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Revenue Sharing

A great deal of revenue sharing goes on in the U.S. now, generally flowing from higher-rent states to lower-rent states. Were we to start taxing land value properly, the same thing would happen: the extremely high land values in our largest cities would be collected and used to support spending, including education, in much lower-rent places. Currently, only a small amount of the economic rent of, for example, New York City, San Francisco and Los Angeles is collected. The rest lines the pockets of individuals, family trusts and the shareholders of corporations and real estate investment trusts, and contributes mightily to our amazing concentration of wealth in a small segment of the U.S. population.

When one stops to think about the huge amount of land rent that exists in New York City, it is particularly shocking that NYC's public schools aren't the showpieces of American society.

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894) — Appendix: FAQ

Q3. In an interior or frontier town, where land has but little value, how would you raise enough money for schools, highways, and other public needs?
A. There is no town whose finances are reasonably managed in which the land values are insufficient for local needs. Schools, highways, and so forth, are not local but general, and should be maintained from the land values of the state at large.

Q5. If the full rental value were taken would it not produce too much revenue and encourage official extravagance? If only what was needed for an economical administration of government, would not land still have a speculative value?
A. In the first part of your question you are thinking of a vast centralized government as administering public revenues. With the revenues raised locally, each locality being assessed for its contribution to the state and the nation, there would be no such danger. The possibility of this danger would be still further reduced by the fact that private business would then offer greater pecuniary prizes than would public office, wherefore public office would be sought for purer purposes than as money-making opportunities. As to the second part of your question, the speculative value of land would be wiped out as soon as the tax on land values was high enough and that on improvement values low enough to make production more profitable than speculation. And this point would be reached long before the whole rental value was absorbed in taxation. ... read the book

Nic Tideman:  The Morality of Taxation: The Local Case

Nic Tideman:  Improving Efficiency and Preventing Exploitation in Taxing and Spending Decisions

The current trend toward returning functions to the states is a step in the right direction. But it encounters understandable objections that poor states cannot afford to do what they ought to do. Some form of revenue sharing is needed. But it is important to have the right definition of which states are rich and which are poor. The level of well-being in a state is determined in part by the wisdom of its public policies. States should not be penalized for adopting productive policies. Revenue sharing should equalize per capita levels of natural opportunities (mineral revenues, fishing rights, pre-development land rents, etc.) Replacing the personal and corporate income taxes with either a flat income tax or a national sales or value added tax would greatly reduce the excess burden of federal taxes. (Excess burden is roughly proportional to the square of the typical marginal tax rate.) But almost all the gains go to the rich. Perhaps the flat tax could be combined with a guaranteed income.

Even better than a flat tax or a national sales tax, in my view, would be a return to the revenue system that was apparently envisioned by the drafters of the Constitution in 1787. I mean a rule that the federal revenue requirement would be allocated to the states in proportion to their populations. The use of population as the allocation device seems anachronistic in this era of concern for impoverished regions. But the allocation could be corrected by an expenditure that equalized per capita access to natural opportunities.

I see three important virtues in allocating the revenue obligation to the states.
  • First, it gets rid of the IRS and its intrusions. (A national sales or value added tax would do most of this, leaving only firms subject to the tax man's scrutiny.)
  • Second, it requires the states to compete in seeking ways of raising revenue that do not reduce the productivity of their economies. The competitive equilibrium is to raise as much revenue as possible from charges for exclusive use of land and other natural opportunities, and to tax labor and capital only as a last resort.
  • The third virtue is the likelihood that placing the revenue obligation on states rather than on individuals would lead to more careful scrutiny of the value of proposed expenditures.
With only fifty states and each state aware of exactly how much each spending proposal will cost its treasury, I believe that it would be much harder to secure approval for inefficient or special-interest spending. ...  Read the whole article

Nic Tideman: Revenue Sharing under Land Value Taxation
The proposition that the rental value of land should be collected by governments and used for public purposes has a powerful moral rationale: Since no one made the land, no one can properly claim to own it. There is a simple efficiency rationale as well: Social collection of the rental value of land does not interfere with incentives to be productive. If governments do not collect the rental value of land, then they will levy taxes that discourage productive activity.

When "government" is not a monolith but a collection of entities with responsibilities in different geographic and functional areas, these rationales for land value taxation leave unanswered the question of how the rental value of land should be allocated among governments. That question is addressed in this paper.

Nic Tideman:  A Bill of Economic Rights and Obligations
Our nation was founded on the idea that we are all created equal, that we are endowed by our Creator with certain inalienable rights, and that among these are life, liberty, and the pursuit of happiness.

In living, expressing our liberty, and pursuing happiness we sometimes conflict with one another, so we need a shared understanding of the extent of the sphere of equal rights given to every person, and beyond that sphere our obligation to respect the rights of others. This Bill is concerned with the economic aspects of these rights and obligations. ...

Article 4: Congress may place levies on states to collect from states a portion of the benefits they receive from national defense, national systems of infrastructure, research of national significance, or any private activity that has widespread public benefits. State legislatures may place corresponding levies on their subdivisions. ...   Read the entire article

Mason Gaffney -- Canada's System of Revenue Sharing

It seems to me therefore that we need to face up to the question that is known in my trade as Fiscal Federalism, that is, how is money going to be distributed by the federal government out of its so-called surplus, either to people or the States, or localities? ...

The reason it's so hard to sell growth policies at the local level today in the United States is very much due to the fact that the United States federal government taxes people and it gives subventions to landlords. So the landlords can get the subventions without having the people. So who needs people? That's it in a nutshell. We need to reverse that, I think, if we're going to be able to make Georgism work at the local level. ...

At any rate, let's begin by looking at the similarities between the federal systems in the United States and Canada. In both countries we find something called 'vertical balancing' which means that the senior governments send money to the junior governments. We find also something called 'horizontal balancing' which means that the payments are made more to the poorer governments, those that are poorer on a per capita basis, than to richer ones. ...

 ... Cannan's Law. ... But the general idea is, you may think you have tenure control of land but if the municipal government can tax that land and use that money to finance public welfare services, public education and other things that are open to all comers, then you will end up with an uneconomical distribution of population. ...

At the same time, in both countries you find something I will call Hammer's Law. This is not a carpenter's tool but again the name of a man, an economist in Missouri, who observed in 1935 that if you compared population to land values in the different counties of his State (in the very poor counties of the Ozarks the land was hard scrabble land of very little value, with the very rich lands in the northwestern part of the State, which resembles Iowa) you found that the population density was much greater on the very poor land of the Ozarks than it was on the very rich land of the northwest. ...

Now another similarity to the two countries us that the subventions that do go from the federal government to the provinces in Canada (and you find a similar thing in the United States) do not come from the richer provinces. They come instead from the general fund, the general taxpayer. There is in other words more vertical balancing than there is horizontal balancing (horizontal balancing you remember means equalization among the different jurisdictions). It's a little like what somebody said about foreign aid. 'Foreign aid is a device by which poor people in rich countries are taxed to subsidize rich people in poor countries.'

We'll see that equalisation in most countries works something like that; that is, in addition to this inter-provincial equalisation, there's a tax shift involved where local sources of taxation like the property tax are being displaced by the federal income tax. I suppose Ferdinand Marcos would be a splendid example of the kind of person I was talking about in the poor country and in West Virginia you have all these coal companies whose owners live in Palm Beach, whose shareholders live in Palm Beach and such places, who benefit from an inter-state equalisation that benefits West Virginia. Well these are similarities.  ...

The federal aid in Canada goes to provinces, whereas in the United States it goes to specific cities, The U.S. Congressman likes to have his fingerprint, as they say, on every dollar that goes from Washington. ... So in the States the idea has been: Tax the States according to their population and then give the money back according to political power. In the United States Senate it means that the smallest State has just as much clout as the biggest State or would have if their senators weren't so merchantable. (I mean, in California when we need something we just look to Nevada or one of those places for a Senator who is having difficulty raising funds for his next election. But that's another story.) ...

But the most delightful distinction about Canadians is the strong and explicit recognition among almost everyone, even if he's an economist, who discusses this subject, that different resource endowments are the basis of inter-provincial differences. Equalisation in Canadian politics means sharing the economic rent. Everybody talks that way. Canadian economists even when they come to the States talk that way. Just as though rent were a permissible word in polite discourse. It's very refreshing. However there's a very selective attitude towards rent -- towards what rents are shareable, I should say.

  • Rents from oil and gas are fair game.
  • Forest revenues are fair game.
  • Mineral revenues of other kinds are fair game.
  • Water power is fair game.

But now how about the rents that are generated by the valuable lands of Montreal, or Toronto, or some of those other big and powerful cities in the east? They are not fair game. As a matter of fact, if you pore through the fine print of the equalization law, which I did on the airplane, you find the most interesting exception to what's included in the formula. I'll explain the formula to you in a moment if you are still awake. ...

Now let's look at the sharing formula. The sharing formula in Canada is essentially based on population and potential tax base. And it can be made to look very complicated but I think I've boiled it down to its essence. You take a province's percentage of the population of Canada, and then you take the percentage of the tax base that it has, subtract that and that gives you another percentage. And then you multiply that times the total tax revenue that's collected throughout Canada from that tax source, and then you pay them that amount out of the provincial treasury. ...

The conclusion of all this is that the Canadian system is really better in terms of its Georgist implications because the payments to the provinces, with all the faults that I've described, are essentially based on population. Population is in the formula. And if you compare this with the way things are done in the States, population plays a very minor role in the formula for equalisation payments in the United States.

Now, how should it be done? Well, there's a well known Georgist economist who figured this out a long time ago and wrote an article about it. His name is Colin Clark. ... He came up with a plan for collecting economic rent at the federal level, and he said what we really should do, and this I think is the ultimate equalisation payment, is we should classify local jurisdictions according to land value per capita, and those that have the least land value per capita, we'll leave all of that land value for them to use for local purposes. But then we will graduate the federal land tax according to the amount of land value per capita in the jurisdiction, and thus we will have a federal tax that automatically achieves inter-regional equity, without all this razzmatazz that I've been describing about inter-regional equalisation payments. Read the whole article

Mason Gaffney: Property Tax: Biases and Reforms
Priority #1. Safeguarding the property tax
Priority #2: Enforce Good Laws
  • Reassess Land Frequently
  • Use the Building-Residual Method of Allocating Value
  • Federal Income Taxes
Priority #3. De-Balkanize Tax Enclaves
  • A. Rich and Poor
  • B. Timber and Timberland
  • The Role of Timber and Timberland
  • Two More Areas Deserving Attention
  • Offshore Oil
  • Tax All Natural Resources Uniformly and Comprehensively
Priority #4. What Tax to Fight First?
Priority #5: Make Landowners Pay Their Taxes

A. Rich and Poor

There are rich jurisdictions and poor. Professor Tideman's paper in this conference alludes to this matter in passing. Let us support his point with some numbers.

In California, you might think that farm counties like Tulare have a lot more taxable value per capita than cities, but au contraire. Tulare County reports assessed values per capita of $38,100; the whole State averages $60,000 per capita. Suburban Marin County weighs in with $95,400; urban Los Angeles County has $59,000; Orange County has $74,000.

You might also think that Tulare, being rural, has a lot higher fraction of land value in its mix, but again, not so. The Land Share of Real Estate Value (LSREV) in Tulare County is 28 percent, compared to a statewide mean of 40 percent, and 47 percent in Orange County. (This datum, and others of like kind, refute the conventional belief that farm counties are heavy on land in the mix. On this last point, I must respectfully take issue with my good old friend Gene Wunderlich, whose paper at this conference suggests that farm counties have higher land fractions. I wonder if he has perhaps conflated building values with pure land values? My data, from California State Board of Equalization, show lower land fractions in real estate in the purely rural counties of the San Joaquin Valley.) Grazing and mining counties like Inyo have high values of LSREV, but they are a small share of the farm economy. (lnyo County, lightly peopled but heavily cattled, has $136,000 per capita, with very few human capita (and its cattle are exempt from the California property tax). Major farm counties with intensive farms, like those of San Joaquin Valley, have low values of LSREV.

Within counties, disparities among cities and school districts are much greater. In Tulare County, one pathetic little povertyville, the City of Parlier, has just $10,000 of assessed value per capita. Here are some assessed values per capita from different California cities in the County of Los Angeles: Lynwood, $21,500; Beverly Hills, $294,000 (14 times Lynwood); City of Industry, $5,533,000 (257 times Lynwood).

This is why some critics call the property tax "regressive." It has given some plausibility to the otherwise bizarre claim that switching to a sales tax is less regressive than sticking with the property tax. Within each city a property tax is progressive, but when your data meld cities like poor little Parlier and Lynwood with Beverly Hills, you sometimes find poor people paying more of their income in property taxes than rich people, and getting less for it. Switching just the local property tax to land ex buildings will do little or nothing to correct such disparities, and therefore make little progress toward overall social justice, and the wide support that will evoke. There is, in fact, a natural cap on local property tax rates imposed by local particularism: the City Council of Beverly Hills will not raise taxes in Beverly Hills for the benefit of voters in Parlier.

To avoid such regressivity we must work out some formula for power equalization. The most straightforward formula is simply a statewide land tax. On this I must again applaud Dick Noyes in NH - not for what he says, but what he does. What he says is that the genius of NH is its local control of revenues; what he does is initiate bills for a statewide land tax.

There are many other tax enclaves and exemptions by which much property stays off the tax rolls. I have a long list, with about 35 items. Here I'll just focus on two: timber and oil. Read the whole article

Mason Gaffney:   Privatizing Land Without Giveaway (1990)

Functional Reasons for Taxing Land Rent
Ethical Reasons for Taxing Land Rent
Political Reasons for Taxing Land Rent

Functional Reasons for Taxing Land Rent
1. Taxing land allows us to avoid taxing functional activities like production, exchange, work, saving, and investment. Taxing productive activities has counterproductive effects, certified by expert economic testimony.

2. Taxing land holds down its purchase price, thus easing and democratizing entry. The financial problems described above under heading "A" are thus minimized or eliminated.

3. Taxing land drains cash from sleeping owners of surplus land, arousing them in the most compelling way to the otherwise overlooked opportunity cost of their surpluses. A cash drain has wealth and liquidity effects that are demonstrably more potent than mere "opportunity cost" in driving land to its highest and best uses.

4. Taxing land motivates sellers and moves the otherwise torpid land market. Standard-brand market theories implicitly envision a flow of commodities, readily turned up or down with changing demands, constantly consumed and replaced, easily divided or assembled, moved at will from here to there.

Land does not fit the model. "So much the worse for land," pedantic theorists seem to say, but our realistic concern is with life and the facts that the models do not fit. The models' bright promises of competition working smoothly are not borne out by experience with land. It takes a strong extra push to make land markets work: land taxes provide that push.

As Harold Groves put it, land is not a stream from a fountain, it is the fountain itself. Land is fixed in place, easily subject to local monopolization, slow to be divided, arduous and costly to assemble, and tempting to hold in reserve. Most land lasts forever and is accordingly bid up by a wealthy few who seek a store of value for the distant future. This strong competition, usually with speculative overtones, makes land unaffordable for median buyers seeking to meet ordinary needs of the present.

5. Taxing land promotes markets by pushing central urban land into commercial uses yielding high cash flows. "The market" is not just an idea or a way of organizing the economy; it is a place, a land area dedicated to exchange. Taxing land inhibits most non-commercial uses in all those locations having high potential commercial value. It by no means destroys non- commercial uses, but relocates them to less central places.

6. Taxing land discourages the motives, currently powerful and dominant, to hold land mainly as a store of value and hedge against inflation. It also discourages landowners from their current practice of borrowing money and then joining and leading the too-powerful pro-inflation lobby.

7. It is arguable that taxes on bases other than land are largely shifted to - that is, are drawn from - land rent anyway. That is the "Physiocratic doctrine" of tax incidence. It presumes an open economy: labor and capital migrate freely across the borders. Given the premise, it follows that after-tax wage levels, and rates of return on capital, are fixed by world market forces. Local taxation can only affect land rent.

With closed borders, the Physiocratic rule still applies in part. In either case a prime reason for singling out rent for direct taxation is that it is simply a more efficient means to socialize rent. Tax shifting always implies some friction and loss of taxable surplus: "excess burden" is the standard term.
This reasoning also gives us a new, expanded insight into the adequacy of land as a tax base. Under Physiocratic doctrine, land rent and taxable surplus are nearly coterminous.

Ethical Reasons for Taxing Land Rent

Once land titles are privatized, unearned gains and losses begin accruing immediately in this dynamic, complex, stochastic world. Expectations change daily; unforeseen windfalls and wipeouts based on exogenous, uncontrollable forces soon take over from original expectations which formed the basis of initial bids and sales prices. Surprises are inherent in land markets because land is irreproduceable, permanent and stationary.

Professor Thomas N. Carver has divided all incomes into "Earnings, Findings and Stealings." Historically most if not all land rent has been secured by stealing, that is by force of conquest in the manner of Iraq taking Kuwait, Cromwell taking parts of Ireland, Spain taking the Philippines, Captain John Mason massacring the Pequods to take Connecticut, and so on. There is a lingering presumption of unsanctity about landed property.

On the other hand, if buyers in a truly free market paid government up front the full present value of land, one could regard future land rent as an honest "earning" on their early payment to the general fund. That view prevails among landowners and their economists, ex parte to be sure, but still arguable. Even from this perspective, however, there soon arise windfall rents which are "findings." Such findings are just as non-functional socially as stealings based on force, covin and fraud.

A major source of such "findings" is new infrastructure which brings benefits to specific lands, and may remove them from others. In the Soviet lands, shifting from one political-economic system to a radically different one will entail massive changes of infrastructure - for example, providing micro-infrastructure like road and utility extensions for the many small private farms expected to supplant the present few giant collectives. Giant landholding units, both farm and industrial, typically have provided internally for much infrastructure that must now be provided publicly, no doubt with new plans and layouts.

The capital to finance this infrastructure now lies sleeping in the lands to be served, whose rise in value will more than cover the costs, providing the projects are well planned and executed. To be just, however, the land gains must be tapped to pay the cost. If they are not tapped, the result will be the unethical process of someone else's paying to give the landowners a windfall.

Some lands are occupied by squatters. When these lands are privatized and tenured, removing the squatters poses hard ethical choices. Should they be given a prior claim to own the land they occupy? With a land tax that problem is de minimis: the state may give them titles but then require regular land tax payments to keep them. All buyers are more able to pay over time than up front. Many squatters could pay that way, too: the effect is the same as extending credit to these poor risks on the same terms as to the best. The inevitable non-payers can be evicted selectively, leaving most squatters undisturbed.

Political Reasons for Taxing Land Rent

To unify a nation it makes sense for a central government to tax the rent from richer regions, those with more rent per capita, and distribute it nationally as some form of social dividend. Distribution should be on a per capita basis, and/or some surrogate basis like average daily attendance at school, military service, or social security entitlement. Nothing else that is purely economic seems as well calculated to give every citizen a birthright and stake in the nation.

On balance this policy helps overcome ancient ethnic loyalties and particularism. One must concede it may be resented by local landowners in regions of high land value per capita, exemplified by the Province of Alberta, Canada. However, local distribution of superior local rents - in money or superior public services - is of no lasting advantage to the bulk of local people. The gain is quickly offset by competition from immigrants drawn by the higher social dividend. Such migration is also socially wasteful.

National distribution of rent, by contrast, has a great efficiency advantage along with its political advantage. Local distribution mislocates the population by overattracting immigrants to the favored local polities, much as footloose people are now drawn to Moscow. National labor resources are wasted when people work at jobs of low productivity in order to enjoy the supplement of superior local public services. The efficiency advantage of national distribution can be made a political advantage because it raises national output for the gain of all.

The alternative method of distribution, "regional equity," sets an implied goal of equalizing rents among regions or local polities, rather than among individual citizens. Regional equity says, in the extreme, that every cow county deserves its own Grand Central Station or JFK Airport to compensate for its inherent geographical handicaps. It is a proven, historically certified recipe for dissipating rent and impoverishing rich states and nations. It may also be used as a cloak for costly, irrational imperialism, a way of clinging to distant, submarginal marches whose maintenance and demands exceed all possible economic, military or political gains.

Distribution to local governments is also a formula for aborting their development as quasi-independent sources of power. Such quasi-independence within a nation is needed to balance central power and check despotism. Early U.S. federalism had some praiseworthy features (I do not refer to modern "revenue-sharing"). Sovereignty was shared between central and state governments ("territories," earlier). States then set up counties, generally on the principle of nulle terre sans seigneur, that is without leaving much land unorganized and hence untaxed. The states' power of taxation was delegated to counties and later to cities as they organized.

A key factor is that little aid (other than military) was passed from central to local governments as such. Local units had power to tax property, and they used it. They had little effective power to tax anything else. In this way, decentralized political power grew, saving the U.S. from the evils of overcentralization that beset, for example, its neighbor to the south.... read the whole article

Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent

The United States is a federation of states (and Indian-nation reservations), with many government functions such as criminal law, education, and local services provided by the states. Since the federal income tax was enacted in 1913, taxation and authority have shifted increasingly to the federal government.

In 1902, federal taxes represented 37 percent of total revenue to governments at all levels.45 By 2002, federal taxes represented 67 percent of the government revenue pie.46 The share taken by state governments rose from 11.4 percent in 1902 to 21.5 percent in 1986. Local governments’ share fell from 51.3 percent in 1902 to 13.7 percent in 1986.

The change in the share of tax revenues taken by each level of government has occurred in large part because of the relative ease of increasing income taxes at the federal level, and the relative difficulty of increasing local and state taxes. Taxpayers find it much easier to respond to changes in state and local taxes, by moving to lower-tax communities. It is far more difficult to avoid taxes imposed by the federal government — especially since U.S. citizens are taxed even if they are abroad.

Revenue-sharing from the federal government to the states is, in effect, a tax cartel among the states, collusion to tax the population and then divide the funds among the states. Taxation at the federal level also encourages spending by the federal government instead of the states, so now we have federal departments and agencies for education, housing, health and welfare, energy, and other fields that once were local, state, or private-sector matters.

Local and state governments, once willing to go along with the federal government’s tax-and-revenue-sharing scheme, are beginning to realize centralized taxing brings with it centralized authority, dramatically reducing local control. Revenue-sharing comes with strings attached: Local and state governments must abide by federal government mandates in order to obtain the funds, taken from their residents in the first place. Revenue-sharing allows the federal government to sidestep the Tenth Amendment to the Constitution, which provides that powers not specifically delegated to the federal government are reserved to the people and the states.

Land value taxation would shift economic power back to state and local governments. Land is suited to local taxation because — unlike enterprise, capital, and labor — it cannot be moved. Land is also the logical source of local public finance because it does not burden enterprise, so that entrepreneurs don’t even want to run from it. Indeed, entrepreneurs welcome a shift to land value taxation, not only because their economic profits are not taxed if all taxation is on land values, but also because land value taxation reduces the price of land, so they do not need to borrow so much when they invest funds in an enterprise.

When public finance is based on land value taxation, government revenues flow up, instead of trickling down from the federal government to the states and then to local governments. Real estate taxes today are assessed and collected primarily by county governments; under a system of land value taxation, funds raised would flow up from the counties to the states, and only then to the federal government.

Land value taxation would create a decentralizing force, shifting or “devolving” power down to local government in accord with the principle of subsidiarity: that which can be most efficiently done by individuals or smaller jurisdictions should not be done by larger or higher-level jurisdictions. Government functions would then come under more observation and control by the voters, who can monitor and alter local governments much more easily than remote federal agencies. ... read the whole document

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Wealth and Want
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