Archive for the ‘land value tax’ Category

Politician talking sense…

 

image credit: njcull (cc) via flickr

image credit: njcull (cc) via flickr

…or at least so it appears from this interview. (No transcript is posted so you’ll have to listen to the audio.) Andrew Barr is described as Chief Minister of the Australian Capital Territory.  His jurisdiction is substituting a “land tax” (which seems to be approximately proportional to land value) for the “stamp duty” (tax on buying/selling real estate), also using the revenue to reduce payroll taxes and eliminate a tax on insurance. He calls the land tax the least distorting tax.

The change is, in a sense, optional. Owners may choose,, instead of paying the tax annually, to incur a debt which becomes due when the property is sold.

Apparently this change is being phased in, having been announced in 2012, as also reported by Incentive Taxation.

Local land prices show that location still matters

taken about 8 years ago by Zachary Korb, via flickr (cc)

A different vacant parcel, about 8 years ago by Zachary Korb, via flickr (cc)

Crains reports the sale of a vacant parcel in the fashionable North State Street neighborhood for $70 million — $4075 per square foot. The article says that “Under a zoning agreement the city approved in 2006, a developer could build as many as 261 residential units on the parcel,” which would work out to about $268,000 land cost per unit.  You can buy a nice residential lot in many decent neighborhoods for a lot less than $268,000 (and in less-decent neighborhoods land is practically free). Perhaps the buyer is expecting to obtain an increase in permitted density.

The article also reports that the seller, a “Miami-based developer” who has held the parcel only four months, will realize a $42 million profit.  It’s unfortunate that none of this profit goes to support the intensive and expensive infrastructure which helps keep the neighborhood functional.

Two dumb tax policies give Aussie millionaire a bite of your lunch

Image Credit: Marshall Astor (cc) via flickr

From Crains we have a report that McPier — the Metropolitan Pier and Exposition Authority which controls McCormick Place and Navy Pier — has paid $5.5 million for about half an acre which sold last year for just “over $1 million.” It seems to be an awfully nice profit for Drapec USA, the California-based Australian real estate operator who earlier was expected to develop the property themselves.

I don’t know that this deal was in any way particularly corrupt or dishonest.  Maybe the parcel actually quintupled in value over 14 months.  Or maybe Drapec really has better “analytical and negotiating skills in finance and real estate” than McPier (or the seller last year, BMO Harris).  But there are two things I do know:

(1) The multi-million dollar profit will be paid by everyone who patronizes restaurants in or near the central part of Chicago, where McPier imposes a 1% tax on all meals. To keep the math easy, figure the average fast-food meal costs $5.50, yielding 5½¢ for McPier.  At that rate, it’ll take a hundred million meals to buy this real estate. Of course, McPier has other tax revenues, too. And actually, not quite all meals are subject to the tax, since some nonprofit organizations, as well as governmental agencies including McPier, are exempt.

(2) The asserted purpose of McPier is to “strengthen the local economy.”   Why should the economy need to be “strengthened?” What are the obstacles preventing people from finding productive employment? Certainly one of these obstacles is taxes, not only the amount of taxes paid but also the difficulty and expence of conforming to all the applicable tax rules and regulations. Another, perhaps more important obstacle, is the vacant and underused land throughout the City.  Land can be forced into productive use by collecting its full economic value through a land value tax.  Since nothing can be produced without labor, productive use means wages will be earned. That is the way to strengthen the local economy.  Of course, under a full land value tax, the selling price of that half-acre parcel near McCormick Place would be nominal, and Drapec would not have bought it unless they planned to begin development promptly.

Land sales price vs. what is paid for land

image credit: Onishenko

image credit: Onishenko

In order to fund community needs from a tax on land value, assessors need to estimate what that land value is.  Conceptually the task need not be difficult (Ted Gwartney outlines some options here, but a more complete and still-valid examination is in this book.) Basically, you look at sales prices for actual land transactions, and make adjustments for parcels which haven’t sold recently or where land comprises only a small part of the value.  But what happens if the buyer pays something additional, “off the books,”  for the land?

According to Peter Katz, that seems to be what often happens. This presentation at APA last March starts off slow (and self-promotional), but moves along thru some interesting territory. Regarding the price of vacant land, he asserts that, in many desirable areas, developers have to first buy (or option) the land, then negotiate with local authorities to get permission to build. Getting that permission might require agreeing to donate money (or land) for public use, or perhaps less savory expenditures, and to the developer this is part of the cost of land. If an area of any size is subject to such constraints, all the land sales are below market prices by the amount of such costs, and all sites, whether sold or not, receive assessed land values that are lower than what developers actually pay to get a buildable site.  This results in less public revenue, implying a need for other taxes, as well as a tendency to develop at lower densities than might be appropriate, when developers choose to settle for existing zoning rather than what they might be able to negotiate. Katz suggests that a formal study of this effect should be done, and nominates Lincoln Institute to make it happen.

Katz’s remedy seems to be a combination of form-based zoning codes, plus a sophisticated (and presumably accurate) fiscal impact analysis that might show denser development to actually be more “profitable” to governments.  But, responding to a question about 65 minutes into (and near the end of) his talk, he acknowledges that funding government from a land value tax would be a good way to obtain the desired development pattern, and that Henry George was a great guy.  His observation that Georgists tend to be wacky has been made before, and I can’t say it’s wrong.

Quid Pro Brew

image credit: Bernt Rostad (cc) via flickr

image credit: Bernt Rostad (cc) via flickr

I was wondering a few weeks ago why Revolution Brewing supported the lobbyist-friendly “Transit Future” funding effort.  How foolish I was, is not brewing a regulated industry desirous of government favors? WBEZ reminds us of the “Small Brew Act,” which would cut the federal taxes on the first 60,000 barrels produced. Senator Kirk, who has never done anything constructive that I can recall, toured the Lobbyist Revolution Brewery and spoke kindly of the act.

Of course, there is no just reason to impose any tax on production of beer or anything else people want, provided that land rent is collected by and for the benefit of the community. In the same situation, I might do the same thing Revolution has done, especially if I knew more about political strategy and good beer than about smart fiscal policy and public finance.  But it’s a shame they’re doing it.

 

NY Times reports another benefit of the citizens dividend

photo credit: coal dubya via flickr (cc)

photo credit: coal dubya via flickr (cc)

If the earth belongs to the people, then whatever is paid for the use thereof belongs to them in some equitable fashion also.  Therefore, beyond what’s needed for legitimate government purposes, there would seem to be enough for a considerable “citizen’s dividend” for everyone.  Plenty of discussion on this subject can be found here.

My guess is that it would likely be enough to replace most of the aid programs which provide funds — rarely enough but maybe better than nothing — to low income people.  One advantage is that it could be administered at relatively modest expense.  A related advantage is that it can probably be made to work, with everyone getting what they’re entitled to. This latter aspect is what came to mind when I read this NY Times article, in which a Georgetown law professor summarizes “a litany of automation and contracting meltdowns” whereby the poor were unable to obtain benefits to which they were entitled under various aid programs and which may have been essential to their support.

His point seems to be that, while healthcare.gov suffered major problems initially, it was soon repaired because its failure affected many non-poor people. (I have no idea how well-repaired it might be, but will assume he is correct about this.)  He does not mention the citizens dividend, perhaps is unaware of it, or maybe ignores it because it would likely reduce the demand for lawyers. But he makes the case. A regular check for everyone, as a just entitlement, would be a far simpler system than most of the means-tested (and otherwise-restricted) aid programs which cost taxpayers so much money.

And while we’re on the subject of means-tested programs, consider this:

[I]f a single mother has two children in childcare and she’s making $36,000, she’ll pay about $310 a month for childcare. Then, if she gets a raise to $37,000, she’ll need to pay $1,200 a month for childcare because of the loss of a subsidy.

Of course, it needn’t be a raise, it might just be a decision to work a bit of overtime. I have written about this before and I will probably have to write about it again. Means-tested aid is a disgrace.

 

Progressive proposal from Kenya

detail from photo by Jennifer Wu via flickr (cc)

detail from photo by Jennifer Wu via flickr (cc)

Writing in Standard Digital, Charles Kanjama proposes that “If government was clever, it would include a value-capture approach in project financing.”  He’s writing about big infrastructure projects, which in his time (2014) and place (Kenya) include railway and port improvements. He suggests that perhaps half the cost should come from land value tax, without explaining why it would be appropriate for landowners to receive half the benefit of improvements paid for by the general community.  (Kanjama is an attorney and accountant who was rated among the top 100 legal minds in Kenya as well as one of the 100 most influential people in that country.)

The same edition (January 4 2014) carries another article showing a problem resulting from failure of the community to collect all the rent.  It seems that the government wanted to remove a large number of squatters who had settled in a protected forest.  Ordered to vacate, they each received 400,000 shillings ($4604.67 US, according to Wolfram Alpha) to purchase land elsewhere.  Now the time for relocation has expired, and many spent the money on things other than land.  Of course I don’t know these people, don’t know what land was available, don’t know their needs, but very clearly if land were nearly free (as results from a high land value tax) they would almost certainly be better off.

Land value depends on the definition

Image of Drake Hotel by Teemu008 (cc via flickr)

Image of Drake Hotel by Teemu008 (cc via flickr)

In an urban context, absent special environmental issues or legal constraints,  land value and location value are pretty much the same thing.  So we read in Crains that the Drake Hotel is on a 63,000 square foot parcel valued at $150 million, implying this land is worth about $2381/square foot.  But no, the location probably isn’t worth that much.  Rather, the land is leased by the owner of the structure, and the lease document says that, every five years, the land value is to be estimated and the annual rental set at 10% of the land value.

Possibly 10% was a reasonable return in the past, but in today’s zero-interest-rate world no safe investment would yield that much. Rather, the owner of the land actually owns two things: (1) the land, and (2) the privilege of requiring the building owner to pay an above-market rental rate.  Were we to value the land “as vacant,” which is the correct way to estimate land value for taxation purposes, then (2) would disappear and the land would be worth, more or less, the same per square foot as other land in the very prestigious immediate neighborhood.

It would be interesting to see what the lease says specifically about how the land value is to be estimated, and to read the (certainly confidential) document describing how the $150 million value is justified.

For more discussion about methods of valuing land for assessment purposes, duck around for works by Ted Gwartney on the subject, or consult the old but still-relevant TRED volume.

The taxing question of land value

1_69ffd9a3b25bee3673beaa1ee0190583UK Geoists are crowdsourcing a film about the nature and benefits resulting from a tax on the value of land.  You needn’t be a UK resident nor have a UK charge card in order to support this. Seeking a total of £9000, they’ve already got £2188 with 18 days to go.  Join the 46 funders so far, or find out more, here.

Another report ignores the citizens dividend

marginal rate chart

From C. Eugene Steuerle’s June 27, 2012 statement at http://www.urban.org/UploadedPDF/901508-Marginal-Tax-Rates-Work-and-the-Nations-Real-Tax-System.pdf

I’ve written before about the wild effects of graduated taxes and means-tested benefits which can dump low-income workers into effective tax brackets in excess of 100%.  That is, once the effects on eligibility for earned income tax credit, child tax credit, medicaid, SNAP (food stamps), subsidized housing, and so forth are taken into account, an extra $1000 of income can easily cost more than that amount in increased taxes plus reduced benefits.  (Worse, most low-income people don’t have professional accountants who keep track of this, and so they don’t know in advance what the effects of getting a raise, or taking some overtime, might be.)

This is hardly original with me, and most recently the Congressional Budget Office has issued a report on the subject, summarized here by Evan Soltas of  Bloomberg. What can be done to fix this?  Not much, conclude most writers including Soltas.  We need tax revenue, we need to target aid to those with the greatest need, we can’t expect the rich to pay everything (since they have the lobbyists, lawyers and accountants to limit the taxes they pay.)

None of the writers who get attention seem to consider the citizens dividend. The basic idea is that government collects all the land rent — that is, the effective rental value of private control of natural resources — and share it with all citizens, everyone getting an equal share. It’s done on a small scale in several jurisdictions, including Alaska where each state resident gets a thousand dollars or so, each year, as a share of investments funded by mineral resources.  Of course, natural resources include not only oil, gas, and ore, but also the electromagnetic spectrum, agricultural land, forests, and much of the value of land sites (except of course those which have no market value.)  Suppose this rental value, or just a substantial part of it, were collected by the federal government and distributed, equally, to every U S citizen (maybe legal permanent residents should get a share also). How much would that be?  Would it be enough to pretty much replace most means-tested programs?  Wouldn’t that solve our problem?

Of course, arguments for collecting economic rent go far beyond fixing the screwed-up incentives of means-tested programs and graduated income taxes,  (visit a Henry George School or the Henry George Institute to learn more), but let’s not forget this benefit.

And by the way, it isn’t only the poor who can face these >100% marginal rates.  I wrote before about how certain Cook County homeowners with incomes in the $75,000 – $100,000 could face such rates; I don’t know whether these limits remain in effect. More broadly, it seems that affluent Americans subject to Medicare face a similar situation: As explained here, should your “modified adjusted gross income” amount to $107,001, then your Medicare cost will be $754.80 more than if your income had been only $107,000.  The effective tax rate on that particular dollar is 75,480%.  (Of course if you have a really alert accountant keeping track of all your financial affairs, she will alert you and find a way to avoid that extra dollar. And that accountant knows that the rates quoted above are for 2011 income, at least I think they are, and different limits will be in effect for the current year.)