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land-holding

Land value tax

Land value taxation (LVT) (or site value taxation) is an ad valorem tax where only the value of land itself is taxed. This ignores buildings, improvements, and personal property. Because of this, LVT is different from other property taxes which generally tend to fall on real estate - the combination of land and improvements to land.

Land value taxation is ancient, tracing back to early governments after the introduction of agriculture. One of the oldest forms of taxation, it was originally based on crop yield. This early version of the tax required simply sharing the yield at the time of the harvest, akin to paying a yearly rent. In modern times, every jurisdiction that has a real estate property tax has an element of land value tax, because part of the ad valorem basis for real estate is the location, or site value, in addition to the improvement value.

Economic effects

High efficiency

Most taxes distort economic decisions. If labor, buildings or machinery and plants are taxed, people are dissuaded from constructive and beneficial activities, and enterprise and efficiency are penalized due to the excess burden of taxation. This does not apply to LVT, which is payable regardless of whether or how well the land is actually used, because the supply of land is inelastic, market land rents depend on what tenants are prepared to pay rather than on the expenses of landlords, and so LVT cannot be passed on to tenants. The only alleged direct effect of LVT on prices is to lower the market price of land. Put another way, LVT is often said to be justified for economic reasons because if it is implemented properly, it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do. A correlation between the use of LVT at the expense of traditional property taxes and greater market efficiency is predicted by economic theory, and has been observed in practice.

Proponents allege that the necessity to pay the tax encourages landowners to develop vacant and under-used land properly or to make way for others who will. The claim is that because LVT deters speculative land holding, dilapidated inner-city areas are returned to productive use, reducing the pressure to build on green-field sites and so reducing urban sprawl. For example Harrisburg, Pennsylvania has taxed land at a rate six times that on improvements since 1975, and this policy has been credited by its long time mayor, Stephen R. Reed with reducing the number of vacant structures in downtown Harrisburg from about 4,200 in 1982 to less than 500. LVT is an ecotax because it ostensibly discourages the waste of locations, which are a finite natural resource.

Reduced speculation

Real estate bubbles direct savings towards rent seeking activities rather than other investments, and can contribute to recessions which damage the entire economy. Advocates of the land tax claim that it reduces the speculative element in land pricing, thereby leaving more money for productive capital investment and making the economy more stable.

Loss of asset value

Land value is proportional to the expected profits from rent or investment after taxes, so LVT would reduce the value of all real estate owners' holdings. Critics suggest that a rapid reduction of real estate values could have profoundly negative effects on banks and other financial institutions whose asset portfolios are dominated by real estate mortgage debt, and could thus threaten the soundness of the whole financial system. If the value to landowners were reduced to zero or near zero by recovering effectively all its rent, total privately held asset value could decline by 25% or more, a massive reduction of private sector wealth. Most LVT supporters support a gradual tax shift to avoid disrupting the economy, and argue that the reduction in private rent collection would result in a corresponding increase in net wages held by laborers and net interest from capital held by investors.

Implementation

There are several practical issues involved in the implementation of a land value tax. Most notably, it needs to be:

  • Calculated fairly and accurately,
  • High enough to raise sufficient revenue without causing land abandonment,
  • Billed to the correct person, and
  • Legal in the jurisdiction in which it is applied.

Simplicity and certainty

In theory, levying a Land Value Tax is straightforward, requiring only a valuation of the land and the identity of the landholder. There is no need for the tax payers to deal with complicated forms or to give up personal information as with an income tax. Because land cannot be hidden, removed to a tax haven or concealed in an electronic data system, the tax can not be evaded.

However, critics point out that determining the value of land can be difficult in practice. In a 1796 United States Supreme Court opinion, Justice William Paterson noted that leaving the valuation process up to assessors would cause numerous bureaucratic complexities, as well as non-uniform assessments due to imperfect policies and their interpretations. Austrian School economist Murray Rothbard later raised similar concerns, stating that no government can fairly assess value, which can only be determined by a free market.

When compared to modern-day property tax evaluations, valuations of land involve fewer variables and have smoother gradients than valuations that include improvements. This is due to variation of building style, quality and size between lots. Modern computerization and statistical techniques have eased the process; in the 1960s and 1970s, multivariate analysis was introduced as a method of assessing land.

Sufficiency of revenue

Some have argued that a land value tax alone cannot raise large enough revenues if LVT were to replace all other taxes. In a case event where a jurisdiction attempts to levy a land tax that is higher than the entire landowner surplus, it would result in the abandonment of property by those who would be paying and a sharp decline in tax revenue.

Requires clear ownership

In some countries, LVT is nearly impossible to implement because of lack of certainty regarding land titles and clearly established land ownership and tenure. If the government can not ascertain the proper owner, it cannot know from whom to collect the tax. The phenomena of lack of clear titles is found world-wide in developing countries and is in part the subject of the work of the Peruvian economist Hernando de Soto. In African countries with imperfect land registration, the landlord can be elusive and significantly more difficult to tax than occupants, but most governments require that tax collectors track owners down nonetheless so that the burden of the tax does not fall on the poor.

Legality in the United States

In the United States, there have historically been two alleged legal obstacles to the implementation of land value taxes at the state and local level: uniformity clauses and Dillon's Rule. At the federal level, land value taxation is legal so long as it is apportioned among the states.

Uniformity clauses

The United States legal system includes "uniformity clauses", which require that all taxation is applied evenly within a jurisdiction. Although the federal Uniformity Clause has never been an issue, many state constitutions have their own uniformity clauses, and the wording and interpretation of these clauses varies from state to state. For example in 1898, prior to an amendment of the Maryland Declaration of Rights which now specifically allows for land value taxation, the Maryland supreme court ruled that the use of land value taxation in Hyattsville was unconstitutional. However, the uniformity clause in Pennsylvania has been broadly construed, and land value taxation has been used since 1913.

Each state will have its own legal stance or lack of any stance on LVT; some uniformity clauses explicitly allow some types of classifications of property, some have no uniformity clause, and some do not specifically discuss land qua land at all. Except for the Maryland case of Hyattsville, no state courts have squarely ruled that land and improvements are actually "classes" of property such that uniformity clauses are applicable. As a general rule, as long as each type of property (land, improvements, personal) is taxed uniformly there is no constitutional obstacle. In addition, no court other than the 1898 case in Maryland has actually struck down an attempt to implement land value taxation on the basis of a state uniformity clause.

Even in rather strict uniformity clause states, it is unclear whether the uniformity clause actually prohibits separate land value taxation. Some states have other constitutional provisions - for example in New Jersey, which gives localities maximum home rule authority and have not adopted Dillon's Rule. While the uniformity clauses might be interpreted to prohibit state-wide action, local action may be legitimate.

Dillon's Rule

Although uniformity clauses do not seem to be a major obstacle in most jurisdictions to land value taxation, control of local authority by the state legislature remains a real obstacle, requiring the need for local enabling authority or the abrogation of Dillon's Rule. The theory of state preeminence over local governments was expressed as Dillon's Rule in a 1868 case, where it was stated that "[m]unicipal corporations owe their origin to, and derive their powers and rights wholly from, the legislature. It breathes into them the breath of life, without which they cannot exist. As it creates, so may it destroy. If it may destroy, it may abridge and control. As opposed to Dillon's Rule, the Cooley Doctrine expressed the theory of an inherent right to local self determination. In a concurring opinion, Michigan Supreme Court Judge Thomas Cooley in 1871 stated: "[L]ocal government is a matter of absolute right; and the state cannot take it away. In Maryland, for example, municipal corporations have the right to implement land value taxation, but the counties, including Baltimore City which is treated as a county in Maryland for certain purposes, do not.

Ethics

Land (unlike goods and services) has no cost of production. If an ample supply of land of equal desirability were available everywhere, there would be nothing to pay for its use. In reality land acquires a scarcity value owing to the competing needs of the community for living, working and leisure space. According to proponents, the unimproved value of land owes nothing to the individual efforts of the landowner and everything to the community at large. These supporters suggest that the value of land belongs justly and uniquely to the community. Conversely, they argue that the reward for individual effort can belong only to the one who earns it, to spend, save, or give away as he or she may see fit.

In religious terms, it has been claimed that land is a common gift to all of mankind. For example, the Catholic Church asserts:

In distributism terms, land value also has been alleged to be much more maldistributed than income. While sizeable numbers of households own no land, few have no income. For example, 10% of land owners (all corporations) in Baltimore, Maryland own 58% of the taxable land value. The bottom 10% of those who own any land own less than 1% of the total land value. This is a form of Gini Coefficient analysis. It is because of these distribution issues that land value taxation is sometimes suggested as a moderate, market-based form of land reform.

LVT is also purported to act as value capture tax. A new public works project may make adjacent land go up considerably in value, and thus, with a tax on land values, the tax on adjacent land goes up. Thus, the new public improvements would be paid for by those most benefited by the new public improvements -- i.e., those whose land value went up most.

Advocacy

Physiocrats

The physiocrats were a group of economists who believed that the wealth of nations was derived solely from the value of land agriculture or land development. Physiocracy is considered one of the "early modern" schools of economics. Physiocrats called for the abolition of all existing taxes, completely free trade, and a single tax on land. Their theories originated in France and were most popular during the second half of the 18th century. The movement was particularly dominated by Anne Robert Jacques Turgot (1727–1781) and François Quesnay (1694–1774). It immediately preceded the first modern school, classical economics, which began with the publication of Adam Smith's The Wealth of Nations in 1776. Smith took the term "laissez faire" from the physiocrats but gave it a somewhat different meaning connotating free enterprise or a free market economy.

A land tax was advocated by the Framers of the U.S. Constitution in 1789. Alexander Hamilton, writing in the Federalist Papers #36 gives the argument calling it the "most simple and most fit resource" for the several States. It was probably known to Franklin and certainly known by Jefferson as they were ambassadors to France, where physiocracy had become popular. Jefferson brought his friend Pierre du Pont to the United States to promote the idea.

Thomas Paine contended in his Agrarian Justice pamphlet that all citizens should be paid 15 pounds at age 21 "as a compensation in part for the loss of his or her natural inheritance by the introduction of the system of landed property." This proposal was the origin of the citizen's dividend advocated by Geolibertarianism.

Henry George

Henry George (September 2, 1839October 29, 1897) was an American political economist and originator of the "Single Tax" on land. He was the author of Progress and Poverty, written in 1879, and is the most influential advocate of land taxation.

The Henry George Foundation of America is a 501(c)(4) non-profit foundation, founded in 1926 by some of the leading progressive Democrats in Pittsburgh, Pennsylvania: Pittsburgh Mayors Scully and McNair, City Assessor Percy Williams, State Senator and Allegheny County Democratic Chairman Bernard B. McGinnis, and Councilman George Evans (driving force behind Buhl Planetarium). Its national office is now located in Philadelphia, where Henry George was born.

The Center for the Study of Economics is a 501(c)(3) non-profit educational foundation, established in 1980 as the sister organization of the Henry George Foundation of America. Its mission is to research land value taxation, to assist governments in implementation and to study the effect of land based property taxation where used. It suggests implementation where appropriate but does not support political candidates or become involved in the electoral process. The Center also gathers and disseminates articles, studies and monographs on the subject of land based taxation.

The HGFA and CSE use assessment data and have tax calculators to illustrate how "two-rate" taxation (lower on improvements and higher on land value) might actually be implemented and the effect on parcel by parcel basis in a variety of jurisdictions. They also sponsor the land value tax projects in Maryland, New York, Indiana, Washington, Pennsylvania, and New Jersey, and were instrumental in providing technical assistance (how to calculate rates, etc.) to the Pennsylvania cities that adopted two-rate taxation in the 1970s-90s. They continue to provide technical assistance and do implementation studies across the United States.

British Liberal Party

In the United Kingdom, LVT was an important part of the platform of the British Liberal Party during the early part of the twentieth century - David Lloyd George and H. H. Asquith proposed "to free the land that from this very hour is shackled with the chains of feudalism". It was also advocated by Winston Churchill early in his career. The 1931 Labour Budget included a land value tax, but before it came into force it was repealed by the Conservative-dominated National Government that followed shortly after. The Liberal Party remains committed to a local form of land value taxation.

Contemporary economists

  • In 1990, several economists wrote to then President Mikhail Gorbachev suggesting that Russia use Land Value Taxation in its transition towards a free market economy.
  • Milton Friedman noted that "[T]he property tax is one of the least bad taxes, because it’s levied on something that cannot be produced — that part that is levied on the land".
  • Nobel Prize winner William Vickrey believed that "removing almost all business taxes, including property taxes on improvements, excepting only taxes reflecting the marginal social cost of public services rendered to specific activities, and replacing them with takes on site values, would substantially improve the economic efficiency of the jurisdiction.
  • In 2000, Florenz Plassmann and Nicolaus Tideman wrote that when comparing Pennsylvania cities using a higher tax rate on land value and a lower rate on improvements with similar sized Pennsylvania cities using the same rate on land and improvements, the higher land value taxation leads to increased construction within the jurisdiction.
  • American politician Ralph Nader supports "the present adjustment of Henry George's celebrated land tax" as part of his presidential campaign platform.

Land value tax systems

United States

Every single state in the United States has some form of property tax on real estate and hence, in part, a tax on land value. There are several cities that use LVT to varying degrees, but LVT in its purest form is not used on state or national levels. Land value taxation was tried in the South during Reconstruction as a way to promote land reform. There have also been several attempts throughout history to introduce land value taxation on a national level. In Hylton v. United States, the Supreme Court directly acknowledged that a Land Tax was constitutional, so long as it was apportioned equally among the states. Two of the associate justices explained in their summaries, stating:

There have also been attempts since then to introduce land value tax legislation, such as:

  • The earliest known legislation was the Federal Property Tax Act of 1798.
  • In 1894, a bill was introduced by Representative James G. Maguire of California that would have introduced a Georgist taxation policy.
  • On February 20, 1935, Theodore L. Moritz of Pennsylvania introduced HR 6026, which would have implemented a national land value tax. It would have imposed a 1% tax on the value of land in excess of $3,000.

Single tax

The first city in the United States to enact land value taxation was Hyattsville, Maryland in 1898, through the efforts of Judge Jackson H. Ralston. The Maryland Courts subsequently found it to be barred by the Maryland Constitution. Judge Ralston and his supporters commenced a campaign to amend the state Constitution which culminated in the Art. 15 of the Declaration of Rights (which remains today part of the Maryland State Constitution). In addition, he helped see that enabling legislation for towns be passed in 1916, which also remains in effect today. In addition, the towns of Fairhope, Alabama and Arden, Delaware were founded as model Georgist communities or "single tax colonies".

Two-rate taxation

Nearly 20 Pennsylvania cities in the USA employ a two-rate or split-rate property tax: taxing the value of land at a higher rate and the value of the buildings and improvements at a lower one. This can be seen as a compromise between pure LVT and an ordinary property tax falling on real estate (land value plus improvement value). Alternatively, two-rate taxation may be seen as a form that allows gradual transformation of the traditional real estate property tax into a pure land value tax.

Nearly two dozen local Pennsylvania jurisdictions (such as Harrisburg) use two-rate property taxation in which the tax on land value is higher and the tax on improvement value is lower. Pittsburgh used the two-rate system from 1913 to 2001 when a countywide property reassessment led to a drastic increase in assessed land values during 2001 after years of underassessment, and the system was abandoned in favor of the traditional single-rate property tax. The tax on land in Pittsburgh was about 5.77 times the tax on improvements. Notwithstanding the change in 2001, the Pittsburgh Improvement District still employs a pure land value taxation as a surcharge on the regular property tax.

Other countries

Pure LVT, apart from real estate or generic property taxation, is used in Taiwan, Singapore, Hong Kong and Estonia. It is currently being introduced in Namibia, and there are campaigns for its introduction to South Korea and Scotland. Many more countries have used it in the past, particularly Denmark and Japan. Many pre-modern societies used land tax systems that were not based on the value of land, but nevertheless approximated a limited LVT by taxing agricultural land according to its yield or expected yield.

Hong Kong is perhaps the best modern example of the successful implementation of a high LVT. The Hong Kong government generates more than 35% of its revenue from land taxes.. Because of this, they can keep their other taxes rates low or non-existent and still generate a budget surplus.

Several cities around the world also use LVT, including Sydney, Canberra, and many other Australian cities. It has also been used in Mexicali, Mexico.

Notes

References

  • Coughlin, J. Anthony. "Land Value Taxation and Constitutional Uniformity", Geo. Mason L. Rev., Winter 1999, Vol. 7, No. 2

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