Monday, June 22

Just a little comment about taxes

Pittsburgh has been taxing land and improvements at a different rate since 1913
In the Atlantic’s How to Fix the World issue, Reihan Salam, of the New America Foundation, uses his piece to extol the virtues of a land value tax. This simple economic concept, often attributed to 19th century reformer Henry George, has curiously popped in and out of U.S. public discourse ever since George introduced it over a century ago. Bill Hudnut, of the Urban Land Institute, brought it up a few months ago, and sparked some good online conversation. I have not been able to take a look yet, but the Lincoln Institute of Land Policy has just published a set of essays on land value taxation. It has the adamant support of many tax reform nerds but pretty much no interest from the other 99% of the public. That's too bad.

The property taxes currently in use usually assess the value of land and improvements made to the land, or the entire market value of the property. A landowner sitting on a vacant lot is taxed less than one who has put the property to a productive use by building on it. This tax structure ends up not only dampening human productivity in general, but also discouraging landowners from making the highest use of their property. In contrast, The idea of land value taxation is to tax the value of only the land itself. Holding costs would be higher the closer a parcel is to the center of a city, leading to increased pressure for infill development.

James Howard Kunstler makes the connection between tax structure and urban development: “our system of property taxes may be the single most insidious, pathological factor contributing to the geography of nowhere … site-value taxation would encourage more compact town and city development, and would take the development pressure (demand) off property in the hinterlands.”

And this is why I'm bringing it up here.

Land value taxation makes a certain philosophical sense as well. The modern notion of property rights springs from John Locke, who based his understanding of property on the labor the owner "mixes with the land." If you're a farmer, you want to know that you will be able to reap a harvest in the fall from the seeds you plant into the land in the spring. Otherwise, you might not plant at all. However useful the labor theory of property is, there has been a big gaping hole in the logic that Eric Freyfogle, among many others, has clearly pointed out. Often the value of land is socially created. The same farmer can sit on the field doing nothing, and because of the actions of the community around him, he can sell the field after a period of time at great profit. Lockes' labor theory doesn't have a good explanation for land speculation. A land value tax would attempt to capture for public use the socially created value of land, while allowing the owner to be the sole beneficiary of any work that has been added to the land. This strikes me as fair.

Is this yet another noble yet quixotic quest, like eliminating the Electoral College or granting D.C. voting rights? After all, the current system is pretty financially entrenched and any change will result in winners and losers. Even in the face of this, I think land value taxation may have a shot for two reasons: it may be locally implemented and a transition can be phased incrementally. Perhaps certain cities or counties can devise a 10-year transitional period, with the the tax burden shifting a little away from improvements and toward land each year. The clear and advanced notice will help investors adjust themselves in preparation for the change.


generationbubble said...

Keep your eye on New London, Connecticut. LVT activists recently managed to push through legislation establishing a pilot program in that city. If it turns out to be to everyone's liking, they've the option of taking it state wide.


Dave Reid said...

This is a concept I've been very interested in for awhile, but still haven't read enough on to make a call one way or the other. That said on the surface it seems like it would encourage more infill development... I just wonder what the downside would be.

Blair said...

We already have this with assessments.

Are you saying one acre of land should pay the same amount of tax whether the land is vacant or has a million dollar condo sitting on it? That's not very progressive. The owner already pays a different rate based on assessments. Location, location, location means equal land is in fact taxed at different rates through arbitrary assessments.

"A land value tax would attempt to capture for public use the socially created value of land, while allowing the owner to be the sole beneficiary of any work that has been added to the land. This strikes me as fair."

Ouch. So you're equating taxes and eminent domain?

Here's my idea. Increase tax revenue by increasing the supply of tax-paying land. Increase supply of land, value and tax on each acre goes down. Public property pays no taxes and requires ever more taxes to maintain.

Edward J. Dodson said...

I was introduced to the concept of taxing land values (and exempting improvement values) back in the early 1970s by a town planner in Pennsylvania. The concept (LVT) made sense to me, and I eventually became a strong proponent of this strutural change.

What I learned by studying the literature on the subject is that if effectively implemented LVT would go a long way to bring investment back into the cities and remove the tendency of development to sprawl into the adjacent agricultural land.

If there is a serious problem with LVT implementation it is the fact that property assessment all across the United States (with a few exceptions) rarely is kept current with market values. In too many cases, property reassessment is the responsibility of county government, and occurs about once every generation. Under the standard system of property taxation this results in serious inequities of tax burden. Good assessment practice needs to be put in place, first, to ensure that all property assessments are at an equal percentage of market value (ideally, 100%) as values rise -- and fall.

Most proponents of LVT urge its adoption over a period of years to minimize concerns over displacement of the elderly or other lower income households who happen to live in areas with rising land values. This problem can also be minimized by adoption of a "circuit breaker" that caps a property owners tax payment based on an affordability formula. The unpaid amount would accrue as a lien against the property to be paid when the property is transferred by inheritance or sold.

epar said...

I like the idea. I think it could be an especially effective tool against slum lording by making it much more expensive to carry unimproved land in city neighborhoods. But how would it be implemented? Would the goal be to make it revenue neutral, so the tax rate on land would be set equal to the original tax rate times the ratio of total assessed value to assessed land value?

Re: Blair, at least in Maryland, improvements and land are not taxed at different rates, though rates vary between counties. In your million dollar condo question, the answer is that it depends. The value of a parcel is a function of the type of development that is feasible on it. If a parcel is only suitable for a $150M duplex then the land value reflects that and would carry a lower tax. Similarly, a parcel that can support a $1MM condo will have a higher land value and be taxed accordingly. That's still progressive.

I'm not sure how an LVT "equates" to eminent domain. The current real estate tax system is probably closer to the idea of eminent domain than an LVT, in that it captures value from the economic use that the land owner creates (by taxing the improvement value). Contrast this to taxing land only, which derives its value from what uses are feasible - a source largely outside of the owner's control. (And yes, I agree that zoning and entitling adds value to land and is an activity within the owner's control, but I am speaking in terms of degree, not absolutes).

Daniel said...

I appreciate all of this feedback. Blair, I didn't intend to bring eminent domain into this, but I probably could have worded that sentence more clearly. Your comment about whether this is progressive is a challenging one. I believe LVT is normally considered a somewhat progressive move in taxation. Owners of high-value land would be paying the most taxes, and they would naturally tend to be more wealthy. I'll have to think about it more to understand exactly how this would play out, but it is an important question.

Epar, I imagine that anywhere trying to implement LVT would want to make sure it was revenue neutral. There would be so many political challenges to change anyway, it probably wouldn't be a good time to raise the tax rate overall. But I suppose this would depend on the locality.

Edward, that is interesting. You're right that this is only as good as the assessments, and it would be a shame for politically motivated or just underfunded assessors to subvert the whole system. That's also a problem with the current property taxes too in some places (although I think here, at least, they are fairly good with staying up to date with the market value). The "circuit-breaker" sounds like a good way to allay the concerns Blair had about whether this was progressive. Some towns (including Charlottesville) already have some sort of property tax relief measures for low-income property owners, particularly elderly. This would seem to be necessary in high-value areas.

Generation Bubble, that's exciting. This could be an interesting contemporary example for the rest of us.

Dave, I'm really just wading into this myself. There are lots of moving parts. Although it seems like a good idea to me overall, I still have some questions too.

CarFree Stupidity said...

Another aspect of the current tax structure on property is that part of a piece of land's monetary value is its potential to be developed.

Right now this encourages sprawl at the rural/urban interface by valuing farm land in prime locations higher than agricultural land farther out.

This forces farmers to make the choice of holding out against development and experiencing a decrease in their incomes, selling to developers and watching their years of hard work to be destroyed, or to sell off their development rights to a land trust for a usually modest sum compared to what they would get from developers.

Any improvement to the tax structure that would discourage spwral would be a great change in helping fight spwral and encouraging better land-use policies.

Alanna Hartzok said...

I have studied the effect of a shift towards land value taxation in the 18 cities in Pennsylvania that have been moving in this direction. Results in all cases show decrease of slum properties, infill development, and overall improvement of the city. For more see my article on Pennsylvania's Success with Local Property Tax Reform.

Daniel said...

Thanks Alanna. I read your article, and found myself pretty convinced that a land value tax had helped with the turn-around of Harrisburg and Pittsburgh. With so many former industrial towns languishing, I can't imagine why they wouldn't look to the success of these Penn. towns for some guidance. As you mention, there's more going on than this surely, but it's likely a factor. But what about Scranton? They've adopted the tax without much of a resurgence. I suppose there are many other things that could be happening to cause this.

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