Solution to School Finance Equity Dilemma in New York State: A
Response to the Court of Appeals Decision to Provide $4-6 Billion to
the New York City School System
H. William Batt
The Court of Appeals has spoken. The State Legislature is
challenged in response to find an additional $4 to 6 Billion to
support the New York City School System, as described by the
continuing Campaign for Fiscal Equity, an organization expressly
designed to press for this resolution.
Where will the money come from? It can come from only three possible
sources: taxes on land, labor, or capital. Land in economics
refers to all natural resources -- air, water, the radio spectrum-plus
land in the more common sense of acreage and urban sites.
Unfortunately some neoclassical economists have effectively hidden and
defined land out of existence, classifying it as capital, a grave
mistake. This blinds many otherwise proficient students of
economics and public finance to an obvious solution to this school
Negative consequences of taxing labor and capital are profound.
Taxing labor makes people work harder for less, that is for fewer of
the things needed to support their families. Taxing capital,
whether in the form of sales, savings, investments or equipment,
incurs what is called "deadweight loss," which puts an
enterprise or region at an economic disadvantage.
In contrast, if land is the tax base, there is no such loss. Clearly
the same amount of land remains after land is taxed, as advocates of
taxing the economic rent from land point out.
The beneficial effects of taxing land have been noted by at least
eight Nobel Prize-winning economists. Moreover, taxing land
value-or location value-comports with all the textbook principles of
sound tax theory. Indeed the more land is taxed the more positive
effects are apparent:
- Taxing land fosters it's more intensive and efficient use.
- It engenders greater economic vitality by exerting downward
pressure on the market price of sites so that their acquisition
becomes more feasible to potential users.
- Potential developers are able to secure their first choice of
locations rather than being driven to second-best sub-optimal
- Taxing prime locations discourages their being held off the
market by speculators, making the full array of locational choices
available for appropriate use.
- Taxing land reverses the centrifugal forces of sprawl
development by making sites in core areas competitive with sites
at the periphery. Cities thereby become more livable.
More than simply fostering better land use patterns, taxing land
positively affects the economic vitality of a region, as shown in
economic models, and in many actual examples.
In 1982, Harrisburg, Pennsylvania was adjudged the second most
depressed city in the nation under Federal distress criteria. Since
that city's phase-in of ever greater tax rates on land than on
improvements, Mayor Stephen Reed notes that "Harrisburg has
registered in excess of $3.1 billion in new investment. The number of
businesses on the City's tax rolls has increased from 1,908 to more
than 5,900. Taxable real estate values have increased from an
aggregate of $212 million to over $1.6 billion. The number of vacant
properties has been cut by 85%." The crime rate has been reduced
54% and the fire rate has dropped over 76%. Mayor Reed, re-elected
continually since 1982, was just named one of the world's most
outstanding mayors. The City's tax rate on land values is six
times the rate on improvements. Twenty other Pennsylvania cities are
now following suit.
A tax on land values is eminently fair. It correlates highly with
ability to pay. At the same time it serves as a benefit fee or user
Look first at matters of ability to pay or what may be called
vertical equity. Households that own no land pay no land taxes even
indirectly. Land, being "inelastic" or fixed in supply,
means land owners cannot pass taxes forward to tenants. Taxes on
structures can be shifted, but not the taxes on land. Thus the
roughly one third of all households who are tenants, largely poor
people, pay no property taxes. Of those that do own real estate --
homeowners, businesses, industries, and farmers - roughly half the
aggregate burden in normal circumstances is paid by non-residential
titleholders. Valuable parcels are typically located in the urban
centers, and homeowners are at the urban peripheries. Remote farmland
usually is inconsequential for tax revenue - if it isn't protected in
any case by other save harmless clauses. Maps of land value
typically look like those showing elevation above sea level, downtowns
constituting the peaks. Empirical studies on the incidence of the
property tax also show that it is progressive. At the same time it
fares well by the other criteria of fairness, payment according to
It is timely to note the effect of a land tax on the market price of
real estate. It is well understood that buildings depreciate over
time. Just as cars, computers, and factory equipment get old and
obsolete even with maintenance, so do buildings. The rise in the
market price of real estate comes from the appreciation of land, not
from the homes or commercial buildings on the land.
What creates this land value? In part it reflects the overall
entrepreneurial activity in a location, rather than what any given
titleholder does to the site. It also reflects the general vitality of
a neighborhood or region. And it very much results from the totality
of public facilities and services serving a locality. In sum, the
value of land is community created.
Land speculation may be understood as the attempt by owners, who
apparently have little interest in tapping the productive potential of
their sites, to ride the upward market trends and to reap these
socially-created land values. Often the owners reap these gains by
waiting to be bought out by public ventures after suitable time
passes. John Stuart Mill noted that landlords grow richer in
their sleep without working, risking or economizing. The increase in
the value of land, arising as it does from the efforts of an entire
community, should belong to the community and not to the individual
who might hold title. This does not prevent opportunistic
speculators from pirating the public birthright when the opportunity
arises. A century ago commentator William Riordan aptly portrayed
New York ex-Senator George Washington Plunkitt's saying.
There's an honest graft, and I'm an example of how
it works. I might sum up the whole thing by sayin': "I seen my
opportunities and I took 'em."
Just let me explain by examples. My party's in power in the city,
and its goin' to undertake a lot of public improvements. Well, I'm
tipped off, say, that they're going to lay out a new park in a
I see my opportunity and I take it. I go to that place and I buy up
all the land I can in the neighborhood. Then the board of this or
that makes its plan public, and there is a rush to get my land,
which nobody cared particularly for before.
Ain't it perfectly honest to charge a good price and make a profit
on my investment and foresight? Of course, it is. Well, that's
But when a land tax is in place, the economic rent is recovered by
the community so that land doesn't rise in market price. It is
stabilized. And there is no opportunity for such trickery. Real
estate, especially residential property, thereby becomes more
affordable. The greater the tax on land parcels, the greater the
downward pressure on market prices. A land tax is the only tax that
actually works to foster economic growth. The higher the tax on land
value, the greater the incentive to economic vitality. This was
recognized in a notable article in Fortune Magazine over two
It is this logic, taken in total, that invites consideration of a
land value tax, administered statewide at a single rate, as a solution
to New York State's need to come up with $5 billion. Keeping in mind
once more that the higher the tax on land the more it drives down the
market price of real estate, and the higher the tax the more it
removes the deadweight loss hampering economic development, it should
become clear that instituting such a measure would solve the problem
of securing the necessary revenue. With sound land assessment
statewide, a rate can be calculated that will bring in the required
total. Down the road, the sales prices of such parcels may well be
lower while titleholders pay more "up front." But even this
prospect needs to be qualified, as increased activity may work in the
The most likely question is how the burden will be borne. Much of the
obligation will fall on parcels that are underused relative to their
value - often locations not as productive as they potentially could
be. This will provide an incentive to their improvement, so that their
contribution to neighborhood and regional economic health will further
enhance overall site values. If at the same time local taxes on
improvements are phased out, as is occurring in Harrisburg and other
Pennsylvania cities, the overall burden on parcels which contribute
most to economic vitality will begin to decline relative to others.
There is also the question of how to treat the case of the proverbial
"poor widow" who may otherwise be driven out of her home.
Such situations exist under current tax regimes, so that the
application of a land tax constitutes a situation no different. What
many states have done is to institute a practice of tax deferral,
reserving the option for such titleholders to pay in full, with
interest, when their homes are finally sold. This may come at time of
transfer to other living arrangements or at death. Even with the
recapture of deferred obligations, the increase in market prices is
typically far greater than what taxes are due. One recent study notes
that some 24 states employ property tax deferral provisions of one
sort or another. This relief mechanism is far more just than
others such as the oft-mentioned circuit-breaker or various tax
credits or exemptions. The reason is that there is no net loss of tax
revenue, and better use of residential infrastructure is likely to
eventuate. There is no reason for young households to be locked out of
housing opportunities for lack of ability to afford them, or for
inheritors of elderly titleholders to reap the windfall gains from
what is essentially the accretion of economic rent to the value of
A statewide tax on land values would foster efficient economic
policies to serve both upstate and downstate regions. Real estate
values are far greater downstate than upstate, to the point that they
make housing oft-times unaffordable. A statewide land value tax raises
the necessary revenue by driving down market prices of real estate.
Any parcel with a building to land ratio greater than the average
would pay proportionately less with a tax shift off improvements. Any
parcel with a below average ratio would pay more. Vacant lots in high
value areas would bear the greatest increase, fostering their
development. By recovering the economic rent that otherwise accretes,
the economies are relieved of the deadweight loss, or excess burden,
that exerts a dampening influence on market transactions. Again, the
greater the tax, the greater the impetus to economic stimulation.
In upstate regions, where the economic conditions are often moribund,
the same factors apply to a lesser degree. The excess burden of
economic rent is removed from land markets, and the impact on land use
configurations is likely to be positive in as much as vacant and
underused parcels will be most affected. Because the market prices of
real estate, largely reflected in land values, are so much lower
upstate than they are downstate, a single statewide tax rate on land
values is likely to raise the greatest proportion of revenue from
downstate regions, even while it is viewed as "fair" by its
being a single statewide levy. This is important as a political
consideration, because any other revenue stream from hard-pressed
upstate regions will be catastrophic. Only a tax on land values can
have a positive impact on economic circumstances.
It remains to be explored how such a design will work - how accurate
assessments of land value can be made to be, how easy it can be to
educate the citizenry about a new paradigm of economics and taxation
so that such a regime can be politically acceptable, and what
proportion of the revenue stream will derive from various regions of
the state. But these are empirical questions, and they can be quickly
and easily determined. Computer-assisted assessment of land by itself
is far easier to carry out than is assessment of land and building
values together. Simulating the feasibility and the results would
likely be achieved in a matter of hours.
Apart from the technical feasibility and economic soundness of a
statewide land value tax, there is a matter of its attractiveness as
an environmental policy, and as a matter of economic and political
justice. As an environmental policy, numerous organizations have come
to see the virtues of a tax on land value; an extensive list can be
found on the website of the Center for the Study of Economics. As
a matter of political and economic justice, no name is more closely
associated with these principles than the greatest advocate of this
philosophy and approach: Henry George. At the time of his death in
1897, he was, along with Thomas Edison and Mark Twain, among the most
famous men in the country. Today, a Google search on the words "economic
justice" brings up among the top listings the Georgist website,
www.progress.org. Two recent articles by this writer further explain
how land value taxation can facilitate solutions to contemporary
problems of a wide-ranging sort.
In the final analysis, a statewide land tax is neither difficult nor
alien to New York State. Almost a decade ago, the City of Amsterdam
sought to institute it, and in fact did so for one year. Prior to so
doing a legal ruling was necessary to deem it constitutional in New
York, and the already available assessment roll separation of land
values from totals made the shift a matter of a small computer
adjustment. Unfortunately, however, the assessments were of poor
quality, and titleholders blamed the land value tax regime for the
disparities they noticed perhaps for the first time. The policy was
rescinded, but not before many lessons were gained about its future
Nor is a statewide property tax something without precedent in New
York. As early as 1799, one mill was levied on real estate and
personal property, and this was continued intermittently until 1842.
After that time an effort was begin in earnest and the tax continued
throughout the 19th century. Roughly three quarters of the
property tax was on real property. In the early period, sale of public
lands constituted a significant proportion of the state's revenue, but
records show that over $90,000 in property taxes were netted in the
year 1800. Although the total vacillated greatly from year to year,
the amount reached $1.25 million by 1854, and $7.8 million by 1890.
Sowers' Financial History of New York State shows that by 1912
state property taxes totaled $6,325,823, constituting 10.5 percent of
total state revenues.
What are the alternatives? There are none. Every other tax choice has
strong downside consequences. Every other revenue stream penalizes
real estate development, depresses investment and savings, discourages
work, drives out economic expansion, and/or stifles commerce. If New
York intends to address the challenge handed it by the Court, it will
examine, and adopt a statewide land value tax. It will lead the way to
a revitalized New York State.
NOTES AND REFERENCES
- Campaign for Fiscal Equity,
Inc.,v.The State of New York November 20, 2006. See
- Efforts of human hands or
- Products created out of land
and labor used to create more wealth.
- Mason Gaffney, The
Corruption of Economics, Shepheard Walwyn, 1995, fully online
at http://homepage.ntlworld.com/janusg/coe/!index.htm; and Herman
Daly and Joshua Farley, Ecological Economics, Island
Press, 2003. Batt, "How the Railroads Got us on the Wrong
Economic Track," at
- This truism was popularized by
the famous Laffer Curve.
- See, among others,
- One study calculated that "on
average, a one percentage point increase in the tax differential
will yield an increase in the total value of construction of 17.8
percent." Tideman, Nicolaus and Florenz Plassman, "A
Markov Chain Monte Carlo Analysis of the Effect of Two-Rate
Property Taxes on Construction," Journal of Urban
Economics 47(2)216-247. This researcher found that a $128
million highway investment of eleven miles generated additional
land value of $3.734 billion within a limit of two miles on either
side. "Value Capture as a Policy Tool in Transportation
Economics: An Exploration in Public Finance in the Tradition of
Henry George," The American Journal of Economics and
Sociology, 60(1)195-228 (Jan. 2001); reprinted in Laurence S.
Moss (ed.), City and Country. Malden MA: Blackwell
. Still a third study compares state tax burdens and their
economic plights, and New Hampshire, which has a tax bearing most
heavily on land values (albeit in the form of the conventional tax
on real property) fares favorably with states that rely more
generally on a balance of income, sales, and property taxes. See "The
Income-Stimulating Incentives of the Property Tax," by Mason
Gaffney and Richard Noyes, in The Losses of Nations:
Deadweight Politics versus Public Rent Dividends, Fred
Harrison, Editor. London: Othila Press, 1998, also at
- See especially the record of
the impact of Land Value Taxation's use in the city of Harrisburg,
PA, at www.urbantools.org, and Alanna Hartzok, "Pennsylvania's
Success with Local Property Tax Reform: The Split-rate Tax,"
American Journal of Economics and Sociology, 56(2)205-214
(April, 1997), and www.earthrights.net/docs/success.html .
- Letter to municipal
colleagues, in this case, to Philadelphia Controller, May 1, 2003.
- See Harvey S. Rosen, Public
Finance, 2nd Edition (Homewood, IL: Irwin Press, 1988), pp.
- Such regimes compare favorably
to current property tax designs where farmers are sometimes taxed
on their homes, barns and other structures. In urban areas,
buildings on a small footprint (i.e., with little if any
curtilage) pay less than under current property taxes, and
properties that have small structures relative to their land sites
- drive-in eateries, service stations, and parking lots - pay far
- New computer technology allows
ease of computer mapping, even of assessments, although few
governments have availed themselves of such tools. For one
illustration of landvaluescapes that shows how variable locational
sites can be, see, the author's "The Nexus of Transportation,
Economic Rent, and Land Use," at www.taxpolicy.com/batt/
- Only two empirical studies
have ever been done on the subject, but both concluded that the
real property tax is mildly progressive. When land and
improvements, the two elements of the property tax, are taken
separately, it becomes even clearer why this is so. See Peter
Mieszkowski, "The Property Tax: An Excise or a Profits Tax,"
Journal of Public Economics 1 (April 1972): 73-96, cited
and discussed extensively by James Heilbrun, "Who Bears the
Burden of the Property Tax?" in Lowell Harriss (ed.), The
Property Tax and Local Finance, Proceedings of the Academy of
Political Science, Vol 35, #1 (1983), pp. 56-71; and Henry J.
Aaron, Who Pays the Property Tax: A New View, Washington:
the Brookings Institution, 1975. These are reprinted and further
discussed in Dick Netzer and Matthew P. Drennan (eds.), Readings
in State and Local Public Finance. Oxford: Blackwell
Publishers, 1997, Chapters 7 -- 10. See also Harvey S. Rosen, Public
Finance, 2nd Edition (Homewood, IL: Irwin Press, 1988), pp.
483-489; Mason Gaffney, "The Property Tax is a Progressive
Tax," Proceedings, National Tax Association, 64th Annual
Conference, Kansas City, 1971, pp. 408-426. [Republished in The
Congressional Record, March 16, 1972: E 2675-79. (Cong. Les
Aspin.) Resources for the Future, Inc., The Property Tax is a
Progressive Tax, Reprint No. 104, October, 1972], online at
- Walter Rybeck, "The
Property Tax as a Super User Charge," in Lowell Harriss
(ed.), The Property Tax and Local Finance. New York:
Academy of Political Science, 35(1)133-147, 1983.
- John Stuart Mill, Principles
of Political Economy, bk. 5, chap. 2, sec. 5.
- One of Henry George's most
notable speeches was titled, "Thou Shalt Not Steal," see
- William Riordan, Plunkitt
of Tammany Hall. New York: Dutton Paperback, 1963 (orig.1905).
- "Higher Taxes that
Promote Development," Fortune, August 8, 1983.
- This argument is effectively
made by Professor Nicolaus Tideman, in, among others, his "Taxing
Land is Better than Neutral: Land Taxes, Land Speculation, and the
Timing of Development," in Kenneth C. Wenzer (ed.), Land
Value Taxation: The Equitable and Efficient Source of Public
Finance. Armonk, NY: M.E. Sharpe, 1999.
- State Tax Policy & Senior
Citizens: Second Edition, Washington: National Conference of State
Legislatures, 1994; David Baer, State Programs and Practices
for Reducing Residential Property Taxes, Washington: AARP,
2003; www.aarp.org.ppi; and "Research Memo," by Don C.
Richards, Senior Research Analyst, Wyoming Legislative Service
Office, July 14, 2006.
- By far the largest component
of land value is in cities, typically upwards of 90 percent, and
the ability to accurately assess such parcels is very much
dependent upon data on adjacent sites. The official handbook of
The International Association of Assessing Officers states (p.547)
that "the chief measure of uniformity [in aggregate analysis]
is the coefficient of dispersion (COD), which, depending on the
nature of the properties involved, should not exceed 10.0-15.0 for
residential properties, 15.0-20.0 for commercial properties, and
20.0 for vacant [i.e., rural] land." Joseph K. Eckert, et al,
Property Appraisal and Assessment Administration, Chicago: IAAO,
1990. The revolution in computerized assessment is fast making
such tolerances far too generous, and will soon in fact at least
- Ted Gwartney, "Estimating
Land Values," www.geocities.com/bororissa/land.html and
- Henry George's classic book,
Progress and Poverty: An Inquiry into the cause of Industrial
Depressions and of Increase of Want with Increase of Wealth. . .
The Remedy. (orig. 1879). New York: Robert Schalkenbach
Foundation. See www.schalkenbach.org. for more exposition, and for
access to contemporary works and abridgements of this classic
- "Who Says Cities are
Poor? They Just don't know how to Tax their Wealth!" and "Painless
Taxation," at www.wealthandwant.com/docs/Batt_WSCP.htm and
- See Donald Reeb, "The
Adoption and Repeal of the Two-Rate Property Tax in Amsterdam, New
York," Lincoln Institute of Land Policy, 1998.
- John Christopher Schwab, History
of the New York Property Tax: An Introduction to the History of
State and Local Finance in New York, American Economic
Association, V(5), September, 1890; and Don Sowers, The Financial
History of New York State From 1789 to 1912, New York: Columbia
University Studies in History, Economics and Public Law, LVII(2),
Whole Number 140, and Longmans, Green & Co., 1914.
- Sowers, Appendix II.