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. ...
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