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SCI LIBRARY

Urban Financing for Jobs, Profits and Prosperity

Perry I. Prentice



[Reprinted from the American Journal of Economics and Sociology,
Vol.35, No.3 (July, 1976)]



FOREWORD


SPECIALIZED COMPETENCE of many types must be combined for a complete, accurate, and effective understanding of any major issue of public policy. Mr. Prentice brings to the study of land use, housing, urban affairs-the myriad aspects of problems of great human significance - his long background in matters involving real estate. He also brings a highly developed skill in exposition to help our understanding.

For decades Mr. Prentice has been directly involved (1) in one or another aspect of the analysis of the aesthetics, the economics, and the politics of the subject matter of a forthcoming book from which the three studies in this collection are taken. His unique qualifications for his task include, as other economists and I can testify, a determined effort to learn what others offer from their specialized points of view.

The wisdom of the general direction of policy advocated here seems overwhelmingly clear to me and to every other economist with whom I can remember having discussed the issue. Very few, of course, have had occasion to devote extensive time to this one aspect of public policy. Had academic and other economists done so they would doubtless have sensed some, but probably not all, the many potential benefits which Mr. Prentice discusses. He has put us in his debt by raising and discussing some three dozen questions - questions which bear most directly upon the quality of life ahead for us and our children and their children. The reader has an exciting experience in now encountering this stimulating discussion of vital questions.

C. LOWELL HARRISS


1. The ABCs of Property Tax Reform


ALMOST NOBODY seems to understand the property tax - not one business man in a hundred and not one taxpayer in a thousand. Even the assessors charged with its administration are apt to confuse it with an income tax. So too often they grossly underassess and undertax land that is kept so underused or misused that it is earning little income. And then they overassess and overtax land whose owners are making the most of it.

What most taxpayers know about property taxation seems to stop with just knowing that the tax bills on their own homes have been getting quite a bit bigger. This lack of understanding may explain but certainly does not justify their being more belligerent about rising property taxes than about any other levy. For the truth is that property taxes have gone up much less than any other major source of government revenue.

From 1939 to 1973 property taxes climbed less than one-eighth as fast as the federal income tax, less than half as fast as state income taxes, less than a quarter as fast as sales taxes and only two-thirds as fast as the cost of local government. And despite all the recent talk of federal income tax reductions the inflation fed by huge federal deficits has pushed so many families into higher tax brackets that from 1965 to 1973 federal income tax collections actually kept on climbing 10 percent faster than the property tax. Meanwhile, state income tax collections have been increasing nearly three times as fast as property taxes and state general sales taxes have been rising nearly twice as fast.

What the lack of taxpayer understanding does explain is why the big landowners have found it easy to sell the voters on so-called property tax reforms that would be a lot better for land speculators than for anyone else. Among these questionable reforms are:

  1. present use assessment
  2. farm value assessment
  3. temporary open space reserves
  4. salable development rights
  5. legalized underassessment of land
  6. farm buy-up and lease-back
  7. the British system of rates
  8. just cutting the property tax in half

Says Dr. Arthur Solomon, director of the Joint Harvard-MIT Center for Urban Studies:

In state after state the principal leaders of the property tax "revolt" prove to be substantial property owners and realtors rather than the proverbial "little men". . . .We believe that it is these relatively well-to-do people who would be the true beneficiaries of the currently popular proposals for effecting massive property tax reductions.

What too few tax officials and too few taxpayers understand is that the property tax is not just one tax. On the contrary, said the urban experts and tax authorities at a round table conference cosponsored by the National League of Cities and the Council of State Governments:

The property tax combines and confuses on one tax bill two completely different and conflicting taxes, and it would be hard to imagine two taxes whose consequences would be more different.

One of the two conflicting taxes fused and confused in the property tax is the tax on the improvement - the tax on what past, present, and future owners of the property have spent or will spend of their own money to improve it.

And, said the round table consensus:

It should be obvious to anyone that heavy taxes on improvements are bound to discourage, inhibit, and often prevent private investment in improvements.

The other levy confused in the property tax is the land tax - the tax on the unimproved location value or the site, the tax on what land in that location would be worth if its past and present owners had never spent anything or done anything to improve it. And it should be obvious to anyone that heavy taxes on the location cannot discourage or inhibit improvements; on the contrary, heavy taxes on locations could put effective pressure on the owners to put their sites to better use so as to bring in enough income to earn a good profit after paying the heavier tax.

So, concluded the round table:

All this is so obvious [repeat,obvious] that you would think every city would try to tax land heavily and tax improvements lightly if at all; but just the opposite is the case. Almost every city collects two or three times as much money from taxes on improvements as from taxes on land. In fact, many cities tax improvements more heavily than the combined local, state, and federal taxes on any other product of American industry except hard liquor, cigarettes, and perhaps gasoline.


Conversely, millions of idle urban and suburban acres are so underassessed and undertaxed that owners have been able to hold their land off the market for a net yearly tax cost seldom exceeding 1 percent waiting for inflation and an enormous investment of other people's money to double or triple its price [i.e., to increase its price one or two hundred times as much as the net yearly tax cost].

Wisely applied, the property tax could be one of the wisest and fairest of all taxes; but as most cities apply it today it may well be the very worst - a weird combination of overtaxation and undertaxation, an incentive tax for what we don't want and a disincentive tax for what we do want. It harnesses the profit motive backward instead of forward to both urban renewal and urban development Too often it makes it more profitable to let buildings decay than to improve them or replace them.


THE ENORMITY Of THE IMPROVEMENTS TAX


A 4 PERCENT-OF-TRUE-VALUE-A-YEAR property tax on new construction (as in New York City) may not sound big compared with a federal income tax that runs up to 70 percent. But it sounds small only because the 4 percent tax is 4 percent of the entire capital value of the investment, whereas the income tax, as its name makes clear, applies only to the income on that capital value.

The enormity of this 4 percent-a-year tax on the true value of new improvements should become clear if we restate it in sales tax, in income tax, and in consumption tax terms.

In sales tax terms: The Advisory Commission on Intergovernmental Relations has calculated that each 1 percent added to the tax on improvements is the installment plan equivalent of a 19 percent sales tax, i.e., it will cost the improver as much each year as a 19 percent single payment sales tax would cost him if he could finance it at 5 percent interest spread over the 60-year life of the improvement. So, for example, New York's 4 percent-a-year property tax on new improvements is the installment-plan equivalent of a 76 percent sales tax!

In income tax terms: New York's 4 percent-of-true-value tax on new improvements is likely to cost the improver much more than 50 percent of the income the improvement could otherwise earn on the equity investment.

In consumption tax terms: New York City's 4 percent-of-true-value-a-year tax on new improvements is the equivalent of at least a 25 percent consumption tax, i.e., it adds more than 25 percent to the rent or 25 percent to the carrying cost of a home.

Said the Douglas Commission's report: "It seems inconceivable that we would knowingly place such a tax burden on such a necessity as shelter, but we have."

If improvements were taxed more lightly or (better still) untaxed, our cities would have to find another tax source to make up the loss.

The cities can't very well raise the new revenue by multiplying the city income tax. That would give everyone with an income one more reason to move out of the city. And anyhow no good can come of piling a heavy city income tax on top of a state income tax on top of the federal individual income tax schedules. The income tax has already passed the point of diminishing returns. Since 1939 it has been multiplied 71 times over at the federal level and 52.8 times over at the state level. Today the federal income levy alone taxes away a quarter of anything a father can earn over $25,000 and roughly half of anything he can earn over $40,000. Combined with the inflation caused by the federal deficits, it has made getting-ahead such a rat-race that a man must now earn well over $40,000 a year to be as well off as on $15,000 40 years ago and well over $100,000 a year to be as well off now as on $25,000 then.

Likewise, most cities dare not try to get the new revenue by multiplying the city sales tax. That would make it too much cheaper to shop outside the city line. And anyhow the sales tax is a bad tax whose only advantage is that it is collected in so many small pieces that the taxpayer is less likely to notice its cost. It comes down hardest on the poor, and its end result is fewer jobs and less production of real wealth, for each 1 percent it adds to the cost of living translates into much less consumer purchasing power and therefore less sales, less production, less jobs, and less Gross National Product.

Likewise, the cities can hardly hope to raise the offsetting billions by new or increased taxes on corporate income. For the state and federal governments are already taxing away much more than half the profits of corporate business. First, we subject firms to state corporation income taxes that 45 states now apply at rates ranging up to 10-l/2 percent. Then the federal government subjects the profits of all but the smallest corporations to a 48 percent tax. Then die states tax any profits paid out in dividends at rates running up to 15 percent, and the federal government taxes dividends at rates running up to 70 percent. End result of this unique four-way tax is that our country is socializing a far bigger share of business profits than any other theoretically non-socialist country.

Likewise, cities would be foolish to hope they could get the federal government to offset any part of the tax loss from untaxing improvements by increased revenue sharing. For sooner or later the federal government will have to face up to the fact that it is in much worse money trouble than the cities. For years the federal deficit has been running bigger than the total of all the deficits of all our local governments combined!


LAND, THE IDEAL REVENUE SOURCE


LAND is THE ONLY TAXABLE that can't leave town to escape taxation. So the only revenue source a city could tap to make up for the revenue loss by untaxing improvements would be to increase the tax on the unimproved location value of land in the city.

And very fortunately, the result of doubling or tripling the tax on unimproved location values should be at least as good as the results you could expect from untaxing improvements. Low taxes on land get capitalized into high land prices, so some cities like St. Louis where the property tax is too low are in even worse trouble than cities like Buffalo and Boston where the property tax is too high.

Untaxing improvements would provide the carrot; uptaxing location values would provide the stick needed to prod the owners of underused and misused land to put it to better use in order to bring in enough additional income to pay the higher tax. This carrot-and-stick combination would be such strong medicine that in cities where the property tax is now heavy it might have to be given in small doses spread over five years or perhaps more. Otherwise, the tax shift might create a temporary chaos in the local real estate market by starting an overnight building boom that could send construction costs skyrocketing and rush in new facilities faster than the market could absorb them. A six-year study instigated by the Urban Land Institute in Milwaukee found that it would so change the arithmetic of property ownership that no subsidy at all would be needed to make it profitable for the owners of all the valuable vacant land and obsolete or inadequate buildings close to downtown to erect new buildings that would make better use of the site.

There are at least 40 good reasons why this carrot-and-stick combination would work wonders to cure many of our urban ills. They were all spelled out in the Tax Institute Magazine by Professor Arthur Becker, chairman of the Interuniversity Committee on Taxation, Resources and Economic Development and past-chairman of the Property Taxation Committee of the National Tax Association. Dr. Becker is professor of economics of the University of Wisconsin in Milwaukee, and former chairman of its economics department.

Before we start discussing some of these forty reasons, let's make sure we understand what "unimproved location value" means. The unimproved value of non-farm land means what land in any given urban or suburban location would be worth if its past and present owners had never done anything or spent anything to improve it. In other words, it means the value that land in that location derives almost entirely from an often enormous investment of other people's money and most notably other taxpayers' money to develop the community around it, thus making land in that location accessible, livable and richly salable. It is a value that is 99-44/100ths percent unearned increment, and for the life of me I can't think of a fairer tax than a tax on the unearned increment of other people's investment.

This unearned increment is why multimillionaire Marshall Field I, who made most of the Field fortune speculating in urban and suburban land, said: "I would not call owning land a good way to become wealthy. I would not call owning land the best way to become wealthy. Owning land is the only way to become wealthy." The word "only" is an obvious overstatement, but it overstates a good point.


UNEARNED INCREMENT Of LAND VALUES IN NEW YORK


HERE ARE SOME SPECIFIC EXAMPLES of how this unearned increment works in New York.

Example No. 1. Landowners on Staten Island got a windfall (estimated all the way from $350 million to $700 million) they had done nothing to .earn on other people's investment of $350 million to build the Verrazano Bridge linking the island to Brooklyn. This doubled and tripled the value of their land by making it twice as accessible from the rest of the city.

Example No. 2. The owners of the three under-assessed half blocks on the west side of the Avenue of the Americas (Sixth Avenue) between 47th and 50th Streets - landowners who had been letting their property run down and decay ever since some time around 1900 - got a windfall of some $75 million because: 1) the Transit Authority spent millions of dollars to replace the Sixth Avenue El with a subway with a station right there; and 2) the Rockefellers spent millions of dollars to build Rockefeller Center across the street.

Of the 7 million people living in New York not more than 70,000 profit by the way New York now overtaxes the improvements and under-taxes the unearned increment in land. The rest of the 7 million New Yorkers lose by it, directly or indirectly.

The trouble is that the 70,000 think they have a very good thing going for them and fight to keep it. The rest of the 7 million have no understanding of how they are losing, so they make no move to correct what is wrong. And the unimproved location value of New York's land that the 7 million create continues to go to the 70,000.

Dr. Becker keeps this anomaly in mind in explaining why uptaxing land and untaxing improvements would be good for the cities, good for the suburbs, good for the countryside, and good for their people. Consider just a few of his reasons.

Says Dr. Becker:

If improvements were untaxed and the whole weight of the realty tax were shifted to location values:

  1. More new homes would be built in the city to take advantage of the tax exemption of improvements.
  2. Building more new homes would give slum dwellers a better chance to escape from the slums.
  3. Rents would come down as new construction eased the housing shortage.
  4. Urban redevelopment would be accelerated at no cost to the tax-foyers. Over the years the heavier land tax would tax the slums and their almost worthless buildings out of existence.
  5. Commercial and industrial construction would likewise be stimulated.
  6. This would create more commercial and industrial jobs.
  7. New buildings would be built better and existing buildings would be improved if we stop penalizing quality by taxing good buildings more heavily than cheaper buildings.
  8. The building boom would create many more jobs in the construction trades.
  9. The construction boom would give city planners a better chance to get their plans off the drawing board and translated into reality.
  10. Less close-in land would be wasted. This would save city governments billions of dollars now wasted by sprawl, for all municipal costs are multiplied by distance.
  11. Premature subdivision would no longer be profitable, and this change should make ecologists and other lovers of open space much happier.
  12. Subsidies would no longer be needed to make it profitable for private enterprise to take on most of the job of rebuilding and revitalizing our cities.
  13. The new construction and all the resulting increase in in-city business activity would strengthen the local tax base and make our cities less dependent on state and federal aid.


And so on for 27 more good reasons.

So, says Professor Lowell Harriss, economist for the Tax Foundation and former president of the National Tax Association:

Almost all competent economists are now agreed that the community-created value of urban and suburban locations should be taxed much more heavily and the owner-paid-for value of improvements should be taxed much more lightly.



SOME AUTHORITATIVE OPINIONS

HERE IS A SAMPLING of what authorities past and present have said about the need of uptaxing land and downtaxing improvements:


A powerful tool for rebuilding urban centers through private initiative lies in reforming the property tax. Higher taxation of location values and lower taxation of improvements would help push land into more effective use. [CARL H. MADDEN, chief economist, United States Chamber of Commerce]

Higher taxes on land [and] lower taxation of improvements would help stimulate development and redevelopment. Holders of sites in and around the center would be induced to develop their land or sell it to those who will, so there would be less leapfrogging out beyond the fringes. Reduced fringe development would reduce the cost of providing public services and increase die conservation of green areas and open space surrounding the city. [CONGRESSIONAL RESEARCH SERVICE, 1971 Report]

The states should vigorously explore the desirability and feasibility of placing new or differentially higher taxes upon land values. [NATIONAL COMMISSION ON URBAN PROBLEMS (The Douglas Commission)]

The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title. [JOHN STUART MILL]

We need property tax reform with better assessments, better administration and more stress on taxing land. [BREVARD CRIHFIELD, executive director, Council of State Governments]

The burden of property taxation should be so shifted as to put the burden on the unearned rise in the value of land rather than the improvement. [THEODORE ROOSEVELT]

Land should be taxed at a higher rate than improvements so that there will be encouragement to put land to its most productive use. The land tax is the only tax that is anti-hoarding - and hoarding, I submit, is the basic sin in a productive economy. [THOMAS B. CURTIS, when chairman, Joint Economic Committee of Congress]

Putting the tax on improvements rather than on land favors old buildings whose aging is an intimate part of the urban decline process. [JAY W. FORRESTER, professor of economics, Massachusetts Institute of Technology and author, "Urban Dynamics"]

Land values rise mostly because of other peoples' and other taxpayers' investment, community development, and population growth - not because of any actions by the owner. The community creates the unearned value-increments and has every right to recapture them by taxation. [DICK NETZER, dean, Graduate School of Business, New York University]

Lower taxes on improvements encourage new construction and rejuvenation. Lower taxes on site values have the opposite effect because they invite land speculation, raise land prices, and discourage construction. [ROBERT C WOOD, president, University of Massachusetts, and former secretary, Housing & Urban Development]

The tax assessor rather than the planner is today determining the use and development of land. Until we get our tax and planning policies running in parallel instead of opposite directions, we will accomplish little in the planning field. [MAX WEHRLY, when director, Urban Land Institute]

The value of land (in contrast to the value of improvements) is created by society, not by the owner. [NEW YORK REGIONAL PLAN ASSOCIATION]

Our staff agrees that today's property tax with its weight on improvements discourages new construction and impedes the rehabilitation and maintenance of existing buildings; it constitutes a force to promote urban sprawl and leapfrogging development and fosters speculative land holding. A change-over to site value taxation should give private enterprise an incentive to improve and build and make fuller use of the land. [WILLIAM R. MACDOUGALL when executive director, Advisory Commission on Intergovernmental Relations]

Tax manufactures and you check production. Tax buildings and improvements and you slow development. Tax trade and you hinder or prevent exchange. Tax capital and you raise the cost of production. Tax wages and you lessen incentive. But you may take the whole value of land in taxation and the land will not diminish or be any less productive. On the contrary, land-value taxation will reduce the price of land and make more land available, stimulate trade and open up new opportunities to labor and capital for the production of wealth. [R. R. STOKES, M.P.]

We tax unimproved land very low; we tax improvements very high, and the result is simply to inflate the price of land and force taxpayers and employers to go farther and farther out. This makes it unprofitable to locate enough plants near enough to a city so that you can get jobs and job needers related. [ANDREW HEISKELL, chairman, Time, Inc., and co-chairman, Urban Coalition]



2. Self-Interest Questions About Property Tax Reform


THE FIRST QUESTION almost everybody asks about property tax reform is: "Just how would property tax reform affect my own pocketbook? Would it cost me more or cost me less? And why?"

The short answer is that property tax reform would be good for almost everybody except land speculators. But we can get some more precise and helpful answers by breaking up the question into its implicit elements. Why would taxing land more and improvements less be good for people who work for a living? Why would it be good for investors, good for the unemployed, good for homeowners, good for home buyers as well as slum dwellers, good for farmers, good for Blacks, homebuilders, architects, mortgage lenders, and so on. Last but not least, would it be good for landowners and if so why?

Question No. 1 - Would taxing land much more heavily be good for wage earners and everyone else who works to earn a living?

Answer - Indeed it would.

That is the truth Henry George dramatized nearly a hundred years ago in Progress and Poverty, a study of why vastly increasing wealth had failed to wipe out poverty. He dramatized his message with such simple clarity and sympathy that overnight his masterwork became a worldwide best seller. Translated into fourteen languages, it sold well over 4,000,000 copies - far more than any other economic treatise. Wrote William E. Leuchtenburg 90 years later in his history of the growth of the American Republic:

On the dusty plains of Kansas, in the slums of Liverpool and Moscow, on the banks of the Ganges and the Yangtze, poor men painfully spelled out the message of Progress and Poverty to grasp a new vision of human society.

Henry George devoted 565 pages of type to detailing his message and documenting a truth so simple that it can be restated here in less than 565 words.

All the wealth, all the goods and services we produce each year (what we now call the gross national product or G.N.P. for short) has to be divided between:

  1. the workers who actually create the G.N.P.
  2. the investors who put up the money needed to pay for the facilities and tools the workers need to multiply their productivity and their production (in our time somebody has to invest an average of more than $30,000 to provide the facilities needed for one more job in industry or farming);
  3. the owners of the land and natural resources on and under the land on which and from which the G.N.P. is produced. For short, Henry George said the G.N.P. has to be shared between labor, capital and land.


LANDOWNERS VS. LABORERS AND INVESTORS


THE LANDOWNER gets his cut, not for doing anything, but just for letting his land be used by the doers. In other words, the landowner's share of the "take is almost 100 percent unearned. Said famed economist John Stuart Mill:. "Landowners get rich in their sleep, without working, risking, or economizing." The richer the landowners get in their sleep, the less there is for the workers and investors to split. That's why economist David Ricardo said "The interests of the landowner are directly opposed to the interest of every other element in the economy."

Conversely, the less the landowner gets for just letting the producers use his land the more G.N.P. would be left for the producers to share.

So Henry George (who was much more interested in helping the poor than in making better use of the land) blamed the tragedy of poverty in midst of plenty on the undertaxation of land which has let the landowners pocket a bigger and bigger share of the G.N.P. without doing anything to earn it. That is why he urged shifting the full weight of a heavy property tax off improvements onto land. He went so far as to question both the landowner's right to keep any of the community-created unearned increment on his land and the government's right to take away through taxation any of the money workers and enterprisers earn by their labor and investors earn by their savings.

Without going to this extreme, there can be no doubt that the reform Henry George urged would make it that much more profitable for investors to create more jobs on which more workers could earn more money.

If Henry George were writing today he would have to add a fourth sharer, the tax collector. The more the tax collector takes away, the less is left for labor, capital and land to share. Right now taxes are taking nearly 40 percent of the national income, leaving only 60 percent for labor, capital and land, and, if taxes keep growing at the 1970-75 rate, taxes may soon be taking 60 percent.

Question No. 2 - Would taxing land more heavily be good for business investors ?

Answer - Yes, for all the reasons spelled out in answering Question No. 1. They would, in fact, have to be the first to benefit from getting the bigger share of the G.N.P. that would then make it more profitable for them to make the investments needed to create more jobs at which more workers could make more money.

Question No. 3 - Would taxing land more heavily be good for the unemployed ?

Answer - Yes, as explained in the answer to Question No. 2.


WHY MOST HOMEOWNERS WOULD BENEFIT


QUESTION No. 4 - Would the tax shift raise or lower the tax on homes?

Answer - Except for the owners of aging homes preempting, valuable close-in locations that are now needed for more intensive use, most home-owners should get lower property tax bills. They should pay less because on good homes the correct improvement-value-to-land-value ratio is usually well above the prevailing 2-to-l or 3-to-l area-wide average (for new homes the stipulated Federal Housing -Administration (FHA) ratio was 9-to-l until land price inflation ran wild, i.e., FHA would not include in its appraisals a land cost more than 10 percent of the total).

The prospective cut in homeowner taxes has been confirmed by many local studies at home and abroad. It was detailed most clearly by a computer study in Wellington, New Zealand. The Wellington study showed that although aging homes built prior to 1920 would average somewhat heavier taxes because their location value had been increasing while their improvement value shrank with age and obsolescence, homes built between 1920 and 1930 would average little or no tax change and homes built in each decade since 1930 would be taxed progressively less and less.

A computer study of every property in Washington by the District of Columbia assessor's office found that raising the same revenue by site value taxation on present assessments would reduce the tax on row houses an average of 14 percent, detached dwellings 18.8 percent, two-family homes 20.9 percent, walkup apartments 38.9 percent, and elevator apartments 22.5 percent.

A computer study of every property in Port Credit, Ontario, found that if land assessments were corrected to conform with current sales data, a shift to land value taxation would cut the average homeowner's property tax by $137 a year Or 22.5 percent.

A San Diego study by the California Statewide Home Owners Association found that homes inside the city limits would be taxed slightly more because their average age is greater and their location closer to the high-land-value center. But outside the city homes in La Mesa would pay 34 percent less; in San Marcos 29 percent less, in Chula Vista 28 percent less, in Del Mar 28 percent less, in- Oceanside 37 percent less, in Escondido 23 percent less.

That's one big reason why the Home Owners Association led the fight to untax improvements and uptax land. And that's one big reason why most homeowners everywhere have a pocketbook reason to favor such a tax shift.

Caution: One man's guess is as good as the next man's about what property tax reform would do to or for homeowners: 1) in places where homes are now grossly underassessed for political purposes, as they are, for example, in large sections of New York City; or 2) in places where (as too often happens) the assessors have made no serious effort to use a ratio between improvement values and land values that accurately reflects market conditions. So, for example, a $50,000 study financed by the Schalkenbach and Lincoln Foundations for the New York City government found that shifting the whole weight of the property tax to land would reduce the average homeowner's tax bill only 2 percent. In Milwaukee, where land is grossly underassessed, a computer study by Dr. Arthur Becker of the University of Wisconsin found that the tax shift would actually cause a slight increase in the average homeowner's tax bill.

Question No. 5 - Is today's undertaxation-subsidized inflation in land prices good for homeowners?

Answer - Most homeowners seem to think so; in fact most homeowners seem almost slaphappy over all the paper profit they have made on houses-and-lots they bought for much less than today's prices.

Alas, that paper profit will vanish when they have to pay it all out to somebody else to cover the similarly inflated price of the next house-and-lot they buy. When that time comes they can only console themselves with the thought that as second-time buyers they had the paper profit to lose, whereas today's first time buyers must go deeply into debt for a similar purchase.

Wrote Fortune in a very thought-provoking 1973 report headlined "Land: The Boom That Really Hurts":

Even those who own modest panels of land (like the plot under their homes) suffer more from the indirect effects of the land boom than they benefit from the inflated value of their property, for directly or indirectly the inflated price of land enters into the cost of everything they buy today.

Time has been still more explicit that today's land price inflation is bad for everybody except, of course, big landowners and smart land speculators. Wrote Time:

For most Americans land price inflation costs more than it is worth. For the homeowner a rise in the price of his home is just a theoretical profit until he sells it. Meanwhile the land price spiral is raising the price of everything the homeowner buys. Packing plants, bakeries, supermarkets, movie theatres, filling stations, widget makers all pass on to their customers the rising price of the land on which they set up shop. The rising price of farm land is reflected directly in the cost of crops and the price of food.

Question No. 6 - What about homebuyers?

Answer-Today's misapplication of the property tax hits them twice over - once before they buy and then again (like all homeowners) after they buy. It hits them before they buy as part of purchase price, for the crazy price inflation in land made possible by its undertaxation is the biggest single reason housing prices have more than doubled since 1960.


PROPERTY TAX REFORM WOVLD ABOLISH SLUMS


QUESTION No. 7 - What would property tax reform do for slum dwellers?

Answer - Over not-too-many years it would build the slums out of business by making it much more profitable for private enterprise to create without subsidy enough more good new or renovated homes so nobody would have to live in bad housing or put up with slum conditions. Nobody in his right mind would willingly live in the kind of shelter that now disgraces most slums, so you can be pretty sure almost everybody would abandon them and move out as soon as enough better housing at an attractive price is made available for them to move to. In many cities you can see this abandonment process already well advanced as a result of the 10-million-odd new homes brought onto the market by the 1969-73 splurge of housing subsidies.

Some of this better housing for slum dwellers might be created right in the present decay areas as the tax shift simultaneously relieves slum owners of today's tax penalty on improvements and pressures them to renovate their properties or abandon them. Most of the good new housing would probably be built in a higher price class somewhere else. In that case it would help build the slums out of business by pouring enough more decent housing into the trickle-down market to make trickle-down flow faster and more freely and so enable millions now trapped in the slums to escape to better neighborhoods.

In brief, shifting the tax off improvements to land could make today's slums almost self-eradicating or self-renewing by this three-way process of: 1) speeding the renovation of slum housing that is worth renovating; 2) speeding the abandonment and demolition of slum housing that is hopelessly bad; and 3) making the land now preempted by junkers available for more desirable and more profitable re-use.

This should go far towards ending the clamor for pouring millions of tax dollars into slum demolition, land writedowns, and subsidized housing. More important, let's hope it would obviate the destruction of whole neighborhoods by the kind of catastrophic slum clearance that so often ruins the owners of slum area businesses, leaves block after block of cleared land bare and unused for years, and forces the mass relocation of yesterday's slum dwellers without first providing good housing where they could afford to relocate.

No one should expect this self-renewal miracle to happen overnight. No one would or should rush out to start erecting good new housing in the middle of the slums. The renewal process would have to start at the edge of the slums and spread inward as the tax change tips the economic scales and makes it more profitable for edge-of-the-slums property owners to replace or improve the present buildings and less profitable to let them continue to decay.


GOOD FOR MOST FARMERS


QUESTION No. 8 - Wouldn't the tax shift be bad for farmers who need so much land?

Answer - Most farmers think so and it may be a waste of time to try to make them see they are wrong.

The shift would be good for farmers because it would give them an added incentive to improve their farms and thereby make them more profitable. It would be bad only for farmers who let their farms run down. A farm-by-farm study in Pennsylvania's rural Indiana County by Professor Steven Cord of Indiana University found that it would lower the tax on all the better farms. Perhaps significantly, the farms in North Dakota and the nearby Canadian province of Alberta offer the only North American example of a complete shift to land value taxation. Farm buildings and farm equipment are not taxed at all there; the entire weight of each farmer's property tax falls on the value of his land alone. This would have been politically impossible if the farmers had opposed it.

"Tree farms" (i.e., forest areas whose owners have spent millions of dollars for access roads, increased fertility, fire protection, replanting, etc., etc.) could also expect lower property taxes under land or site value taxation. Says Dr. Ellis T. Williams, who was financial economist for the Forest Service in Washington: "The application of site value taxation to forest land is not only feasible but (in conjunction with land use controls) desirable."

The only farmers who stand to lose by a shift to land value taxation are farmers on the urban fringe whose land price is now being multiplied by the prospect of early and lucrative sale for urbanization. These fringe-farm owners do have reason as land speculators, to fear that high taxes on land might dash their hopes of selling out to a developer for many times their purchase price and retiring on the proceeds.

Soaring land prices for undertaxed land have been fine for farmers turned speculators who want to get out of farming, but very bad indeed for anyone who wants to buy or enlarge a farm instead of selling. They are particularly bad for farmers who want to go on farming on the fringe of suburbanization, for the too-high price of close-in land made possible by its undertaxation is forcing developers to leapfrog far out into the boondocks of premature subdivision and scatter their tracts over land that should be left free for farming for many years to come. These scatterations need many costly urban and suburban services that require much heavier local taxes than outer-fringe farmers can afford to pay.

Perhaps the best way to neutralize farm and lumber industry opposition to uptaxing land would be to give all land a basic exemption of $200 or perhaps even $300 an acre. This would make little tax difference in $10,000-an-acre suburbia or up-to-$l million-an-acre cities, but it would spare most farmers the risk of a tax increase from higher land taxes. It would also give farmers out in farm country a bigger tax saving than they would get from the proposed stipulation that all farms should be assessed at their farm value rather than market value (since the only value at which farm-country farms can now be assessed anyhow is their value as farms).


NOT UNFAIR TO LANDOWNERS


QUESTION No. 9 - Wouldn't the tax shift be very unfair to landowners?

Answer - Contrary to common belief, even tripling the tax on land could be good instead of bad for most landowners if it is offset by a simultaneous reduction or elimination of the tax on improvements.

The three-times-as-heavy land tax would indeed be capitalized into a lower land price, but the chance to use the site for a tax-free or almost tax-free improvement instead of an overtaxed improvement would be capitalized into a higher land price.

Landowners who put their land to a use fully commensurate with its value could expect to pay a substantially lower total tax than they would now pay and this lower tax on the land-and-improvement package should make their land more valuable. So, provided the tax shift is staggered over enough years to give landowners time to adjust to it, the only landowners who would stand to lose by the change are ...

  1. the owners of unused, underused, or misused land who persist in keeping it that way instead of taking advantage of the lowered tax on improvements; and
  2. the owners of outer fringe land that now enjoys a completely fictitious shortage value because the present undertaxation of so much closer-in land that should be urbanized first makes it cheap and easy for its owners to hold it off the market waiting for still higher prices.

Perhaps surprisingly, the first to benefit from the tax shift uptaxing land and downtaxing improvements might be the owners of idle or almost idle land close to the city center, for they could be first to take advantage of the lowered tax on improvements.

For the long pull urban landowners have as much if not more, than anyone else to gain from correcting today's misapplication of the property tax. The value of their land derives 99-44/100 percent, not from anything they themselves have done or can do to make it more valuable but from what others do to make the location more desirable. The present tax with its heavy penalty on improvements gives each property owner in the neighborhood an incentive for letting his property run down instead of spending good money for improvements that would help upgrade the neighborhood. When all the property owners on the block let their property deteriorate to save taxes all of them are bound to lose.

Land is the only investment that cannot move away when the city, the neighborhood, or the block decays, so landowners have more to lose than anybody else by a tax whose present incidence penalizes betterment and seems to reward decay.

Question No. 10 - How would the tax shift affect downtown?

Answer - In all but the newest cities it would make downtown pay a much bigger share of the property tax total. In Washington, for example, the assessor's computer study showed that it would increase property tax collections in the central business district by 31.6 percent, from J32.359.669 to $42,624,598.

Surprising as it may seem, such a tax increase would be just about the best thing that could possibly happen to downtown, where decay has too long been subsidized by both federal and local undertaxation. The tax shift would reduce the tax on downtown buildings that make good use of their site just as it would reduce the tax on good buildings elsewhere in the city. The only reason it would increase the downtown tax total is that downtown is the oldest part of most cities, so in too many cities (says Fortune) downtown is "leprous with dilapidated old buildings and pockmarked with parking lots" where the old buildings have been demolished and not replaced.

Around the center of Detroit, for example, the Downtown Association says 70 percent of the land is abandoned to one-level parking; in downtown Milwaukee 95 percent of the buildings are more than 50 years old and will soon be overdue for replacement. These old buildings do not necessarily offer even the advantage of cheap rents, for the overtaxation of new improvements protects them from strong-enough rent competition from new construction.

How can anyone expect such a huddle of undertaxed old buildings to provide a strong enough magnet to hold the city together? Concluded Dr. Gaffney on the basis of the Milwaukee tax study he made while a member of the economics department of the University of Wisconsin: "Today's tax system is delaying downtown renewal by at least thirty years."

What downtown needs most of all is a tax shift that would, at one and the same time, 1) put heavy tax pressure on downtown landowners to put their prime locations to good use; and 2) stop penalizing downtown rebuilding by overtaxing improvements.

Meanwhile the federal government subsidizes downtown decay by letting the owners of decayed or obsolete old buildings redepreciate them over and over again for tax purposes as often as they are sold.

On buildings old enough or run-down enough to rate taking their re-depreciation in ten years this tax deduction could double the potential profit for a corporate purchaser or a private buyer in the 50 percent tax bracket, and doubling the potential profit could double the resale value. For example, on a building bought for $100,000 with two-thirds of the $100,000 arbitrarily assigned to the improvement under the standard I.R.S. practice of conforming to the usual 2-to-l improvement-to-land assessment ratio the annual 10-year redepreciation deduction would be two-thirds of one-tenth of $100,000, or $6,666.67 a year. On a million-dollar purchase it would be $66,666.67!

This redepreciation allowance may well be costing the federal government much more than a billion dollars a year, but nobody at the Treasury seems to know how much.


WHAT INDUSTRY COULD GAIN


QUESTION No. 11 - What industry has most to gain by property tax reform?

Answer - The building industry and its customers (including home-owners), for the building industry's product is now taxed more heavily than the product of any other major industry except hard liquor, cigarettes, and perhaps gasoline while the cost of its biggest purchase (land) has been inflated by undertaxation 6.19 times as fast as the rest of the wholesale price level (so said the Douglas Commission).

The high price of land which has been so profitable for land speculators is bad for land developers. They are, in fact, its first victims, and often its biggest losers, for the more they have to pay for raw acreage the bigger their risk, the bigger their cost for interest paid or interest foregone, the less money they have left to pay their development costs, and the less their chance of making a good profit on their investment.

The high price of land is bad for architects because the more money their clients must pay for the site the less they have left for creative quality design, quality features, and quality construction. Today's land costs are the No. 1 reason we could afford a far richer architecture when America was much poorer than we can afford now that America is rich. And that, in turn, helps explain why architects in both Chicago and Los Angeles are actively urging that most of the local property tax should be shifted off the improvements they design onto the land that is now so overpriced. It also helps explain why a 1974 study showed unemployment was almost as bad among architects as among poor blacks.

The high price of land that has been so good for acreage owners is bad for homebuilders because the more the builder has to pay for his lots the less money he has left to build more sales appeal into his houses, the greater his risk of having to price his product out of the market, and the less his chance of selling his houses at a good profit. Thirteen years ago the Home Builders voted 4-to-l that land was already their No. 1 problem and Nat Rogg, later executive vice president of the National Association of Home Builders, said: "Land is a real killer to the builder. The cost of land has gone up more than all other housing costs combined."

The high price of land has been equally bad for subcontractors, building material dealers, and building product manufacturers. When a builder has had to pay thousands of dollars too much for his land he has to take that money out of his house somewhere or go broke, so he passes 21 the squeeze on to his subs, he passes the squeeze on to his dealers (or tries to eliminate the dealer and the dealer's mark-up entirely), and he passes the squeeze on to the building products manufacturer, too often by buying the cheapest products he thinks he can get by with.

The high price of land is bad for real estate brokers because they live by making sales and today's crazy land prices are pricing millions of both new homes and used homes clear out of the market. And let's not forget that when a family that could afford to trade up to a better new home elects to stay put instead, the real estate brokers don't lost just one sale; they lose up to a dozen sales they could have made to families playing musical chairs, each trading up to a better used home, with each of the trade-up sales offering brokers the chance for a trade-up commission.

And finally the high price of land that has been so good for acreage owners is bad for the mortgage lenders and mortgage holders, because the more water there is in the land price the less real value the mortgage will represent and the less the mortgage holder's security.

As for the homebuilding industry's customers, they are the final victims of the high price of land, for they end up paying the entire bill. They are also the first victims of the way the product of the building industry is now overtaxed.

Question No. 12 - What people have most to gain from property tax reform ?

Answer - The Blacks, especially poor Blacks.

Poor Blacks are two-time losers by today's misapplication of the tax.

  1. They lose on the home front because the overtaxation of improvements has discouraged private investment in enough new homes to end the housing shortage while the undertaxation of land has been a major cause of the land price inflation that has been the biggest single factor pricing good unsubsidized housing beyond the reach of the poor. So most poor Blacks, being low men on the totem pole, are trapped in slum housing because there is not other housing they could afford.
  2. They lose on the job front because the overtaxation of improvements is driving too many employers out of the cities to places outside where job-needing Blacks find it difficult if not impossible to follow-places where land is cheaper and taxes are lower.

Middle-class Blacks now trapped by prejudice and covert segregation on the edge of the slums would find homesellers in better neighborhoods much readier to welcome them if ending the housing shortage should make their homes harder to sell for their asking price. 1. [Perry Prentice for 25 years irai vice president of Time Inc., including service as publisher of Time Magazine and as editor and publisher of Time Inc.'s housing and architectural journals. He has been Time Inc.'i principal officer concerned with the problems of housing and urban development. He is active in professional and business organizations interested in providing and improving America's housing, cities and urban life. Eorro*.]