Equity of Heavier Reliance on Land Taxation
(Location Value) and Less on Improvements
C. Lowell Harriss
[Reprinted from Land Value Taxation: Pro and Con,
by C. Lowell Harris, Arthur P. Becker, A.H. Schaaf and Manual
gottlieb, Tax Policy, September-December, 1970. At the time of
this paper, C. Lowell Harriss was Professor of Economics, Columbia
University and an Economic Consultant, Tax Foundation, Inc.]
Greater fairness in sharing the costs of local government constitutes
a prime -- but not the only -- reason for shifting much of the
tax from improvements to land. This country will be around for a long
time. So also, I hope, will meaningful local government. Effective
freedom requires financial independence, in-chiding ability and
responsibility for raising revenue.
One of the biggest legacies we leave our children will be the tax
system. We want to make it as good as possible. Equity is one (again,
not the only) element of "goodness" of a tax system.
EQUITY: A COMPLEX CONCEPT
The concepts of "equity," "justice," and "fairness"
as applied to sharing the cost of local government must present
endless challenges of definition. Matters of the meanings of these
concepts are by no means so clear as to give us reliable guides for
settling the complex questions at issue here. Even for taxes which
apply nation-wide, equity issues are maddeningly complex. For example,
who would not agree with the statement: "The federal personal
income tax is grossly inequitable in some respects; highly inequitable
in others; in some cases, however, it is generally about as good on
equity grounds as anything in an imperfect world, and in some ways it
rates 'excellent,'"? Yet we would differ sharply in selecting the
specific income tax features which fall at the various points on a
scale from horribly inequitable to about the best possible.
For financing local government, the concept of fairness, of equity,
must reflect other considerations, not least being the features of
local spending. For example, if taxpayers generally finance community
improvements which enhance the worth of some parcels of land, then an
argument, which seems overpowering on equity grounds, arises for
taxing the values so created. Some of my other views about the meaning
of the "equity" for present purposes will be implicit in the
"The" property tax - economically two quite different
levies (one on land or location value and one on improvements) - is
not, and should not be judged as, a tax on income or a tax on net
worth (net wealth or capital). "Ability to pay" is at best a
highly ambiguous term. As it is popularly used it has limited
applicability in judging property taxation in the "mushy"
vagueness of common usage, and even less usefulness for purposes of
distinguishing the fairness of taxing land as compared with
WHAT IS PROPOSED
Substantial reduction in the tax rates on improvements -
including capital investments by the owner in land - would be
financed by sharply increased reliance on land (location) values.
Definition of "land" for the purposes of the proposal
presents real problems, but they are not beyond man's capacity to
solve. Admittedly the concept of land - land value, site value -
requires refinement, especially when a high tax rate is involved. Here
lies one of the many problems of transition. The term "location
value" may well be more appropriate, and I shall use it
frequently. It conveys, I trust, a distinction between (a) the results
of the use of capital and labor by present and past owners to make a
part of the earth's surface more valuable and (b) the results of
community action (governmental spending and rising demand for space)
affecting the amount people will pay for the use of one as against
The shift would be made in stages within a period of perhaps five
years. My proposal would not in itself produce a change in total
Some communities might move at once. Others, even within the same
state, might delay. Those communities acting soonest to cut tax on
improvements would benefit from attracting more of the flow of the
economy's new capital, Our first equity issue: Would this advantage as
compared with the effects on other localities be inequitable? Only a
straining of terms, it seems to me, would so indicate.
The "goal" might be a rate of tax on location (land) value
of three or four times that on improvements. Increasingly, the tax
on buildings might become a levy associated with factors other than
value. Such things as size and use, for example, seem to me more
logically related to the costs of local government service than does
value. This range of matters presents considerations calling for
further analysis. Land (location value) might also be taxed to some
extent on bases other than value, especially according to area and
distance (from a population center) as related to the cost of some
local government services. The proposal would not, as a rule, raise
issues of shifting more tax to farmers as a group if the total
of local government spending does not change. There would be
differences among farms according to the amount of capital which has
been invested by past and present owners to enhance the worth of what
God provided. Separating out past inputs of capital and labor would be
less than ideally precise, but for the future the record-keeping would
be no more than required for income tax purposes.
TRANSITION DISTINGUISHED FROM EVENTUAL CONDITION: EQUITY ASPECTS
Two markedly different sets of equity issues command attention. The
one of dominant concern ought to be the situation in which we (and our
children) would carry on our affairs after generally full adjustment
as contrasted with conditions then if present practices were to
continue. The long run in which "we" are not all dead! The
other concern involves the transition. The shift itself would produce
results distinguishable from those to prevail after the economy had
settled down to the new system.
When it is government rather than the free market that originates the
changes, questions of public policy arise. Some people will be hurt
and others benefited without any close relation to their own actions
and choices. The Tax Reform Act of 1969 was a source of such changes.
Many others come about, e.g., zoning, one sort or another of
regulations, monetary policy. The discriminatory results lose much of
their apparent social significance with the passing of time.
Meanwhile, there build up gradually various new conditions - a new
economic framework. People carry on their affairs in a different
environment. Will the resulting differences involve more or less
equity in sharing the costs of local government? Will payment for the
benefits of community spending that affect the values of different
locations be shared more equitably?
The vast majority of property owners and users would not have their
existing taxes changed "much." For most homeowners the
total difference in tax would probably not be down or up more than $1
or $2 a month in any one year. This guess, and I admit that it is just
that, assumes that in any community a large fraction of residential
properties are close to the average in die relation of land to
building value. Recall, no change in total tax is envisaged! The
change would not seem to me to be enough to justify appreciable
controversy on grounds of equity-but this value judgment is personal.
The Fine Building
One equity issue of the transition would be the reduction of tax on
fine structures - new, modern, highly valued buildings (especially if
the land is in other ownership). Where improvements are large
relative to land, there will be tax relief. Perhaps a few cases of
large amount would seem clearly undeserving. The owners of such
buildings would benefit, but not much individually where corporations
with many shareholders are the owners. The relief m most cases would
not seem to me to be great enough to justify much controversy on
grounds of equity; but this personal judgment can obviously be
questioned. Magnitudes would, of course, depend upon local conditions.
Two groups might be distinguishable - the "worthy" who would
be relieved of formerly excessive burdens and the undeserving who
would now pay less for no new contribution on their part. But you and
I might assign rather different groupings. If there is net inequity,
some would certainly be a price worth paying for a reform which over
the longer run would have many advantages on grounds of equity and
other benefits as well.
To the extent that the structures getting much relief will have been
built or purchased since imposition of the "present" tax
rates (those rates being reduced), there will be a positive windfall.
There will be properties in the typical city where the property tax
rate has gone up from year to year, and where many of the best of
buildings in place are not new. In such cases the amount of "excess"
tax relief, over and above the increase in land tax, may seem
unreasonable and unmerited. However, the original capital investment
may have been receiving an unduly low net return; but facts will vary
widely. The amounts will differ from one city to another and one
property to another. The number of cases of "large" tax
relief could not be great - especially if the transition is phased in
over five years or so. The flows of new capital and the negotiations
of new rental agreements would have opportunity to work many offsets
during such a period.
The Extreme Case Not a Good Basis for General Public Policy
A basic proposition warrants statement. It applies to both ends of a
spectrum, in this case large unmerited gains and losses. A few cases
of large benefits - and some of large losses - may seem inevitable,
but they ought not to be allowed to determine the issue for the entire
public. If one thing is clear, it is that wise policy for society
as a whole cannot result from focusing on a few extremes. These do
deserve consideration in making policy. But vastly greater weight
ought to be given to the majority of cases, first during the
transition and then over the long run.
Where land is vacant and idle or much underutilized, as with
deteriorated slum structures, the tax would rise - and by quite a bit.
Whether himself the user (for residential or business purposes,
including farming on the urban, fringe) or leasing to another, the
owner would face new, unwelcome conditions. The contrast with the
owner of the fine building does warrant concern. And my sampling of
views suggests that the "typical" American has quite an
identification with the land "speculator"! I would not
suggest an atavistic feeling for land ownership, a sympathy for land
speculation which has an old (and honored?) tradition in this country,
or a powerful sense of conviction that holding land deserves special
consideration. Yet my sampling does suggest more than a random - or
rational - bias favoring the owner of land, even (or especially?)
The case of underutilized land whose value declines more than
moderately as a result of the tax increase does require attention. The
person who has bought recently at a price which reflected the
capitalization of then exist"g property tax burdens would
properly complain, "Unfair."
The fruits of community spending on public facilities and the
benefits of rising demand due to social forces will have been
capitalized by earlier owners of location. Bygones are bygones. Old
inequities can be ignored - except as they point out lessons for the
Much would depend upon the quality of assessments. The sense of
unfairness that worries some critics of my proposal stems to large
extent, really, from an unrecognized (but not unimportant) fear that
assessments would not reflect changing conditions with reasonable
accuracy. Yet this danger, being recognized in advance, can,
hopefully, be forestalled by upgrading the assessment process. Here
lies one of the big challenges of government quite independent of a
shift to greater reliance upon location values for financing local
For owners of land having little in the way of improvements (little
in value though perhaps quite a bit of space in an obsolete building),
tax changes as capitalized, even though the transition is gradual,
would sometimes be more than nominal. But actual magnitudes are easily
Some owners of vacant land, for example, might come off surprisingly
well; they would be in a position to take quick advantage of the new
conditions, the enlarged flow of new capital to build new and better
(tall) structures to make fuller use of the potentials of location.
The enlarged supply of new structures would enhance the opportunities
of occupants of all types. The. filtering process would work with
greater scope. This favorable dimension of equity might positively
affect more people than the other results from the change.
Where losses do result, the justice, or injustice, of such change
ought to be faced frankly. Can it not be argued - argued with solid
basis in equity - that society owes rather little to the owner who has
kept land in a use much below its potential?
Withholding of a resource scarcely seems to justify compensation in
the form of social commitment to avoid action which will make such
withholding more costly!
The fact that an owner has been content to accept a return below what
the market would have paid -does not vest in him a claim on society of
a right to continue on such terms. Or do we unconsciously identify
with "speculation" m land?
Still, equity does require that changing the "rules of the .game"
must not be done without regard for implied as well as explicit
commitments. For the transition, even with a five-year spread, I
would, "in principle," welcome some adjustment to ease the
more extreme cases. Individuals as owners, whether or in groups,
likely to incur "large" capital losses might well deserve
consideration. If real losers could be compensated, the price would be
modest in relation to the long-run benefits to the community.
The practical difficulties of any such compensation plans are
formidable. (The mere existence of the possibility would add to the "need"
because sharp owners of vacant land would tend to buy and sell to take
account of the prospective remedy.) Frankly, I am not hopeful about
this potential transition device. Nor does the need seem likely to be
The amount of transition effect would depend upon the extent of
preparation in advance. Surprises are hardly conceivable. The
inevitable discussion would extend over years. The approaching
possibility would tend to get into the prices of land and buildings.
The incorporation into prices attached to location (land) values of
prospective tax changes would decline as the possibility of cutting
taxes on buildings and raising them on land became mere probable.
Purchasers in, say, 1975 would not be much surprised. The change in
land prices in the first year of transition would not be felt as if a
big shift suddenly became effective on one single day. Meanwhile, many
other forces would be influencing property values. Therefore,
determining within any high degree of precision the actual effect of
the tax change would be imposable. If two, three, or more years had
preceded action, the problem of significant amounts of gain and loss
would be only a small fraction of the fears which opponents can be
expected to marshal and exploit.
The flow of capital into new building would also begin to respond to
prospects. The nearer the approach of relief for buildings, the larger
the chance that construction will rise to anticipate, and thus to
spread, the benefits.
Community Use of Values Created by Social Development and
Local Government Spending
Over the longer run, landowners would get less of the increment in
the values of location. The general public would get more in the form
of a larger flow of the rising yields of the worth of location (land)
to finance local services. On this score, the equity results commend
themselves very strongly indeed. Socially created values would go for
governmental, rather than for private uses - and locally. The
absorption of the increments for local, rather for state or national,
governmental use would channel these funds on a benefit basis
The localities doing most to make themselves attractive would have
most of this revenue source. In major cities $10,000 to $15,000 (now
often considerably more) of governmental outlay is frequently needed
for each new dwelling unit - schools, streets, fire and police,
sanitation and health, park and prison, facilities. Under present
arrangements much benefit from such outlays in developing areas
accrues to the owner of locations being "ripened" for more
lucrative use; his payment in taxes (and special assessments) toward
the cost will generally be only a modest portion of the total.
Lower Tax on Improvements
What would be the equity of lower taxes on buildings? The answer
depends upon shifting (in the longer run) of the tax on improvements.
The debate among economists would hinge upon the extent to which the
tax falls on returns to capital compared with the portion falling on
consumers. My answer has been that the tax on improvements is
generally a consumption tax. If so, the great bulk of the bill is
shared more or less in proportion to income because in the vast
middle-income range consumption is roughly proportional to income.
However, regressive elements exist at both extremes of the income
scale. In relation to income, the relief would tend to favor lower
income groups. To the extent that the tax falls on suppliers of
capital, analysis becomes more complex; but for present purposes the
amounts of differences would not be large enough to justify much
Most of the relief would be spread more or less gradually over the
years, generally in proportion to income.
As for the future, the tax on values of location above their present
levels would be almost burdensomeless, except as owners of land and
their heirs get less of the "unearned increment" of rising
values over the decades. Much of the element of true economic surplus
would be used for public purposes. For those parcels of land whose
values drop, the annual tax would also decline. Then, because tax
rates on land would be higher than today, local government would share
more fully in the loss of worth. For landowners the proposal would not
be a one-way affair which assumes that land always rises in price.
No other revenue source teems to me to compare so favorably on this
score of fairness. Future users of land would be no worse off for
the much heavier tax they would pay on the value of location. The
purchase price of land would be correspondingly less. Of die total
flow of yield of location value, interest (explicit or implicit) would
be smaller, taxes higher. Who would be less well off? The landowners
and their heirs who would have gotten the (unearned) increments!
More of the rise in land value which results from (1) governmental
investment in community facilities and (2) the general rise in demand
due to the growth of population and income would go to pay for the
costs of local government. Such a tax on a pure economic surplus seems
to me about as fair as any imaginable source of funds for financing
community services. The National (Douglas) Commission on Urban
Problems estimated that in the 10 years to 1966, and despite rising
interest and tax rates,. land prices rose by over $5,000 per American
family -- $250,000 million. Even a modest fraction of this amount
if used for local government would have permitted quite a reduction of
burden on buildings. The estimated rise in land prices was over four
times the total growth of state-local debt and was greater than all of
the property tax paid in the 10-year period.
Finally among the points bearing upon fairness, I quote from Mason
. . . unearned enrichment discredits wealth and property.
Instead of being a mark of distinction, a symbol of productivity and
service, such unearned wealth symbolizes predation, dependency, and
corruption. Unearned wealth makes hypocrisy and a mockery of efforts
to legitimize property and rationalize capitalism. Parasitic wealth
stigmatizes all wealth. The latent sense of civic community and
polity, now so frustrated in American cities, is lost between the
avarice of some and the disgust of others. Not to tax rent,
therefore, is to alienate those outside a small circle, and lose a
valuable resource of community spirit.
LAND AS A PRODUCT OF NATURE
Land as a productive resource resembles labor and capital in some
respects but differs crucially in others. The similarities include the
fact that parcels of land vary greatly in desirability as do human
skills and machines. One outstanding difference lies in
mobility-immobility. Space is immobile, other things mobile. Here is
the one thing a local government can tax heavily without fear that it
will move to a lower tax area. This is a tax which ought not to be
neutral as compared with the burden on improvements. The reasons which
argue for neutrality in taxation do not apply to the productive
resource whose supply is immobile and inelastic.
Another difference between land and other things is the source of
worth, the way by which values come into existence. Labor and capital,
the vigor of human endeavor, entrepreneurship, the amount of machinery
and structures, all these depend in part upon what individuals expect
to get in compensation. And over time expectations depend upon the
actual payments. To get productive capacity of these types, society
must pay. Moreover, attempts of society to take back through taxes
what it has paid for the service of capital and labor will affect the
future supply. Not only the equity of high taxes but also the effects
on what will be available in the future must be considered.
Land in the strictest sense is different. Nature created part of what
we now pay for - but not all. As space on the surface of the earth,
especially in cities, the amount of land in existence will depend
scarcely at all upon the amount paid. The payment, however, does make
a difference in what is actually available. Ownership permits
withholding from use, thus depriving the community of the value of
something created by nature. Rewards influence the kind of use.
Occasionally, the difference between high and low payment will
determine whether land is used at all or held essentially idle. Much
more often, the amount paid will govern the particular use to be made
of a location, its allocation among alternative uses.
Parcels of land, especially in their characteristics as space and
location, do differ immensely. Therefore, something to help allocate
and achieve most efficient use is of utmost importance to society.
Payments for the use of land do perform a function of outstanding
significance - allocation among alternative uses - but a portion of
the payment will not, as for manmade productive capacity, also serve
the function of inducing the creation of the productive resource.
Land as area is fixed in quantity. Tax it heavily, and it will not
move to some other place, or decide to take a vacation, or leave the
inventory of productive resources by going out of existence. Tax land
lightly, and the favorable tax situation will not create more space in
Our ethos apparently ties economic justice - equity -- to rewards
based on accomplishment." This principle does not lead to
justification of large" rewards because of the ownership of land.
Differences, big ones, in payments for human services or for the use
of capital can rest on what the recipients have done. But for the
owners of urban locations such justification can rarefy be found; when
there have been private inputs for community development, to the
extent feasible administratively, they belong on the tax rolls as
improvements rather than as land.
PRIVATE OWNERSHIP OF LAND
Private owners have much control over how land is to be used, over
the space in a crowded area. They can insist upon being paid for the
use of this space. From decade to decade private owners who do
nothing, or very little, to enhance the usability of land often get
more in prices and more from occupants. Zoning and other governmental
actions also materially affect prices of land.
What an owner can get in the form of land price increases in and
around cities has made rich men out of owners of farmland, vegetable
plots, and waste areas. More than one owner of a few acres of potato
land on Long Island or farms on the outskirts of many a city in the
United States, of a small plot of rice land near Tokyo or Bangkok or
Taipei, has reaped handsome gains because of the pressure of
population. In America, North and South, in Europe and Australia and
Africa, private enrichment has come to the passive owner of land who
has done little or nothing to enlarge its worth as part of the city
whose growth has brought his good fortune. In fact he may have paid no
more than an infinitesimal fraction of the taxes which have financed
the streets and other governmental facilities that have helped to
elevate the value of his land.
What strikes me in the present system is the amount of "unmerited"
increases in land prices, despite rising tax and interest rates. Most
owners today must be beneficiaries of increases in land prices. To
withdraw some of these by taxes to finance local government would in
itself not strike me as seriously questionable on grounds of equity,
even if there were no reduction in the tax on structures. The
overshadowing concern ought to be the longer run.
The equity aspects provide a strong case for shifting tax burdens
from improvement to location values. Other reasons which I have not
attempted to cover reinforce the arguments.
NOTES AND REFERENCES
- See C. Lowell Harris*, "Land
Value Taxation: Pro," International Property Assessment
Administration, Volume 2, Chicago: International Association
of Assessing Officers, 1970, pp. 59-75. The present paper includes
material which follows closely from my Morrison Lecture at DePauw
University, Property Tax Reform: More Progress, Less Poverty,
Greencastle: DePauw University, 1970, 26 p. Assistance from the
John C. Lincoln Institute, University of Hartford, is gratefully
- Views expressed are my own and
not necessarily those of any organization with which I am
- See ray article, "Transition
to Land Value Taxation: Some Major Problems," in The
Assessment of Land Value, Daniel M. Holland, Editor, published
in 1970 by the University of Wisconsin Press for the Committee on
Taxation, Resources, and Economic Development.
- The reasons for keeping some
tax on improvements require more explanation than is possible
here; some are admittedly debatable. They go beyond the equity
focus of this paper. In general, if consumption is to be taxed as
heavily as seems to be necessary to finance our desired levels of
governmental expenditures, the consumption involved in the use of
structures may well have proper place. Moreover, the difficulties
of separating the pure land from the improvements elements add a
reason for not seeking full exemption of structures.
- An alternative for the first
two or three years, as an aid to transition, might be to confine
all increases in property tax burdens to land values; a potential
drawback would be the invitation to use the reform as a vehicle
for making tax burdens higher than otherwise and then not to
proceed with relief to buildings. Moreover, no progress toward the
goal would result where tax rates are stable or declining, as one
should expect in many localities if assessments are improved.
Another transition possibility would be to exempt (largely if not
entirely) new buildings and other inputs of capital for, perhaps,
three to five years by which time all structures would be subject
to a much reduced rate. This proposal would tend to stimulate
investment and raise the demand for land; some owners of older
buildings, thus forced to compete with new ones, would have a
legitimate complaint of unfair treatment.
- Professor Schaaf criticizes
site value taxation on the grounds of probable burden on
low-income groups. But he is quite clear that the conclusion rests
on an assumption that in the short run an increase in land taxes
can be shifted to tenants. This wide departure from standard
economic analysis, as he recognizes, depends upon assumptions
applicable to the short run. Some may well be valid, in some cases
for limited periods. But market forces operate, not perfectly but
overwhelmingly, to put an increase in land tax on the owner of
land. (Long-term leases and escalator clauses must be taken into
account.) The encouragement of new building would enlarge the
housing stock and speed up the improvement of living conditions
for all. The "filtering upward" process works better,
the larger the number of alternatives.
- Public utilities would present
problems calling for special consideration not covered here.
Often, subject to high ad valorem taxes now, their ownership of
land is frequently low relative to their total assets. Businesses
with large amounts of taxed inventories would also be relieved of
- Federal and state income tax
obligations would absorb some of the special transition gains and
losses, but such cushioning effects are incomplete and partial.
- Let us assume adequate
assessment, not the relative underassessment sometimes found for
vacant and underutilized land. In fact, underaasessment may have
given an unfair advantage for years.
- The waiting for tend to "ripen"
can provide an exception. Such cases will exist. Whether they are
one-tenth or one-fifth or one-twentieth of speculative
underutilization, I would not pretend to know.
- The appropriate type of
compensation would not be a capital payment by the community
except in the few cases of direct acquisition. And it ought not to
be anything which would relax pressure on the landowner to put
land to higher and better use." In "theory" one
might argue for a sort of windfall tax on owners of the finest
improvements to subsidize the owners of vacant land - or is such a
suggestion out of the question in principle as well as in
- Suggestions that the federal
income tax on capital gains will capture some of the increment do
not provide for the revenues to flow to the particular local
government where the land is located. Where national government
funds are spent in ways enhancing local land values, a practice
which seems to me suspect, the merits of the federal capital gains
tax will have more appeal. Location values are not the only ones
affected by social forces more or leas beyond individual control.
The fact that not all are reached does not indicate that taxing
some will be inequitable. The supply conditions of land do differ
from those of other types of property.
- Where the developer incurs
part of the expense and charges the buyer, that portion of the
payment for land is a capital improvement not appropriately a part
of the land value which ought to be subject to the higher of the
two tax rates (one on location value, one on improvements).
- The amounts of which owners in
the future would be deprived have no systematic relation to
wealth, income, or consumption. The concept of equity as related
to such factors lies in a different plane of analysis or
consideration - valid and important but a goal reachable in other
- Even this latter sort of
burden, a disappointment, can be largely eliminated. How? By
building a society in which such expectations get no support. Land
prices now include some element of expectation of future increases
in the value of location. The proposal, by destroying such hopes,
no matter how small, would impose some "unearned decrement"
on the present owner. How large? I have no way of knowing, but
with the gradualness of a five-year transition and discount rates
now 8 per cent or more, the losses could hardly be large as a
percentage of value. No complete ending of private title to
increases in land values would be consistent with economic
efficiency in land use. No such goal could be achieved without
destroying the potential benefits from owner search for the best
use of land. Going too far would work damage for which no remedy
would be available, no remedy which would operate more or teas
automatically, within the general framework proposed.
- Professor Gottlieb questions
the accuracy of the estimate. Even if his doubts are justified,
there can be no question that in the last 15 or 20 years land
prices have gone up - and by far more than the owners invested in
making land and locations more useful.
- Mason Gafiney. "Land
Rent, Taxation, and Public Policy." Papers and
Proceedings of the Regional Science Association, 1968,
Philadelphia. 1969, pp. 149-50.
- As noted earlier, Americans,
and as far as I know, other people*, get along without articulated
consensus on the meaning of "justice," "equity,"
"fairness." In discussions of public Policy, much fuzzy
and wishful thinking, and avoidance of hard problems, gets mixed
with good intention, high aspiration, and the most commendable of
humanity. The results are not the sharp, dear guides which one
seeks in judging alternative governmental policies.