LAND VALUE TAXATION: THEORY, EVIDENCE, AND PRACTICE
edited by Richard F. Dye and Richard W. England
Lincoln Institute of Land Policy, 2009
“[E]conomists agree on a great many things, but tend only to discuss the things about which they disagree,” writes Lincoln Institute (of Land Policy) chief Gregory K. Ingram in the Foreword to this new book. And if one is disinclined to conspiracy theory, that might be the reason that the Single Tax and its various derivations don’t get much attention in the academic world.
A book about experience with the Single Tax would, of course, be a short one, since we don’t have any experience of a modern economy in which the only tax is one that collects virtually all the land rent. Rather, this work examines some cases in which land has been taxed at a higher percentage of value than buildings and other improvements.
After an introduction, there is a chapter on the U. S. experience, then one that looks at the rest of the world. The former, by Steven C. Bourassa, includes a table, based largely on data from the Center for the Study of Economics, that lists every Pennsylvania jurisdiction that since 1912 has ever had a “graded tax,” including the year established, current land rate, and current improvement rate. It shows a total of 23 units of government, of which 16 continue to tax land at a greater percentage of value than improvements. Amsterdam, NY and the Hawaii experience are also reported.
All of the post-1913 moves toward graded tax in Pennsylvania are attributed to “a desire to reverse economic decline by attracting new investment.” While that desire may have existed in every case, I recall in some communities more specific desires to increase revenues without resorting to taxes (such as a wage tax) that discourage production and drive away jobs.
Why have seven Pennsylvania governments (as well as Amsterdam, NY, and some counties in Hawaii) dropped their graded taxes in favor of the conventional real estate tax? In most cases the recission was due either to poorly-done assessments, or lack of proper development controls. In at least one case, there is a suggestion that a large landowner influenced the City Council to rescind the graded tax.
Although it dropped the graded tax in 2001, Pittsburgh retains LVT for its Business Improvement District, and has introduced at least six separate programs to abate the tax on improvements elsewhere under limited conditions.
Non – US Experience
Riel Franzsen’s chapter on non-U.S. experience gives considerable detail on Australia and a few other countries, including a discussion of “unimproved value” vs. “land value” concepts (and why the latter is much more practical). But no one reading it would realize that land value tax had an important role in the development of such 20th-century economic successes as Japan, Taiwan, South Korea, and Hong Kong.
One will not find here much of the modern historical context, within the U.S. as well as internationally, which is provided by Land Value Taxation Around The World.
Franzsen writes “One of the main disadvantages of a land value tax system is the difficulty of determining credible land-only values in heavily built-up urban areas (see chapter 8 in this volume.)” However, if one looks at chapter 8, whose authors include an actual assessor, one reads that “we conclude that adequate analytical tools to estimate with reasonable accuracy separate values for land and for improvements are available…the tools necessary to do the job efficiently and accurately are available…” (page 193).
Theory and Evidence
The descriptive work completed, the book now moves into “theory and evidence.” Oates and Schwab start out well, acknowledging that a tax on land value cannot be passed on by the landowner and does not (unlike other taxes) distort economic decision-making. Then they go out of their way to introduce a liquidity problem (if the landowner can’t borrow money to pay taxes while waiting for the efficient time to develop), which straw man they knock down by noting that a smart landowner in such a case could sell the land to someone who can afford to wait. OK, then there was no need to bring this up, but while we are talking about liquidity, they should have pointed out that, by reducing the up-front cost of land with any given productive potential, a land value tax also reduces the amount of credit which a buyer would need.
Oates and Schwab also seem a bit unclear on the effect of production taxes on land values. What would happen to the value of productive land if all taxes on production are eliminated? The land would be more productive (in terms of what would be left after taxes), the value of the land would increase.
And so they find it “unlikely that the federal government could raise a substantial share of its revenue by taxing land” (page 69), because they have not considered this effect. And yet, at the bottom of the same page, they assert that theoretically “no tax can generate more revenue than a tax on land,” which they proceed to clearly explain.
What does “fair” mean?
The next chapter is Elizabeth Plummer’s on “Fairness and Distributional Issues.” A footnote explains that she is not going to evaluate based on benefits received, because “many government programs provide the greatest benefit to those who can least afford to pay…[and] benefits can be difficult to measure.” I suppose if we conceive government as a device for redistributing incomes, then we would be happy to see that some are paying more than the benefits they receive, end of discussion.
But if we merely seek a just distribution of wealth (meaning that the producer receives the product), then the main function of government is to manage common assets for the benefit of the community, and protect property, including protection of land titles. (Welfare and criminal “justice”, in this case, are intended to protect the lives and property of all members of the community). Then, the greatest beneficiaries of government are those who own the most valuable property, particularly land, so a tax on land is more likely to reflect benefit received than is a tax on retail sales or earned income.
But the definition that Plummer has chosen is “fairness…the idea that people should be taxed according to their financial ability to support government activities, regardless of the benefits they receive. ” Even by this definition, tho, “evaluating a tax system’s fairness…can be difficult because…how should [economic] well-being be measures?”
She then mentions (page 76) the “moral” argument, that the community is entitled to the land value, which results from community activity rather than anything done by the landowner. The problem with this approach is that it is complete in itself and leaves nothing for the remaining 20 pages of the article.
So Plummer goes on to suggest that a business owner might be able to pass on the land value tax to customers, employees, or suppliers, which of course Oates and Schwab had earlier (accurately) said they cannot. (The reason is that a rational business owner is already paying as little and charging as much as she thinks she can, and even if a land value tax increases her expenses, the compensatory decrease in land prices and/or increase in productive potential means potential competitors aren’t disadvantaged by the land value tax.) She then reviews some studies focused on residential property, in every case looking at the possibility of shifting from a conventional real estate tax to an LVT or graded tax. Some indicate this shift might be “progressive” and others do not. All seem to ignore three things:
(1) Renters generally have much lower income than owners; therefore any effect on owners of housing occupied by low-income people likely is felt more by landlords than by residents.
(2) LVT and graded tax are often presented not as an alternative to the conventional property tax, but as an alternative to an increased wage tax, sales tax, or other consumption tax. Such taxes are surely more regressive than any type of real estate tax.
(3) The impact of a shift toward LVT on real estate owners is a one-time thing, affecting only current owners. But taxes on production and consumption have continuing impacts, as long as they are imposed.
Plummer winds up citing (pp. 95-96) a couple of studies that seem to indicate that land value taxes are progressive, again by her income-based definition.
Desirable and legal?
John Anderson then presents a chapter looking at studies of potential and actual tax shifts. In the former category is one, done in 1987 on 1980 data for the Boston area, and concludes (page 110) that under a shift to a graded tax “land rents would fall, improvements per acre …would rise, housing prices would fall…and wages would rise.” Hey, isn’t this what we want?
Anderson then goes through some regression-based studies of Pennsylvania, all of which seem to be consistent with Georgist understanding of economics. Noteworthy is Plassmann and Tideman’s 2000 study, which estimates that “a 0.1% increase in the differential [between land tax and improvement tax] increases the number of residential whole units permits by 0.14% and the number of permits for residential additions and alterations by 0.14% as well…[and] a 1.58% increase in the total value of construction.” Also, they conclude “that a switch to a pure land-only tax would increase residential whole units by 6.53% and residential additions and alterations by 6.98%.” Georgists might hope for larger effects, but of course the vast bulk of land rent is still going into private pockets, and taxes on production, such as income tax, wage tax, and sales tax, remain.
Anderson’s chapter concludes with a table summarizing 22 studies of the effects of increasing taxes on land values. Unfortunately, there appear to have been no studies of the “reform by obeying the law” approach (discussed in Land Value Taxation Around the Worled), that was successful in Southfield and elsewhere, and could be the most politically feasible approach for most areas.
The next chapter is Richard D. Coe’s on legal considerations. I am not a lawyer, really I am not a lawyer, and the chapter contains a key point that I simply do not understand. On page 130 Coe cites Article I, Section 9, Clause 4 of the U. S. Constitution. “No capitation, or other direct Tax shall be laid, unless in Proportion to the Census…” He remarks that this would prohibit any Federal property tax. [WHOOPS! 9/1/09 update: Thanks to Yisroel Pensack for an email pointing out that this need not prohibit a federal tax on land, and to Mason Gaffney for reporting that such a tax apparently was imposed on five occasions prior to 1863. ]
So far he is correct, but the 16th Amendment, ratified in 1913 says
“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
So why would this prohibit a federal land value tax? It is already established that a federal tax can be imposed on non-cash income, so why not on land rent? There might be a reason, but Coe doesn’t provide it.
Coe then goes on to consider the legal issues regarding state and local governments imposing LVT. Of course the situation differs from state to state. Perhaps the most significant finding originates with Tony Coughlan’s 1999 state-by-state review, which concludes that, based on what the constitutions say, it seems impossible for Pennsylvania to have the graded tax that in fact it has.
Technically and politically practical?
In the eighth chapter, Michael Bell, John Bowman and Jerome German discusses the practical aspects of actually assessing land values, and describe the different approaches that can be used. Anyone who is going to have to defend the feasibility LVT should read this chapter. For the rest of us, it may be sufficient to know that “There are adequate analytical tools available to estimate with reasonable accuracy independent land and improvement values.” However, “land value estimates are in part a function of the valuation methodology adopted.” I think the different methods may reflect different concepts of exactly what land value is, and any assessment system needs to be very clear about just what is being assessed.
In the final chapter, Steven Bourassa asks, “If LVT is such a good idea, why haven’t more jurisdictions adopted it, and why have some [dropped it after a time]?” He concludes that there are five reasons: Taxation of unrealized gains; difficulty assessing land values and properly setting rates; excessive development (which is really a failure of planning and zoning laws), winners and losers; and lack of understanding by politicians and citizens. Only the first of these is an inherent feature of LVT, the others being mainly a symptom of any significant fiscal change. And even the first can be alleviated, by permitting financially stressed landowners to abate taxes in exchange for a lien on their parcels.
So is this a good book? It is a book coming from the Lincoln Institute of Land Policy, a very well-funded organization that commands a large number of PhD’s. It says LVT tax is workable and has generally good effects. It provides some directions for future research that, if competently performed, will further support and detail those assessments. I don’t think we could have hoped for anything better.