Gulf Islands are important constituents who should have both their subsidized ferry service and their exclusionary zoning to keep hoi polloi from sharing it. I have war stories, but the objective point is that the socio-political bias for territorial expansion is even stronger than the bias against cultivating, intensifying and renewing our internal frontiers. The Georgist dream of taxing central rents to finance public services becomes a nightmare when the public money is dissipated in enriching Speculators Type #2. This kind of spending not only dissipates rents, and wastes capital, at the same time it despoils the environment. Worst of all, as the subeconomic land development proceeds, each new settlement makes a platform for the next, so there is no end to it short of the limits of capital and of Earth. It is perhaps fortunate for Earth that, historically, the limits of capital have been reached first, at the ends of bursts of territorial overexpansion. Read the whole article
Henry George: The Common Sense of Taxation (1881 article)
Mason Gaffney: Megabucks for Negabucks: Solving the Water Crisis
There’s more than one way to skin a cat. When Henry George wrote “We must make land common property” it was in a place and at a time when most land in sight had been privatized only recently, using crude methods. “Force and fraud” were not dim memories in 1879, but a living presence. So George’s phrase did not strike people then as being any more shocking than it is today to remind them that the public domain, with its pasturelands, waters, rights of way, the air, radio spectrum, fish, mineral riches and timber, belongs to us all in common. Today, to replicate George’s impact, we would do well to train our sights on the public domain that is currently being privatized. ...
The California Constitution and Water Code, like those of most states, are explicit that “The waters of California belong to the people of California.” Water is not private property, evidenced by its not being taxed as such (except indirectly, as it adds to the value of fee simple land). Water is not, therefore, subject to the limits that Prop. 13 (and cognate laws in other states) impose on property tax rates. The State, as owner, can presumably charge whatever the legislature decides, without its being considered a tax at all. Water claimants would of course resist strenuously, with all the lawyers and pawns and media that money can buy, and social pressure sway, but the public has a strong case. ... Read the whole article
Mason Gaffney: The Partiality of Indexing Capital Gains
Tantamount to ignoring land is minimizing its weight. Thus one may acknowledge it indulgently, while actually dismissing it. In fact, though, land comprises some half the assessed value of taxable real estate in California, and is not dismissable. Half the assessed value means more than half the market value because of assessment discrimination favoring land. A raft of studies of assessment discrimination, like the sales/assessment ratio studies of the U.S. Census, show consistent patterns of discrimination favoring land. In addition to ordinary assessment discrimination there is much legislated underassessment, for land in forest, farm, country club, and other favored uses.
[An interesting recent case involves Charles H. Keating, Jr. of Arizona. He and Kemper Marley posed as farmers to secure "millions of dollars in agricultural tax breaks on land they planned to develop." The breaks result from lower assessed land values for "farmers." [Steve Yozwiak, "Land-tax bill OK reached," The Arizona Republic, 13 April 89.]
Most states legislate similar loopholes, widely used by suburban land speculators. More generally, the effect in California of Prop. 13 is to keep much land assessed not much above its 1978 valuation.] If that data were not enough, most of us resident in California have been through one or more years since 1976 when the value of our homes alone rose by more than our annual salaries. [As early as 1970 it was possible to document a high share of land value in national wealth: Mason Gaffney, 1970, "Adequacy of land as a Tax Base," in Daniel Holland (ed.), The Assessment of Land Value, Madison: University of Wisconsin Press, pp. 157-212. The theme is further developed in the writer's "Why Research Farmland Ownership and Values?", 1985, in T.A. Majchrowitz and R.R. Almy (eds.) Property Tax Assessment, Chicago: U.S.D.A., I.A.A.O, and The Farm Foundation, pp. 91-109.] ... read the whole articleMason Gaffney: Taxation of Interjurisdictional E-Commerce
What would happen in California if we eliminated the sales tax, and replaced it by raising the property tax?
A. No catastrophe
Five states and the Province of Alberta already get along nicely with no sales tax, so it must be possible. No state at all had a retail sales tax before 1929 (GA).
The A.V. value of land is probably about 1/3 or so of market value; buildings are closer to market.
B. Greater equity: The distribution of the tax burden would shift from poor counties to richer ones.
Thus, the state sales tax takes a lot more money from the poor counties than it would cost them to replace the services from local taxes; the rich counties, with the high property tax bases, are contributing less to the common pool than they are saving in property taxes.
Within counties, by extension and analogy, I am reasonably certain that a careful study will show that the burden would shift from poorer cities and districts to richer ones. Again, among individuals, I believe we would find the same. One of these days, God willing, I will find the time and money to conduct or sponsor such a study.
The relevance here of this equity question is that most states and provinces have complex and expensive systems and formulae for "power equalization," and the like, designed to shift resources from rich counties to poorer ones. One reason such programs are needed is to offset the effects of the very same state sales taxes used to finance them. There are great savings to be realized by quashing this cross-hauling of public funds. Read the whole articleMason Gaffney: Unearned increments and reality in California's recall election
California homeowners are wallowing in unearned increments beyond the dreams of avarice, while its governments are courting bankruptcy. Warren Buffett dared point this out, and overnight changed from the Oracle of Omaha into the Numbskull of Nebraska because he does not understand the "reality of California politics," the oxymoron du jour.
Most candidates for Governor fled like startled deer. Buffett's sponsor, well-tailored Mr. Muscles, recalled meeting a tearful widow who said she would have been taxed out of her home were it not for Prop 13. Poor thing, her home had risen in value. No one asked her name, or whether she knew what she was talking about, or had her claims audited - being a tearful widow "on a fixed income" insulates one from reality checks. The press chimed in with pix of poster oldsters, gazing from their multi-million dollar perches over the blue Pacific, fretting about Buffett's solecism and its possible effect on them, never mind anyone else.
Fact is, unearned increments ARE income, at the time they accrue. Illiquid? They are better than cash income because you can turn them into cash by borrowing on them, and pay no income tax on the cash. If you have trouble with that, the tax man himself will arrange it for you by placing a tax lien on your appreciated home, rather than foreclose and evict you. This helps explain why we never actually see one of these evicted widows suffering from unearned increments -- they are maudlin figments for mythmakers. The evictees we do see are renters who couldn't pay, and had no equity to mortgage. Who cries for them? ...
Only Cruz Bustamante has proposed any specifics. He would begin dismantling Prop 13 -- still not menacing the mythical widow -- by raising assessments on industrial/commercial property. A whispering campaign right off has it that Bustamante is leading an Hispanic conspiracy to take over the southwest and turn "white, European" Americans into a minority to kick around. We observe mixed marriages on every hand, and Spain is still European, but this is California, where "reality" means mythology. May Warren Buffett continue to get in our faces with facts.... Read the whole articleMason Gaffney: California's Governor-Elect
For better or worse, California has recalled its governor and elected Arnold Schwarzenegger (A.S.) to replace him. A.S. has revealed no specifics of how he will stanch our deficit. He campaigned on generalities: he is against taxes, against waste in government, against measures to rein in vehicle use, and nostalgic about the good old days when Governor Pat Brown was spending heavily on roads and water projects. No one seems sure how he will connect the dots. After his first visit to Sacto last week, he seemed not sure, either.
His choice of advisors, however, tells us A.S. will repeat Pete Wilson's performance from the early 1990s. Chief of Staff Patricia Clarey is a good soldier from Wilson's old staff; Auditor Donna Arduin is from Jeb Bush's Florida. The gurus who set the doctrinal tone give the clearest hints: they are neo-classical economists of deepest dye. These are advisors George Shultz and Michael Boskin from the Hoover Institution. Economics, to them, is a set of dismal choices. California's choice is to cut public services, or lose business and jobs. That is what they told Wilson in 1994. All taxes are the same, always "burdens," always driving away "business." ...
Boskin and Shultz, posing their dismal choice for California, dismissed by silence that we can raise needed revenues while also spurring job creation and stimulating the economy. It is simple: restore that part of the property tax that falls on land, while continuing to cap the rate on buildings. ...
It is also alleged that land values are too small to support government. Let us test that idea. In 2003, at the current rate, there will be about 15,000 "confirmed" sales of owner-occupied urban California residences at prices over $1 million. That is from DataQuick, a standard source of current real estate data. 15,000 is about 2.7% of all confirmed sales. Some of those go much higher. The mean is probably over $2 million.
Turnover of costlier homes is lower than that of ordinary homes. (For example, turnover of existing homes is 30% greater in Riverside County, with lower values, than in Orange County, with higher values.) 2% a year is a fair guess at the turnover of homes valued at $1 million or more. If so, there are 50 x 15,000, or 750,000 homes in Calif valued at a mean $2 millions. Their aggregate value is 750,000 x $2million = $1.5 trillions.
These are not large buildings: they average 2864 s.f., with 4 bdrms, 3 baths. In the north end of Sta. Monica, a vacant lot alone is over $1m. They are not new buildings: only 9% are new. It's the land that makes them worth so much.
A tax of 1% on that value would yield $15 billions a year. That's from only 2.7% of the urban homes in Calif. The data exclude many sales, country manors, for example. Some well-known lands thus excluded are
There is also the other 97.3% of urban owner-occupied residential real estate. A lot of it is just under $1 million a pop. In Marin County, the median sales price of owner-occupied single-family homes was $700,000 when last seen, and rising. The mean is always higher than the median. Some L.A. County cities with median values just under $1 million include San Marino, Bel Air, Westwood, Brentwood, La Canada, Calabasas, and others. There is also all the other land: commercial, industrial, farm, forest, etc., which is 60% of the assessed property value in California, and a much higher fraction of the real value because it is so egregiously underassessed. ...
A high fraction of California real estate is absentee owned. The Sultan of Brunei, for example, owns several houses and sites in Beverly Hills and Bel Air. California's official Legislative Analyst, the highly respected William Hamm, estimated in 1978 that over fifty per cent of the value of taxable property in California was absentee-owned. ...
Some half of any reduction in California property taxes leaks to out-of-state owners. Nor is this the only leakage. ...
Yet no one has seized on this obvious case to show that local property taxes, substituted for absentee rent payments, creates multiple increases in local income. The whole intellectual apparatus is dominated by absentee investors and used for their benefit.
Many valuable land resources are held by license, rather than title, and escape the property tax almost entirely. ... Read the whole article
Mason Gaffney: What happens when a state radically slashes its property tax?
Michiganders are saying they must wait and see, but there is no need for that: California can show you 17 years of experience. To read your future, just study our past. Here is what has happened since California passed Proposition 13 in 1978.
The obvious direct results have been to cut public services, raise other taxes, and lose credit rating. ...
The private sector is doing badly, too. Raising income taxes, business taxes, and sales taxes is no way to stimulate an economy; they are all a drag on work and enterprise. ...
It should give one pause. It is, however, if you think about it, the expectable result of what the voters did.
The predictable result is to inhibit economic activity, and encourage holding wealth inert and stagnant.
David Shulman tersely summarized the distributive effects of Prop. 13 as he left us for Salomon Brothers in Manhattan: "it breached the social compact." ...
1/8 of all new businesses started in the U.S. were in L.A., 1945-50. These were small, creative, flexible, and too varied to classify. No Linnaeus could sort them in conventional categories: the new Angelenos simply stayed here and started producing everything for themselves, some things previously imported, and others never seen before. ...
Why is that not happening today, 1995? An invisible, pervasive change is Proposition 13, which makes it possible to hold land at negligible tax cost. In 1945 land was taxed at 3% every year, building a fire under holdouts to turn their land to use. Today that same tax cost is well below 1%. Using Gwartney's Rule of Thumb (see below under B,1), it is about 1/8 of 1%: a rate of 1% applied to 1/8 of the true value.
Landowners are only taxed now if they use their land to hire people and produce something useful. Then they meet the drag of our high business and employment and sales taxes, necessitated by the fall of property taxes. A handful of oligopolistic landowners control most of the market; small businesses are squeezed out. This helps us segue from being at the cutting edge of industrial progress to a third-world economy - from the NH model to the AL model - with little relief in sight. ...
California displayed amazing growth up to 1978, and the resilience to shrug off the loss of war industries after 1945 and still grow "explosively" (as Jane Jacobs put it). After 1978 we have a string of reverses. The timing, along with a priori causative analysis, plus various direct observations too numerous for this time-slot, support an hypothesis that the reverses were aggravated by Prop. 13. Michigan, be warned of our lot, and learn about taxes from us: "This Could Happen to You." Read the whole article
Mason Gaffney: The Partiality of Indexing Capital Gains (1990)
Now we are witnessing a major effort to revive the exclusion of part or all of capital gains from taxable income, partly on the grounds that much of the gains are "phantom" income, an illusion of inflation. ...Fred Foldvary: Geo-Rent: A Plea to Public Economists
Land is not formed, like capital, by saving and investment; land is not reproducible. For that very reason land tends to appreciate, and therefore has to be a major source of what are misleadingly called "capital" gains. Again for that very reason, there is no supply-side kick in untaxing gains. Most of them are land gains, and should be called that. To use land as a store of value is macro-economically unproductive at best, and on balance counterproductive and destabilizing (considering its effect on financial institutions like the S&Ls). ...
As to borrowing on land, that can be worse than barren when the financial system rises and falls on a land bubble, as it has and is. ...
Ignoring land and its distinctive attributes has the effect of treating land as though it were true, reproduceable capital, to be formed by saving and investing, to be routinely worn out and replaced in the normal course of life and business. It lets advocates of investing and capital formation abuse the legitimate case for macro incentives, exploiting the case to camouflage unearned, nonfunctional rents and increments to land value.
Tantamount to ignoring land is minimizing its weight. Thus one may acknowledge it indulgently, while actually dismissing it. In fact, though, land comprises some half the assessed value of taxable real estate in California, and is not dismissable. Half the assessed value means more than half the market value because of assessment discrimination favoring land. A raft of studies of assessment discrimination, like the sales/assessment ratio studies of the U.S. Census, show consistent patterns of discrimination favoring land. In addition to ordinary assessment discrimination there is much legislated underassessment, for land in forest, farm, country club, and other favored uses. ///
... most of us resident in California have been through one or more years since 1976 when the value of our homes alone rose by more than our annual salaries. ...
We are not pushing for a general wealth tax, but for impartiality and accurate thinking about indexing capital gains, a policy that would protect some forms of wealth, but not others. This apparently temperate, common-sense proposal is in fact partial and discriminatory. Worse, it protects most where the macro social benefits are least. Read the whole article
Land values in many parts of the United States are very high, and one reason is supply-side restrictions. But much of the value reflects the capitalization of amenities. Today, government works are financed in large part by taxes on labor, profits, sales, and non-land real estate. The owners of land receive an implicit subsidy. This implicit subsidy is of great empirical importance, yet is not discussed in microeconomics textbooks, and is usually ignored in the tax analysis in public finance. ... Read the entire articleMason Gaffney: Property Tax: Biases and Reforms
Priority #1. Safeguarding the property tax
Priority #2: Enforce Good Laws
Priority #3. De-Balkanize Tax Enclaves
Priority #4. What Tax to Fight First?
Priority #5: Make Landowners Pay Their Taxes
Priority #1. Safeguarding the property tax
What happens when a state radically slashes its property tax? Michiganders are saying they must wait and see, but there is no need for that: California can show you 17 years of experience. To read your future, just study our past. Here is what has happened since California passed Proposition 13 in 1978.
The obvious direct results have been to cut public services, raise other taxes, and lose credit rating.
Our fall of income pc (per capita) is greater than appears from a purely monetary measure. Real pay (in contrast $) has fallen more because of the drastic rise in shelter prices. In San Francisco, shelter takes 50 percent of the median income, with many other cities, especially coastal ones, not far behind. It is unusual to find livable quarters for less than $600 per month. The median home price rose 163 percent during the 1980s to $258,000 (that is just the median - the mean is higher). These prices are part of the C.O.L. of all renters and new buyers, a part not fully incorporated in standard CPI measures.
Some cities are in desperate straits. In 1976 San Bernardino was chosen an "AllAmerican City, A City on the Go." Go it did: today 40 percent of its people are on welfare!
California is earthquake country. But it has always renewed itself. It was different after the Northridge quake in the San Fernando Valley, January 1994. This is the uppermiddle neighborhood of Los Angeles, but now large pockets of ruined buildings remain, unreconstructed, inhabited by vagrants and criminals: an instant Bronx West. These ominous blighted sections portend the spread of more blight.
It should give one pause. It is the expectable consequence of what the voters did. They rejected the concept of taxing inert wealth in favor of the alternative: taxing liquidity, cash flow, work, production and commerce. The predictable result has been to inhibit economic activity, and encourage holding wealth inert and stagnant. They turned property from a functional concept into a sacred one; from a commission to be enterprising, hire people, produce goods, and pay taxes into a welfare entitlement.
California had a construction boom in the late 1980s, but it was not healthy. It was marked by extreme scatter and instability. Downtown L.A. was to become a great new financial capital. But it now has nearly the highest office vacancy rate in the U.S., with of course a high rate of builder bankruptcies. Speculative builders were led on to over-build, in part by anticipated higher land rents and prices. This Lorelei effect was magnified by national income-tax provisions luring on speculative builders. But we have to ask why California fell harder than other states, even with the object-lessons of the oil states in clear view.
David Shulaman tersely summarized the distributive effects of Prop. 13 as he left us to become Chief Equity Strategist for Salamon Brothers in Manhattan: "it breached the social compact." Alienation is the result, and the results of alienation are the Rodney King riots, arson and looting. (The consistent leader in death rate from violent causes is New Mexico, with the lowest property tax in the nation.) The Watts riots, you may object, preceded Prop. 13, and you are right. However, the Watts riots were part of a national epidemic. By 1967 there were riots with arson and looting in 70 or more American cities. The Rodney King riots were endemic to California, and they spread over a much wider area of Los Angeles than the Watts riots did. The looters and arsonists were not all black, and the targets were not all white, but mainly Korean-Americans who just happened to be there minding their stores.
Conventional wisdom now blames our California bust on the end of the Cold War. Surely that is a factor, but as a casual explanation, it is too pat, too easy and too convenient. It shifts the load onto impersonal historical forces - the Marxist world view. Let us see if it can survive analysis.
Compare today with 1945. Los Angeles' economy depended much more on The Hot War, 1940-1945, than it every did on The Cold War. Los Angeles' wartime boom had swelled its population as no other great city, 1940-45. After 1945 the U.S. pulled the plug on defense spending, more than today. Jane Jacobs, in The Economy of Cities, tells us what happened to military spending in Los Angeles after 1945. It lost 3/4 of its aircraft workers, and 80 percent of its shipbuilders. It lost its military and naval overseas supply and replacement businesses. Troops stopped funneling through. It got worse: petroleum and cinema and citrus, its traditional exports, all declined.
Pundits then forecast a regional collapse, but Los Angeles boomed instead. The wartime immigrants stayed. They formed creative, innovative small businesses in large numbers, giving L.A. its deserved reputation for having the most dynamic, flexible, adaptable industrial base in the nation. Besides exporting goods, L.A. also became more self-contained, providing itself with more of the goods it previously imported. How could this be? Angelenos had access to land, the basis of all supply and demand in any economy.
Between 1945-50, one-eighth of all new businesses started in the U.S. were established in L.A. They were small, creative, flexible, miscellaneous, and too varied and dynamic to classify. No Linnaeus could sort them in static conventional boxes; they were the despair traditional economic geographers and base theorists who were at a loss to explain the region's thriving economy. The new Angelenos stayed and started producing everything for themselves, some things previously imported, and others never seen before.
Eastern firms established branch plants. Top eastern students came to California's great university system and stayed behind to take jobs and make careers here, then sent their children through California's excellent public schools. California became famous for supporting outstanding higher education, highways, water supplies, public health, public safety, and other public services, all without repelling business by taxation. There was a regional "El Dorado Effect" as demand and supply grew together. Growing local demand allowed for economies of scale serving local markets. Food and shelter were cheap and abundant. Land for business was accessible, providing a basis for the California self-contained phenomenon. A "continental tilt" developed in both interest rates and wage rates, drawing in eastern capital and labor. Why is that not continuing today?
The invisible, pervasive change is due to Proposition 13, which makes it possible to hold land at negligible tax cost. In 1945 land was taxed at 3 percent every year, building a fire under holdouts to turn their land to use. Today that same tax cost is well below 1 percent. Using Gwartney's Rule of Thumb (see below under #2, A, "Reassessing Land Frequently") it is about 1/8 of 1 percent: a rate of 1 percent applied to 1/8 of the true value.
Landowners are only taxed now if they use their land to hire people and produce something useful. Then they are confronted by the drag of our high business and employment and sales taxes, necessitated by the fall of property taxes. A handful of oligopolistic landowners control most of the market; small businesses are squeezed out. This helps us segue from being at the cutting edge of industrial progress to a third-world economy - from the NH model to the AL model - with little relief in sight.
What was different then? We had high property tax rates, but they were more focused on land than now, less on new buildings. Another obvious difference was the lower burdens of sales tax, business tax, and income tax. California was more hospitable to Georgist thinking than perhaps any other state, shown by its long run of Georgist political action in the prior thirty years. Most people today are totally ignnorant of this subject. It has been deleted from our history books. Here is a brief review.
Several states had "single-tax" movements and initiatives, 1910-14, but most of them petered out. In California they continued through 1924, and then popped up again in 1934-38. In 1934 the "EPIC" campaign of Upton Sinclair included a strong Georgist element - he proposed the establishment of new factories and farms on idle land. At the same time, Jackson Ralston was pursuing a pure land tax initiative, 1934-38.
Sinclair and Ralston lost. But the very existence of such political action in California, when the movement was torpid elsewhere, tells us a lot. It reveals a large matrix of supportive voters and workers, with effective leaders, to whom politicians (including elected County Assessors) would naturally respond by focusing on land assessments. Politicians survive by accommodating and absorbing dissident movements. Even while "losing," such campaigns raise consciousness of the issue. Thus, in California, 1917, land value constituted 72 percent of the assessment roll for property taxation.
This remained the California norm for years. California was different. Even into the 1960s, Sacramento County elected an avowed single-tax Assessor, Irene Hickman; San Diego County harbored an active movement for raising land assessments. The Henry George Schools of San Francisco, San Diego, Los Angeles and Sacramento were the most active such schools in the country: four in one state, when most had none. State Senator Al Rodd, Chair of the Senate Finance Committee, held hearings and tried to push land tax legislation through his Committee in the 1960s and early 1970s. He assigned a staffer, Jack Massen, to spend a year working out the detailed effects on intergovernmentai relations. Assemblyman Dr. William Filante, from a base of Georgist support in Marin County, picked up the torch too.
California displayed amazing prosperity and growth up to 1978. It had the resilience to shrug off the loss of war industries after 1945 and still grow "explosively" (as Jane Jacobs put it). After 1978 we suffered a string of reverses. The timing, along with a priori causative analysis, plus direct observations too numerous to review support an hypothesis that the reverses were aggravated by Prop. 13. Michigan, be warned: "This Could Happen to You.
Priority #2: Enforce Good Laws
Reassess Land Frequently
In California, where we used to have good assessment, we now have bad assessment legally mandated by Prop. 13. So long as land is unsold, and/or not newly improved, its assessment rise is capped at 2 percent a year, while market prices soar. Here is one example of the results. This year the Metro Water District of Southern California (MWD) condemned 410 acres for its new Domenigoni Reservoir to expand the system (to accommodate land speculators in the desert boonies). The jury hit them for $43 million, which works out to about $1.95 a square foot.
The question occurred to me, how does that square with the assessed value for property taxation? I asked Ted Gwartney, a professional appraiser with the Bank of America, to check the assessed value. It is about seven cents a square foot; The condemnation price, supposedly based on market value, is about 28 times the assessed value.
This is not the result of fractional assessment. In California we assess property at 100 percent when land changes ownership or there is a new building. Rather, this is the result of Prop. 13 and its prohibition of market reassessment until land sells.
I thought that was startling, but Mr. Gwartney's reaction was, "What else is new?" He, who works with such data every day, has a rule of thumb that market land value in California today is about eight times assessed value. That is important enough to repeat: our assessed land values are routinely at 1/8 of true land value. I wouldn't dare say that on my own authority, but Mr. Gwartney is here to confirm it. He is a veteran appraiser; for many years he was Director of Assessments for the entire Province of British Columbia.
Does this help you understand why California landowners are now so slow to adapt to new demands? In 1945 the assessors were building fires under landowners, so they sought new strategies to meet new circumstances. Today there remains a weak incentive to improve to improve property: tax collectors generally cost them money when they make improvements. Sit still, lie low, hire no one, hang on, produce nothing, and your holding costs are negligible.
A little of the old magic lingers. In October, 1995, a 225-acre parcel in Corona, the Chase Ranch, was sold to a builder, Coscan Davidson Homes, for building 967 units. The previous owners, "GGS," including a Japanese insurance firm, were "seeking a way out. They were behind in tax payments and GGS was losing its staying power,..." quoth Stephen Doyle, spokesman for the buyer. It is that "staying power" that stifles land use and production. Coscan wants to build immediately. Even so, though, they plan to take five years to build out the project - if everything goes well. This is the new, post-Prop. 13 meaning of "immediately."
In spite of extreme underassessment, the assessed value of taxable land in California is 40 percent of the total real estate value. Imagine what it would be if assessed values were real values, "marked-to-market,'' as the law used to stipulate. It would be over 70 percent, as in 1917. "Staying power" would go down; land use, jobs and production would rise.
Use the Building-Residual Method of Allocating Value Read the whole articleTed Gwartney: Estimating Land Values
Land, in an economic sense, is defined as the entire material universe outside of people themselves and the products of people. It includes all natural resources, materials, airwaves, as well as the ground. All air, soil, minerals and water is included in the definition of land. Everything that is freely supplied by nature, and not made by man, is categorized as land.
Land holds a unique and pivotal position in social, political, environmental and economic theory. Land supports all life and stands at the center of human culture and institutions. All people, at all times, must make use of land. Land has no cost of production. It is nature's gift to mankind, which enables life to continue and prosper.
Land's uniqueness stems from its fixed supply and immobility. Land cannot be manufactured or reproduced. Land is required directly or indirectly in the production of all goods and services. Land is our most basic resource and the source of all wealth.
Land rent is the price paid annually for the exclusive right (a monopoly) to use a certain location, piece of land or other natural resource. People receive wages for work, capital receives interest for investment, and land receives rent for the exclusive use of a location. Equity and efficiency require that the local general public, who created land value, should be paid for the exclusive use of a land site. That Payment is in the form of a land tax.
When considering world-wide economics, most people think that land rent contributes only a small insignificant portion of value. But as societies progress, land has become the predominant force in determining the progress or poverty of all people within a community. Land in major or cities is so costly that people are forced to move further away and travel great distances in order to get to work and social attractions. In the more developed countries of the world, land rent represents more than 40% of gross annual production.
Since land is fixed in supply, as more land is demanded by people the rent will increase proportionally. Demand is the sole determinant of land rent. Changes in land rent and land taxes have no impact on the supply of land, because the land supply is fixed and cannot be significantly expanded. Labor and capital are variable in supply. A higher price for commodities causes more labor and capital to make itself available. Labor and capital are rewarded for their work. A high price is an incentive to work harder and longer, while a low price is not an incentive to work harder and longer.
The rent of land, however, serves no such incentive function, because the supply of land is fixed. The same amount is available no matter how high or low the price. Buildings are not a part of land rent. Land rent results from the desire made by everyone who lives within a community to use land. Economic rent is the only source of revenue that could be taken for community purposes without having any negative effect on the productive potential of the economy. Economists consider rent to be a surplus payment which is unnecessary to ensure that land is available. When a community captures land rent for public purposes, both efficiency and equity are realized.
The economic market rental value of land should be sufficient to finance public services and to obviate the need for raising revenue from taxes, such as income or wage taxes; sales, commodity or value-added taxes; and taxes on buildings, machinery and industry. Public revenue should not be supplied by taxes on people and enterprise until after all of the available revenue has been first collected from the natural and community created value of land. Only if land rent were insufficient would it be necessary to collect any taxes.
The collection of land rent, by the public for supplying public needs, returns the advantage an individual receives from the exclusive use of a land site to the balance of the community, who along with nature, contributed to its value and allow its exclusive use.
Land Market Value is the land rental value, minus land taxes, divided by a capitalization rate. ...
Not only is land rent a potentially important source of public revenue, the tax on land is a means of limiting excessive speculation in land prices. This would ensure that the equal opportunity to be productive would be available to all citizens. With limited money to invest, people could invest in productive equipment and wages, rather than in high land prices which produce no additional tangible wealth. ...
What are the factors that cause land to have market value and to whom does this market revenue advantage properly belong? Land has market value for three reasons:
Land rent is the price that people and businesses are willing to pay for the exclusive right to possess and use a good land site for a period of time. For example, people prefer to use sites of good location because it gives them an advantage of spending less time in travel by being near what they choose to do and where they work. A businessman can sell more goods at a site where many people pass each day, compared to a site where only a few people would pass. The collection of land rent should be used as revenue, by the community for supplying public needs. This returns the advantage an individual land possessor receives from the exclusive use of a land site, to the balance of the people who live within the community and have allowed the land possessor the exclusive use of the land site for the period of time.
It is the responsibility of the local communities to insure that the market rent of land is collected for public purposes. When a major part of land rent is not collected, which is the case in most of the world today, land title holders obtain rights to sell the value of the public improvements which were made by the whole community. The community added to the market value of land by making improvements which increases demand and rent for the land. The longer the possessors hold the land out of use the greater will be the bonus they obtain. ...
Adam Smith, in The Wealth of Nations, suggested that any "tax" should be a charge for services which benefit all people and are more efficiently performed by a single cooperative effort. He postulated four principles of taxation which any source of revenue should meet:
1. Light on the production of wealth, and does not impede or reduce production;
Collecting public revenue from land rent is the only revenue source, or "tax", that meets these criteria.
While the major argument for raising public revenue from land rent and natural resources is because it is equitable and fair, it is also the most efficient method of raising the revenue which is needed for public facilities and services. Land is visible, can't be hidden and its valuation is less intrusive than valuations of income and sales. Taxes on labor and capital cause people to consider alternative options, including working with less effort, which produces less real goods. For example, a tax on wages will reduce after-tax net wages and weaken the incentive to work. A person might be willing to work hard for a wage of $20 per hour, but decide to drop out if the taxes take $8 and the net wage is only $12 per hour. Economists claim that present taxes account for a 25% loss in production in the United States. Production and consumption would be greatly improved if public revenue came primarily from land rather than a wage tax. The same would occur when buildings and machinery are taxed. The tax on building reduces the quantity and quality of buildings produced. A tax on sales, commerce or value added reduces consumption, production and net wealth. Sales tax evasion in the United States has exceeded 30% in recent years.
As new inventions and more efficient ways of producing goods are discovered, people's economic well-being is not improved, because they have lost access to land and must pay both rent and taxes. (5) Instead of rent being used to provide community services, capital and wages must be depleted, which obstructs private enterprise.
When the rent of land is taken for public purposes production and distribution are not held back. This is because the same amount of rent would otherwise have been taken by some private individual. The rent would be the same, the difference is how it is utilized. There is evidence that communities who raise their revenue from land, rather than from labor and capital, are more prosperous, many increasing productivity by more than 25%.
In order to preserve the environment, it is necessary and possible to better utilize our communities. If the producers of the land market value (nature, government and people) don't utilize land rent, someone else will. This is why efficient land use fails under contemporary land systems in most countries. All countries collect some of the land rent, perhaps 10%, 20% or 30%, but none yet, collect all of the market rent of land. ...
Cities which choose to collect land rent as their primary source of revenue have the advantage of not requiring burdensome taxes to be paid by workers, businesspeople, entrepreneurs or citizens. Individuals who work to create wealth should be allowed to keep what they produce. When labor is not taxed, greater production and consumption occurs. Investment capital is formed which is used to produce more wealth. New jobs are created and economic diversity results.
Each person has a right to keep what he or she produces, but no one has the right to waste what belongs to all people, the land which includes the natural environment. Each person should have an opportunity to use the best land for his business or personal needs, as long as they are willing to pay the land rent that other land users are willing to pay. ...
Not only is land rent potentially an important source of public revenue, collecting all of it would ensure that the equal opportunity to be productive would be available to all citizens. People could fund useful buildings, equipment and wages, rather than having to buy land at inflated prices. ... Read the whole articleMason Gaffney: Sounding the Revenue Potential of Land: Fifteen Lost Elements
Correcting for downward bias in standard data
1. Standard data sources neglect and understate real estate rents and values. These standard sources include:
a. Assessed valuations used for property taxation. ...
The question I am assigned is whether the taxable capacity of land without buildings is up to the job of financing cities, counties, and schools. Will the revenue be enough? The answer is "yes."
The universal state and local revenue problem today is whether we must cap tax rates to avoid driving business away. It is exemplified by Governor Pete Wilson of the suffering State of California. He keeps repeating we must make a hard choice: cut taxes and public services, or drive out business and jobs. (When a public figure gives you two choices you know they're both bad, and he wants one of them.)
The unique, remarkable quality of a property tax based on land ex buildings is that you may raise the rate with no fear of driving away business, construction, people, jobs, or capital! You certainly will not drive away the land. However high the tax rate, not one square foot of it will put on a track shoe and hop out of town. The only bad thing to say about this tax's incentive effects is that it stimulates revitalization, and makes jobs. If some people think that is bad, maybe this attitude is the problem.
There is the answer to Governor Wilson' dilemma. I hope here in The Empire State you will supply a practical demonstration of the answer, one we may then use to inspire The Golden State. California now, following Proposition 13, has become a morality play, a gruesome object lesson in what happens when the property tax is pushed down toward zero. It forces higher taxes on production and exchange. Non-property taxes, you know, mostly have the character that they "shoot anything that moves," penalizing and discouraging economic activity. New buildings gain by having a lower property tax burden, it is true; but they bear the brunt of these new taxes and impost fees up front, at the time they are built. These offset the benefits of their lower property tax rate.
Most California land, on the other hand, is now taxed at well below the allowable max of 1%. Speculators may sit on it at little tax cost, however many highways and water and sewer lines run to and past it, however many policemen are guarding it from trespass. Little wonder that California enterprise, once so dynamic, flexible, and vital, is giving way to stasis and decay. We used to lead the nation in making jobs; now in losing them. We used to lead in school quality; now in jail population.
The dearer the land parcels, the higher is the "land fraction" (the fraction of total real estate value that is land value). From such data, one might formulate a rule along the lines that "the lot value increases with the square of the house value." It is hard to be so precise, and not necessary. The relevant rule we need here is just that people's house values are more alike than their lot values. It is lot value, more than house value, that divides the rich from the poor.
Now do us both a favor, please. Pause and savor that comparison. Let it linger, as though you were testing a slow sip of wine from Fredonia's famous grapes. Roll it on your tongue, mull sensually over its aroma and bouquet, and, getting back to business, mull cerebrally over its full import. The house that shelters the very rich family is worth 2.8 times the house of the modest family; but the land under the house of the very rich is worth 17.5 times the land of the modest. Seventeen and one half times as much! Again, it is lot value, more than building value, that divides the rich from the poor. Seldom will you find an economic rule more strongly supported by data. It's just a matter of presenting the data so as to test and bring out the rule.
An American counterpart of Vancouver's "University Endowment Lands" is Beverly Hills, California, where land value composes some 80% of residential values, and the mean parcel is worth something like a million dollars. Beverly Hills, with its great wealth and mansions, is known as "Tear-down City." Every year many a grand old palace that once sheltered some renowned matinee idol, and rang to scandalous parties, is torn down to salvage its site for the next, grander one. In a land boom, such as crested in 1989, half the city goes to the brink of demolition and replacement. ...
Making the property tax more progressive is not just equitable, it raises its revenue capacity. That is because visible damage to the poor and marginal puts a cap on any tax. You can't squeeze blood out of a turnip, and if you try you'll look like the Sheriff of Nottingham. A land tax won't drive the poor from their humble huts, because it exempts the huts, and the sites have low tax valuations. It may tax a few off valuable land, if their poor huts are there and they own the land. However, if they own such land, are they really poor?
They may be "land-poor:" a few folks always are. They have non-cash assets, but are illiquid. "Illiquid" may be just a euphemism for "holding out for more" -- there is always a market at a price. Even so their plight, genuine or affected, traditionally evokes sympathy and support. We must address it.
California, although backward in many ways, has addressed it effectively. In our special improvement districts (SIDs), State law allows the SID to contract with the landowner as follows. You don't have to pay your annual charge in cash. If you choose not to, we take an equity in your property, charging a modest rate of interest. Our equity accumulates over time. When you die, we sell the property and take our share; your estate gets the rest. Should our equity reach 100% during your lifetime, you stay there for the duration, tax free.
Objectively, it looks like a good deal for the taxpayer. They can't come out behind, even if they die soon; if they live long, they come out ahead. The instructive result is that very few people take this apparently advantageous option. UCLA's Donald Shoup has published several works on the program. One way or another, they manage to pay on time. Perhaps it attracts the attention of potential heirs, in a compelling way, but somehow the cash comes forth. While intending only to relieve distress, the program seems to have called a great bluff. The lachrymose plea of the cash-poor widow is unanswerable in debate, without appearing callous, doctrinaire, and jackbooted. Meantime wealthy interests, thoroughly undistressed, hide behind the widow's skirt and get their way. ...
Land prices boom and bust too, jeopardizing revenue stability. That can be a problem, but land taxation contains a built-in contra-cyclical factor. When a land boom reaches its manic phase, as it did in California before 1989, growth expectations rise so high that they offset interest costs: people think they are holding land with no net carrying cost. Your home is expected not just to shelter you, but pay off its own mortgage, upkeep, and maintenance by appreciating. Call it irrational, but it happens. In this phase, the fast-moving tax assessor is an equilibrating force. The quicker he follows such a market, the quicker he showers it with cold water, by imposing a sobering cash drain on the participants. This is an excellent time for local governments, if they have the wit, to pay their debts, fix their potholes, and fill the fiscal reservoir against the next drought.
Those getting the cold shower, meantime, may resist it. In California, the land of extremes, we got Howard Jarvis and Prop. 13. This Constitutional Amendment capped the property tax rate at 1%, and virtually froze assessed values until land sold. Then the boom really went wild. I myself, after campaigning hard against Jarvis, unexpectedly made $200,000 in a few months after it passed. Buyers were chasing me around the block, just to buy a scrap of land I happened to have in the right place at the right time. It was blind luck, but the money was as good as though I had earned it honestly: better, in fact, because 60% of the gain was not even reportable as taxable income. It was a once-in-a-lifetime experience, but buyers and sellers came to regard it as normal, and only fair. They saw regular annual increments as a divine right of property. For a few mad years, they were.
It was the lack of a tax stabilizer that took the cap off land prices. When my lot rose to $240,000, it was still assessed at $10,000, and capped there by constitutional law! Taxes were 1% of $10,000 - that's right, $100/year, 1/24 of 1% of the market value. Was I in a strong bargaining position? You bet, and I loved it, just as you might. Now we are paying the price, or beginning to, as our public services collapse and our criminals outgun our police. This year they are cutting faculty salaries (that's me) 5%, and raising college tuition (that's my three children) 100%. I'll pay all right. All tax rates other than property are headed north; land prices south. Our once-vibrant economy is dying; our unemployment rate leads the nation. Our largest city was torched last year by the frustrated unemployed. Our once-leading schools trail the nation; our murder rate leads it. Those are the economic consequences of Howard Jarvis. Like Tokyo and London and Faust, we signed with Mephistopheles. He showed us a grand time, but now his bill is due. To paraphrase Kipling, "Be warned of our lot, which I dread you may not, and learn about Jarvis from me."
Another attractive feature of land taxation is its interesting positive effect on the economic base of a city. It strengthens it by its tendency to hit absentee owners harder than resident owners. The land fraction in real estate is generally highest in the CBD of any city, so that is a favorite place for absentees to buy and hold. They like the steady income, and the "trophy" quality. The surplus in real estate is what attracts outside buyers, and land is what yields the surplus. About 2/3 of downtown Los Angeles is owned by non-resident aliens, for example. In a more workaday city, Milwaukee, the absentee owners consist of former residents, or their heirs, who grew too rich to abide the harsh winters.
Consider the effect on your balance of payments. When you get more tax money from absentees, money that used to flow to Tehran, Zurich, or Palm Beach now flows into your local treasury to pay your local teachers and city workers, and relieve your builders and building managers. In this way taxing land actually acts to undergird the value of its own base. ...
I once wrote a long chapter on this subject, "The Adequacy of Land as a Tax Base" (Gaffney, 1970). It came out of two years of research, and is too long even to summarize now. I am delivering it to Pat Salkin, however, and hope she may add it to the record of this conference. I also attach a short bibliography of articles that expand on topics covered above, for whoever is moved to study more on this fascinating subject. I hope you think it as important as I do. Please pick up this ball and run with it. Nobody said it was going to be easy. There are some bone-crushing line-backers out there, like Greed, Ignorance, Myopia, and Inertia. So much the more credit to you when you cross the line: your fans will love you for a touchdown. They really need a lift; they've waited so long! Read the whole article
Mason Gaffney: Who Owns Southern California?
1. HOLDINGS BY ALIENS ... Non-resident aliens own about 75% of the "major" buildings in the L.A. CBD west of Broadway ...
2. AMERICANS FROM OTHER STATES ... A second kind of holder is the out-of-state American, individual or corporate.
3. CALIFORNIANS Many of our largest landholders also live in California. This is partly because the lands are here, but moreso because certain places in California are good places to live. One of the advantages of receiving property as opposed to labor income is it lets one choose his residence. California ranks after New York in the number of rich Americans (using Forbes' list) who reside here.
Also included here are California-based corporations. A corporation's "base" refers simply to the site of its headquarters: its shareholders are scattered around the world, and the major shareholders, who exercise control, are effectively screened behind layers of trusts and financial institutions, so they are impossible to identify with certainty.
Institutions acquire land for their operations and then it tends to stick to them for various reasons. It is tax free, for one, so long as they retain it (and do not use it commercially). They are not subject to corporate raids. Thus there is no mechanism whereby the current opportunity cost of land is felt by management. It never appears in their budgets; they never need compete for or justify it. College Boards are not accountable to any public body, a precedent set by Marshall's U.S. Supreme Court in Dartmouth College v. Woodward, 1819.... Read the whole article
Jeff Smith and Kris Nelson: Giving Life to the Property Tax Shift (PTS)
John Muir is right. "Tug on any one thing and find it connected to everything else in the universe." Tug on the property tax and find it connected to urban slums, farmland loss, political favoritism, and unearned equity with disrupted neighborhood tenure. Echoing Thoreau, the more familiar reforms have failed to address this many-headed hydra at its root. To think that the root could be chopped by a mere shift in the property tax base -- from buildings to land -- must seem like the epitome of unfounded faith. Yet the evidence shows that state and local tax activists do have a powerful, if subtle, tool at their disposal. The "stick" spurring efficient use of land is a higher tax rate upon land, up to even the site's full annual value. The "carrot" rewarding efficient use of land is a lower or zero tax rate upon improvements. ...
In PTS, the T stands for tax. Taxes, at best, are grudgingly accepted as "the price of civilization". The property tax, a threat to home ownership, is roundly disliked. Rather than recognize the two different taxes rolled up in the property tax, most reformers and most electorates simply choose to cap the property tax rate (and thereby inflate the price of land). To parry the anti-tax fervor, it is possible to rename the proposal as a "sprawl tax" (as does Alan Thein Durning in Tax Shift). This name suggests the new charge would counter a negative condition. It's also possible to formulate the proposal as a user fee. A jurisdiction could raise the fee for deeds and collect it annually, as states do for titles to vehicles, and thereby technically avoid being a tax.
The proposal is often seen as a tax on land, on one's private property, the under girding of one's home, "everyman's castle." The associations with land are so positive, and the connotations of tax are so negative, that the proposal feels to the public like a threat to one's own niche in the universe. One way to try to defuse this emotional reaction is to replace "land" with terms such as "site" and "location." Also, proponents can insert the word "value" which is not only more accurate, it's also more abstract, softening the emotional blow.
People prefer "the devil they know." People may not like their tax burden, but they sure don't want to risk letting it go any higher. Yet the proposal is to increase the land tax rate or deed fee. Plus, a levy on site value, in the many growing jurisdictions, constitutes a higher charge on something growing -- site values. To prevent "inflating residents out of their homes", the proposal could either
(a) exempt the first $20,000 or so of site value, ensuring that the poorest landowners pay at most a modicum, orPTS proponents could present their proposal as an even lower cap on improvements, down even to zero, with an equivalent quasi-cap on locations, above which any surplus collected rent would automatically be rebated to residents on a per capita basis. This higher rate on land may be made even more sellable than a lower one were the PTS hitched to a reduction of taxes on income or sales, too.
(b) rebate some rent (collected site value) once some threshold is reached, say when the land dues owed by the poorest quintile equal, say, 5% of average local income. (The actual trigger figure needs more thorough calculating.)
The PTS is social engineering, an attempt to manipulate behavior. Yet all taxes spur a different response from taxpayers. Hence legislators offer credits, deductions, exemptions, deferments, abatements, and assess property at current use versus market value. Which is the real distortion of free choice? The present practice of privatizing publicly-generated land values or the proposed policy of sharing rent while respecting earnings?
A big problem needs a big solution which in turn needs a matching shift of our prevailing paradigm. Geonomics -- advocating that we share the social value of sites and natural resources and untax earnings -- does just that. Read the whole article
Mason Gaffney: Land as a Distinctive Factor of Production
Land values are hypersensitive to discount rates
The sensitivity of present values to discount rates increases as the value being discounted. Land values are discounted from more remote future values than are values of most capital, even most durable and "fixed" capital. Consider land yielding an expected constant cash flow: let the interest rate double and the present value is halved. Compare the present value of a steer to be slaughtered in one year: let the interest rate double from 5% to 10% and the present value drops from .95 of slaughter value to .91. Even that overstates it a lot because we haven't accounted for the feed bill, but never mind, the point should be clear.
Let buyers expect land's cash flow to rise annually by a growth coefficient, G, and the valuation formula is cash flow divided by the interest rate minus the growth rate (I-G), rather than I alone. Now let the interest rate double, and the present value is cut to less than half.
Or let land be yielding a nominal current cash flow and to be held in anticipation of a higher use to begin 10 years down the road, and thirty years after that to be renewed for an even higher use. Let there be a whiff of oil, or the floating value of a shopping center, or the possible extension of a freeway and a new water supply paid by others. Let there be a fear (or hope) that Washington will debauch the currency sometime again in this century, or that another Howard Jarvis will cut land taxes some more, or that future building costs will fall: any and all of these, which are common and familiar expectations, make present values of land more sensitive to discount rates than in the simple basic capitalization model which is based on assumed constant cash flow in perpetuity.
Expectations like those denoted above by G, or like the anticipated higher future use referred to, are "a state of the public mind" (Richard Hurd, Principles of City Land Values). They are incapable of proof or disproof in the present and, whether proven true or false in the future, will have lost relevance, to be replaced by new expectations of new futures that unfold endlessly as time passes.... read the whole article
While this one was written a decade before Prop 13, it speaks to some relevant issues:
Herbert J. G. Bab: Property Tax -- Cause of Unemployment (circa 1964)
us now turn to that part of the
tax that is assessed on land. Increases in population,
immigration from the farms and other forces have led to a rapid
increase in the population of our large cities and metropolitan areas. Population
pressure is bound to increase the value of urban land. Yet an adequate
system of land taxation could have prevented the steep rise in urban
to email this page to a friend: right click, choose "send"
Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper