Method Of Taxing Unused Land Is Scandalous
Perry Prentice
[An address delivered at a Property Tax Conference,
San Francisco, California. Reprinted from The Commercial and
Financial Chronicle, 22 August, 1968]
The so-called property tax system provides
fantastic financial "windfalls" to land owners who "under-use
or misuse" their holdings. Conversely, the system penalizes
those whose social consciousness impels them to upgrade their
properties, including .homes, regardless of the personal
financial burden. Author Perry Prentice, who is most
knowledgeable on the subject, presents a scathing indictment of
a tax system that encourages realty owners to create the very
slum area, for example, that the government is trying to
eradicate by its costly urban renewal program. In the same
context, he calls attention to the "windfalls"
resulting from such projects as the Bay Area Rapid Transit
system and the Verrazanu Bridge.
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How rightly Americans think about property tax reform can be mighty
important to millions of people all over this country. For to quote my
college classmate, Bob Hutchins, Director of the Center for the Study
of Democratic Institutions at Santa Barbara, Calif., the kind of
property tax we are now suffering from "promotes almost every
unsound public policy imaginable. It harnesses the profit motive
backwards instead of forward to both urban renewal and suburban
development. Toe often it makes it more profitable to misuse and
underuse land than to use it wisely and fully, more profitable to let
buildings decay than to improve them. So in too many cases the
landowner's profit, in Winston Churchill's words, is "in direct
proportion to the disservice he has done the community."
The property tax, wisely applied, could be the best and fairest of
all taxes, but in practice today it may well be the very worst - a
truly weird combination of overtaxation and undertaxation, an
incentive tax for what you don't want and a disincentive tax for what
you do want.
Right now I'm afraid there is more confusion and more
misunderstanding about the property tax than there has been about any
other tax anywhere ever.
Part of this confusion has been deliberately created by the interests
who have been making such a good thing out of what's wrong with the
present property tax -- the interests who have made hundreds of
millions of dollars out of its faults and hope to make still more
millions in the future.
But most of the confusion probably stems from the simple fact that
the property tax isn't really just one tax. On the contrary, it
combines and confuses two completely opposite and conflicting taxes,
and it would be hard to imagine two taxes whose incidence on the
taxpayers and whose impact on urban development would be more
different.
One of the two conflicting taxes confused in your property levy is
the tax on the improvement - the tax on how much of their own money
and effort the past or present owners of the property have spent to
improve it.
The other of the two conflicting taxes confused in the property levy
is the so-called land tax, which is really something of a misnomer,
because what we really mean by the land tax is the tax on the location
value of the site without the improvements -- the tax on what the site
would be worth if the owners had done nothing and spent nothing to
improve it.
Define the Taxes
Sometimes assessors get confused and put into their land assessment
some of the site improvements for which the property owners have spent
their own money. But just because the assessors sometimes get confused
let's not us get confused here today. The improvement tax is the tax
on what the owners have spent their own money to create; the
unimproved land value tax is by definition a tax on what the site
would be worth if the owner had never done anything and never spent a
penny to improve it. In other words, it is a tax whose net effect
today is to recover for the community a small annual return (and under
present tax practice it is a very small return indeed) on what other
people have done and spent to create the community around it that
makes the location desirable and a very small annual return on what
other people - mostly other taxpayers -- have had to spend to make the
location accessible and pleasantly livable.
Today's practice almost everywhere -- and this practice strikes me as
just plain nuts - is to put most of the property tax oh the
improvement, i.e., to put most of the tax on what the owner has spent
his own money to build or otherwise create. The tax .on the
improvements the owner has. paid for averages roughly twice as much as
the tax on the location value - the value on which the property owner
is getting almost a free ride on other people's investment!
These two taxes -- the improvement tax on what the owner has done and
spent to improve the property and the location tax -- the tax on what
other people have done and spent to make his location more desirable
and more valuable -have such different economic and social
consequences that perhaps we should take a minute to consider these
different impacts separately.
First, the tax on what the owner has spent:
We needn't spend much time on this, for it must be obvious to
everybody that:
(1) It is good for the community to have property owners invest good
money to improve their property. It is good for the community to have
families build better homes and keep improving their homes instead of
letting them run down and decay. It is good for the community to have
merchants build better stores, good for the community to have the
owners of aging and obsolete buildings replace them with good new
buildings, good for the community to attract new industry to build new
plants to create new jobs.
And it must be equally obvious to everybody that:
(2) Levying a heavy tax on improvements is not a very intelligent or
constructive way to encourage property owners to spend their money for
improvements. On the contrary, a heavy tax on improvements can be a
serious deterrent and make the property owner think twice before he
spends his money that way -- and the heavier the tax on improvements
the bigger the deterrent.
This is so obvious that you would think every community would insist
on taxing improvements lightly if at all.
But the crazy fact is that all over the country we tax improvements
more heavily than any other product of American industry except hard
liquor, cigarettes, and perhaps gasoline -- and if you can imagine
anything crazier than that you have livelier imaginations than mine!
Impact of Improvement Tax
The only possible explanation of this nonsense is that almost nobody
realizes how heavy the improvement tax really is. But if you will ask
your banker to do a little arithmetic for you he will tell you a
3%-of-true-value-a-year improvement tax such as we pay in New York in
the instalment plan equivalent of a 52% lump sum sales tax, i.e., it
costs the improver as much each year as a 52% sales tax would cost him
if he could finance that 52% sales tax over the sixty year life of the
improvement at 5% interest.
It's such a serious deterrent and such an obvious deterrent that
whenever the government is particularly anxious to get private
enterprise to build some favored project it offers the builder tax
exemption on the new construction. But that just makes the over-all
problem worse by increasing the improvement tax load everywhere else,
thereby discouraging all other improvements. What we need is exemption
for all the improvements the owner pays for himself.
So much for the folly of overtaxing improvements. Now, let's consider
a few of the reasons why if is urgently important to multiply -- and I
mean multiply -- the tax on unimproved land values.
REASON NO. 1
- is the personal reason. Most of you stand to find yourselves paying
more taxes instead of less taxes if the improvement tax is minimized
without at the same time maximizing the land tax, thereby making the
owners of unused and underused land pick up a bigger and fairer share
of the total tax load. Every local government depends on the property
levy for most of its tax Income, so if you don't offset your untaxing
improvements by uptaxing land every local government would have to
either …
- go broke, or
- impose a lot of new local taxes that would almost certainly hit
the average family and the average business harder, or
- get bailed out by the state, in which case, for example the
executive vice president of the California Taxpayers Association
says California would have to double its sales taxes or triple its
state income tax just to make up for even a 50% cut in the
property tax take, and both these increases would hit the average
family and the average business harder, or
- get bailed out by the Federal Government, which is already
spending so much more money than it is collecting in taxes that
inflation is getting way out of hand, the dollar may have to be
devalued, mortgage interest is soaring towards 8 and 9%, and
nobody knows what next.
REASON NO. 2
- is the scandalous reason. It is also the biggest reason, because it
underlies all the other reasons, and is the reason that is least
'understood, so I want to be extra careful to state it clearly and to
avoid any chance of overstating its seriousness, its magnitude or its
impact.
Reason No. 2 is you can't afford to go on year after year taxing
yourselves and bonding yourselves to subsidize the land speculation
and the land price inflation that is now the worst part of today's
over-all inflation, with land prices soaring 15% a year compounded,
three or four times as fast as everything else, including specifically
six times as fast as other homebuilding costs rose from 1960 to 1966.
This is the subsidy nobody seems to know. It's a hidden subsidy, so
well hidden that it never even gets on the government's books. It's so
well hidden that the beneficiaries are never named, so well hidden
that they never get a government check for their subsidy payment. It's
a secret subsidy worked, not by sending subsidy checks to the
beneficiaries, but by tax treatment so extremely favorable that (in
Fortune's words), "It almost completely exempts land speculation
from the ordinary working of the law of supply and demand." It is
worked by taxing the owners of unused and underused land so lightly
that they pay only a trifling share - perhaps 2% or 3% -of the truly
enormous cost other taxpayers must absorb to pay for the public
improvements that multiply the value and the selling price of their
underused land.
Unless I am very much mistaken this hidden subsidy -this subsidy of
public improvements for private profit -- is the biggest subsidy of
all -- far bigger than the shipping subsidy, bigger than foreign aid,
bigger even than all the Federal farm subsidies, which, not so
incidentally, the Federal Government's own report on the causes of
rural poverty has now identified as mostly a land subsidy that has "created
a class of rich rural landowners but done little to improve the
condition of the rural poor." It has made more Americans rich at
the public expense than all our oil wells and all our gold mines.
Once in a blue moon this subsidy becomes so obvious that it arouses
public protest. For example, when you bonded yourselves for nearly a
billion dollars for Bay Area Rapid Transit the windfall for landowners
around its stations was so big and so obvious that Lady Barbara Ward
of the London Economist heard the report 5000 miles away in England
and urged you to get busy and recover some of that windfall from the
landowners. We have had a similarly obvious example in New York, where
the landowners on Staten Island are happily pocketing a $700,000,000
windfall because other taxpayers put up $350 million for the Narrows
Bridge that will make their land twice as accessible; and in New York
we are amazed to hear tales that along with enriching many other
landowners you Californians seem willing to enrich one single
California family with a $200 million windfall as a direct result of
your bonding yourselves for $1,750,000,000 to bring Feather River
water cheap to irrigate 400,000 arid acres on the way to Los Angeles!
A Mystery
But most of the time the subsidy for land speculation and land price
inflation is so well hidden that I've got to confess that even after
sixteen years at the very heart and center of the building Industry as
editor of its biggest architectural magazine and editor of its biggest
homebuilding magazine I had no foggiest realization of how many
different subsidies are compounded in the total subsidy and how big
the total subsidy for land speculation must be.
What opened my eyes was a research report from the truly excellent
Regional Plan Association in New York spelling out in detail that for.
every family added to the metropolitan population the taxpayers will
have to pony up an average of $16,850 for the capital cost of the
infrastructure of new schools, new highways, new mass transit systems,
new water systems, new sewage systems, new pollution controls, new
police facilities, new parks, new fire protection, etc., etc., etc.,
that will be needed to let that added family live there -- all this
over and above the on-site improvements the builder or developer pays
for himself. Change one word in that sentence to read per lot instead
of per family and you get the truly shocking figure that other
taxpayers will have to pony up an average of $16,850 per lot to make
it possible for the owner of that lot to sell it to a new family for,
say, $8000! And a taxpayer subsidy of $16,850 per $8000 lot is one
hell of a subsidy!
All this may help you understand what Marshall Field meant when that
department-store-tycoon-turned-multimillionaire-land- speculator said:
"I wouldn't call owning land a good way to make money; I wouldn't
call it the best way to make money; owning land is the only way to
make money." It is the bonanza way to make money because under
today's property tax breakdown other people -- mostly other
taxpayers-put up most of the money needed to make the land more
livable, more valuable, and more richly salable -- but only the
landowner can cash in on that huge investment of other people's money!
And that's why, in the words of economist John Stuart Mill, "Landowners
can get rich in their sleep."
A hundred and sixty years ago that father of classical economics
David Ricardo spelled out a simple truth that is still almost
unchallenged, "The interest of the landowner is directly opposed
to the interest of every other element in the economy." In other
words, what's good for the landowner is no good for anybody else, and
today's subsidized land price inflation that is so good for today's
landowner is bad for everybody else, including specifically bad for
the homebuyer, bad for the homebuilder, who has to pay too much for
land to build on, bad for the land developer, who has to pay too much
for land to develop, bad for the mortgage lender who finances the
inflation, bad for the realtor who has to sell the inflated price, bad
for' the architect, who has to cheapen his design because the
landowner has taken too big a profit out first, bad for the land
planner whose planning is frustrated by high land costs, and for all
of me, bad for General Motors.
So much for Reason No. 2 for taxing land much more heavily. Now let's
consider Reason No. 3 for multiplying the tax on unused and underused
land. This is the How-to-get-better-suburbs reason.
REASON NO. 3
- is you can't afford the heavy costs of suburbs sprawl, bypassed
land, and premature subdivision, which for brevity's sake I'll just
say you can't afford the heavy costs of sprawl. You can't afford the
tax cost of sprawl, you can't afford the wasted-time cost of sprawl,
you can't afford the unemployment cost of sprawl, you can't afford the
agricultural cost of sprawl.
There is just one cause and just one explanation for sprawl unused
and underused land on the outskirts of our growing cities is so
undertaxed that its owners are under no tax pressure to let their land
be put to a better use when it is needed for orderly urban
development. Land is so undertaxed that the owners of unuerused_land
can afford to sit tight waiting for their land to ''ripen'', which is
the euphemistic way of saying they can afford to sit tight until a
huge investment of other peoples' money to develop the land around
them has multiplied the market value of their land by five, or ten, or
twenty - and that's what Winston Churchill meant when he said the
landowner's profit is often in direct proportion to the disservice he
had done the community by holding his land off the market longest when
it was needed for orderly development. Land is so lightly taxed that
homebuilders are forced to leapfrog further and further out into the
countryside to find land they can afford to build houses on and
manufacturers are forced to leapfrog further and further out into the
countryside to find enough land they can afford on which to build new
plants.
How "Sprawl" Works
And all this sprawl and leapfrogging is very wasteful, and all this
leapfrogging is very very costly to everyone except the hold-out
landowners it makes rich.
Specifically:
(1) Sprawl multiplies the cost of almost every municipal service. It
multiplies the cost for roads to reach the sprawl-scattered homes,
multiplies the cost of water distribution, multiplies the cost of
sewage collection, multiplies the cost of mass transportation
facilities, inflates the cost of police and fire facilities, doubles
the cost of getting children to and from school.
(2) Sprawl multiplies the waste-of-time-and-money cost of getting to
and from places to work and multiplies the waste of time and money
getting to and from places to play. City people must waste countless
hours getting out of the city for outdoor recreation; suburban people
must waste countless hours driving past by-passed miles of vacant land
on their way to town. A University of Pennsylvania study found that
millions of men and women now spend more money driving to and from
.work than they spend for the homes they own; a Stanford Research
study found that millions of men and women must now spend a third as
much time getting to and from work as they spend working. finding
problems of the poor and underqualified by shifting too many of the
jobs they could fill and hold too far from the slums where poverty
makes them live. So, for example, sprawl was found guilty of being a
major cause for the nearly - 30% unemployment and underemployment in
Watts. The jobs the poor in Watts could fill and hold have moved miles
and hours away often three bus rides away at $2 a day bus fare! (4)
Sprawl is blighting mile after mile of fine farming country. In Santa
Clara county, for example, leapfrogging builders have had to scatter
their little tracts one-or-more-to-the-mile over 200 square miles of
the finest prune and apricot land in America, and the fruit growers
are so busy wondering whether to sell and how to sell that they aren't
replacing their aging trees when replacement is due. All these
builders' tracts that are now scattered over 200 miles could have
fitted comfortably into 15 square miles of orderly development,
leaving most of the other 185 for prunes and apricots for years to
come.
The land price inflation in the suburbs hits and hurts homebuilders
and land developers hardest of all. The landowner takes his profit out
first, and the homebuilders' No. 1 elder statesman, Tom Coogan, is
guilty of only a slight exaggeration when he says: "There; is
very little profit in homebuilding; all the profit is in the land."
And now, briefly, Reason No. 4 for taxing land more heavily:
REASON NO. 4
- is the architects' reason. Most new buildings could be a lot better
-- a lot better planned, a lot better designed, and a lot better built
-- if the undertaxation of land had not made it easy for the landowner
to take such a big profit out first -- a profit so big that it is
usually figured to allow the actual builder only just enough profit to
let him make out if he keeps his costs under tight control. For
example consider the reasons why Rockefeller Center in New York -- so
long considered "an outstanding example of the kind of amenity
planning that enriches a city and insures its future" is now in
serious trouble with the New York Planning Commission over what the
New York Times calls "the catastrophic, neolithic, delinquent,
and public-be-damned non-planning" for its next extension.
The Times finds it impossible to explain that Rockefeller Center is
now unwilling to spend the few extra millions needed to make the
extension "spectacularly good" instead of "delinquent."
I would suggest that at least one explanation is pretty obvious: The
owners of the three blighted and undertaxed blockfronts the extension
will cover got in there first and took out $90 million dollars for
just letting Rockefeller Center improve their land. After paying out
that $90 million no wonder Rockefeller Center is making a poor mouth
about how well it can now afford to plan and build.
REASON NO. 5
This is the How-to-develop-better-cities reason. Reason No. 5 is I
don't see how you can possibly afford to do more than a patchwork job
of urban renewal and urban modernization unless you tax urban land
more heavily, including specifically unless you tax the location value
of underused, and misused urban land much more heavily.
Too few people seem to understand that every public or private
improvement on one piece of land gets capitalized into the price of
the adjoining land, so the more public and private money you spend to
renew one blighted block the more you will have to pay to renew the
next one. For example, if the Rockefellers say they had to pay $90
million for three blighted blockfronts on Sixth Avenue between 47th
and 50th Streets in New York, the irony is that almost all this $90
million is a windfall from what the Rockefellers themselves had spent
to develop Rockefeller Center across the street!
Or consider a similar windfall right in San Francisco where nearby
landowners have capitalized the big public and private investment in
the Golden Gateway Renewal Project into a five-fold increase in the
price of their surrounding property. In like manner the land cost for
Western Addition No. 2 was tripled by the success of Western Addition
No. 1, and this suggests that under today's land tax System your
future renewal ventures will have to be far enough away from any of
your other big renewal projects so the subsidy for the new project
won't have to be tripled as it was for Western Addition No. 2 to pay
off the subsidy for the first project all over again because the
surrounding landowners were able to capitalize the first subsidy into
the price they got for the land for the second project!
If you would like a preview of the problems every city will face if
it undertakes to rebuild itself, bigger and better, without first
taking steps to recover through high land taxes, a large part of the
windfall this rebuilding will dump in the landowners' laps, take a
look at the trouble Philadelphia is in already.
Philadelphia has cashed in more Federal urban renewal subsidies than
any other city except New Haven and perhaps Boston; but despite all
those Federal subsidies - or perhaps more correctly, because of all
those Federal subsidies - the regional urban renewal director has
declared that "the situation is desperate" and the local
Federal renewal director has announced that Philadelphia will need a
subsidy of $225 million this year to carry out the same program that
was budgeted just a year ago at $135 million because, said he
euphemistically, "urban renewal has been so successful in
Philadelphia that we're having to pay much higher prices for the land
we have to buy." In other words, last year's renewal subsidies
get capitalized into the price of this year's renewal land, just as
the subsidies for your Western Addition No. 1 were capitalized into
the price of the land you had to buy for Western Addition No. 2.
In brief, unless you tax urban, land much more heavily to stop the
scandalous way landowners have been able to convert renewal dollars
into private profits, the more you spend for renewal the more the next
step in renewal will cost.
And this brings me back to completing the quotation I started way
back in my first sentence -- the quotation from my classmate Bob
Hutching who is now director of the Center for the Study of Democratic
Institutions at Santa Barbara.
After spelling out how today's misapplied property tax "promotes
almost every unsound public policy imaginable, encouraging urban
blight, suburban sprawl, and land speculation and thwarting urban
rehabilitation, new construction, home improvement, and orderly
development," Dr. Hutchins went on to conclude:
"The remedy is absurdly simple: Take the property tax off the
improvements and put it on the land. The owner would then be taxed on
what the community had done for him by making his land valuable. He
would not be punished for what he had done for the community by
putting his land to good use."
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