Property Tax Reform:
More Progress, Less Poverty

C. Lowell Harriss

[A lecture delivered at DePauw University, Greencastle, Indiana, 1970, as the Dr. Paul L. Morrison Lecture In Political Economy]

"The best of taxes, the worst of taxes." True, or very nearly so, of America's property tax today. In its best aspects it deserves a larger role, more intensive use. In its worst, the property tax works needless harm. The sharp contrast grows to a large extent out of the economic difference between a tax on land and one on other forms of property, chiefly buildings, machinery, and the inventories of business.

Economically, "the" tax is two. A long evolution has blended significantly different elements. A challenge to economic analysis, to statesmanship, to citizen leadership, and to public administration, this challenge consists of two parts. One offers a positive opportunity for strengthening the finances of local government. The other promises relief from adverse non-revenue effects which load us with "excess burdens," quite unnecessary losses of well-being.

The property tax is not a tax on net wealth in any meaningful sense. With the disallowance of debt as a deduction and the (inevitably necessary) exclusion of most securities and deposits in financial institutions, American property taxation does not begin to approach a tax on personal net worth.

Nor is property taxation income taxation. Although payment comes out of income from some source, the tax base, properly conceived and applied, is capital value, not actual income. Generally, capital value relates closely to income; but when land is underutilized, the income that ought to be used for determining assessment is not the actual, but the potential, income. Attempts to base assessments on actual income can pervert the tax when land use is not the best possible.


The property tax in 1970 will yield nearly $34,000 million. In several cities and suburbs the tax will exceed $250 per capita ($1,250 for a family of five). The average for the whole country must be close to $160 per person, up by almost $35 since 1966. Two years ago when the average was around $140, three states (California, Massachusetts, and Wyoming) averaged more than $200 per capita.

Any tax that brings in large revenues will have substantial non-revenue effects. Behavior will change, not just because people have less to spend and save. Individuals and businesses alter the ways they carry on their affairs. When rates of tax are high, and when differences in tax burdens are large (e.g., from one area, type of property, or activity to another), the nonrevenue results can be substantial. Those today from the property tax, I am sadly certain, influence American life profoundly. And they are needlessly bad. The same revenue could be raised with much better results. The fundamental basis for reform was formulated long before Henry George asserted its merits in Progress and Poverty.

Effective Rates Sometimes High

Although property tax rates when expressed as percentages are usually small numbers, they apply to capital values. In parts of the country - but not all - rates are "high" and rising. Comparison with income or sales tax rates will often be deceiving. For example, a 3 per cent property tax equals 33 per cent of the pre-tax net income - and 50 per cent of that after tax - from a property which yields 6 per cent to the owner. An increase of % percentage point would reduce the amount remaining after tax in such a case by around 8 per cent. The tax frequently exceeds 25 per cent when expressed on the same basis as a retail sales tax (perhaps even after full allowance for amounts capitalized earlier).

Nonrevenue results ought to command much more attention than in the past when rates were lower. To do so correctly, we must distinguish clearly the two elements - land and reproducible capital (buildings or machinery).

Merits and Strengths

Those of you who keep in touch with the local press need no reminding of the frequency, sincerity, and determination, mixed with despair, of the condemnation of property taxation. Most complaints stem from the dollar amounts. These result largely from decisions about spending on schools and other functions. For the present let us put aside some of the complaints to deal with strengths of property taxation.

1. Viability of Local Government. The tax now finances local government, not fully and not to the relative extent of the past, but enough to make local government meaningful and viable. Heavens forbid that I romanticize the virtues of "government close to the people," of home rule, of the real-life operations of local government. All of us have read about weaknesses of school, municipal, county, and special district government. More than one person in any college group will have seen things in local government to which he will not point with pride. Anything that humans do must be affected by the fallibility of men - and even women. Local government too often fails to meet our aspirations. State and national government are also less than perfect; so is the world of business and even that of nonprofit organizations.

Be reality as it may, the use of localities, as distinguished from state and nation, to get some of the things we expect from collective (governmental, political) action, has great merit. Recent visits to three dozen or so countries have convinced me that we are fortunate to have as much decentralization, as contrasted with centralization, of government as we do.

Property taxation offers people in different localities an instrument by which they can make some truly local choices significant. Local sales and income taxes, and fees and charges, also aid financial independence. They do so more than in the past and can serve more extensively. Property taxation, however, stands out as a source of strength for local independence.

2. Benefit and Justice. A significant benefit basis exists, especially that related to paying for different quantities of services from one community to another. Some localities do contain concentrations of property which permit a substantial shifting to nonresidents, but such cases are exceptions. Generally, the localities in which burdens are highest are those providing residents the most services. Here is an element of justice, a quid pro quo. Within communities the relation of benefits received per family to tax paid will often be crude, even perverse. Yet the inter-community aspect alone commands respect. Differential and discriminatory benefits tend to be largest where taxes are heaviest.

3. Good Results of Age. "An old tax is a good tax," not completely so, of course yet in some respects true. Being old, property taxation has worked its way through the economy, especially the portion represented by rates other than the most recent increases. Some elements have been capitalized and other adjustments made so that conditions are better than they may seem. Inequalities and crudities lose some of their sting as men adjust over the years.

4. No Real Burden of Some of the Tax. Most significant, however, is the fact that in a meaningful sense part of the tax is no Property Tax Reform | 5 current burden on the present owner or user. In most communities probably 20 per cent - but frequently more, I think - property taxation represents (a) tax on land values, (b) at rates which have existed for such a long time that most present owners allowed for it in the price they paid. The annual payment of this portion constitutes no true burden on the user. You would not have an easy time convincing the homeowner. Yet part of what he pays over to his local treasury each year does not really leave him worse off, compared with what would have been his situation if the tax had not applied when he bought the property.

5. Administration. Through much of the country property tax assessment continues to be shamefully bad. Yet, good administration and easy compliance are possible. In combination they probably cost less per dollar of yield than any alternative source of large revenue for state-local government.[1] The dismally poor administration in many localities can be replaced by good, given the determination to apply the methods successful elsewhere and to press ahead in refinement and improvement. Moreover, removal of some of the worst "stingers"-burdens on aged homeowners (or renters) with low incomes, for example-can free the tax from some elements which make it vulnerable to persuasive criticism.

6. Taxpayer Awareness. To a large extent property taxes are sufficiently out in the open to assure considerable taxpayer consciousness - and in a way related to the services to be paid for. Presumably this tie will contribute somewhat to rational balancing of cost and benefit in local government.

Building for Permanence

Here, then, is a big revenue source. Although its demise by around 1975 was predicted by a leading scholar fifteen years ago, each year has seen a rise. Perhaps I shall seem just as wrong in predicting that property taxation on a large scale will be with us as long as we live, even the youngest here, and with our descendants. But my confidence rests on a conviction of basic merit and continuing need. The issues which justify attention are not only the effects of the tax today, some needlessly bad, but also strengths on which to build.


Who Really Bears the Ultimate Burden of the Two Elements of Property Taxation?

Who really pays this tax? The answer requires sharp distinction between the two elements of the tax. In both cases, however, the person who is truly worse off because of the tax may be very different from the one who writes the check. Sometimes when taxes are shifted - from building owner to tenant - the process works rather clearly. Often, however, the process is both slow and obscure (though perhaps less obscure than in the case of the slightly larger tax on corporation earnings) .[2]

A change in tax will initially fall on the owner or, depending upon contract and market conditions, upon the user if he is someone else. With the passage of time, more of the burden on structures will be borne by the ultimate user, the residential occupant or the customer of a business; tax on utility and other business structures will in general be shifted to consumers. The process involves the flow of capital; after-tax returns (taking account of benefits of government services) tend toward equilibrium. (For public utilities, regulatory processes can delay adjustment. Railroads, traditionally subject to heavy property taxes, have for decades not in fact earned after-tax profit that indicates effective shifting to customers.)

The tax on land values is capitalised into land prices.[3] In effect, the owner at the time of each jump in tax rate will have suffered a loss of capital value - except as the spending of the funds adds offsetting benefits which enhance the demand for the property. Present users of land as they pay tax are not in fact truly worse off by the amount they pay. If the tax had been lower, they would have paid a higher purchase price (or rental rate). The "saving" in tax would then be offset by other costs of acquisition or lease. Much of what owners feel as burden of tax on land does not in fact deprive them of something they would otherwise receive. This basic fact of economics underlies the assertion that tax on pure land values is a tax on an "economic surplus," with results markedly different from those of other levies - a "burdensomeless tax."


As ultimately shifted, is the tax (or are the taxes, for I insist that economically "the" property tax is two levies) fair? The search for tax equity rests upon the best of instincts. Taxation represents government's use of coercion. And all use of compulsion should be just, fair, equitable. But what constitutes fairness in sharing the costs of government? Would further increases in property taxation be a fair way to finance the rising cost of local government?[4] "Fairness" has more than one aspect.

Regressivity: Burdens on Low Income Groups

Critics say that the property tax runs counter to one concept of fairness by burdening low-income groups more heavily in relation to income than those with larger incomes. (Families with higher incomes, of course, do pay very much more than those with less. The issue is whether the difference is "large enough.") A regressive element does exist, but the fact that property holdings tend to be slight in the low end of the income scale and large higher up does complicate analysis. Assumptions about shifting make quite a difference, especially the portion of tax capitalized in lower land prices. Yet there is regressivity, and it is generally believed to conflict with "vertical equity." Men of goodwill can disagree in the vigor of their condemnation. A little is not so bad as a lot - a range of 5 per cent to 3 per cent would call for evaluation different from 7 per cent to 1 per cent. The numbers of families at various income levels will also make a difference. For the families with incomes covering most of the population in a community, the property tax seems to be roughly proportional with income.

Regressivity exists at the upper and lower tails of the income distribution. Rather few people are affected materially at the upper end (and some may bear heavy burdens as owners of large amounts of property). Where the tax does burden persons with low incomes more heavily than may seem fair and wise, there is a "pro-low-income" bias of the benefits paid for by the tax - schools, welfare, hospital service. Some of the most deplorable results can be partially offset by special features of relief.

Still another source of criticism lies in "horizontal inequity": Taxpayers in about the same circumstances do not receive essentially similar tax treatment. Where this criticism is valid - and it often is - the chief culprit is poor quality assessment. In some communities properties of about the same type (new as against older houses) are assessed unequally, and assessments vary from one type of property to another (housing versus commercial). Assessment inequalities are much too great in most communities.[5] But such defects can be reduced by improvements in assessing, with enough success to inspire confidence that good standards can be achieved.[6]

Perversive Character in Relation to Costs of Government

An annual tax of 3 per cent, or even when "only" 2 per cent, a year on full current worth of buildings distorts resource allocation perversely. New, well-constructed, high-quality buildings are taxed more heavily per unit of space than are slums and "junk." Can justification for such burden discrimination be found in the cost differences which the two types of property and their occupancy impose on local government (per unit of occupancy space)? Most probably, no; just the contrary. The badly run-down and less heavily taxed buildings are more likely to be associated with the greater costs per unit of usable interior space.

A property tax represents to some extent a cost to the private owner for which there is no comparable cost to society. When the tax is "greater" because the building is better, the private owner (user) does not get correspondingly more or better governmental services. He pays more, but not because he puts the community to greater expense. The buyer of a high priced consumer (or producer) good pays largely because that item costs more to produce (say, a Cadillac) than one with a lower price tag (Ford, Rambler, or Plymouth). Not so, in general, is the relation (per unit of space) between the cost of property tax for the private owner and the cost to government of the differential services for the new and fine building, contrasted with the old and decrepit.

Moreover, as compared with the slum and low-tax property, the high quality and high-tax building brings the general public some "neighborhood benefits." The owners and users of dilapidated structures - the residential and industrial slums - will be freer from one type of economic pressure to replace with something better. The user's payment for the services of local government goes down, relatively, as the building gets worse, even though public expenses attributable to the property are unchanged or may even increase.

The person who wishes to shift from poorer to better quality housing, or business property, cannot do so without also paying more toward the costs of government - $1 of taxes for each $3 or $4 (or in cases as little as $2) of pure occupancy expense. Ordinarily, however, such a shift to better facilities will not add to the services received from, or the expense imposed upon, government.

New for Obsolete: Obstacles to Urban Renewal

Heavy taxation of new buildings must stand as a tragically apt example of mankind creating needless obstacles for itself. Cities which urgently need to replace obsolete, decayed, degrading buildings nevertheless put powerful tax impediments in the way of progress. Nobody "planned" to set up a tax system with such influence. No one tried deliberately to base local finance on a tax that would favor holding on to the decrepit structures, many of which spread evil influence through a larger section, while penalizing the new and the good, the source of benefit to the larger neighborhood.

Let us assume that a new building will have a life of 60 years. Its construction involves the owner in a commitment to pay property tax for each of 60 years. The magnitude of these future tax obligations can be expressed in terms of today's dollars. For doing so, each of the 60 annual tax bills must be discounted at some rate of interest to compute the present worth. If one assumes an interest rate for discount of 5 per cent (too low today, of course) and a tax rate of 3 per cent a year on capital value as measured by construction cost, and if one makes some rough allowance for reductions in assessments as the building ages, then the present value of the taxes due over the life of the building will equal about 50 per cent of the construction cost.[7]

The higher the rate of property tax, the less the desirability of putting capital funds into new buildings. The tax on structures creates an incentive against -upgrading of quality of cities and suburbs by new construction, even in just those parts of older cities where need seems greatest but tax rates are so high.

Maintenance versus Deterioration

The tax on buildings discourages maintenance and modernization. Partly because of the realities of assessments as made, and partly because of what people believe the assessor will do, maintenance and improvement of existing structures lag somewhat.

Most Americans must live most of their lives in "not new" housing. Much will have been built before their birth. Housing will gradually lose its ability to provide satisfactory shelter unless labor and materials are devoted to offsetting the effects of time and use. The quality of the residential space actually available will depend greatly upon the maintenance of the stock of housing.

Undermaintenance forms one way by which an owner can reduce his net investment in a building. His actions affect others. The maintenance done, or not done, on even a minority of properties can materially affect a larger neighborhood - for ill or good. Outlays for maintenance can be combined with spending for improvement. Over time, the owners (and occupants) of housing may do more than merely preserve earlier quality. Good effects due to betterment will "spill over" into the neighborhood. Any reasonably complete social system for making the best of the huge stock of existing structures will assign key roles to the prevention of new deterioration and the avoidance of discouragement of improvement.

Property tax payments reduce the net return from property and thus its attractiveness as an investment. Moreover, the owner may believe that maintenance expenditures will lead to higher assessments. So he may spend less. An owner seeking to act in a logical way would not be deterred by real estate tax in maintaining his property if such investment offered the best after-tax return. In fact, however, misconceptions can exert influence. The owner may fear that a "repair and maintenance" job having visible results (or one reported for getting a building permit) will result in an assessment increase.

Inducement to Smaller Structures: Sacrifice of Potential Benefit

The property tax on buildings produces a rarely recognized effect which imposes what economists call "excess burden." The tax deprives the consumer of more real benefit than the dollars which are paid for the government.

Property Tax Reform | 11 The expense per cubic foot of construction declines as the size of the house, office, display area, apartment, or other unit increases.8 In terms of one of the major things generally desired - cubic contents -unit cost drops as room size increases. One estimate, for example, finds that if the cost per cubic foot of a more or less typical, good quality, single family residence of 1,000 square feet is 100, the cost per cubic foot for the same type of construction goes up to 115 if the unit has only 700 square feet and drops to 86 if the size is 1,600. For another type of construction, with 1,000 square feet size as 100, the cubic foot cost is 23 per cent higher for a 700 foot unit, and 20 per cent less for one of 1,400 square feet.

The decline in construction expense per unit of enclosed space reflects the fact that cubic content rises more than proportionately to floor, wall, and ceiling area. Moreover, much the same plumbing, wiring, kitchen, heating, and other facilities can serve larger as well as smaller rooms and buildings through a range of sizes. The general public welfare can be served best (within a range) by the construction of rooms, houses, and buildings, of larger, as opposed to smaller, size. Resource allocation in the economic sense will be more efficient when labor and raw material go into more commodious or less cramped housing, office, and other use. The property tax on buildings, by adding to occupancy costs creates pressure for building smaller units; in doing so, the tax makes for poorer resource allocation.

Not observably from one year to the next but unobtrusively and mixed with many changes which occur slowly, the property tax on buildings will lead to the construction of rooms, apartments, and buildings somewhat smaller than would be built in the absence of tax. The smaller units are not so good and yield less utility per unit of input. The public unknowingly deprives itself of opportunity to exploit fully the potential benefits from the "law of the cube." Thus, the public bears a hidden burden by sacrificing the benefits of greater economies in construction, per unit of space and quality.

Tax Islands and Central City Difficulties

Among localities, differences in effective tax rates on buildings have other nonrevenue results. Rates much above average in one locality will reinforce opportunities and incentives for creating "islands" of relatively low tax rates nearby. Among the independent governments in a general area, a few with, tax bases which are much above average in relation to service obligations can get by with lower rates. They can attract capital for new structures and become low-tax enclaves. Per unit of output or sales, companies operating there incur below-average property taxes. They get something of a competitive advantage while (with their customers) bearing relatively little of the cost of local government elsewhere.

Some communities, perhaps by the use of zoning power and building codes, are able to exclude types of property associated with high governmental expense. They may, for example, prohibit high-density housing which brings many children and heavy school costs. The kinds of housing used by claimants on welfare can be largely (or for a time in new communities, entirely) excluded. Some independent jurisdictions of a metropolitan area can hope to finance relatively high-quality local service with property taxation which is less burdensome than nearby. Personally, I put great value on those aspects of our system which embody and support the advantages of freedom and opportunity for differences in ways of living; but less welcome consequences do result, stemming in part from local autonomy in taxation.

As regards buildings, not land, lower tax rates here and there on the fringes of an urban area encourage dispersal and the development "far out" of activities, including housing, which in a full economic sense "ought" not to be so distant. Property nearer to the center will be subject to high tax rates; and unless the services provided improve, each increase in tax rate will reduce the value of the property and the tax base. The land cannot leave. Improvements can, and will, shift location. Many buildings will already have deteriorated but yet have some years of useful life, but of depressing decline, before replacement becomes economical. As the tax base goes down, the decline in itself adds to the need for still higher tax rates. In many cities the forces of the modern economy have made central city business properties vulnerable to competition from outlying neighborhoods. Tax differences can aggravate the troubles as (effective) city rates rise, due in some cases to lag in downward revaluations for tax purposes. Unless the users of property believe that the benefits of local government go up with the tax obligations as just described - not a likely result - the repelling forces gain strength. Yet the destructive process, one somewhat self-reinforcing, may be scarcely perceptible from one election to another.

The existence of enclaves where tax rates on structures are relatively low, "tax islands," will do more than add to the fiscal imbalance Property Tax Reform | 13 of neighboring localities and accentuate the difficulties of older areas. The region as a whole may also suffer. As applied to structures (not to land) this pattern of taxation arbitrarily - and the arbitrariness must be emphasized - favors horizontal over vertical growth in metropolitan areas.

Others in the area - businesses, commercial establishments, professional persons, and residents-may wish to escape the urban center. Almost all must then "leapfrog" over the enclaves with their policies of exclusion. The movers must go further out than would be "normal" if taxes were not distorting. The resulting land use then imposes higher costs on the whole society - in time and money of traveling greater distances from home to work, and for recreation and perhaps schooling; higher expense of supplying water, sewer, and utility services farther from central locations; and reduction in the economic and social benefits which population concentration brings.

The total of these tax-originating tendencies cannot be measured; nor can their future force in the economy be quantified. But they ought not to be ignored, especially in view of the feasibility of counteracting them by shifting burden from structures to land.

Property Tax as a Business Tax

As the property tax falls on business, affecting both prices and the processes of production, it influences not only the quantities of productive property. Property taxation also affects business decisions about when, where, how much, and in what forms to operate and to invest in productive facilities.

The influences which grow out of tax considerations will rarely be constructive in the sense of helping companies to produce more efficiently. In general, tax-created additions to business operating expense are undesirable.[9] Businesses are overwhelmingly the source of income. In taxes, however, they encounter costs for which there are usually no identifiable aids to production. Unlike wages, for example, most tax payments do not go for services received by the business firm and thus helping it to create income.

The significance of property tax for business will depend in part upon the relation between the tax and the governmental services provided. Most services rendered by local governments - education, welfare, sanitation, protection - are more for the consumer than for business as such. The expenses of city government are not of a type to be, in large measure, of direct benefit to business firms.[10]

Managers must take account of property taxes in making decisions, such as where to locate. Other business decisions affected by property tax are by no means individually dramatic - perhaps scarcely identifiable. Some companies, of course, are firmly attached to a location, e.g., those providing a local service. They will not leave if the tax rate goes up, but their growth or decline will be affected. Firms which deal in highly competitive markets cannot afford to incur avoidable costs which do not, in return, either yield a salable output or reduce other costs.

Each rise in property tax on structures unless matched by improvements in local services to business as such will tend to reduce the business use of structures. The amount of production in the locality will fall below what would otherwise be the case, perhaps not observably, or grow more slowly rather than record any absolute decline.

The competition among communities for industry grows. Some takes the form of property tax favors. Community leaders can be acting sensibly in trying to include within their boundaries companies which would pay "high" property taxes while selling outside. As a result, people elsewhere would then pay some of the costs of local government where the plant is located. The localities which do impose high property taxes on buildings, machinery, and inventory (not land) used by business are less able to maintain and build their economic base.[11]

Pressures for "Socialisation" and Exemptions

If time permitted, other effects of property taxation (on buildings) would warrant comment. One I call "inducements to socialization," This imprecise expression refers to attempts to lower the cost of something by providing it through government instead of private ownership. High property tax rates stimulate somewhat the expansion of the scope of governmental activity by giving misleading signals of the relative desirability of governmental, as compared with private, ownership - for example, "public housing" and governmental ownership of utilities.

Property tax exemptions have properly been getting more attention. The higher the tax rates, the greater the incentives for some groups to press for exemption.

A Note to Get Perspective

The cumulative effects of my remarks may have an imbalance that misleads. For one thing, effective rates high enough to exert truly serious results do not apply in much of the country. In fifteen states, 1968 property tax per $1,000 of personal income was less than $30 against a nationwide average of $45 and over $55 in twelve. Much of the country would seem clearly to have unused scope for getting substantially more property tax without approaching the rates which I believe must cause great concern in some areas.

Where tax is high, perspective is desirable. Any account of only one side of a set of large money transactions - the benefits (of spending on schools or furniture) or the costs (taxes or payments for food) - will give an unbalanced view. Proposals for more government spending frequently fail to accord reasonably equal attention to the (marginal) effects of the (added) taxes needed to pay, including nonrevenue effects.[12] And vice versa.

A happier aspect, however, has made me anxious to deal with unpleasant realities. The brighter side is a conviction that in this case of taxation a feasible alternative would raise the revenue with substantially fewer bad results and some good ones.

A feasible change in the framework of the economy can alter the environment in which men carry on their activities. The incentive system being altered, the results of the myriads of private decisions will conform to a better - probably very much better - pattern of resource allocation. Let us look at the tempting possibilities.


Three distinguishable prospects support proposals for substantially greater reliance on land as a tax base - site-value taxation - justice, progress, and efficiency.

(1) Justice in Sharing Costs of Government. Much of what people pay for the use of land ("the original and indestructible" qualities) will reflect socially created demand. Much of the cost is not a payment to bring land into existence. The community can capture in taxes some of the values which it has created - including values resulting from local government spending on streets, schools, and other facilities. In this "most just" manner the community can get funds to pay for local government.

(2) Progress. Relief of taxes on structures would result from the enlarged revenue from land.

(3) Efficiency in Land Use. Higher land taxes would put greater pressure for the fuller and better use of (urban) land. A more efficient market in land would facilitate more productive use of this immensely important resource.

The Proposal(s)

Land (the use of land by an owner or a renter) would be the base for much more of the property tax than it is today, while the use of improvements would occasion much less tax. The relations of rate on land to that on buildings might be 3 to 1 or 5 to 1.[13]

Greater use of special assessments would also be wise although absence of deducibility for income tax purposes exerts a bias against them. A somewhat new form of tax on (urban) land might well appear. It would use such objective elements as plot area (size) and location to determine tax due. One result would be to reduce the weight placed on value alone. Another would be to relate tax more to the cost of providing certain services - streets, sewers, sanitation, fire protection - especially those at different distances from centers.

Increment taxes on land values, even those limited types known (in the United Kingdom and South Africa) as development levies or charges, offer less promise than once seemed to me likely. Fortunately, an annual tax on capital values will differentiate burdens over a period of years according to changes in value.[14]

One Thing Not Changed by High Tax on Land - The Quantity of Land: The Economic Functions of Price

A high tax which is in force for long will do one thing, reduce the quantity of that thing - with one exception, a high tax on land. God made land (in its natural state). He made lots of it and has not charged us for it. Land, for the most part, especially as space, has not come into existence because someone paid to get it produced. Yet for some land we pay a very high price. When we do so, the Creator does not receive the generous payment. Perhaps the person who gets it, and prior owners through history, will have invested money and effort in the parcel and in the neighborhood. In such cases, something of what present users pay will represent compensation for such investment of capital. Most urban land, however, brings prices which are vastly greater than the worth of inputs of owners (including what they have paid in land tax for local development, as distinguished from maintenance and current services).

The amount paid now, whether capital value or annual rental, generally exceeds, by a large amount, whatever was needed to get the land in its present state. What city today has more land (within the same boundaries) because the average price which people must pay is three or four more times that of a generation ago? If more of the payments for land, beginning before or with Henry George or a generation ago, had been channeled into the local government treasury, the land as space would still be with us.

Price, however, does have an important economic function other than getting things produced. That other function consists of guiding the use, of preventing waste in consumption, of allocating resources according to their relative productivities and scarcities. A "high" price for some land is essential for guiding it to the best available uses. A good market in land, one built around prices, is of the greatest importance in getting the most productive use of something we must all have, space.

What we pay out as more for some plots than for other, plays a role unlike that for differences in other prices. For other things, "higher" price not only restricts use - guiding, allocating, apportioning. Price also encourages and pays for more (or less) new output. Not so for land. To assure efficient allocation, the user must pay; but the owner need not receive all that is paid. Therefore, government can step in and take quite a chunk of what the user pays, with no harm to the supply (output) nor to the pressures and incentives for efficiency in use. But not take all, not by any means. An owner must feel confidence that his cunning and effort in finding a use yielding more return will bring him benefit.[15]

By substantially increasing the land tax, government would make a change in the conditions of land ownership. The total gross income collected from users would not change. But private owners would get less, the public treasury more.[16] The price system would still allocate land use. The effective supply of land would go up in the sense that more would be offered on the market.

More Investment in New Structures

A reduction of half to two thirds in the tax rate on buildings would reduce the ill effects which I discussed earlier. The 25 per cent to 30 per cent sales tax equivalent for housing would drop, if not to the 4 per cent or 5 per cent so now often imposed on most consumer goods, at least nearer to such a level. The tax relief for junky, shimmy, obsolete buildings would be slight; where assessments are truly accurate, no reduction at all would result for properties where the structures are very inappropriate. For fine, new structures, the tax reduction could be large (in relation to return on investment). For a time the owner (or, depending upon rental contracts, the user) would enjoy a windfall of higher after-tax income. Market forces, however, would respond to alter matters. How? More buildings, new and better ones, would be supplied.

Lowering the tax on (new) buildings would increase the attractiveness of such investment. The competitive position of new structures in the demand for i capital funds, would rise.[17] Some rise in the demand for land would act to offset the forces adversely affecting land prices.

, The greater the tax on structures, the fewer the number of investment projects - and the smaller the number of dollars on the average put into each - which will yield a satisfactory after-tax return. Lowering the tax rate would raise the legitimate expectations of benefitting from more investment (in quantity and average quality) in housing and other types of buildings.

Market processes would work to replace the old buildings with new, because the cost of using the new (as compared with old) would not include as large an element for government expense as now required by the property tax. The user of the building would get more in the benefits of occupancy for his dollar. The mighty forces of private enterprise-decentralized, partially obscure, dispersed-would work with fewer impediments, with more vigor, in channeling capital funds into new buildings.[18]

Slums - the legacy of generations - would not all be replaced by modern structures before the next election. But the process of replacement would be accelerated. Let me assure you that I see, with discouraging clarity, obstacles to rapid and massive rebuilding of older cities and the construction of new. All the more reason, therefore, to reduce obstacles!

Modernization and maintenance of existing buildings would become somewhat more attractive as a use of capital, helping to raise the average quality of the community's stock of buildings.

Owner-occupants and renters would get better accommodation per dollar of cost. Less of what they would pay for the use of the building would go to support government, but much more of the payment for the use of land would finance governmental services. The construction of somewhat larger units would permit society to benefit from the "law of the cube," getting more usable space per unit of labor and material input.

Indirect Easing of Financing: Better Market

A tax increase on land reduces its price but not, we assume, the total costs of ownership. Let us look at an interesting aspect. A purchaser will pay less in price after land tax has been raised. But he will then pay more each year as tax.

It might seem that the position of the new buyer will not really be any different - less interest but more tax to pay each year. In another respect, however, the position of some (potential) buyers will be different and better.

The change would favor the person with less capital. It would do so without making things harder for the person more amply supplied with funds. Because price is lower a buyer could acquire land with a smaller outlay; he would need less of his own resources and less borrowing. More buyers, especially those with below-average capital and access to borrowing, would have a chance to acquire land. The annual charges for interest plus loan amortization would be less, but the owner would have to pay more to government out of each year's gross yield.

Individuals or real estate enterprises, such as builders of apartment houses, who are "short" of capital relative to opportunities for good use of investment funds for buildings would find conditions of financing easier. Builders could proceed more rapidly, not only because the prospective net return from investment in new buildings would go up because of the decline in tax but also because land cost would absorb less of the available capital, including borrowing power. More people would be effectively in the market for supplying buildings.

The Element of Justice: Socially Created Values

Raising taxes on the existing capital value of land would generally work against present owners of land; building values, however, would tend to rise with the drop in tax rate on improvements. Many landowners have unrealized capital gain accrued since the land was purchased, but some legitimate expectations for which owners had sacrificed other alternatives would be destroyed. Nevertheless, for the great majority of cases in short run, much of the effect on land Property Tax Reform | 21 prices would be offset by higher building values. The "average" owner's position would not change by enough to warrant concern in a world with constant change.

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), changes would sometimes be more than nominal. Yet some owners of vacant land might come off surprisingly well because they would be in a position to take quick advantage of the new conditions and build (tall) structures to make intensive use of land. Where losses do result, the justice of such change would be anything but obvious. It can properly be argued, however, that society owes nothing to the owner who has kept land in a use much below its potential. Withholding of a resource scarcely seems to justify compensation. Still, changing the "rules of the game" must not be done without regard for implied as well as explicit commitments.

For the immediate transition let us assume that some adjustment will ease the more extreme cases. Chief emphasis will be prospective, applying to future value increases. In a society with large population increase and rising income, land prices seem certain to go up over time (even without general inflation).

Investments by owner (or tenant) in improving land ought to be treated as the input of capital. To the extent practicable, such inputs deserve the same tax consideration as investment in structures. Certainly, public policy ought not to discourage real investment in clearing, draining, landscaping, and other forms involving land as compared with buildings or machinery.

Over the longer run, present and future landowners would get less of the increment in land values. The general public would get more. On this score, the equity results commend themselves very strongly indeed. Socially created values would go for governmental rather than private uses - and locally. The absorption of increments for local, rather than state or national, governmental use would relate government financing to a benefit basis geographically. The localities doing most to make themselves attractive would have most of this revenue source. In major cities $10,000 to $15,000 of governmental outlay (even more) is often 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 land being ripened for more lucrative use; his payment toward the cost will generally be only a modest portion of the total.

As for the future, the tax on land values above their present levels would be almost burdensomeless, except as owners of land and their heirs get less "unearned increment" from rising values. Where land values drop, the annual tax would decline. Then, because tax rates on land would be higher, local government would share more fully than now in the loss of worth. The proposal would be not a one-way affair.

No other revenue source can possibly compare on this score of fairness. Future taxpayers would be no worse off for the much heavier tax they would pay on land. The purchase price of land would be correspondingly lower. Who would be less well off? The landowners (and their heirs) who would have gotten the (unearned) increments ![19]

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, more or less automatically, within the general framework proposed.

More of the rise in land values 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 ten years to 1966, and despite rising interest and tax rates, land prices rose by over $5,000 per American family - $250 billion. Even a modest fraction of this amount if used for local government would have permitted quite a reduction of burden on buildings.

Finally among the points bearing upon fairness, I quote from Mason Gaffney: "... 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 Property Tax Reform I 23 rent, therefore, is to alienate those outside a small circle, and lose a valuable resource of community spirit."

"Highest and Best" (or "Higher and Better") Use of Land

The necessity of paying tax, in cash, at "high" rates, on full current market value would intensify pressure on the owner to get the best income possible. Heavier tax would sometimes force owners to make more effective use of land. The "speculator" would face new conditions, generally increasing the inducements to put land - space - to a use more nearly up to that which market demand suggests as most productive.

Today, keeping urban and suburban land idle, or nearly so, while waiting for the price to go up may cost the owner rather little. His ability to deduct property tax in computing taxable income reduces the net cost to him, but not to society, of holding land largely idle waiting for the price to rise. If, as seems to be the case, the assessor "cooperates" by putting lower figures (relative to full value) than for developed property, the public official works against the public interest. He probably does so without realizing the deeper implications of the underassessment. Users of other land must pay more when underassessment and undertaxation of some land help to keep it underutilized.

Where land is held out of the "highest and best" potential use for whatever reason - ignorance, lethargy, or desire for future capital gain from community development - a heavy tax payable in cash will add inducement to find and adopt a type of use which will bring more income, now rather than later.[20]

At present an owner can keep a resource created by nature (plus governmental outlays for community facilities) from being used, or used to best advantage. The higher land tax would reduce such possibilities. The economics of slum properties and seriously deteriorated structures - all aspects of the economics of land use in rundown areas of cities - would need reexamination.

With reduction of the tax on buildings, especially new ones, conditions for putting land to better use would improve. Both the "negative" aspect of higher land tax and the "positive" element of lower burdens on new buildings would aid replacement. Over the long run one effect of lower taxes on improvements would be to encourage earlier replacement.

As a result of the higher tax on land, the withholding of land from "better" use - commonly called "speculation" - would become more obviously expensive.[21]

One man's use of land has "spillover" effects on neighbors. Better use, especially forms involving more capital, will spread benefits beyond the specific parcel. Cumulative benefits extend broadly and build upon themselves. Much good will appear in the neighborhood effects. Speculation is not by any means to be condemned out of hand. It can be socially constructive as risktaking of a pioneering type. Withholding land from "better" use may be a form of "private conservation" (of green and open space), bringing benefits to neighbors. The goal we should seek is to make all the costs and all the benefits - the full social costs and benefits - open and effective.

The market in land would tend to be more active with more units available for sale. Assembly of larger units and greater opportunity for subdivision and use of parcels of different size should both be accomplished more readily. (Recall the easing of financing noted above.) In a dynamic society, one with endless forces of flux and change, the public welfare will be served more effectively the greater the freedom to change land use, to adapt as conditions change.

What Patterns of Use of Land?

The change in any area would depend upon the prior amount of "speculative" underuse, consumer desires, the changes in tax rates, and other factors which will differ from one place to another. The speeding of urban change expected from the reduction of tax on buildings and increasing the tax on land would add to the need for modern and up-to-date urban planning and zoning.

Heavier taxation of land coupled with lower taxes on improvements would reduce what is so aptly called "urban sprawl." The effective supply of land, the amount in fact usable, would rise, especially in areas which have higher land values (as contrasted with places farther out). New possibilities of, and incentives for, compactness would appear over an urban area. The new tax relations would weaken the power of some landowners to "force" people in a growing community to settle farther out than otherwise.

More intensive, more solid use of the central areas of cities, of "close in" rather than "farther out" sections, would result. The costs and the benefits associated with land would be closer to market values and tax liabilities. Social accounting would be more nearly accurate. Keeping as largely idle many parcels more or less close in would be, not only uneconomic but for the owner more obviously so.

The filling in of idle spots would be accompanied by more vertical development. Horizontal expansion would be somewhat less attractive compared with more intensive use of land. The changes would result from more adequate recognition of all costs and alternatives. More capital would be economical per plot of land because the tax element of the use of capital would be less.[22]

Real economies would result from more compact building of urban areas. Considerable saving in transportation would result - the time each week spent in travel, to say nothing of the cost of vehicles and roadways required for the shorter rather than the longer trips to and from work. And let us note certain real economies of compactness. Extension of streets, sewers, utility, and other facilities will generally involve rising costs per unit of service received as the distance reaches out. Compactness reduces the need for extension of pipes and other capital facilities whose cost per unit of eventual service rises with distance. (A larger diameter carries more per unit of surface than the smaller pipe stretching into more remote areas.) Compactness permits fuller utilization of any existing set of capital facilities. Elevators as a means of transport can often serve more efficiently than autos or buses!

The public as a whole would need to devote less capital per family to provide a given quantity of streets, utility, and other facilities when the area covered is X rather than 2X. The total capital saving in itself ought to be great enough to constitute a significant reenforcement of other reasons for relying more heavily on land taxes.

A Note of Urgency

A reason for urgency in shifting to greater emphasis on land as the tax base stems from a feeling that emerging public concern with urban problems will lead to programs of special aid for cities. Some aids will be outright subsidies, some may be tax concessions. Programs of urban aid which direct funds into particular areas will tend to raise land prices there. Will not much of the intended benefit then be incorporated into gains for landowners? Experience indicates a "yes" answer.

America's farm programs have seen subsidies capitalized into higher land prices to the benefit of owners of land at the time the plans became effective. Future users of farm land must pay more and to this extent get no benefit from the subsidy. The same sort of thing must be expected in urban aid unless special precautions are taken. Future residents and other users will get less advantage from urban subsidies and aids than is intended to the extent that land prices absorb the worth of special aid. And one project's success by raising nearby property values will add to the cost of other projects in the neighborhood.

Note of Caution

To "sell" a program in which one believes, enthusiasm leads to exaggeration unless caution asserts itself. So let me be clear. The changes proposed would not pour huge sums into city treasuries without pain to worthy voters. Nor would a change in the tax law build new structures or put all land to its best use before the next election, or many elections. But the tax reform would help.

In an economy of elaborate interdependence, a change in one place has some effect at many others. Moreover, some movements feed or build on themselves - cumulate or snowball. How natural for an advocate of a change, such as a shift to site-value taxation, to combine interrelation and cumulation and then envisage huge, pervasive, self-sustaining results of his proposal. Fortunately, the economy and the society are more stable; they are not so susceptible that large, multiplied responses follow from all the many changes which impinge on an economy from various sources. In presenting the case for site-value taxation, I do so expecting "much" in response. Yet my vision remains more mundane than miraculous, more for the decades than for the years ahead.

Property tax administration in most communities needs sweeping reform. Move toward site-value taxation could be integrated with some elements of basic revision of assessment, appeal, and collection. Without appearing to depreciate the need for difficult reform of administration, I believe that the task lies within, not only the technical abilities of man but also the realities of politics (in some states at least). Provisions to deal with aspects of equity call for more consideration than my discussion has permitted. Though some would be troublesome, let us not spare the effort needed to deal with them effectively and humanely.

Concluding Comment

No change of such a human creation as property taxation will go quite as forecast. Shift to greater reliance on land taxation, along with relief for buildings, would present more problems, and probably more opportunities, than I have discussed. They can, I feel, be handled well enough to leave an overwhelmingly large balance in favor of the proposal.


1. Obviously, the text statement lacks precision. What is "good" administration? Data on comparative costs of tax enforcement-governmental plus taxpayer - are incomplete. Income taxes at high rates bring in large amounts at low per-dollar cost to. government. We do not know the compliance costs for taxpayers-keeping records, filling out returns, etc. - except that for income tax they will likely be very much greater than for property tax.

2. For a more complete analysis see W. J. Shultz and C. Lowell Harriss, American Public Finance, 8th ed. (Englewood Cliffs, N.J., 1965), Chapters XVIII and XIX The effects of deducibility for purposes of income taxation are too diverse to try to examine here. I neglect the tax on personal property; generally, the tax on machinery, inventory, and other personal property of business will be shifted about as the tax on buildings used by businesses.

3. I use the term "land" to mean the original condition. Expenditures of time and effort by past and present owners in clearing, grading, etc., should be classed along with investment in structures for purposes here. Difficult and complex issues of measurement, and even of concept, arise.

4. The answer should depend in part upon the reasons for growth of spending. For some discussion see C. Lowell Harriss, Handbook of State and Local Government Finance (New York: Tax Foundation, Inc., 1966).

5. Not all taxpayers have equal opportunity to get a property-tax assessment reviewed for possible correction. Although "on paper" every owner has the same access to facilities for appeal, the real-life difficulties vary greatly. Another source of inequality affects the low income groups of some cities. Families who live in private housing will pay more property tax than those who live in "public" housing. In New York rent control also distorts.

6. Property taxation burdens some (businesses and) types of consumption more than others. For example, families which choose to use above-average portions of their income for housing tend to pay relatively more of the cost of local government. Retail sales taxes exempt rentals, but building materials for construction and maintenance are taxed. Even after allowing for all effects, one finds housing taxed less heavily under the sales tax than most other types of consumption. The income tax treats owner occupants favorably.

7. M. Mason Gaffney, "Property Taxes and the Frequency of Urban Renewal," Proceedings . . . National Tax Association . . . 1964 (Harrisburg: National Tax Association, 1965), pp. 272-285.

8. W. A. Morton, Housing Taxation (Madison, 1955). The higher the price of housing, the smaller the quantity of space purchased. Similarly, the quality, the amenities, enjoyed will be less as their cost goes up. The property tax by adding to price will reduce both the quantity and quality demanded. Averaging over the years, it seems, the dollar amounts spent on housing by a family of given income will be about the same whether property tax is somewhat higher or lower. To make up for a higher price due to tax, the amount and quality of space obtained will be curtailed. Dick Netzer, Economics of the Property Tax (Washington, 1966), 63ff.

9. For more complete discussion see Committee on Federal Tax Policy, "Taxing Business Enterprises: Some Principles," Tax Review, Vol. XXX, No. 7, July, 1969, Tax Foundation, Inc.

10. Differences in quality of local education will be significant for employers. Yet will riot wage rates be higher where schooling turns out more productive workers? Yes. Will wages be enough higher to offset all potential benefits which businesses may have expected from higher property taxes for better schools? The answer does not seem clear in theory, and empirical evidence is not available. Businesses do not, of course, have the right to vote. Managers, owners, employees, and consumers will have diverse interests. Many in this land of "one man one vote" have no vote in some localities which seek to tax them.

11. Competition, however, limits the possibility of one locality's getting much revenue from non-resident consumers. Each of the communities granting property tax favors, in a sense, "tells" the potential consumer elsewhere, "You can buy products created by factories, or services rendered, within our borders without paying (much) toward the cost of our local government." The tax treatment of the machinery and inventory of business can influence business operations.

12. Fundamentally, man cannot escape the problems of scarcity by any magic or any pushing of problems to government. Yet the individual or small group may hope to benefit considerably on balance because its payments will not equal its benefits. And taxpayers have incentives to alter affairs to escape tax so that the secondary and tertiary effects can include costs greater than those payments of a quid pro quo in the market.

13. Personal property, public utilities where now taxed on other than an ad valorem basis, and other special forms would each need examination in the context of the conditions of the state and locality. Moreover, the relative roles of state and local governments in reliance upon, and administration -of, property tax can certainly stand reexamination.

14. There would, of course, be difficulties. Results not adequately foreseen are to be expected. Allowance must be made for surprises, in nature or kind and in degree. No one can expect to identify in advance all of the consequences, welcome and disappointing, of a major modification of a major tax having major and direct bearing on a major industry and a major element of the economy.

15. Moreover, as a practical matter ample room should be left for rewarding investment in land and the development of location. Assessment will not always be able to separate out such elements of value.

16. The argument challenging the propriety of destroying existing rights in private property in land has force and strengthens the case for emphasis on prospective application. Giving "windfalls" to owners of fine buildings may also be criticized; for the tax reduction would do so. For most owners, the net change would be slight. The other cases unquestionably justify concern. The analysis would be much more complex than appears on the surface. Federal income tax considerations, the length of prior discussion and "notice," the effect of rising demand due to an increase in building, the nature of the outstanding lease and rental agreements, and other elements, all these bear upon the problem.

17. The first communities to shift to site-value taxation would have an impressive advantage over those coming later. As more and more localities offer the better attractions, less capital would be potentially available, on the average, to each. Compared with the present, all would be in better position but not so strikingly as for those leading the parade. No economist may be confident whether the supply of new saving out of income, especially saving for investment in real estate, would rise appreciably in response to higher after-tax yields. The United States would become somewhat more attractive compared with other countries in competing for capital in world markets.

18. Empirical evidence, it is said, provides little concrete support for the conclusion reached deductively here. The whole history of enterprise economy testifies to the effectiveness of profit incentives. The fact that Pittsburgh was a long time in rebuilding what has become the Golden Triangle does not prove that a big property tax differential has no great influence. Pittsburgh's tax rate differentials were never more than a modest fraction of those envisaged in my plan. For more discussion of the economic forces governing the flow of capital see C. Lowell Harriss, The American Economy, 6th ed. (Homewood, 111.; The Irwin Corp., 1968).

19. 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. My proposal, by destroying such hopes, no matter how small, would impose some "unearned decrement" on present owners. How large? I have no way of knowing.

20. Income tax considerations complicate any general analysis such as this or an analysis made for any particular piece of land. Such tax factors differ from one case to another, depending in part upon whether ownership is by an individual, corporation, or nonprofit organization; the owner's other income and deductions; capital gains and the possibility of avoiding tax by holding till death; and so on. The term "highest and best" implies a degree of knowledge which is more nearly one we would like to have than the one we do have about best potential use. Possible ambiguities may be avoided by using "higher" and "better."

21. Is it consistent with the principles of free enterprise capitalism to exert such pressure on the owner of property ? Whatever one may feel about government pressures on property use in general, land does differ in vital respects. For one thing, the owner did not create the land. His moral claim to any reward (net after tax) for just owning the land he did nothing to bring into existence, such claim seems to me less than impressive. Decisions about land use will affect not only the owner and his tenants. The decisions also affect people around and those who may have to "leapfrog" or use more of their life travelling farther for each day's work if he keeps the land at a use which is below optimum for the community. Does one individual really have a "right" to impose such higher costs upon others?

22. The implication that "up" may sometimes be preferable to "out" for living and working may seem the antithesis of the American dream. Some families will prefer "out," but the costs of alternatives, including the effects on others, must be realistic. Dreams cannot always become realities - certainly not in housing, especially not until for travel we can rely on a magic carpet moving at a high speed and needing no parking space. Apartment life may not be ideal; neither is the life of the single family in a house in the suburbs. Apartment life will be with us permanently; the relevant issue for present purposes is to get it, along with all other aspects of our life, to be as good as possible. Easing the availability of both capital and land must certainly be an impressive method of encouraging use which conforms more closely with the relative costs of local government services.