Tax the Land, Not the Buildings
My friend Trevor Acorn has a great new blog and today he is quoting a green party candidate from Canada. Here is an excerpt from Frank deJong:
The current structure of our property tax system sends the wrong signals. Generally speaking, municipalities calculate property taxes based on the value of the land and the buildings sitting on them. This means that anyone who builds on a vacant site in an existing urban area or renovates an abandoned building back to health pays more taxes than if they just left the land or building vacant. This is a tax on smart growth. And it’s not smart.
He makes a good case for placing all the tax burden on the land itself, not the structures. Click here for the full read.
– Steve
This idea has been around for many years, dating back to economist Henry George in the mid to late 19th century.
[URWell, I didn’t presume to think it was a new idea (do any new ideas actually exist?). The question is does this have relevance as a means of controlling sprawl and encouraging in-fill development? – SLP]
That seems like it would be either regressive or overly complicated. The guy who builds the 3000 square foot McMansion where a two bedroom ranch used to stand pays the same taxes as the guy next door who still has a two bedroom ranch? Perhaps something more like penalties for holding vacant land and derelict properties or credits for building higher density projects would be a good idea.
[UR I see your confusion but it is not a penalty. The guy with the small ranch would pay the same taxes they are now, it just would be weighted heavily toward the land and not the building. The guy next door with the vacant lot would be payin the same (or nearly the same) taxes as the guy with the ranch on one side or the McMansion on the other side. He is going to be motivated to get that lot sold or build on it because the holding costs are now too high. – SLP]
Well yes and no. Being well over 100 years old, some communities in the US and abroad have used the Georgian tax system, or as it is commenly called now a LVT (land value tax).
http://en.wikipedia.org/wiki/Land_value_tax
You can read more about it many places. Wiki gives a decent overview of the system and brings up the most well known use of it in the US, as part of Pittsburgh’s “graded tax system.” I am not as familiar with the system in Harrisburg, though you do often hear it as a LVT sucess story.
Your logic would seem to favor sprawl – get a couple of McMansions in an area and everyone’s taxes would rise, resulting in more churn and, likely, more McMansions?! Bigger stuff on the same ground doesn’t guarantee more housing options, it just guarantees a bigger structure!
The article assumes that speculation is successful only on greenfield sites, that the speculator is the one that makes the profit and the developer pays an inflated cost in either scenario, which really isn’t the case.
It IS more expensive to do in-fill development, but in most cases, the market is willing to pay more for the location. In reality, the taxes on a property are just the cost of doing business, roughly equal across the region. The real costs of in-fill development include the demolition of existing structures, dealing with environmental contamination, limited sites access, (and with the typical smaller site) fewer economies of scale, and dealing with urban crime issues, everything from theft to arson. Throw in entrenched bureacracies that may or may not be focused on redevelopment, and the costs go up.
Theose are just the direct costs. Indirect costs are zoning regulations that require wider new streets, 1½ spaces per unit, limited density, limited multi-family (NIMBY) and require a line of demarcation between residential and non-residential uses.
The real reason for taxing both the land and the structure is equity. Why should someone who can afford only a small house pay the same tax as someone who can afford one that costs many times as much. The lot size in Clayton and Festus are pretty much the same, but home values differ greatly. Why shouldn’t the Claytonian pay more? They should be better able to afford it!
Jim,
The tax would encourage density, which is the opposite of sprawl, by encourage the more efficient use of space. We may still have McMansions with the LVT but they wouldn’t be on 3 acre lots.
Also, the tax is based on Value, not lot size. There is a direct correlation within a given local but not within given region. In other words, people in Clayton would pay a higher tax than people in Festus even though the lots are the same size due to the difference in land value between the two areas. But within Clayton larger lots would pay more than smaller lots since larger lots have a higher total value.
It’s important to remember two other things about a LVT.
1) The highest land values typically occur in more commercial areas. This means that, as a rule, property taxes would shift away from residential neighborhoods and on to more commercial areas.
2) LVT is based on the theory of Land Rent, or The Law of Rent as Ricardo called it. Without going into too much economic theory this means that you all ready pay the Land Value Tax. You’re just not paying it to the government, you’re paying it to whomever owns your land. Those that argue for the LVT believe that the rightful “owner” of Land Rent is the local community, since it is the community that creates it in the first place, not landowners. For this reason the LVT is considered one of the only “just” tax structures.
It seems smart to me but a two tier system would probably work better. Perhaps the tax should be a factor of land to improvement value. For instance, if the land value is a certain percentage greater than the total value, there would be a resulting upward tax shift. This would discourage vacant lots and encourage development. Perhaps the only one adversely effected there would be say a surface parking lot owner or even samll car dealer where there is nothing but pavement.
newsteve,
I fully agree. A two-tier system would be better. At least initially. A cold turkey switch to a high LVT would cause havoc in the market place and many people would find themselves without a shirt.
Or so IÂ’ve been told. The economics are quite hairy.
Steve:
You’ve hit on a good public policy issue to debate. I can see both sides of the issue. Taxing on the land only encourages use of the land, or at least doesn’t discourage use, rehabilitation, etc. The downside, though, is that the tax then becomes regressive, as the property owned by those on fixed incomes would be taxed at the same rate as more expensive property. So, the tax burden is shifted from the more expensive homes to less expensive homes on the same sized parcel of land.
It would likely be a better plan to offer abatement to rehabbers and developers that provide infill, while keeping the same taxation plan. Or, better yet, if you want to push land owners to develop their land increase the taxation on empty lots (and/or empty buildings) while keeping other parcels’ rates the same. Basically, charge for unemployed land resources.
I’m not so certain that we need property taxes at all! Schools, public services, social security, transit–all of it it– can be paid for with a single sales tax. Get rid of all taxes–income, gift tax, death tax– and put in one sales tax on the finished good.
The effect on urbanism–people who spend wildly on urban sprawl will pay for all new development. Those revitalizing cities will be able to do so at a fraction of the cost.
The effect on the individual–without an income tax people have more money to spend.
The effect on price of goods–no inbedded taxes, prices will stay the same or possibly go down.
oh and by the way, no need for the IRS or tax day. The idea here is to try and simplify that 40,000 page document into say 20 pages.
23% sales tax. Check out http://www.fairtax.org.
Matt,
Much of what causes urban sprawl (free roads and utilities) is subsidized by the government, which, obviously, isn’t taxed. Hence the fair tax wouldn’t help.
The fair tax is also regressive. Poor people pay a higher % of thier income on goods.
Proof:
http://robocracy.net/img/conschart3.jpg
I’ve read Boortz’s book. I’ve also read a handful of economic text books. My word of advise, stick to the latter not the former.
Trevor-
The current tax system is extremely convoluted. Of course highways, sewer systems, roads, and other infrastructure are subsidized by the government. That government subsidy is funded by tax money. We all agree on that. Furthermore, in most cities (not St. Louis because of the city/county split) the city’s tax money goes toward the development of the suburbs. Another words, the city is paying for its own “urbicide.” Essentially, policy has consolidated the poor and then removed all of their resources.
This is true for all declining American cities except the two, Baltimore and St. Louis: two cities that tried to prevent this over 100 years ago by splitting from their counties. It didnÂ’t help, in fact it seemed to have adverse affect.
I believe cities are more efficient than suburbs. That is why I point to the Fair Tax. Our current tax system taxes creation, which slows us down. Alternatively, the Fair Tax taxes “consumption.” I’m not suggesting that adopting the Fair Tax will solve all the problems, I just think it will give us a better skeleton system to work from than the current system of income tax, property tax, and all the rest of them.
As for the “Fair Tax” being “regressive”—its effects are not. First, essentials such as milk and bread are not taxed. Second, and probably more importantly in addressing your concerns, if the “rich” don’t spend their money (and if it isn’t taxed) the only other place to hold it is in banks. This will lower interest rates and make things a lot easier on the poor.
-Matt
P.S. IÂ’ve come to believe that trying to focus and solve one problem often times creates many others (i.e. the tax system has become some 40,000 pages long). Although itÂ’s difficult to do, a sophisticated solution can solve many problems.
Matt:
The problem with a single sales tax is that it places too heavy a burden on those at the lower end of the economic model, as a greater percent of their income is spent on taxation due to the price of goods and services relative to their income.
Travis, there are some economists who would argue that looking at anual income to assess the impacts of a tax as progressive or regressive is wrong. That’s why lifetime consumption models exist. There is more than one way to crack that egg.
I’m sorry I took this thread about the question of property tax and urban infill into a topic of sales tax.
Travis- without imbedded taxes in goods and without an income tax (which contributes to the cost of goods sold) prices will decrease. Because this system (ideologically) is simpler, everyone should be able to keep all of their money and pay the same for goods.
Furthermore, there are far fewer loop holes, the tax burden is spread more evenly. (i.e. many people don’t pay any taxes not because they are poor but they have found loop holes, this pushes a higher burden on the poor who can’t afford to pay high taxes)
It’s difficult for the poor to get tax deductions while it is easy for the rich to get tax deductions. Everyone consumes, so place the tax there.
The income tax debate is very tautological.
In the consumption tax system there would be no property taxes, making urban renewal an extremely attractive thing.
Property taxes are good things not bad.
Zero property taxes (i.e. the “Fair tax”) means Zero penalty for sitting on land. With a low holding cost land will not be used in the highest and best fashion (notice that this is NOT true of any other market good). Instead, investors and speculators will have a vested interest in doing nothing. Over time land almost always goes up in value (their not making any more of it!) so there is no reason for do-nothing landlords to start doing something.
But high property taxes, especially if they are concentrated on the land and not the building, will act as an incentive for owners to “use it or lose it.”
A high land value tax would be the best way economically to spur inner city development and discourage sprawl.
HereÂ’s some good reading material to get you started:
http://www.earthrights.net/docs/kunstler.html
http://www.marylandlandtax.org/
http://en.wikipedia.org/wiki/Land_value_tax
I’ve never met anyone who, upon fully understanding the LVT, was not convinced of the wisdom of the approach. I’ve read the Fair Tax literature, do me the favor of reading this literature.
Oh no I am going to cite evil right wing libertarian think tank CATO:
“A national sales tax could be made progressive by combining it with a refundable tax credit. Each household could file a form requesting the tax credit and receive a check from the Internal Revenue Service equal to the amount of credit for which the household qualified.
The first concern–the lack of progressivity of a proportional national sales tax–has been overstated, because progressivity has been measured in terms of annual, rather than lifetime, income. At some point, all income is consumed. In any case, a national sales tax could be made progressive by combining it with a refundable tax credit. Each household would file a form requesting the tax credit and receive a check from the Internal Revenue Service equal to the amount of the credit for which the household qualified. The value of the tax credit could be fixed per household, independent of the household’s income, or graduated (made to decline as the household’s income increased). In addition, the value of the household credit might depend on the number of children and other dependents in the household.
In principle, if the tax credit were set sufficiently high, the same degree of progressivity that characterizes our current income tax system could be achieved with a national sales tax and a graduated refundable tax credit.”
The likelihood of a national sales tax is very low, but the same system could be implimented locally.
http://www.cato.org/pub_display.php?pub_id=1648&full=1
Question to all of the Sales Tax only folks, have you thought about the boom in the black market if this was to pass?
If the average citizen is paying around 35% of their income in the various taxes a year wouldnÂ’t the sales tax be around 35%?
$100 of groceries would be $135 out of your pocket.
A $10,000 car is now $13,500.
A home that is 200,000 is now $270,000 (what would the tax on closing costs be)?
In this situation a black market option of at least 35% off of all goods would become very attractive.
What would be a good historical example of this height tax on goods scenario… let me see… oh yes, the Boston Tea Party. England had a tax on tea of around 30% all over its empire. A very booming black market was set up all over the empire for tea. And as we all may or may not know Black Market businessmen take the form of gangsters, pirates, AKA the bad guys. Instead of a vast bureaucracy of accountants and clerks and customer service reps. like our modern commercial America this system was staffed by large men with various clubbing/ stabbing/shooting devices. In a black-market there are no invoices just broken legs.
Tea agents roamed the land in a vein attempt to prevent criminalized tea from being smuggled, sold, or purchased. This lead to many deaths of Tea Agents and smugglers and eventually to a violent revolution, I mean God Bless America.
My point, Sales Taxes only work if the % increase is low. Most sales taxes are in the single digest because people hardly notice a few cents of every dollar missing. On the other hand a tax of 10% or more become very visible (ask any one that works off tips if they ever get stiffed) and less people will participate. In the case of our country they might even revolt.
P.S.
Flat Tax folks – those that do not learn from history are doomed to repeat it.
Doug,
I don’t have much time to comment but I have one thing to say.
The quote from cato fails to account for compound interest.
The rich, by spending thier money later, do end up paying the tax eventually. That’s true. But they end up spending MORE money in total.
In other words, the delayed taxation has enabled them to increase thier total income level.
I would consider this regressive.
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