The Irish organization Smart Taxes has issued a proposal for site value taxation of residential land in that nation. For those of us elsewhere, a highlight is the brief description (on pages 4-5) of some existing successful land value taxes in North America, Europe, Asia, and Australasia. There is also (unsourced) data asserting that
In the US, recurring taxes on immovable property form 11% of all tax revenues, while in Canada and the UK they contribute 9%. In Australia and New Zealand, they contribute between 5% and 6% of all tax revenues. In Western Europe, the contribution is typically lower (1.5% in 2008)
Also significant is the discussion of how to justly implement a new site value tax in an area with limited data. Apparently Ireland’s existing real estate tax affects only commercial property, so even such basic information as the name and address of the property owner can be a challenge to obtain.
The report considers a tax in the range of 1% to 2% of site value, which is thus comparable to real estate taxes in many US jurisdictions (which, however, fail to exclude the value of improvements).
Overall, an easy read, just 22 pages, entirely in English, pdf directly downloadable here.
I am the second-least-qualified person to review this book. That’s because it takes for granted that the reader is a believing Christian, and that the reader has an Amazon Kindle or other proprietary software (or hardware) with which to read it. I claim neither qualification; what I review here is a text which I was told is the text of this book.
An earlier version of this book is the basis for the course Economics as if God Cared, offered by John Kuchta once or twice each year at the Henry George School of Chicago.
In 2010, the University of Minnesota’s Transitway Impacts Research Program released two studies of the impact of the Minneapolis light rail (“Hiawatha Line”) on real estate values. The residential study (pdf) estimated that houses near rail stations gained a total of $29.4 million more than houses outside the area, and multi-family properties gained a total of $17.7 million. The commercial/industrial study (pdf) estimates an increase of $20 per square foot (pdf) of building space, tho they do not extrapolate this to estimate the total impact. Assuming for the moment that the commercial/industrial impact (which includes much of downtown Minneapolis) is double the total residential impact, we have a total land value gain of $141 million.
Now, that’s a nice amount of money, but building and equipping the rail line cost $715 million in total tax money, and it seems per page 32 of this big pdf to require about $15 million in annual operating subsidy from taxes. Assuming the construction cost to be financed with bonds costing 4%, that’s an annual cost of about $44 million (in addition to fares collected.) Can this be justified by a land value increase of $141 million?
It’s a question worth asking, but there are reasons the answer may be “yes, easily.” First, a big shortcoming of the studies is that they compare prices before the line started operating, in 2004, with prices afterwards. It stands to reason, and has been established elsewhere, that real estate values start rising no later than the beginning of construction for a new rail transit line.
Second, real estate sales price may be the capitalized value of future expected net rent, after taxes, but is only indirectly related to gross rent. The difference is taxes, not only the real estate taxes collected against the parcel, but also other taxes which operate to reduce rent. Thus, increased real estate tax, sales tax, state income tax, and other taxes which may occur as a result of the transit line should be recognized as a benefit which the community receives (and collects!).
Finally, the studies look only at the localized effects within a mile of the station. Of course the greatest concentration of benefits will be found in this area, but a small percentage value increase regionwide, which could result from the rail line, could sum to a large amount but would not show up in these studies.
In conclusion, it is certainly possible that the community benefit of the Hiawatha Line, as measured by actual land value, far exceeds the cost of building and operating the facility. Unfortunately, these studies do not actually test the proposition.
None of this is to say that transit investment always increase land value. A project whose main purpose is to provide jobs and contracts, with little transportation benefit, might cost far more than the resulting increase in land values (if any).
Thanks to Bill Batt for the lead to these studies.
A relevant query from Mohamad Tarifi showed up on the Facebook LVT group:
photo credit: Zoomar via flickr (cc)
A surprising lesson I learned from helping a family member shop for a house in the US: most property value is in the improvement (building) not the land. For example, in a 1M$ house only 100k-200k is land (and this is south california where land is supposed to be super expensive). Since I am new to all of this can someone please explain to me why this does not significantly weaken the LVT argument?
He doesn’t tell us which part of Southern California this is; nowadays there are plenty of places where land (and houses) are worth little. But even in prosperous times, builders of new houses typically expect the land to cost maybe 20% of the selling price for a new house, so his figure is plausible for some areas. But a new house isn’t the average house.
Routinely, in any dynamic community, houses (as well as other buildings) are demolished from time to time so the land can be re-used. When this happens, it means the land with the house on it was worth less than the bare land. The average house is somewhere along the path from “land value is 20% of total” to “land value is over 100% of total.”
The existing U S personal and corporate income tax cause an additional bias to underestimate land value. The owner of “income property” can deduct an amount from her taxable income based on the “depreciation” of the improvement, but land cannot be depreciated. And, since the U S Government has little idea what the selling price of land actually is, it is a simple matter for the “taxpayer” to overestimate the proportion of real estate purchase price which is for the improvement.
Much like Korea, Japan, and other advanced countries, Taiwan has a land value tax which requires it to monitor land value regularly. And they do, apparently pretty well, as indicated by this report that 2011 land values average 8.65% over the previous year. The land value tax could be one of the reasons Taiwan seems to be more prosperous than most countries, but that isn’t my point.
My point is that assessing land value is not exceedingly difficult, if one has competent and reasonably honest assessors. The most valuable land in Taiwan is reportedly under the Shin Kong Life Tower, NT$1.21 million per square meter (about $4,000 per square foot, a figure probably never seen in Chicago).
Hong Kong image credit: theloneconspirator via flickr (cc)
New York’s transit system, like those here on the U S mainland, finds itself in a financially unsustainable position. Despite huge subsidies from taxation of productive activity, its managers claim a need for $10 billion additional capital funds, and the current year’s budget assumes a docile union as well as $35 million that appears imaginary.
And, like private-sector corporate managers, its chief has departed the troubled system for triple the compensation at a more prosperous organization, in this case the Hong Kong Mass Transit Railway. Would you blame him?
For those of us who seek reliable transit funding from a source which does not burden productivity, the important point is what this relocated executive calls Hong Kong’s “sustainable financial model.” And what is that? Simple, and no surprise to those who have been paying attention here. The Hong Kong Mass Transit Railway Corporation “earns millions of dollars from real estate developments along its rail lines.” That’s all it takes. Collect some of the land value, which public transportation supports, to fund the operation at reasonable fares. [Oh, yeah, and get competent managers for the transit operation, but they don’t mention that here.]
Lots of folks seem upset that corporations are being treated like people. True, America prospered for centuries with tight limits on corporate powers (fine history here), and it might be a good idea to again restrict the privilege of forming and maintaining corporations. Or maybe to do away with them altogether.
But if, instead, corporations are going to have the same powers as natural persons, let’s go about this systematically.
A corporation can deduct all its expenses before calculating its taxable income. A natural person should be allowed to do the same, deducting the cost of food, housing, medical treatments, transportation, and everything else. If the result is a net loss, carry it over to the next year.
A person doesn’t get full legal rights until the age of 18 (or for some rights, 21). Until then, the parents are responsible for most kinds of damage which the person might do. So if a corporation is formed today, the stockholders should for 18 or 21 years be liable for the corporation’s debts and damages. The stockholders would also be responsible for making sure that the corporation is properly cared for and educated. In serious cases of irresponsible stockholders, the State Department of Children, Family, And Infant Corporation Services would come in and take the corporation away.
How about voting? Should a corporation, having reached the age of majority, be permitted to cast a vote? I’m not sure about this. Under “one corporation one vote” the megacorporations really wouldn’t be very influential. But wealthy people might choose to form many small corporations in order to influence elections. And of course if they can vote, wouldn’t corporations have to be permitted to hold office? Voting is definitely a concern, but since the rich and their corporations control major elections now, I doubt any choice in this matter would make things appreciably worse.
This post is about credit unions, and it seems to be turning into a rant. Rather than read it, I suggest you go here to see some entertaining short videos that the credit union folks have put together. My experience has been a bit different.
Occupy Wall Street are good folks, I’m sure. I even tried to display their banner on this blog, but for some reason the plugin doesn’t work here. Anyhow, they suggest I get away from the big banksters and open an account at a credit union.
This one was “Bernard Callebaut, Alberta’s most famous chocolatier,” who purchased land to build a new chocolate factory. Those who understand land rent and the business cycle won’t be too surprised at what AlbertaVenture.com tells us happened next:
[Callebaut] insists that it was an ill-timed decision to buy a large plot of land near the Petro-Canada station on the TransCanada Highway just west of Highway 22 for $5 million, and his bank’s unwillingness to exercise patience, that really did him in. “The idea was we would sell 30 acres for development, and we would keep the back part, which is actually the less-expensive part,” Callebaut says. He planned to build a manufacturing and warehousing facility there, and he even held out hope that the project would serve as a tourist attraction. “People love to see chocolate factories,” he says.That never happened. Instead, the value of the land plummeted, and his bank decided to pull the plug.
Of course, under the current system of public finance he really had no choice. He needed land for his factory. If he rents instead of buying he is hostage to the landowners. Only if he really understood how the land cycle works, possibly he could have prospered. But no, Bernard Callebaut is not a political economist, he is a chocolatier. But perhaps he might have benefited from a learning some of what we teach at the Henry George School.
Like most good stories, there’s more to it than that. He not only lost his land and his company, he lost his name. To his lawyer. Read it here.
David Bernstein and Noah Isackson have a pretty good article in Chicago Magazine, Gangs and Politicians in Chicago: An Unholy Alliance. Focusing mainly on Alderman but also including State and Federal legislators, they assert that “gangs” provide the money, votes, and workers that enable officials to attain and retain their office. In exchange, the governments these legislators control provide funds and favors.
Isackson and Bernstein stop short of suggesting how to repair this problem, but reading thru the article it’s clear that the main way these “gangs” prosper is thru unauthorized distribution of drugs. And one of the main favors aldermen provide is assistance in avoiding “law enforcement” efforts to arrest them. End the drug prohibition, most of the “gangs'” income will end, and candidates will no longer get “gang” money. They’ll have to rely on crooked lawyers, lobbyists, etc.
Some of the drug money, of course, has gone into real estate, with “gang” members able to get favors such as rezoning and inspection waivers. A land value tax, by constraining real estate speculation, would be of assistance here.
