The Taxable Capacity of Land
[Published in Patricia Salkin, 1993. Land Value
Taxation. Albany, N.Y.: Government Law Center, Albany Law School,
pp. 59-82, with the addition of a Figure 1, facing Table 1.]
The question I am assigned is whether the taxable capacity of land
without buildings is up to the job of financing cities, counties, and
schools. Will the revenue be enough? The answer is "yes."
The universal state and local revenue problem today is whether we
must cap tax rates to avoid driving business away. It is exemplified
by Governor Pete Wilson of the suffering State of California. He keeps
repeating we must make a hard choice: cut taxes and public services,
or drive out business and jobs. (When a public figure gives you two
choices you know they're both bad, and he wants one of them.)
The unique, remarkable quality of a property tax based on land ex
buildings is that you may raise the rate with no fear of driving away
business, construction, people, jobs, or capital! You certainly will
not drive away the land. However high the tax rate, not one square
foot of it will put on a track shoe and hop out of town. The only bad
thing to say about this tax's incentive effects is that it stimulates
revitalization, and makes jobs. If some people think that is bad,
maybe this attitude is the problem.
There is the answer to Governor Wilson' dilemma. I hope here in The
Empire State you will supply a practical demonstration of the answer,
one we may then use to inspire The Golden State. California now,
following Proposition 13, has become a morality play, a gruesome
object lesson in what happens when the property tax is pushed down
toward zero. It forces higher taxes on production and exchange.
Non-property taxes, you know, mostly have the character that they "shoot
anything that moves," penalizing and discouraging economic
activity. New buildings gain by having a lower property tax burden, it
is true; but they bear the brunt of these new taxes and impost fees up
front, at the time they are built. These offset the benefits of their
lower property tax rate.
Most California land, on the other hand, is now taxed at well below
the allowable max of 1%. Speculators may sit on it at little tax cost,
however many highways and water and sewer lines run to and past it,
however many policemen are guarding it from trespass. Little wonder
that California enterprise, once so dynamic, flexible, and vital, is
giving way to stasis and decay. We used to lead the nation in making
jobs; now in losing them. We used to lead in school quality; now in
jail population. When you tax land, the market moves each owner to
join it with labor and capital as a vehicle for enterprise or shelter.
When you untax it, the market moves each owner to hold it more
passively and obstructively as a "store of value," like a
dog burying a bone. The market not only moves the sitting owners, it
moves ownership itself to new owners whose needs are compatible with
the tax system you impose.
The property tax, rather than "shoot anything that moves,"
is a charge on inactivity. It taxes both lands and buildings on their
market value, regardless of how they are used. "Hold on,"
you might say, "how about the very activity of constructing those
buildings?" Yes, touché, the property tax does shoot at
that, and shoot hard. However, that is why we are here today, to
consider modifying the tax to exempt buildings. The proposal is to
make it a tax mainly, or even purely, on "land ex buildings,"
a tax on inactivity, a tax just for sitting on a piece carved from the
world's fixed, limited land supply.
"Hold on again," I have heard, "how much revenue can
land yield by itself?" It is my job to address that. I assure you
it can yield more than local governments need. I have already pointed
out you can raise the rate to any level without fear of driving away
jobs, capital, people, or building. That is a remarkable quality in a
tax, especially one as progressive as the land tax. I will also
support the point in several other ways.
The taxable capacity of land is camouflaged in our times by a
consistent modern tendency to underassess it, relative to buildings.
There are several studies in point. The most general one is the
quinquennial Report of the U.S. Census of Governments. It actually
understates the tendency a lot, by omitting the class of land most
underassessed, that is, raw acreage in and near cities.
There is great latitude in the assessment process. This latitude is
now used to lower the fraction of the property tax base that is listed
as land value, and raise the fraction that is listed as building
value. It could just as well be used the other way, and used to be in
many cities, whenever assessors were getting that message through the
election returns. This would have roughly the same effect as going to
a two-rate system on a more formal basis - except, obviously, that the
formal basis is more permanent, reliable, and generally respectable.
I have here data (Gaffney, 1970, submitted herewith) I worked up in
Milwaukee from 1969 data indicating that, if land were assessed
correctly, the land fraction of the real estate tax base would be over
twice what the City Assessor reported. His fraction was 31%; it should
have been 70%.
How does one come to so startling a finding? Wisconsin is not a
backward state. It prides itself on the high quality of its public
administration. What I did was study sites on the eve of demolition.
When you buy an old junker to tear down and replace with a new
building, you (the market) are obviously recognizing that the building
has no residual value. All the value is then in the land. However, in
Milwaukee in 1969 the Assessor was saying the building was worth about
three times as much as the land, just before tear-down. That is a good
way to measure to what extent land is underassessed.
Try that in Manhattan. When the visitor first gapes at its skyline
from afar, it looks like one big modern high-rise. If you poke around
on foot much, though, you soon realize those are the exception. Most
of the lots are covered with obsolete junk, some of it tumbledown,
commanding rents mainly for their location value.
Check the Empire State Building. Old as it is, it is still nearly the
tallest building in the world. As to its site, it is in a so-so reach
of 5th Avenue (34th Street), many blocks from the 100% location (57th
Street, I would guess). Even so, when the site and the building sold
in separate transactions a few years ago, the site represented 1/3 of
the total value. What does that say about the land fraction on
neighboring parcels, covered only with the remains of ordinary old
structures? What does that say about the land fraction nearer the 100%
Besides that, exempting buildings from the property tax will raise
the value of the land that goes with them. When you exempt buildings
and uptax land, you are still taxing the same parcel of real estate,
you are just taxing it in a different way. What you don't get from the
building you can now get from the land, whose taxable capacity is
enhanced by your exempting the building, and all potential future
buildings, on the parcel. The process of arbitrage, the higgling of
the land market, should make the land value rise by about the amount
of the discounted present value of the building taxes abated.
How much is that? Take a property tax rate at 2% of the market value
of a new building. Over fifty years, tax payments add up to 100% of
the original value. That's a lot. To be sure, we must correct for the
"time value of money," and discount those future payments to
the present. We must adjust for the anticipated drop in the building
assessment after 20 years or so. Doing so brings that 100% down to
about 30%, more or less, depending on your discount rate. Thus, the
impact of a 2% property tax on a new structure is about the same as a
30% building permit fee levied once, at the time of building. Ouch!
Remove that tax threat and buyers will be willing, if they must, to
bid that much more for the land underneath. If they must? They must:
competition and arbitrage see to that. Land is fixed, but Capital
flows like liquid or gas. It abhors a vacuum, and rushes into new
chances. To seize this one, the investors must bid for land in the
subject jurisdiction. Collectively they bid land up, fortifying your
land tax base.
Please understand, the proposed tax change will not produce an
untempered rise of land prices. Taxing land at a higher rate balances
and offsets the effect of exempting buildings. It tends to lower land
prices, just as untaxing buildings tends to raise them. On balance,
however, the positive effects on land prices will outweigh the
negative ones, because of the constructive incentive effects of
changing the tax base to land. Read on.
"What, then, will have changed?", you might be asking. It's
a fair question. What's changed is that your property tax is no longer
biased against renewal, against replacement of old by new. Neither is
it biased against full development of the economic capacity of each
site. All the ground rents that are now aborted by deferral of
renewal, and by underdevelopment, will be generated by new, full
development. Land prices, your new tax base, will be pushed up just by
the expectation of new buildings' being tax free. The mere expectation
will immediately boost the value of land, your new city tax base, even
before the new buildings go up.
For example, Pittsburgh in 1980 downtaxed its buildings and uptaxed
its land, and is fiscally very sound, much more so than bleeding
California. It is raising revenue and also attracting capital: a nice
combination. At the very same time the Mayor of desperate
Philadelphia, clueless and unavailing, is telling the world he cannot
raise taxes because everyone would leave the city! You can peer south
across the line better than he, apparently, can look west on the
Pennsylvania Turnpike. You, by observing and thinking, can benefit
from Pittsburgh's example, and Philadelphia's folly.
"How about corporate stock?", I hear. "Should we
exempt corporate wealth from the property tax?" Actually, almost
all jurisdictions already exempt stock and all other "intangible"
property. Not to worry, however, you tax corporate assets. When you
rank property owners by value of holdings, the top ten on most tax
rolls are all corporations. None of their multi-national
profit-shifting through layered ownership of foreign subs, and
creative transfer pricing, can hide their taxable property on your
assessor's maps. This makes sense anyway. Why should you think you can
tax a corporation for its business in Malaysia? What concerns you is
its property in your town.
"Wait another minute," I hear. "Some corporations
build bright new plants in cow pastures, with a high fraction of
building value. If you exempt buildings, you let them off easy."
There are cases in point, I concede, like the blue-collar industrial
suburbs of Cudahy and South Milwaukee, Wisconsin. Probably you could
have said that in Amsterdam, N.Y., when the rug industry was thriving
there. Amsterdam's fate, however, draws a moral about that. An
industry that depends on your land, your location, is likely to stay
put; but an industry that brings in most of its own assets, in the
form of capital, is mobile. What it brought in it can take out.
"Take out buildings? Be serious!" you may say. Buildings
look rooted to the spot, but that is illusory: those roots are
temporary. Buildings depreciate. They may be milked through
undermaintenance, and the capital consumption allowances (CCAs)
reinvested elsewhere. After a few years the plant is an empty shell.
They close it, flat-bed the equipment, and silently steal away. If
they really need nothing but a cow pasture, they can find ten thousand
others, anywhere, and reinvest their CCAs there. You are wise not to
tax such plants out of town. You need them, but they can take their
capital to greener pastures. Capital is mobile, both coming and going.
Only land stays put.
In other cases, industries occupy land of high value that is wrongly
assessed low simply because industry occupies it, and it has not been
subdivided. What has subdivision to do with it? The bias of assessors
is to value industrial "acreage" low, relative to improved "lots,"
even though they lie cheek by jowl. It is a kind of wholesale discount
for owners of "raw" (undivided) tracts.
For example, in West Allis, Wisconsin, the southwest corner of the
Allis-Chalmers plant occupies the northeast corner of the 100%
location, the most valuable commercial site in town. That land, with
the same retail potential as the other three corners, is assessed as
raw industrial acreage, as though it were in the boonies, with no
recognition of its high location value for retail/office use. To make
a land tax work, the assessor must be reinstructed to value that land
at its highest and best use rather than as ordinary raw acreage.
Exempting buildings would create the necessary pressure, thus solving
the very problem that otherwise might be taken as a point against it.
As noted earlier, the U.S. Census of Governments gives us no data on
this point. You, however, can find it easily enough: tax assessments
are public records, and you know your own town.
In still other cases "industry" surrounds and intersperses
itself with vast swaths of vacant land. They hold it for open storage,
parking, purported "future expansion," accessways, buffers,
backlots, discouragement of competitors, etc. Many of Los Angeles'
swankiest buildings of today arose over the former surplus lands of
the cinema industry, which disgorged them before 1978 because they
used to have to pay substantial taxes on surplus lands.
"Corporate" is not coterminous with "industrial,"
anyway. Many corporations are in retailing. They own chain stores,
malls, gasoline stations, auto dealerships, major real estate "developments,"
drive-ins, office space, department stores, banks, "power
centers," etc. As to these, shifting to the land basis will shift
more of the tax burden to them, because retailing has a higher land
fraction than any other major land use (except vacant, golf courses,
cemeteries, parking lots, etc.). That is because location is more
critical to retailers than other businesses. You can tell this by
their high rate of tear-downs and remodeling.
Among its other effects, site-value taxation will induce some land to
shift from retail to industrial use. Recall that exempting the
building, or prospective building, lets buyers bid more for land. The
higher the building fraction, the stronger is that force. Thus the
present system, which is biased against buildings generally, is biased
against industrial compared with retail uses. Removing that bias will
help industry outbid retail for land - not all land, of course, but
land on the tipping point between the uses. Most towns today seem
oversupplied with retailers, compared with their shortage of basic
industries. Shifting to the site-value basis of property taxation
helps redress that balance.
"Let the market decide," some say. "No good can come
from forcing land into use, against the owner's private judgment."
Actually, the proposal to exempt buildings and focus property taxes on
site values is premised on the market concept of consumer sovereignty;
it's the present property tax that isn't. The case may be summed up
like this: if the tax on a parcel varies with the use of the parcel,
then the tax biases choices against the use more taxed. Economists
call the land tax "neutral," for that very reason: it does
not vary with use. It does not bias the choice of uses; the consumer
sovereign prevails. "No other tax can make that statement."
I do not view that as saying we should throw away other social
controls over land use. I have written a short piece, "Land
Planning and the Property Tax," showing how land taxation
strengthens the hand of planners and helps them and the market work
together. There are a few libertarians who would terminate city
planning altogether, but that is pretty extreme, and not the proposal
we should be considering here today. Rather, let us consider a
measured proposal, an incremental change within the framework of
present law and custom.
"Hold on once more," I hear, "not so fast, how about
the mansions of rich people?" Another fair question: how, indeed,
can you justify exempting them from taxation? The answer may astonish
you. Here are some data from British Columbia that speak to the point.
They are from the area around Vancouver (The "Lower Mainland")
and the southern part of Vancouver Island, around Victoria, where over
half the people in the province live. B.C. practices high quality
professional assessment; data from its rolls are quite reliable, as
such things go.
Cities and districts around Vancouver and Victoria are ranked, in
Table 1, according to the land value per property (single-family
residences). These range from nearly $700,000 @ in the "University
Endowment Lands" district (very posh), to around $40,000 @ in the
"Victoria Rural" district (more modest). The last column,
LSREV (Land Share of Real Estate Value), shows the land value (L) as a
share of the total value (B+L).
These shares range from a high of 80% on the University Endowment
Lands (UEL) down to 38% in Colwood (the lowest), and 39% in Victoria
Rural (next to lowest). In between, the numbers follow the trend
closely. The dearer the land parcels, the higher is the "land
fraction" (the fraction of total real estate value that is land
value). From such data, one might formulate a rule along the lines
that "the lot value increases with the square of the house value."
It is hard to be so precise, and not necessary. The relevant rule we
need here is just that people's house values are more alike than their
lot values. It is lot value, more than house value, that divides the
rich from the poor.
The average house (ex land) in the posh UEL jurisdiction is worth 2.8
times the average in the Victoria Rural jurisdiction ($173.1/$61.9).
The average land parcel (ex building) in the UEL is worth 17.5 times
the average in the Victoria Rural jurisdiction ($692.5/$39.6).
Now do us both a favor, please. Pause and savor that comparison. Let
it linger, as though you were testing a slow sip of wine from
Fredonia's famous grapes. Roll it on your tongue, mull sensually over
its aroma and bouquet, and, getting back to business, mull cerebrally
over its full import. The house that shelters the very rich family is
worth 2.8 times the house of the modest family; but the land under the
house of the very rich is worth 17.5 times the land of the modest.
Seventeen and one half times as much! Again, it is lot value, more
than building value, that divides the rich from the poor. Seldom will
you find an economic rule more strongly supported by data. It's just a
matter of presenting the data so as to test and bring out the rule.
Land Values (LV) per Residential Property,
Building Values per Residential Property, and Land as Share of Total
Real Estate Value (LSREV) Data from British Columbia, Lower Mainland
and Victoria regions, 1992
|[Table omitted. Readers are referred to the original]
An American counterpart of Vancouver's "University Endowment
Lands" is Beverly Hills, California, where land value composes
some 80% of residential values, and the mean parcel is worth something
like a million dollars. Beverly Hills, with its great wealth and
mansions, is known as "Tear-down City." Every year many a
grand old palace that once sheltered some renowned matinee idol, and
rang to scandalous parties, is torn down to salvage its site for the
next, grander one. In a land boom, such as crested in 1989, half the
city goes to the brink of demolition and replacement.
What do those data tell us? The rich as a rule do not live next to
the poor. Rather, they cluster in neighborhoods with much higher lot
values. The poor seek shelter first, and go where it is affordable.
The rich put a high premium on location, neighborhood, views, and
grounds, resulting in higher land fractions in their real estate.
Mansions are visible evidences of wealth, impressing viewers
powerfully; land values are invisible. The perceptual bias is to
underrate the invisible, if you are not regularly in the real estate
market. In the numbers, however, land and buildings are equally
visible, and their message is clear. It is land value more than house
value that divides the rich from the poor. Ergo, a tax shift from
buildings to land is a shift from the poor to the rich, even though
the houses of the rich are exempted. It makes the property tax more
To be sure, those data are grouped by separate municipalities, not
neighborhoods within municipalities. The poor of Colwood cannot tax
the rich in the UEL, except through a higher level of government.
However, what is true among municipalities is also true among
neighborhoods within municipalities. Indeed, if we divided Vancouver
into neighborhoods, the contrasts might be sharper than those shown.
The UEL, for example, is really just a neighborhood in Vancouver that,
for historical reasons, happens to be reported on separately. Harold
Brodsky has done neighborhood comparisons in Washington, D.C.;
Margaret Reid in Chicago; Richard Muth in various cities. They tell
the same story. If we are very lucky, some Institute or Foundation
concerned with land policy will see the importance of this question,
and support teams of researchers and graduate students testing the
point in a dozen American cities. San Francisco, with its scores of
well-defined neighborhoods, would be a natural. Compare exclusive St.
Francis Woods (top of the line) with the crowded Richmond District,
and both with Visitacion Valley (the pits). I surmise the findings
would reinforce those presented above. Meantime, nothing stops you
from checking things out in your own town.
Making the property tax more progressive is not just equitable, it
raises its revenue capacity. That is because visible damage to the
poor and marginal puts a cap on any tax. You can't squeeze blood out
of a turnip, and if you try you'll look like the Sheriff of
Nottingham. A land tax won't drive the poor from their humble huts,
because it exempts the huts, and the sites have low tax valuations. It
may tax a few off valuable land, if their poor huts are there and they
own the land. However, if they own such land, are they really poor?
They may be "land-poor": a few folks always are. They have
non-cash assets, but are illiquid. "Illiquid" may be just a
euphemism for "holding out for more" - there is always a
market at a price. Even so their plight, genuine or affected,
traditionally evokes sympathy and support. We must address it.
California, although backward in many ways, has addressed it
effectively. In our special improvement districts (SIDs), State law
allows the SID to contract with the landowner as follows. You don't
have to pay your annual charge in cash. If you choose not to, we take
an equity in your property, charging a modest rate of interest. Our
equity accumulates over time. When you die, we sell the property and
take our share; your estate gets the rest. Should our equity reach
100% during your lifetime, you stay there for the duration, tax free.
Objectively, it looks like a good deal for the taxpayer. They can't
come out behind, even if they die soon; if they live long, they come
out ahead. The instructive result is that very few people take this
apparently advantageous option. UCLA's Donald Shoup has published
several works on the program. One way or another, they manage to pay
on time. Perhaps it attracts the attention of potential heirs, in a
compelling way, but somehow the cash comes forth. While intending only
to relieve distress, the program seems to have called a great bluff.
The lachrymose plea of the cash-poor widow is unanswerable in debate,
without appearing callous, doctrinaire, and jackbooted. Meantime
wealthy interests, thoroughly undistressed, hide behind the widow's
skirt and get their way.
We also hear, sometimes, that "it's never been done," or
it's only been done by our drab neighbor Pennsylvania, for whom
familiarity may have bred contempt? Only "far kine have long
horns." Or, whatever progress ensued there was happening anyway.
We are destiny's tots in the grip of cosmic forces. We rise and fall
with the tide. We cannot control Fate; relax and accept what the gods
dish out. Fatalism: it's a sure recipe for milling around
ineffectually while life passes us by.
Let's raise our sights far afield to where "it" has also
been done. I was in Johannesburg not long ago, a city that thrives in
the face of daunting handicaps. I am struck by the miracle of the
place; it is Bootstrap City. It should have died when its gold mines
played out, like a normal mining boomtown. Instead it remains as the
economic capital of its nation and half a continent.
Johannesburg defies and belies many "laws" of urban
economics, such as that "mines create no great cities." Its
once-fabled gold mines are just tailings now, so it should be a ghost
town. It has no harbor, no water transportation, not even any gravity
water supply. It is, in fact, on a ridge-top (the Rand or "reef"),
at an elevation over 5,000'. Water supply is pumped uphill.
It has no sunburst of rail lines, like Chicago or Boston, "The
Hub," except perhaps what it has attracted itself. It is on the
main rail line, but so are a thousand miles of other sites. The
natural site lacks outstanding amenities, and can't hold a candle to
Cape Town. Jo-burg has no governmental economic base. Surrounding
farmland is poor, the climate droughty. Why Johannesburg? Why is it
the largest city, the center of finance, industry, commerce, and
international air travel?
As a public finance economist I may overvalue incentive taxation, but
Jo-burg has it. The property tax is on site value alone, and at a high
rate: they tell me it is 4%. This is what makes Jo-burg distinctive.
Challenge and response: Jo-burg had to do something right in order to
survive, and that is what it did. It not only survived, it became and
remains Number One. Give me a better explanation and I'll back off. I
haven't heard one yet.
Jo-burg is not heaven, far from it. It is surrounded by and
transfused with social problems we can hardly imagine, much more
expensive to handle and solve than what we know. That is part of the
present point. Jo-burg obstinately prospers in the face of these,
added to its natural geographic disadvantages.
Cape Town, by contrast, is Sleeping Beauty. Nature has been generous
there. It is gifted with one of the world's great harbors and sites,
ideal climate and scenery. It has the national legislative Capitol. It
enjoys the business potential of New York, the climate of La Jolla,
the scenery of Vancouver, and the political base of Washington (or at
least Albany). Tourists flock there, and would do so even if the place
were misgoverned by Mayor Idi Amin with Police Chief Saddam Hussein.
Meantime Jo-burg, the ugly duckling, walks off with most of the
nation's business. What is Cape Town's problem? It taxes buildings,
the way we do.
Taiwan is another place that "did it," in part. Its present
government is what remains of the Kuomintang, founded by Dr. Sun
Yat-sen on the mainland around 1920. Sun's ideas were abandoned to
corruption until the Kuomintang's remnants, discredited and beaten,
fled to Taiwan in 1948. Then finally, backs to the wall, they purified
themselves. They put Sun's visage on their currency and buildings, and
beatified him. They created an efficient, honest government and
applied the policies Dr. Sun had prescribed long ago for all China.
Sun's basic economic program was simple. He was a convert to the ideas
of Henry George, which were stirring the world in Sun's formative
years. Tax the land; exempt the buildings, said Dr. Sun. That is what
Taiwan finally did; the Taiwanese economic miracle ensued. It is there
to see and study. Them as has eyes t'see, let'm see.
It's not that simple, of course, and certainly not that pure: nothing
ever is. That is the gist of it, however. As to adequacy of revenues,
they have combined their local land tax with a national tax on land
gains, levied at time of sale. These two taxes between them raise a
full 20% of all Taiwanese revenues: local, regional, and national.
Remember we are talking about a government under siege, with a heavy
military budget. We are talking about land prices that keep rising in
spite of taxes levied on the land value base. Again, it is there to
observe. It is not in America, true: it is even better. It is an
American export that took root and flourishes in an alien culture
because it answers universal needs. Among the Chinese it also evoked
memories of revered statesmen and philosophers, like Wang An-shih, who
had implemented land taxation to abet China's ancient glories.
Singapore, Sydney, Brisbane, and Nairobi are other cities that
collect substantial land revenues. From 1900-20, roughly, many
American and Canadian cities uptaxed land and downtaxed buildings. It
was a part of the Progressive syndrome. There is a world of experience
to instruct us, if we will but study it. Pittsburgh and those other
smart Pennsylvania cities are near and now and noteworthy, but they
are not the whole story. If you want more, your world of observation
is as big, and time as long, as you want to make them.
The adequacy of a tax base must be judged over the cycle of boom and
bust, a cycle we are now learning is still much alive. How stable is
the base? Capital comes and goes; land is fixed. When they finally
close that plant and move the work to Mexico, at present we reward
them by lowering their taxable valuation -- reward them and punish
ourselves, as city revenues fall. On the other hand, if we taxed just
their land, the valuation would remain about the same. They will
squeal, cajole, and threaten, but no way can they move their land to
Mexico. They will just have to find a new use for it. Meantime, you
will have made it more likely there are profitable new uses by
removing the tax threat against whatever new capital they might invest
in your town to employ your people.
Land prices boom and bust too, jeopardizing revenue stability. That
can be a problem, but land taxation contains a built-in
contra-cyclical factor. When a land boom reaches its manic phase, as
it did in California before 1989, growth expectations rise so high
that they offset interest costs: people think they are holding land
with no net carrying cost. Your home is expected not just to shelter
you, but pay off its own mortgage, upkeep, and maintenance by
appreciating. Call it irrational, but it happens. In this phase, the
fast-moving tax assessor is an equilibrating force. The quicker he
follows such a market, the quicker he showers it with cold water, by
imposing a sobering cash drain on the participants. This is an
excellent time for local governments, if they have the wit, to pay
their debts, fix their potholes, and fill the fiscal reservoir against
the next drought.
Those getting the cold shower, meantime, may resist it. In
California, the land of extremes, we got Howard Jarvis and Prop. 13.
This Constitutional Amendment capped the property tax rate at 1%, and
virtually froze assessed values until land sold. Then the boom really
went wild. I myself, after campaigning hard against Jarvis,
unexpectedly made $200,000 in a few months after it passed. Buyers
were chasing me around the block, just to buy a scrap of land I
happened to have in the right place at the right time. It was blind
luck, but the money was as good as though I had earned it honestly:
better, in fact, because 60% of the gain was not even reportable as
taxable income. It was a once-in-a-lifetime experience, but buyers and
sellers came to regard it as normal, and only fair. They saw regular
annual increments as a divine right of property. For a few mad years,
It was the lack of a tax stabilizer that took the cap off land
prices. When my lot rose to $240,000, it was still assessed at
$10,000, and capped there by constitutional law! Taxes were 1% of
$10,000 - that's right, $100/year, 1/24 of 1% of the market value. Was
I in a strong bargaining position? You bet, and I loved it, just as
you might. Now we are paying the price, or beginning to, as our public
services collapse and our criminals outgun our police. This year they
are cutting faculty salaries (that's me) 5%, and raising college
tuition (that's my three children) 100%. I'll pay all right. All tax
rates other than property are headed north; land prices south. Our
once-vibrant economy is dying; our unemployment rate leads the nation.
Our largest city was torched last year by the frustrated unemployed.
Our once-leading schools trail the nation; our murder rate leads it.
Those are the economic consequences of Howard Jarvis. Like Tokyo and
London and Faust, we signed with Mephistopheles. He showed us a grand
time, but now his bill is due. To paraphrase Kipling, "Be warned
of our lot, which I dread you may not, and learn about Jarvis from me."
Another attractive feature of land taxation is its interesting
positive effect on the economic base of a city. It strengthens it by
its tendency to hit absentee owners harder than resident owners. The
land fraction in real estate is generally highest in the CBD of any
city, so that is a favorite place for absentees to buy and hold. They
like the steady income, and the "trophy" quality. The
surplus in real estate is what attracts outside buyers, and land is
what yields the surplus. About 2/3 of downtown Los Angeles is owned by
non-resident aliens, for example. In a more workaday city, Milwaukee,
the absentee owners consist of former residents, or their heirs, who
grew too rich to abide the harsh winters.
Consider the effect on your balance of payments. When you get more
tax money from absentees, money that used to flow to Tehran, Zurich,
or Palm Beach now flows into your local treasury to pay your local
teachers and city workers, and relieve your builders and building
managers. In this way taxing land actually acts to undergird the value
of its own base.
To stimulate building is also to uphold and fortify the tax base,
even though you do not tax the new buildings directly. Some people
fault the "depressing" canyons of Manhattan, between the
skyscrapers. In my observation, it is not the canyons that depress
Manhattan. When the GM building went up, Fortune Magazine reported it
doubled the rents of stores across the deep canyon so formed. Its
spillover effects were highly positive. What really depresses
Manhattan are rather the centenarian firetraps and the activities they
attract. They tend to downvalue other lands nearby, eroding the tax
Consider the effect of floorspace rentals on ground rents and land
values. Doubling floorspace rentals will more than double land values,
through a kind of leverage effect. That is because all cash flows
above a constant amount required for the building will inure as ground
rents. The higgling and arbitrage of the market will see to that. Once
that constant is met, everything above it goes to landownership as
such, raising land prices which are the land tax base.
When you observe cities much, the positive neighborhood effects of
replacing old buildings with new are irresistible and contagious,
raising land prices all around. The converse is also true: the
negative neighborhood effects of letting old junkers stand without
replacement are depressive. Thus, when you take the tax off new
buildings, and put it on the land under old tumbledowns, you kick off
a general process of revitalization that turns gloom into hope into
optimism: optimism that boosts land prices and the land tax base.
There are three kinds of slums. Type I slums develop on land in the
van of downtown expansion, on land held for a future higher use. The
speculators are milking the old structures for any residual value.
They don't much mind when the tenants leave, and spare them the
trouble of an eviction when they want to sell or rebuild. That's what
they're in it for: the current use is incidental.
Type III slums (listed here out of numerical order) develop on land
that is no good, and may never be, like floodplains and earthquake
faults. They also develop around abbatoirs, dumps, stockyards, etc.,
although these are subject to change. In either case, people are
driven there by the inadequate development of good land.
Type II slums, our focus here, are the most extensive. They occur on
good or superior residential land originally developed over fifty or a
hundred years ago. It may once have housed the upper crust, but as the
buildings aged without replacement they "filtered down," and
down, and down, until their occupants began radiating negative
neighborhood effects. There comes a tipping point where the
neighborhood self-destructs cumulatively, because no one wants to
build new in a decayed, menacing neighborhood. The renewal value of
land is lost, the tax base is lost, nothing remains but social and
public costs: a municipal disaster area. The city that fails to renew
itself on time is steering itself to this fate, like Camden, the
Bronx, East St. Louis, Benton Harbor, MI, and Detroit.
That's the bad news. How do you turn it around? When you drop
buildings from the property tax base, you change the arithmetic of
incentives, as we have discussed. Parachuting into the middle of a
slum is still hopeless, as before. Change will come first to the
fringes of the Type II slum, where it merges into healthy
neighborhoods. New development likes to anchor onto healthy
neighborhoods. Richard Hurd, father of urban studies in America,
taught us in 1902 that land values are marked by continuity in space.
It's still so. Fashions and technology change, but principles last.
Hope survives at the edge of the slum; land there retains some renewal
value. There is where you'll first see change, because there is where
the forces are evenly balanced. Tip the forces for renewal, and there
is where it begins.
Once it begins, it proceeds incrementally through the Type II slum.
When it's through, your oldest neighborhood has become your newest,
the cutting edge of progress, the showplace of the town. That is how
it has got to work; that is how it will work when you exempt buildings
and tax only land. When it is through, you have a high tax base where
now you have nothing but fire and police calls.
I once wrote a long chapter on this subject, "The Adequacy of
Land as a Tax Base" (Gaffney, 1970). It came out of two years of
research, and is too long even to summarize now. I am delivering it to
Pat Salkin, however, and hope she may add it to the record of this
conference. I also attach a short bibliography of articles that expand
on topics covered above, for whoever is moved to study more on this
fascinating subject. I hope you think it as important as I do. Please
pick up this ball and run with it. Nobody said it was going to be
easy. There are some bone-crushing line-backers out there, like Greed,
Ignorance, Myopia, and Inertia. So much the more credit to you when
you cross the line: your fans will love you for a touchdown. They
really need a lift; they've waited so long!
SELECTED BIBLIOGRAPHY OF RELEVANT WORKS BY THE WRITER
1. With Pierpont I. Prentice, Land --
a Special Issue. House and Home Magazine 18(2), entire issue, (August,
1960). (Jesse H. Neal Award for Business Journalism, 1960.)
Republished, along with several other relevant works, in Compact
Cities: a Neglected Way of Conserving Energy. Joint Hearings,
Committee on Banking, Finance and Urban Affairs; and Committee on
Interstate and Foreign Commerce. U.S. House of Representatives, 96th
Congr. 1st Sess. Washington: U.S.G.P.O., 1980, pp. 142-62.
2. "Property Taxation and the Frequency of Urban Renewal."
Proceedings, NTA, 57th Annual Conference, Pittsburgh, 1965, pp.
3. "Land Planning and the Property Tax." JAIP 35(3):178-83
4. "The Role of Ground Rent in Urban Decay and Revival."
The Henry George Lecture, St. Johns' University, September 1988.
Distinguished Papers No. 89F-1, November 1989, Business Research
Institute, St. John's University. Pp. 1-15.
5. "Adequacy of Land as a Tax Base." In Daniel Holland
(ed.), The Assessment of Land Value. Madison: Univ. of Wisconsin
Press, 1970, pp. 157-212.
6. "The Property Tax is a Progressive Tax." Proceedings,
NTA, 64th Annual Conference, Kansas City, 1971, pp. 408-26.
Republished in The Congressional Record, March 16, 1972, pp. E
2675-79, by Congressman Les Aspin.
7. "Tapping Land Rents after Prop. 13." Western Tax Review
(annual), 1988, pp. 1-55.
8. "Proposition 13: an Alternative Reform." The Center
Magazine, Sta. Barbara, Nov./Dec. 1978, pp. 19-28.