California

UPON the plains this season railroad building is progressing with a rapidity never before known. The two companies, in their struggle for the enormous bounty offered by the Government, are shortening the distance between the lines of rail at the rate of from seven to nine miles a day -- almost as fast as the ox teams which furnished the primitive method of conveyance across the continent could travel. Possibly by the middle of next spring, and certainly, we are told, before mid-summer comes again, this "greatest work of the age" will be completed, and an unbroken track stretch from the Atlantic to the Pacific. ...

What is the railroad to do for us? -- this railroad that we have looked for, hoped for, prayed for so long? ...

For years the high rate of interest and the high rate of wages prevailing in California have been special subjects for the lamentation of a certain school of local political economists, who could not see that high wages and high interest were indications that the natural wealth of the country was not yet monopolized, that great opportunities were open to all -- who did not know that these were evidences of social health, and that it were as wise to lament them as for the maiden to wish to exchange the natural bloom on her cheek for the interesting pallor of the invalid?

But however this be, it is certain that the tendency of the new era -- the more dense population and more thorough development of the wealth of the State -- will be to a reduction both of the rate of interest and the rate of wages, particularly the latter. This tendency may not, probably will not, be shown immediately; but it will be before long, and that powerfully, unless balanced and counteracted by other influences which we are not now considering, which do not yet appear, and which it is probable will not appear for some time yet.

The truth is, that the completion of the railroad and the consequent great increase of business and population, will not be a benefit to all of us, but only to a portion. As a general rule (liable of course to exceptions) those who have it will make wealthier; for those who have not, it will make it more difficult to get. Those who have lands, mines, established businesses, special abilities of certain kinds, will become richer for it and find increased opportunities; those who have only their own labor will be come poorer, and find it harder to get ahead -- first, because it will take more capital to buy land or to get into business; and second, because as competition reduces the wages of labor, this capital will be harder for them to obtain. ...

San Francisco has one great advantage -- there is probably a larger proportion of her population owning homesteads and homestead lots than in any other city of the United States. The product of the rise of real estate will thus be more evenly distributed, and the great social and political advantages of this diffused proprietorship cannot be over-estimated. Nor can it be too much regretted that the princely domain which San Francisco inherited as the successor of the pueblo was not appropriated to furnishing free, or almost free, homesteads to actual settlers, instead of being allowed to pass into the hands of a few, to make more millionaires. Had the matter been taken up in time and in a proper spirit, this disposition might easily have been secured, and the great city of the future would have had a population bound to her by the strongest ties -- a population better, freer, more virtuous, independent and public spirited than any great city the world has ever had.

To say that "Power is constantly stealing from the many to the few," is only to state in another form the law that wealth tends to concentration. In the new era into which the world has entered since the application of steam, this law is more potent than ever; in the new era into which California is entering, its operations will be more marked here than ever before. The locomotive is a great centralizer. It kills towns and builds up great cities, and in the same way kills little businesses and builds up great ones. We have had comparatively but few rich men; no very rich ones, in the meaning "very rich" has in these times. But the process is going on. The great city that is to be will have its Astors, Vanderbilts, Stewarts and Spragues, and he who looks a few years ahead may even now read their names as he passes along Montgomery, California or Front streets. With the protection which property gets in modern times -- with stocks, bonds, burglar-proof safes and policemen; with the railroad and the telegraph, after a man gets a certain amount of money it is plain sailing, and he need take no risks. Astor said that to get his first thousand dollars was his toughest struggle; but when one gets a million, if he has ordinary prudence, how much he will have is only a question of life. Nor can we rely on the absence of laws of primogeniture and entail to dissipate these large fortunes so menacing to the general weal. Any large fortune will, of course, become dissipated in time, even in spite of laws of primogeniture and entail; but every aggregation of wealth implies and necessitates others, and so that the aggregations remain, it matters little in what particular hands. Stewart, in the natural course of things, will die before long, and being childless, his wealth will be dissipated, or at least go out of the dry goods business. But will this avail the smaller dealers whom he has crushed or is crushing out? Not at all. Some one else will step in, take his place in the trade, and run the great money-making machine which he has organized, or some other similar one. Stewart and other great houses have concentrated the business, and it will remain concentrated.

Nor is it worth while to shut our eyes to the effects of this concentration of wealth. One millionaire involves the little existence of just so many proletarians. It is the great tree and the saplings over again. We need not look far from the palace to find the hovel. When people can charter special steamboats to take them to watering places, pay four thousand dollars for the summer rental of a cottage, build marble stables for their horses, and give dinner parties which cost by the thousand dollars a head, we may know that there are poor girls on the streets pondering between starvation and dishonor. When liveries appear, look out for bare-footed children. A few liveries are now to be seen on our streets; we think their appearance coincides in date with the establishment of the almshouse. They are few, plain and modest now; they will grow more numerous and gaudy -- and then we will not wait long for the children -- their corollaries. ... read the whole article

Massed control of land is the most natural base for monopolizing markets because land is limited. Buying land always does double duty: when A expands he ipso facto preempts opportunities from B. For example, a chain of service stations with most of the best comers in a town has market power, the more so if it also holds a large share of oil sources, of refinery sites, of "offset rights" to pollute air, transmission rights of way, harbor sites, and other such limited lands.

Preemption is not always just a by-product of expansion; it may be the main point. For example, in 1993 Builders' Emporium, a large chain of California hardware stores with large parking lots in good locations, closed down and sold out. The sites were bought up by the largest grocery chain in southern California, Vons Company. According to news reports, this is "a shut-out strategy against competitors." Vons will convert 6-8 Emporium stores to Vons' markets, and "hold onto the others until commercial rents rebound -- then market them to non-rivals."

Salomon Bros. analyst Jonathan Ziegler, far from being shocked, praises this as "ingenious." "You're controlling who's in your market area." Ralphs, another grocery chain, had been looking for sites and is now shut out. The stores remain empty today; the land idle. Read the whole article

Michiganders are saying they must wait and see, but there is no need for that: California can show you 17 years of experience. To read your future, just study our past. Here is what has happened since California passed Proposition 13 in 1978.

Why is that not happening today, 1995? An invisible, pervasive change is Proposition 13, which makes it possible to hold land at negligible tax cost. In 1945 land was taxed at 3% every year, building a fire under holdouts to turn their land to use. Today that same tax cost is well below 1%. Using Gwartney's Rule of Thumb (see below under B,1), it is about 1/8 of 1%: a rate of 1% applied to 1/8 of the true value.

Landowners are only taxed now if they use their land to hire people and produce something useful. Then they meet the drag of our high business and employment and sales taxes, necessitated by the fall of property taxes. A handful of oligopolistic landowners control most of the market; small businesses are squeezed out. This helps us segue from being at the cutting edge of industrial progress to a third-world economy - from the NH model to the AL model - with little relief in sight. ...

For better or worse, California has recalled its governor and elected Arnold Schwarzenegger (A.S.) to replace him. A.S. has revealed no specifics of how he will stanch our deficit. He campaigned on generalities: he is against taxes, against waste in government, against measures to rein in vehicle use, and nostalgic about the good old days when Governor Pat Brown was spending heavily on roads and water projects. No one seems sure how he will connect the dots. After his first visit to Sacto last week, he seemed not sure, either.

His choice of advisors, however, tells us A.S. will repeat Pete Wilson's performance from the early 1990s. Chief of Staff Patricia Clarey is a good soldier from Wilson's old staff; Auditor Donna Arduin is from Jeb Bush's Florida. The gurus who set the doctrinal tone give the clearest hints: they are neo-classical economists of deepest dye. These are advisors George Shultz and Michael Boskin from the Hoover Institution. Economics, to them, is a set of dismal choices. California's choice is to cut public services, or lose business and jobs. That is what they told Wilson in 1994. All taxes are the same, always "burdens," always driving away "business." ...

It is also alleged that land values are too small to support government. Let us test that idea. In 2003, at the current rate, there will be about 15,000 "confirmed" sales of owner-occupied urban California residences at prices over $1 million. That is from DataQuick, a standard source of current real estate data. 15,000 is about 2.7% of all confirmed sales. Some of those go much higher. The mean is probably over $2 million.

Turnover of costlier homes is lower than that of ordinary homes. (For example, turnover of existing homes is 30% greater in Riverside County, with lower values, than in Orange County, with higher values.) 2% a year is a fair guess at the turnover of homes valued at $1 million or more. If so, there are 50 x 15,000, or 750,000 homes in Calif valued at a mean $2 millions. Their aggregate value is 750,000 x $2million = $1.5 trillions.

These are not large buildings: they average 2864 s.f., with 4 bdrms, 3 baths. In the north end of Sta. Monica, a vacant lot alone is over $1m. They are not new buildings: only 9% are new. It's the land that makes them worth so much.

There is also the other 97.3% of urban owner-occupied residential real estate. A lot of it is just under $1 million a pop. In Marin County, the median sales price of owner-occupied single-family homes was $700,000 when last seen, and rising. The mean is always higher than the median. Some L.A. County cities with median values just under $1 million include San Marino, Bel Air, Westwood, Brentwood, La Canada, Calabasas, and others. There is also all the other land: commercial, industrial, farm, forest, etc., which is 60% of the assessed property value in California, and a much higher fraction of the real value because it is so egregiously underassessed. ...

A high fraction of California real estate is absentee owned. The Sultan of Brunei, for example, owns several houses and sites in Beverly Hills and Bel Air. California's official Legislative Analyst, the highly respected William Hamm, estimated in 1978 that over fifty per cent of the value of taxable property in California was absentee-owned. ...

Some half of any reduction in California property taxes leaks to out-of-state owners. Nor is this the only leakage. ...

Yet no one has seized on this obvious case to show that local property taxes, substituted for absentee rent payments, creates multiple increases in local income. The whole intellectual apparatus is dominated by absentee investors and used for their benefit.

Many valuable land resources are held by license, rather than title, and escape the property tax almost entirely. ... Read the whole article

Five states and the Province of Alberta already get along nicely with no sales tax, so it must be possible. No state at all had a retail sales tax before 1929 (GA).

The A.V. value of land is probably about 1/3 or so of market value; buildings are closer to market.

Within counties, by extension and analogy, I am reasonably certain that a careful study will show that the burden would shift from poorer cities and districts to richer ones. Again, among individuals, I believe we would find the same. One of these days, God willing, I will find the time and money to conduct or sponsor such a study.

The relevance here of this equity question is that most states and provinces have complex and expensive systems and formulae for "power equalization," and the like, designed to shift resources from rich counties to poorer ones. One reason such programs are needed is to offset the effects of the very same state sales taxes used to finance them. There are great savings to be realized by quashing this cross-hauling of public funds. Read the whole article

Now we are witnessing a major effort to revive the exclusion of part or all of capital gains from taxable income, partly on the grounds that much of the gains are "phantom" income, an illusion of inflation. ...

Land is not formed, like capital, by saving and investment; land is not reproducible. For that very reason land tends to appreciate, and therefore has to be a major source of what are misleadingly called "capital" gains. Again for that very reason, there is no supply-side kick in untaxing gains. Most of them are land gains, and should be called that. To use land as a store of value is macro-economically unproductive at best, and on balance counterproductive and destabilizing (considering its effect on financial institutions like the S&Ls). ...

As to borrowing on land, that can be worse than barren when the financial system rises and falls on a land bubble, as it has and is. ...

Ignoring land and its distinctive attributes has the effect of treating land as though it were true, reproduceable capital, to be formed by saving and investing, to be routinely worn out and replaced in the normal course of life and business. It lets advocates of investing and capital formation abuse the legitimate case for macro incentives, exploiting the case to camouflage unearned, nonfunctional rents and increments to land value.

Tantamount to ignoring land is minimizing its weight. Thus one may acknowledge it indulgently, while actually dismissing it. In fact, though, land comprises some half the assessed value of taxable real estate in California, and is not dismissable. Half the assessed value means more than half the market value because of assessment discrimination favoring land. A raft of studies of assessment discrimination, like the sales/assessment ratio studies of the U.S. Census, show consistent patterns of discrimination favoring land. In addition to ordinary assessment discrimination there is much legislated underassessment, for land in forest, farm, country club, and other favored uses. ///

... most of us resident in California have been through one or more years since 1976 when the value of our homes alone rose by more than our annual salaries. ...

We are not pushing for a general wealth tax, but for impartiality and accurate thinking about indexing capital gains, a policy that would protect some forms of wealth, but not others. This apparently temperate, common-sense proposal is in fact partial and discriminatory. Worse, it protects most where the macro-social benefits are least.Read the whole article

In 1955, Spiro Agnew was a Maryland State Assemblyman on the rise. He carried a new law that let tax assessors value farmland on its "use-value" as farmland, instead of market value. It let owners who were farming for unearned increments around Baltimore and D.C. hold out with low carrying costs. "Farmland" meant land used for farming, and any play at farming would qualify. Under this law, a relative of mine with 102 acres in Maryland near Western Avenue, the D.C. line, kept just two steers thereon to validate his farmland assessment status. Holding for the rise "never crossed his mind." Right -- except, whenever such land is condemned for public use, courts everywhere have held that compensation must be based on speculative market value. ...

It is not just peri-urban land speculators who gain. A large chunk of land value in rural regions is not based on cash flow from food and fiber, but on amenities. Wisconsin is a major playground for rich urbanites from nearby Chicago, Milwaukee, Minneapolis and St. Paul. "Use-value" assessment exempts this chunk of value completely, for use-value is based on capitalizing the net cash farm income from growing crops, and, in the Wisconsin law, specifically corn. The highest land values per capita in the State are in Vilas County up in the north woods, once dismissed as worthless "cutovers." Vilas' barren podzol soils are worthless for corn, but sparkling lakes bedizen the County. Values per capita in Vilas are 6 times those in Milwaukee. Rich recreationists and "investors" (read speculators) are gobbling up the "wild forties." Shoreline parcels are like diamonds among coal. ...

100 years ago, American Georgists made a big point that city land outvalues rural land many times over. One implication is that taxing city land is taxing the rich, and we can ignore farmland. Some land-taxers counsel that farmers are easily misled to oppose us, so leave them alone and convert the cities. But rich city folks also own choice rural lands.

The Hearst palace at San Simeon sits amid 82,000 manorial acres, including miles of prime shoreline, "improved" with just one home per 82,000 acres. This home, jammed with imported treasures, had become a white elephant even before Citizen Kane uttered his final "Rosebud." The heirs were glad to fob it off onto the taxpayers of California, deducting its alleged value from their taxable incomes, while they kept the 82,000 acres.
Craig McCaw, who made his billions by amassing spectrum licenses, turned some of the pile into a spread of many thousands of acres stretching north from Big Sur -- land he never got around to using.
The O'Neill families and Donald Bren of Orange County,
the Newhall family of Ventura County,
the Chandler family that owns the Tejon and Boswell empires that spread over several counties,
Ted Turner who owns over a million acres around the U.S.;
the Koch brothers of Kansas with all their oil wells,
the Kleberg tribe with their million-acre King Ranch in Texas;
the Southern Pacific Railroad (now Catellus Co.),
Standard Oil:

those are a few of the struggling family farmers whom use-value assessment of farmland saves from destitution.

The privilege of use-value assessment stretches even beyond farmlands, vast as they are. Timberland in most states gets the same preferred treatment, only better. About 1/3 of the privately owned land in the U.S. is in timber. In California, owners (mostly huge corporations) may put the land into the "TPZ" class. The standing timber is then exempt, and taxed only at harvest, at 2.9%, much too low a rate to make up for a 60-year lifetime of exemption. County assessors have to value the land separately on its putative value for growing timber, following a State-legislated formula that is tailored drastically to understate even that low value (California Revenue and Tax Code, Section 434.5). Much of that land, though, has alternative uses, e.g. for retirement and vacation homes and resorts, the outliers and pioneers of urban sprawl. There are also mineral values, hunting, fishing, rifle ranges, grazing, campsites, tourism, rights of way, lumber camps, loading sites, water sources, lakes, log storage, landings - there are many things to do with 1/3 of a nation's land. Those uses are all declared "compatible" with timber, hence land values derived therefrom are tax-exempt. Read the whole article

John Muir is right. "Tug on any one thing and find it connected to everything else in the universe." Tug on the property tax and find it connected to urban slums, farmland loss, political favoritism, and unearned equity with disrupted neighborhood tenure. Echoing Thoreau, the more familiar reforms have failed to address this many-headed hydra at its root. To think that the root could be chopped by a mere shift in the property tax base -- from buildings to land -- must seem like the epitome of unfounded faith. Yet the evidence shows that state and local tax activists do have a powerful, if subtle, tool at their disposal. The "stick" spurring efficient use of land is a higher tax rate upon land, up to even the site's full annual value. The "carrot" rewarding efficient use of land is a lower or zero tax rate upon improvements. ...

About a 100 years ago, California adopted the land tax for a while. The legislature allowed irrigation districts to fund dam and canal construction by taxing the resultant rise in land value. This legislation was the fruit of the effort of one legislator, C. Wright, who left teaching school to run for office, pass his bill, then returned to teaching. As voters, farmers were beginning to have more representation than rich ranchers. Then the idea of a Single Tax on land values, made popular by writer Henry George, was current. Unfortunately, once the irrigation improvements were paid for, the land tax was allowed to languish, as speculators regained political control. ...

A century ago, many farmers and miners went without water because cattlemen like Henry Miller owned 1,000,000 acres in California. Miller could drive his herds from Mexico to Oregon and spend every night on his own land. In 1886 Mill won full rights to the water of the Kern River. To correct this aggrandizement, the state allowed communities to create by popular vote irrigation districts to build dams and canals and pay for them by taxing the increase in land value. Once irrigated, land was too valuable to use for grazing, and the tax made it too costly for hoarding. So cattlemen sold off fields to farmers and at prices the farmers could afford. In ten years, the land rent tax turned the Central Valley into over 7,000 independent farms. Over the next decades, those treeless, semi-arid plains became the garden of America.

Some states permit localities or their voters to establish assessment districts to fund a particular service such as beautification. Some states direct their ADs to collect only the rise in ground rent; others define assessment charges similar to property taxes, falling on the combined value of sites and structures. In some states, assessment charges fall within limitations upon taxes; in other states they don't. The ideal state for setting up ADs in place of the property tax may be California whose Prop 13 severely curtailed the property tax yet whose Supreme Court has given ADs pretty much free reign.

A big problem needs a big solution which in turn needs a matching shift of our prevailing paradigm. Geonomics -- advocating that we share the social value of sites and natural resources and untax earnings -- does just that. Read the whole article

Wealth and Want
... because democracy alone is not enough to produce widely shared prosperity.
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