Category Archives: land value tax

Some effects of high and misconfigured real estate taxes

Delinquent taxes soaring in Cook County

Reportedly, taxes of 163,036 parcels in Cook County were not paid on time. This comprises 2018 taxes which should have been paid in 2019. and amounts to 8.7% of all parcels in the County. For a dozen south Cook County municipalities, this amounts to 20% or more of total parcels.  Counts by municipality are posted separately for south, west, and north Cook.  All sources show the percentage of parcels with unpaid taxes within the City of Chicago as 9.9%.

Separately, the reports show that only 7.8% of the delinquent taxes offered for auction in 2018 were bought by investors, which might imply that the remaining parcels are considered worth less than the taxes owed.

Unfortunately the source doesn’t tell us  how many of the parcels are vacant, residential, commercial, or other uses, and gives no historical context, so we don’t really know how any of these figures compare to prior years. But regardless, the current numbers are alarming.

Suppose that the real estate tax system was changed, so that improvements would be tax-free while the value of land as vacant would be heavily taxed to make up the difference.  For vacant parcels, construction of houses or other structures would not increase the tax.  For parcels which contain improvements, taxes likely would be lower than now, and improvements would again be tax free.  Just a thought.

Maybe expanding tax-exempt institutions raise land prices?

Crains tells us that a strikingly-designed two flat, less than 30 years old, is worthless.  Well, they didn’t say it quite that way, but it was sold for $1.9 million to a buyer who will demolish it. So the $1.9 million was for the land.  I don’t know whether any developer of housing or anything else taxable would have paid nearly that much for the site, but the buyer was tax-exempt Illinois Masonic Medical Center.  Their exempt status of course made the land more valuable to them. Which raises the interesting question of whether buying land in the path of such an institution’s expansion might be a profitable strategy.  Of course, a fair-minded community might decide to tax land used for hospitals at the same rate as land used for housing and other useful things.  But we’re not there yet.

“Taxes – De Standaard” by Stijn Felix is licensed under CC BY-NC-ND 4.0

 

Putting government pension costs into perspective

Wirepoints recently issued a helpful report showing state and local government pension debt per Chicago household.  They estimate the burden at $144,000 per household.  This is a big number, but one could suppose that a prosperous household, over decades, could bear such a burden.  Some could, but probably not those below poverty level.  Take them out of the picture and the per household amount rises to $172,000.  Excluding households with incomes below $75,000, or below $200,000, and the per-household amount rises further, to $393,000 and $2,022,000 respectively.

Here’s their chart: pension debt chart

Of course this doesn’t consider land values, nor businesses.  If prime Chicago land is worth $1,000/sq ft, that’s 5.38 sq miles.  But more typical land value is much less, probably no more than $25/sq ft. (it seems that nobody has tried to estimate citywide values). That would be 112 square miles.  Once we subtract land owned by governments, churches and other exempt nonprofits, we might be approaching the total value of all land in Chicago. And that’s just for pensions, not bonded debt, nor needed capital improvements.  Real estate buyers know, or certainly should know, about these encumbrances.

Of course money can be raised from business taxes, but that’s hardly a way to grow economic opportunity for Chicagoans. I would consider any tax revenue from “gaming” as a kind of business tax.

The lesson Wirepoints draws from this is that pensions have to be downsized somehow, which required amending the state constitution.  And they go further, comparing government salaries to those of the private sector:

some local gov't salaries compared to average workers

So it looks like we’re going to have to confront a large number of people with guns and firehoses and control over our children, who have been getting a lot of money from us for years and may prefer not to moderate their demands.

Tho I don’t know how, this problem will be solved. Maybe MMT will yield a continuing stream of funds to bail us out.  Maybe inflation will accelerate such that the fixed 3% compounded pension increase isn’t a burden.  Maybe Chicagoans will decide that they just don’t want so many government “services.”  Maybe politicians will decide to remove all taxes from productive economic activity, taxing only the value of land and other privileges (such as the private monopoly over street parking fees), which will grow the economy (while reducing the need for emergency services) sufficient to make pensions a non-issue.

And when it is solved, those who own land and other privileges will benefit most.

Why trust corrupt governments to honestly administer a land value tax?

bar chart of what folks say they're afraid of

source: Chapman University Survey of American Fears

I don’t know that governments are always and inevitably corrupt, but there sure seems to be a lot of corruption going on.  It isn’t a new development; maybe it’s worse nowadays or maybe just more visible.

So how can we single taxers say that we want the government to collect all, or nearly all, of the economic rent? Don’t we know that it will be stolen or, at best, wasted?

Not necessarily.  Consider the following:

In the U S at least, real estate tax is administered and collected at the local — that is, substate– level. This is where the records and expertise needed to operate a land value tax exist.

Unlike income tax or sales tax, nearly all the data involved in real estate taxation is public information.   Most of this data is accessible to everyone with internet access, generally without fee. I can see how much real estate tax my neighbor paid.  I cannot see how much income tax they paid. The same goes for sales taxes and most other kinds of taxes. So cheating in real estate tax can be seen.  That doesn’t mean it will always be impossible for people to cheat, but it provides a much greater possibility that cheating will be observed and rectified.

Government corruption seems to be a function of government size.  A survey earlier this year found that “87% of voters nationwide believe corruption is widespread in the federal government. Solid majorities believe there is also corruption in state (70%) and local (57%) government.”  Looked at the other way round, only 13% of us believe the federal government is possibly honest, compared to 30% for states and 43% for localities.  I actually believe that one of the local governments to whom I pay taxes is pretty honest and efficient.

State and federal governments might logically collect some of the economic rent.  Examples currently include severance taxes and could reasonably include rents for electromagnetic spectrum should our rulers become persuaded to levy and collect them. Existing federal agencies are able to review and evaluate collection efforts.

 

Notes on Cook County Assessments

Selection from Olcott’s Land Values Blue Book, 1936 edition, Numbers represent values per front foot, to be adjusted as described in the book.

Assessor Fritz Kaegi appears to seek assessments that are more consistent with applicable laws and ordinances, and easier for taxpayers to understand. This might be a good thing, tho one hopes that, once taxpayers understand how assessments are done, they’ll demand a more helpful system, one which doesn’t punish homeowners and businesses for building or improving.

Traditionally, Continue reading

Fictitious people and their imaginary taxes

Credit: Mike Licht (CC BY 2.0)

Matt Levine has an illuminating post about why the recent reduction in corporate tax rates results in a reduction in some corporations’ reported profits.  It seems that past losses can be saved as a “deferred tax asset,” permitting a reduction in taxes to be paid in future years.  But the ratio of losses to tax reduction declines when the tax rate declines, so the deferred tax asset is reduced.   Levine notes that such tax rate reduction can cause a corporation to appear less well capitalized, since it reduces assets, even tho it increases expected after-tax income.

Just another illustration of the absurdity of a corporate income tax (or perhaps of corporations in general).  Of course corporations should pay taxes – based on the land (including spectrum and other natural resources) that they claim.  And they should pay additional taxes reflecting the limited liability granted by the state.  But the accounting concept of corporate income has little to do with this.

Another outrage that a land value tax would eliminate

One of many sophisticated dogs named “Wrigley” Image credit: Liz CC BY-NC 2.0

Expanding on a subject covered here nearly six years ago, Tim Novak of the Sun Times writes about  assessment deals in Wrigleyville.  Actually, not just 32 properties in Wrigleyville, but apparently on 13,984 parcels countywide, each of which reportedly contains commercial use along with at least one, but no more than six, apartments.

Because Cook County taxes residential (and vacant) property at 40% of the rate applicable to commercial property, and because, 17 years ago, the Cook County Board decided to pretend that commercial property containing one to six apartments is residential, taxes on these 32 Wrigley-area properties (and, presumably, on all 13,984 parcels) are only 40% of the amount they would otherwise be.  Furthermore, Novak visited some of the properties and found evidence that they don’t contain any apartments at all. Which Assessor Berrios thanked him for reporting.

Novak also visited an auto repair shop across the street from Wrigley, whose owner owes $78,000 in back taxes and claims to fear losing his property.  Of course I don’t know the owner’s personal financial situation, but given high land prices in the neighborhood, it seems he could sell his site for a couple million dollars, take the money and buy (or buy land and build) a better facility a mile or two away.  Across from Wrigley may have been a good location for car repair in the 1970s, but not so today.

Three conclusions:

(1) Sun Times needs to sell papers (and attract web traffic) and putting “Wrigley” in the title probably doubles or quadruples the number of people who’d read an article about “tax break.” But the issue is taxes, not commercial baseball.

(2) Once again, let’s be thankful that real estate tax and assessment data is (mostly) accessible to the public.  Who knows what kinds of scandals there are on the income tax and sales tax returns filed by the politically-connected property owners, their accountants or attorneys? Unless Wikileaks takes an interest, we’ll never see them.

(3) All this would be solved with a land value tax.  Everybody pays the same rate — a big rate — based on the value of their land, exclusive of improvements, and perhaps no other taxes are needed.  If there were inequities, the Sun Times — or the Civic Federation — could publish maps making them readily visible.

 

Won’t be finishing this book

Laurel & Hardy silhouettes. Image credit: Stephen McCulloch CC BY-SA 2.0

A Fine Mess by T R Reid. The subtitle is: A Global Quest for a Simpler, Fairer, and More Efficient Tax System. A great quest, and certainly something to investigate. Grabbed it off the library shelf, started to read, and …

Any time I see what might be a thoughtful book about taxes, I pretty soon turn to the index to see what it says about Henry George, land values, or economic rent. Hey, Reid devotes about six of his 262 pages to a section about Henry George and land value tax (tho he sort of conflates this to the “property tax” which includes improvements.) He acknowledges George’s historic significance and the logic of the Georgist argument.  Then he says:

In George’s day, government– and thus the funding needed to pay for it– was vastly smaller than what we know today… [I]n 1879 there was no Social Security, no Medicaid, no NASA, no Department of Transportation or Energy or Health & Human Services.  Some economic historians argue that the Georgian Single Tax might have been adequate to maintain the relatively minimal governmental establishment of the 1880s…No country has ever been able to fund its governments with only the Single Tax on the value of land that Henry George envisioned.

He does not say “Full collection of economic rent would be insufficient to fund all the legitimate functions of government,” tho he certainly implies it.  So a response is needed.  And available.

  • If the government provides services which make the community (city, state, country, whatever unit) a more pleasant or productive place, what is the effect on the value of land? Does this not apply to the services Reid mentions?  If it does not, why should the people continue to pay taxes for such services?
  • If all the taxes which make labor expensive and real wages low, such as the tax on earned income, payroll tax, sales tax, tax on houses, utility tax, Medicare tax, were abolished, what would be the effect on the value of land?  And what would be the effect on the need for that part of government expenditures which assist the poor?
  • In fact, how has the value of land in America changed  since George’s time? It is a national embarrassment that we do not have reliable information to address this question, but surely the answer is “multiplied manyfold.” One reasonable estimate (pdf)  of today’s value is $23 trillion (as of 2009). That’s more than the national debt.  Because land value is a function of rent, and because all taxes come out of rent, imagine how much greater land value would be in the absence of all the anti-productivity taxes as noted above.

Of course, George’s proposed tax does not apply only to land as conventionally defined.  It also includes taxes on mineral rights and extraction, electromagnetic spectrum, water rights, and more. (Mason Gaffney compiled a pretty complete outline (pdf)) It also applies to the moon and planets, should NASA or some billionaire claim rights.

So since Reid neglects to properly evaluate the potential of the single tax, I’m not inclined to read his book because I wouldn’t know what other oversights it might contain. But I did browse thru it.  Reid really likes the value-added tax: “We should…implement this tax and use the money it raises to cut taxes on work and savings. (page 255)”

Uh, what are the economic purposes of work and savings? Yeah, to buy goods and services, now or in the future.  Substituting a VAT for taxes on earned income would permit people to get earn or save more dollars — and would make more expensive the things people want to spend those dollars on.

Gaffney has provided a further case against VAT (pdf).

 

The only honest way to do income tax

“ All of Nature Flows Through Us” by Marc Quinn

photo credit: Randi Hausken CC BY-SA 2.0

In Norway, it turns out, income tax returns are public, sort of. Apparently you need to be Norwegian, or know somebody who’ll let you use their government registration number. And the taxpayer will know who has looked at her information. Authorities say “We like people to do searches which could help us in investigating tax evasion…” Logically, if taxes on income are a major source of public revenue, it makes sense that the public should be able to see the details of how these amounts are determined.

And in Norway, like most places, big landowners are able to minimize their tax:

The tax lists only tell you people’s net income, net assets and tax paid. Someone with a vast property portfolio, for instance, would probably be worth far more than the figure found in the lists, because the taxable property value is often far less than the current market value.

Just to be perfectly clear, I am not suggesting that U S and Illinois income tax returns should be open to public inspection. That would be a second-best solution. The best solution is to abolish the income tax, as well as most other taxes, and obtain revenue for legitimate government costs thru public collection of land rent.

h/t Slashdot which was my original link to the BBC article.

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.