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Property Tax is Two Taxes

The property tax as most of us know it is two very different taxes rolled into one.  The two parts of it have very different effects, but since we traditionally set a single millage rate for both of them, we get very peculiar and undesirable effects.  The portion of the tax that falls on buildings and their contents -- manmade improvements to the property -- have one set of effects, mostly undesirable.  The portion of the tax that falls on land -- site values -- has a very different set of effects, and they are highly desirable ones from nearly every standpoint.  When both tax rates go up, or both are capped and unevenly distributed as they are in California, strange and undesirable things happen.

Pennsylvania has the enabling legislation to use a higher millage rate on land than on buildings, and its use has produced some very good effects.


Walt Rybeck: Have We Forgotten the Foundation?
Urbanologists and the public need to be awakened to the central role played by taxation. They need to see that loss of our historic land tax has made speculation our top national sport -- a treacherous one at that. As Hans Blumenthal wrote in Metropolis...and Beyond (edited by fellow panelist on this program, architect Paul Spreiregen):
There is no doubt that the present real property tax...contributes more to depressing the standard of housing than all government housing policies combined do to raise it. The current property tax may fairly be called the upside-down tax. It taxes land values too lightly, buildings much too heavily. It rewards bad land use, penalizes good land use. Consider three identical homes and lots:
  • Owner No. 1 adds a rec room, new roof, great landscaping. The assessor comes by and says, in effect: "As punishment for making a showplace, and for generating jobs and profits for local businesses, we're raising your assessment by the amount of your investments. Your tax bill will go up, not just for a year, but for as long as you keep the house in good condition."
  • Owner No. 2 lets his house of the same size run down -- loose banisters, torn screens, broken gutters, junk-filled yard. The assessor tells him, in effect: "Because you created an eyesore for your neighbors and an unsafe dwelling for your tenants, we're reducing your assessment and your taxes. If your place is more dilapidated next year, we'll reduce them even more."
  • Owner No. 3 tears his building down; the idle lot neither houses nor employs anybody. The friendly assessor tells him, in effect: "For completely wasting your property, and for making no use of the infrastructure provided for this area, we'll give you the lowest assessment and tax bill of the three."
These all-too-familiar examples condemn not the assessor but our present tax system. And the same perverse property tax incentives apply to commercial properties. Is it any wonder cities are torn apart? The wretched tax on buildings is only the half of it. The low land tax is the other half. A speculator sees that the annual increase in his or her land value is greater than the tax bill. This signals the owner to do nothing, to sit back and collect the values generated by productive neighbors and the community.

Speculation feeds on itself. The more land held out of use, the tighter the supply of available sites. This raises land prices further, seducing more speculators into the land game, hastening the flight of residents and businesses from central cities and even small towns. This is far from the only cause of sprawl, but one of the most potent. It cannot be stressed too much because it is one of the least recognized causes.

If we continue on our present course, overtaxing production and undertaxing land, the outlook is dismal. It is heading us toward the very conditions seen in extreme forms in Latin America and other continents.

Al Hartheimer: Affordable Housing and the Land Value Tax Perspective: a letter to Asheville, North Carolina

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, or
(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.)

PTS 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.

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?

The failed policy that the PTS would replace is the present property tax. This is actually two taxes in one, one on land and another on improvements. The tax on improvements penalizes owners for improving. This negative incentive does its greatest damage at the margin, where profit is slim. There, rather than pay a higher tax, owners let buildings dilapidate into slums. The lack of much tax on land keeps overhead on speculators affordable. This negative incentive lets owners under-utilize prime sites, even withhold them from use entirely. Kept from prime sites, development sprawls outward.

Sprawl inflates the values of suburban and rural land. Leap-frog development raises a few spikes in a land value map that soon pull up values everywhere, increasing the property tax burden of owners of previously developed sites, unless the tax is capped. The resultant sprawl also raises enormously the cost of extending infrastructure and makes auto-dependency a given.

The PTS reverses all these negative consequences.
  • Rather than burden construction, taxing only land spares it.
  • Rather than spread development (hooking us on cars), taxing land concentrates it (providing a market for mass transit).
  • Rather than inflate land price, a land tax squashes it.
  • Rather than enrich the owners of prime sites or itself, a land-taxing government could rebate some collected site rent as a dividend, perhaps in the form of a Housing Voucher, making home ownership inflation-proof. ...
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

Jeff Smith: How Profit Shapes Urban Space
Without spending a penny of subsidy, cities can make urban renewal more profitable than suburban development. How is about as commonsensical as Einsteinian physics, but like "e=mc2", it works. The trick is to forget subsidies and lower one tax while raising another. That is, levy a tax or charge a fee to collect land value while eliminating any tax on buildings or improvements.
The present property tax works backwards, like an intruder from the anti-universe. It increases as owners improve their property; it decreases when owners let buildings dilapidate. "Save money, create slums," cities tell owners. ...

The world looks different to owners dozing at the wheel, waiting for land values to rise. Title-holders keeping prime downtown sites vastly underutilized "now pay only, say, $25,000 per year in property tax for a half block," figures Dr. Mason Gaffney of the University of California at Riverside. "Post-PTS (property tax shift), these owners of parking lots and abandoned warehouses might have to part with three times that amount each year." At $75,000 per annum, no longer could they afford to let prime sites lie relatively idle. "They'll put their land to uses that generate much more revenue than does an empty building or car-covered lot," adds Gaffney. "They'll get busy building apartments, stores, offices, schools, theaters, mixing all uses together to maximize their return."  ...  Read the whole article

Tony Vickers: From Zee to Vee: using property tax assessments to monitor the economic landscape
The Nobel-winning economist William Vickrey said that the property tax is actually two different taxes (Vickrey 1991). That is because buildings are capital, not land, in the economic sense – even if, in most legal codes, there is no distinction between land and improvements made to it which are all lumped together as ‘landed property’ or real estate. Buildings and other improvements to land all depreciate over time unless further capital is expended. Eventually the market value of such improvements may become negative, owing to the costs that would need to be incurred by someone wishing to redevelop the site for an alternative use. But that does not necessarily take away the rental value of the site.

Much urban blight is caused by these so-called ‘brown field’ vacant and under-used sites. However they are often in valuable locations, with good transport connections. It may be that owners are speculating that land prices will rise and enable them to sell at greater profit in the future than now, or it may be that there is genuinely no market for sites in a particular location unless the cost of remediation is subsidised as a form of public investment. Such investment, according to Vickrey and other followers of Henry George, can be entirely funded from LVT. In a lecture given in 1991, first published last year, Vickrey claimed:

“Cities have the capacity to be fully self-financing without dependence on either federal assistance or on general taxes that are unrelated to benefits received.”

The proviso, according to Vickrey, is to replace the tax on buildings with a tax on land value alone – LVT:-

“The property tax combines one of the best and one of the worst taxes we have. The portion that falls on sites or land values is the only major tax that is reasonably free of distortionary effects and is not intolerably regressive”.

Taxing buildings and work done to improve them discourages such work. Un-taxing them and taxing land more highly, irrespective of its actual state of development but based upon its highest and best immediate potential use, will encourage owners to maintain their sites and buildings in such a way as to maximise their income. A remote site or one with conservation or other restrictions will have a low site value, hence attract low taxes, whereas a high value city centre derelict site will very soon be redeveloped. The extra property tax revenue from extending the tax base to sites that are currently under-taxed (because the tax is based primarily on building/rental value not site/owner value), ensures public infrastructure projects can be funded without resource to general taxes or excessive borrowing on the financial markets.  Read the whole article

Herbert J. G. Bab:  Property Tax -- Cause of Unemployment (circa 1964)
... The purpose of my talk is to show that the relation of property taxation to unemployment and lack of economic growth is that of cause to effect. I shall try to explain why I believe that property taxation is one of the two chief villains in the drama we are witnessing today in these United States. The other villain is the monetary policy pursued by the government, which has increased the cost of borrowing to a point where it stifles the growth of the economy. In this context however I shall be concerned only with property taxation. ...

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. ...

Let 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 land values.

Economists agree that taxes on land can not be shifted but are capitalized. For instance a lot having a value of $10,000 -- will have an imputed or expected income of $500 -- assuming a 5% rate of capitalization. A 2-1/2% yearly "ad valorem" tax would reduce the imputed income by $250 -- or 50%. Such a tax would naturally reduce the value of the land by the same percentage.

For these reasons increases in land values can be prevented by taxing land at an appropriate rate. Yet urban land values have increased tremendously during recent years. For instance in Los Angeles county the assessed value of land increased from $1,972 millions in 1952 to $4,002 millions in 1962, an increase of a little over 100%. The assessed values, are supposed to represent 25% of the market value. Thus the unearned increment in land values during this period amounted to not less than $8 billions. Even this figure is an understatement because it is based on assessed values and land is greatly underassessed. While land values have risen by about 10% yearly, property taxes assessed on land averaged about 1.5%. Thus a person owning vacant or underimproved land would have earned about 8 1/2% per year just by withholding land from its proper use. ...

We have discussed the sharp increase in the level of rents that has taken place during these last years. These increases reflect the steep rise in land values that have taken place in almost all sections of our cities. The tax assessed on the improvements has discouraged the construction of more and better housing. At the same time, the tax assessed on land has been too low to induce owners to sell, improve, or replace their rental properties.

Property taxes shape the pattern of our cities.
  • If taxes on improvements are low or non-existing and taxes on land are high, the cities are bound to grow vertically and at a fast rate.
  • If taxes on improvements are high and taxes on land are low, our cities will spread over larger and larger areas. They will become metropolitan areas and they will grow at a much slower rate.
Relatively low taxes on land and high taxes on improvements will discourage the owners of vacant lots or underdeveloped land, such as that used for parking lots, gas stations, hamburger stands, etc., from improving their land. It will encourage them to keep the land out of use and to sell later at a profit. This will create an artificial shortage of land, which in turn will lead to urban blight and irregular, leapfrog city growth.

This urban sprawl makes our cities look ugly, but it has many disadvantages besides:
  • It gobbles up a tremendous amount of farm land;
  • the farmers have to give up their land before it is really needed;
  • the building developer has to go far out to find available land;
  • the prospective home-owner has to travel farther;
  • traffic on congested roads will increase and
  • new roads and schools will have to be built.
It is generally believed that zoning laws are a very effective tool to control the growth of our cities. Zoning laws determine the best possible use of urban land. Yet nobody can be forced to improve his land and to build unless there is an incentive. This can be achieved by taxing land at a rate that will make it unprofitable to hold it without improving it.

The city planner needs land taxation just as he needs zoning laws. With both these tools the orderly growth of our cities will be assured, but -- as experience has shown -- without land taxation rational and efficient land usage becomes impossible.

The administration of the property tax leaves very much to be desired. Assessment procedures and practices are in many cases erroneous, arbitrary and widely variant. So is the ratio of assessed value to full market or cash value. In many states no public records are available indicating assessed values and the taxpayer has no of knowing what his tax bill will be.

The most serious defect in the administration of property taxation is the continuous, widespread and enormous underassessment of land. A survey made recently found that in 9 California counties, vacant lots and acreage were assessed at only 5.3% of the cash value, while residential property was assessed at 19.3% of its value. The illegal underassessment of land deprives local governments of millions of dollars of revenues. Moreover, it further aggravates the serious defects of property taxation.

We have analyzed the effects of property taxation on improvements as distinguished from those caused by the incidence of these taxes on land.
  • We have found that a high and burdensome tax rate on improvements will discourage residential construction, create unemployment, penalize home-ownership, aggravate the housing shortage and force up rents.
  • Yet a low tax rate on land will have similar if not identical effects: it will lead to a rise in urban land values, which in turn will discourage residential construction, create unemployment, penalize home-ownership, aggravate the housing shortage and force up rents.
The paradox of property taxation consists in the fact that lower rates on improvements produce the same results as higher rates on land and conversely higher rates on improvements produce the same results as lower rates on land. Read the whole article

Bill Batt: Who Says Cities are Poor? They Just Don't Know How to Tax Their Wealth!

The Rent in Cities

The land values are highest in urban cores, one is reminded, because the economic rent passes as a surplus through all market transactions and comes to settle on land sites. Rent happens, so to speak, and it raises the market price of sites accordingly. Were cities to recover the socially produced ground rent in the form of tax revenue, it would not be left to collect on sites but could be used to provide the financial wherewithal for the services that cities are bound to perform. As will be evident below, the amount of economic rent available for recovery is thought sufficient to pay for all services and then some. Today it simply collects on sites of greatest activity with typical and visible negative consequences.

One might suppose that collecting the economic rent would leave locational sites with less market price appreciation, stabilizing land prices at levels that are more within reach for various developments. To be sure collecting economic rent exerts a downward pressure on market prices. But there is a countervailing pressure that works to neutralize whatever tendencies are otherwise at work: the collection of rent, especially from high-value sites, increases the carrying costs in ways that provides a greater inducement for their titleholders to improve them. That incentive fosters development in areas that, together in combination with other activity generated in neighborhoods, tends to maintain the stability of land markets in a roughly constant pattern.[11]

Unfortunately the positive effect of taxing rent in the typical American city is neutralized by the fact that taxes are also imposed upon improvements. Even though taxing land sites fosters their more intensive use, taxing buildings exerts a penalty on titleholders for doing so that works in the opposite direction. The conventional tax on real property in most American cities is like a train with an engine at each end. Whatever beneficial effects that might be apparent by taxing just land value are taken away again by the tax on improvements. This is why so many cities suffer from abandonment and despoliation. It is also why titleholders so often revile the conventional property tax. Were the tax on improvements gradually phased out and the tax on land values raised proportionately in a revenue-neutral manner, underused parcel owners would be induced to make improvements and sites would be built upon commensurate with their market price.[12] This practice is increasingly employed by municipalities both in the US and beyond.[13]

Taxing land value only is an incentive with the virtue of reversing the centrifugal forces of sprawl development and the tendency for builders to choose suboptimal locations.[14] Some titleholders find it advantageous to hold their valuable parcels off the market for speculative gain. But bringing the holding costs forward rather than allowing their exploitation for a capital gain upon sale increases the market efficiency of transactions and more optimal use of sites. The incentive to speculate on others' dime is removed.

Cities, having the huge preponderance of land value, stand most to gain by a shift of taxes to land value alone. If they wished they could "cream" the tax base in a way that would make outermost locations positively jealous. Contrary to the thesis of writers like David Rusk who argue for incorporating the suburbs to the cities to expand the tax base,[15] it is the urban cores that have the greatest tax base in the form of high ground rent. Preliminary studies indicate that the amount of economic rent available to be recovered in taxes is equivalent to the optimal demand for services that cities require. Nobel prize winning economists William Vickrey and Joseph Stiglitz have been among those who explored what is known as the Henry George Theorem.[16] Given the quality of current data it remains a challenge to be more specific in applications of this thesis. It remains a subject area begging for further exploration. ... read the whole article


Bill Batt: The Nexus of Transportation, Economic Rent, and Land Use

The conventional property tax, one taxing both land values and improvement values, is analogous to a train with an engine at each end. The tax on land value fosters improvement on the parcels with the highest market and social value, while the tax on structures discourages that very same thing. No wonder it is that economic activities is stymied most in the urban centers and manifests itself in areas where the least imposition of all has taken hold. As scholar Jessica Matthews once put it,
In a now familiar sequence, developers reach for the cheapest land, out in the cow pastures. Government is left to fill in behind with brand new infrastructure roads, sewerage systems and schools paid for in part by those whose existing roads and schools are left to decline. Property values rise in a ring that marches steadily outward from the city and fall in older suburbs inside the moving edge. Because residential development can't meet the public bills, local governments compete for commercial investment with tax discounts that deplete their revenues still further. Property taxes then rise, providing an incentive for new development. Years of such leap-frogging construction devours land at an astonishing pace.(35)... read the whole article

Bill Batt: The Compatibility of Georgist Economics and Ecological Economics
The most compelling arguments to many supporters stem from its environmental consequences. A tax on land sites is the most powerful instrument available to neutralize and reverse the centrifugal forces of urban sprawl. This is because incentives are present — the higher the tax the more power it has — to improve the high-value sites to the full extent that their market value warrants. Titleholders are induced to build on their parcels in order to recover the carrying costs of their increased taxes. The inelastic supply of land sites means that taxes are shouldered fully by owners, without being passed on to tenants. (Of course a tenant’s charges can be raised anytime.) Hence urban areas tend to be improved and peripheral areas become less attractive to sprawl development. George saw a strong moral argument for shifting from the conventional property tax levied on both land and improvements to one based on land alone. The argument was quite simple: the tax as it stood penalized people who improved their property and rewarded people who held vacant parcels for speculative gain. It rewarded those owners who let their holdings go to wrack and ruin, often those who bought up parcels to use as rental property without investing in the maintenance to ensure that they would continue to be attractive and livable — slumlords. ... read the whole article

Mason Gaffney: How to Revive a Dying City
The counterpart of sharing rent through taxation is to untax things, like buildings, that involve human endeavor. This doubles the incentive effect. If land tax is the stick, untaxing buildings is the corresponding carrot, and George's program makes both larger. Every lot with an old "Defender" building has a potential replacement, the "Challenger." Taxing buildings rigs the fight against the Challenger. Say the lot-cum-Defender is worth $100K, and the Challenger would cost $500K to build. Challenger cash flow must exceed Defender cash flow by enough to pay $500K, plus added taxes based on it.

Georgist tax, by contrast, is impartial between Defender and Challenger; the market decides. In 1965, after a detailed Milwaukee study, I found that switching to the George program would allow 30% of the city to be renewed immediately, simply by untaxing Challengers vis-a-vis Defenders. (Sadly, Mayor Maier went the other way, so Milwaukee lost 20% of its people and much of its wealth.)  ... read the whole article

TRED (Committee on Taxation, Resources and Economic Development): Property Taxation -- USA

... As the reader goes through these collected papers he will, I am certain, find himself saying (even as I did) that the taxation heritage of the United States -- based on sound democratic principles -- has been permitted to become heavily encrusted with an overlay of special-interest legislation. It is time these accretions were scraped off so that the clean lines of the original may be seen. When the original purposes and methods of reaching them are revealed, the property tax becomes much more attractive to businessmen, to economists, to tax specialists, and -- most important of all -- to taxpayers in general.

The property tax was developed as a general, state-wide tax, and its evolution into a special district and municipal tax was most unfortunate and requires remedy. In the United States, the property tax just does not possess great, unique advantages as a revenue e source within a small geographical area. Actually, many of the small, independent property-taxing jurisdictions are not required for effective local control of government, but are an example of property-tax encrustation through special-interest legislation.

Before the days of the income tax, the property tax was aimed at ability to pay, and many of its current shortcomings arose from efforts to reach income directly. This effort is no longer required. The development of the income tax as the major revenue source of the federal government and the emergence of the federal government as the nation's major tax-gatherer -- plus the wide use of the income tax by state and local governments -- have largely eliminated the original need to justify the property tax by attempting to base it on ability to pay. Individual justice could now be attained if the property tax were based on cost of benefits enjoyed by the property. Social justice could be achieved if the tax took into account society's general expansion in numbers and productivity. Recognition of the property tax's strength in helping society to benefit generally from the land and resource values it is creating seems currently to be growing.  ... read the whole article


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Wealth and Want
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