How to Refute Arguments
for Reducing Real Estate Taxes
Herbert Barry, III
[Reprinted from GroundSwell, July-August
Many politicians and their constituents are demanding reduction of
real estate taxes. These proposals fail to distinguish between
buildings and land. Buildings in a city should be exempted from
taxation to encourage desirable construction and improvements. The tax
revenues from real estate should be replaced by higher tax rates on
unimproved land. The higher tax on land value has the additional
beneficial effect of forcing owners of vacant and underdeveloped lots
to develop or sell their properties. Replacement of real estate taxes
by higher income or sales taxes would detract from the desirable
actions of earning money and commercial exchanges.
Land is a natural resource. Instead of depreciating during time, its
value increases due to inflation, which gradually depreciates the
currency. Land value is also increased by facilities and prosperity of
the community rather than by the owner's action. In a valuable
location, such as the center of a large city, the quantity of land is
limited Prevalently insufficient tax on land causes high purchase
prices, ownership of most expensive and extensive land by wealthy
individuals and corporations, and vacant lots and dilapidated
buildings in expensive locations.
A building is constructed and maintained at the owner's expense. Its
rental and market values are increased by facilities and prosperity of
the community, but these beneficial effects are counteracted by
competition from other buildings. In a valuable location, buildings
can be taller, larger, and more numerous. Depreciation of buildings is
only partly counteracted by expensive maintenance because of
preference for newer buildings. It is feasible to exempt buildings
from taxation and replace the revenue by a higher tax rate on land.
Clairton, Pennsylvania has a negligible tax rate on buildings. More
than a dozen other municipalities in Pennsylvania have higher tax
rates on land than on buildings.
A frequent argument is that taxation should be based on ability to
pay. The owner of a building can obtain the needed income from tenants
or by occupying the building as a substitute for renting it. The same
argument supports taxation of a portion of income, sales, and capital
gains. The owner of vacant land receives from it no income with which
to pay the tax.
Taxation inhibits the desirable actions of constructing and improving
buildings, earning income, buying and selling, and obtaining capital
gains. Contrary to these detrimental effects, taxation of unimproved
land has desirable effects. Most owners of expensive or extensive land
are wealthy individuals or corporations. Most homeowners benefit by a
shift of taxation from buildings to land. They inhabit a well
maintained house on a small plot of land in a residential area that is
not one of the most valuable locations.
Another argument against higher lax on unimproved land is that some
homeowners cannot afford the real estate tax in a location that has
become highly valuable. They can attain prosperity by selling the
property and moving to a more appropriate location.
A general argument against a high real estate tax rate is that it
decreases the sale price and therefore is a hardship for homeowners.
If an increase in the land value tax is accompanied by exemption of
the house from taxation, the higher sale value of the house
compensates for the lower sale value of the land.