Taxing Land Values is Not Just a Good Idea,
It is an Urgent Necessity

Edward J. Dodson

[January, 2007]

Relying on local property tax revenue to pay for our public schools is clearly a destructive policy on many counts. Voting against new housing development that brings in more school-age children is a rational decision by existing residents who already feel severely overtaxed. State funding for public schools makes the most sense to achieve equity, recognizing as well that some communities are plagued more than others by poverty-related social problems.

From the standpoint of economic development that creates employment opportunities, raising public revenue by taxing property is a better option than taxing commerce, individual incomes or business profits. As a former New York City official, Phil Finkelstein, once said: "if you tax people, if you tax businesses, too heavily, they are gonna move." He added that if you tax buildings too high with the property tax, owners will eventually abandon buildings as well. Then, he made a statement that caused a light to go on among his listeners: "But, if the community taxes land heavily, land will not -- cannot move. Owners will do one of two things. They will bring the land to its highest and best use, or sell it to someone who will."

Phil Finkelstein was one of the few city officials who understood that the property tax is really two very different taxes. The tax on buildings is destructive and, ideally, ought to be eliminated. At the same time, a tax on land values is the most appropriate source of public revenue, inasmuch as land values are directly related to aggregate public and private investment -- in infrastructure, in amenities, and in public goods and services.

What he could have said, also, is that there is a maximum amount of revenue to be raised at any time from a tax on land values. That amount is annual potential rental value of all parcels of land in a community. The selling price of a land parcel in communities today reflects the capitalization of this annual rental value (inflated, to be sure, by the attraction of land as a speculative investment by those who have no intention of development).

If cities and town were permitted to gradually reduce the property tax on buildings and raise an increasing portion of the revenue from the taxation of assessed land values, land prices would begin to stabilize and then begin to decline. This would make it possible for businesses to acquire land for their activities at prices that allowed them to compete more successfully with businesses located in markets where the costs of doing business have for a very long time been much lower. As vacant and underutilized land is brought into productive use, as jobs are created and business activity expanded, some of the community expenses associated with social welfare programs, homelessness and crime are certain to fall. Instead of budget deficits, communities may eventually find sufficient funds to rebuild aging infrastructure and provide better quality housing for lower income households. The development pressure on outlying vacant land will also decline as urban towns and cities become places of destination, desirability and within the means of more households.