land value – The Menace of Privilege

How Los Angeles County can rebuild

“Flames” credit Dominic Lockyer Attribution 2.0 Generic

The wildfires aren’t completely controlled at this writing (January 15), but they will be. Estimates of dollar loss are all over the place, the highest I’ve seen is $275 billion. Maybe it’ll be more; let us suppose $400 billion is the cost to replace the buildings and other wealth that has been lost. Let us further suppose that half of that will be covered by insurance from solvent companies. Finally, let us suppose that it is public policy to compensate private individuals and corporations for their losses, even tho no such compensation is provided to victims of common thieves.

So who should pay this $200 billion? Well, the US Federal government has lots of money and can issue bonds as needed to obtain more. But it’s already over $36 trillion in debt, ignoring some big obligations. Ultimately the money will come from federal taxpayers, of whom we may assume there are about 200 million (The total number of personal returns filed appears to be less, but some are joint.) That would work out to $1,000 per taxpayer, tho of course more for those who lack effective lobbyists and less for those who don’t.

But why should this be a Federal matter at all? Why can’t the people of California, or even of Los Angeles County, cover the cost? They’re certainly closer to the situation. The County Assessor tells us that the total assessed value of taxable property in the County is $2.1 trillion. But like other jurisdictions, this involves many fictions, and the actual value of any given property is typically several times the assessed value. In California this seems to be largely due to Proposition 13.

It seems that in LA County, at least for residential parcels, the land value is typically much greater than the improvement value. [edit 1/18/25: This article and link therefrom supports the assertion that “[l]and values in Los Angeles account for an extremely high share of home value.”] What this means is that, if you bought a house and lot for $1,000,000, and the house was destroyed, you actually lost less than $500,000. Combining the Countywide underassessment with the relatively high proportion of value in land, the $2.1 trillion in total assessed value probably includes actual land value greater than $2.1 trillion. And if this value were taxed at, say 1%, it would yield more than $21 billion/year that could fund recovery and rebuilding. (This 1% would be in addition to the much lower effective rate already applied.) There is no need for Federal taxpayers to bear this burden, which benefits primarily owners of very expensive real estate.

This is essentially how San Francisco recovered from its 1906 earthquake, as documented by Mason Gaffney in this article.

Land Value vs. Land Rent

Altho Henry George’s proposal is “to abolish all taxation save that upon land values,” his objective really is to collect land rent for the community. Of course land value is, ultimately, determined by anticipated land rent, but rent is more stable.

This is illustrated by a recent article in the Wall Street Journal (“Tax Break Divides Large, Small Builders,” Feb 11 ’09). In an example cited as typical, Pulte Homes is reported to have sold, for $2 million, land they had “originally paid $28 million for.” So if land value declined by over 92%, how much did land rent decline?

Probably quite a bit less than 92%, because the $28 million was based on Pulte’s guess as to what the future land rent would be. The actual rent, the amount that someone would have paid to use the land at the time Pulte bought it, was doubtless much less than their expectation of its future amount.

Some opponents of land value taxation cite cases of great declines in land prices to claim that LVT wouldn’t be a stable source of revenue. But LVT moderates speculation, and land prices would be more stable if more of the land rent was collected for public use.

One illustration of this is that states where real estate tax is relatively high have experienced more stable prices for homes and lots.

Olcott's Land Values Blue Book

One of the challenges for many beginning Henry George School students is to understand that land has value, and that the value of land is really not very difficult to determine. One example that we used to use was Olcott’s Land Values Blue Book, an annual publication that, until the early ’90s, reported the estimated land value for every block in Chicago and much of suburban Cook County. I don’t know exactly why the series was discontinued, but I assume it was because professionals now find the Internet a more convenient source of information.

The 1939 edition of Olcott’s has been scanned and posted to the Internet Archive. Below is an example page.

The numbers in most areas are value per front foot for a standard-sized lot. The book includes adjustment factors for use where lots are other than standard. For unsubdivided parcels, a value per acre is shown.

Price of land in NY/NJ area

A new report from the New York Federal Reserve Bank looks at land price patterns around their metropolis (specifically, New York City less Richmond, plus ten New Jersey counties). Like Barker’s work noted here last year, they used sales of vacant land to indicate the value of land in general. But while Barker’s purpose was to estimate total land value and land rent, the New Yorkers’ objective is to see how land prices relate to parcel location and other characteristics, and describe trends over the 1999-2006 period.

Defining the center of New York as the Empire State Building, of course they found that the distance thereto is inversely proportional to land value. They observed a very sharp increase in average prices, from $46.65 in 1999 to $366.08 in 2006, with the increase especially pronounced in land intended for residential use. Of course this rate of increase cannot be sustained, as a subsequent analysis might document.

The paper notes that even vacant land may be “improved,” for instance by having been graded and having utilities. Improved lots of course are more valuable than otherwise identical lots. So do Georgists want to tax the improved value or the “raw” value? I think it was William Vickerey who pointed that this really isn’t a big problem. Either could be used as a base, as long as assessment practice is consistent.

Thanks to Richard Biddle and CityEconomist