With the heady increases in the costs of housing along the coasts, particularly in California, most of us tend to forget that our homes, like all things manmade, are constantly depreciating. (Those who rent property out don't forget it, because the IRS permits them to deduct an allowance for depreciation; see some of the excerpts below for more on that subject.)

A June, 2006, Federal Reserve Board study pegs the depreciation on single family homes, that is, the structures themselves, at 1.5% per year. The IRS uses 27.5 years, which works out to about 3.5% per year, for investors.

We may spend our leisure time or our money fighting that depreciation, by maintaining, painting, replacing systems, upgrading systems, etc., but gradually the value of the house itself is falling. The amazing increases in the value of land, however, have so totally overshadowed the decreases in the value of the house that we are tempted to forget that fact. And few journalists seem to yet make the distinction between the land value and the building value.

Only when a home in our neighborhood is torn down — at some cost — and replaced with something new and technologically and otherwise up to date, does it come to our attention that it is truly the site which has value. This doesn't tend to happen where land is inexpensive and readily available within a reasonable distance, but in the areas surrounding some of our older and healthier cities, it is common. The Boston, Chicago and New York metropolitan areas in particular are seeing many teardowns in the wealthiest suburbs.

Henry George: The Condition of Labor — An Open Letter to Pope Leo XIII in response to Rerum Novarum (1891)

Your use, in so many passages of your Encyclical, of the inclusive term “property” or “private” property, of which in morals nothing can be either affirmed or denied, makes your meaning, if we take isolated sentences, in many places ambiguous. But reading it as a whole, there can be no doubt of your intention that private property in land shall be understood when you speak merely of private property. With this interpretation, I find that the reasons you urge for private property in land are eight. Let us consider them in order of presentation. You urge:

1. That what is bought with rightful property is rightful property. (RN, paragraph 5) ...
2. That private property in land proceeds from man’s gift of reason. (RN, paragraphs 6-7.) ...
3. That private property in land deprives no one of the use of land. (RN, paragraph 8.) ...
4. That Industry expended on land gives ownership in the land itself. (RN, paragraphs 9-10.) ...
5. That private property in land has the support of the common opinion of mankind, and has conduced to peace and tranquillity, and that it is sanctioned by Divine Law. (RN, paragraph 11.) ...
6. That fathers should provide for their children and that private property in land is necessary to enable them to do so. (RN, paragraphs 14-17.) ...
7. That the private ownership of land stimulates industry, increases wealth, and attaches men to the soil and to their country. (RN, paragraph 51.) ...
8. That the right to possess private property in land is from nature, not from man; that the state has no right to abolish it, and that to take the value of landownership in taxation would be unjust and cruel to the private owner. (RN, paragraph 51.) ...

2. That private property in land proceeds from man’s gift of reason. (6-7.)

In the second place your Holiness argues that man possessing reason and forethought may not only acquire ownership of the fruits of the earth, but also of the earth itself, so that out of its products he may make provision for the future.

Reason, with its attendant forethought, is indeed the distinguishing attribute of man; that which raises him above the brute, and shows, as the Scriptures declare, that he is created in the likeness of God. And this gift of reason does, as your Holiness points out, involve the need and right of private property in whatever is produced by the exertion of reason and its attendant forethought, as well as in what is produced by physical labor. In truth, these elements of man’s production are inseparable, and labor involves the use of reason. It is by his reason that man differs from the animals in being a producer, and in this sense a maker. Of themselves his physical powers are slight, forming as it were but the connection by which the mind takes hold of material things, so as to utilize to its will the matter and forces of nature. It is mind, the intelligent reason, that is the prime mover in labor, the essential agent in production.

The right of private ownership does therefore indisputably attach to things provided by man’s reason and forethought. But it cannot attach to things provided by the reason and forethought of God!

To illustrate: Let us suppose a company traveling through the desert as the Israelites traveled from Egypt. Such of them as had the forethought to provide themselves with vessels of water would acquire a just right of property in the water so carried, and in the thirst of the waterless desert those who had neglected to provide themselves, though they might ask water from the provident in charity, could not demand it in right. For while water itself is of the providence of God, the presence of this water in such vessels, at such place, results from the providence of the men who carried it. Thus they have to it an exclusive right.

But suppose others use their forethought in pushing ahead and appropriating the springs, refusing when their fellows come up to let them drink of the water save as they buy it of them. Would such forethought give any right?

Your Holiness, it is not the forethought of carrying water where it is needed, but the forethought of seizing springs, that you seek to defend in defending the private ownership of land!

Let me show this more fully, since it may be worth while to meet those who say that if private property in land be not just, then private property in the products of labor is not just, as the material of these products is taken from land. It will be seen on consideration that all of man’s production is analogous to such transportation of water as we have supposed. In growing grain, or smelting metals, or building houses, or weaving cloth, or doing any of the things that constitute producing, all that man does is to change in place or form preexisting matter. As a producer man is merely a changer, not a creator; God alone creates. And since the changes in which man’s production consists inhere in matter so long as they persist, the right of private ownership attaches the accident to the essence, and gives the right of ownership in that natural material in which the labor of production is embodied. Thus water, which in its original form and place is the common gift of God to all men, when drawn from its natural reservoir and brought into the desert, passes rightfully into the ownership of the individual who by changing its place has produced it there.

But such right of ownership is in reality a mere right of temporary possession. For though man may take material from the storehouse of nature and change it in place or form to suit his desires, yet from the moment he takes it, it tends back to that storehouse again. Wood decays, iron rusts, stone disintegrates and is displaced, while of more perishable products, some will last for only a few months, others for only a few days, and some disappear immediately on use. Though, so far as we can see, matter is eternal and force forever persists; though we can neither annihilate nor create the tiniest mote that floats in a sunbeam or the faintest impulse that stirs a leaf, yet in the ceaseless flux of nature, man’s work of moving and combining constantly passes away. Thus the recognition of the ownership of what natural material is embodied in the products of man never constitutes more than temporary possession — never interferes with the reservoir provided for all. As taking water from one place and carrying it to another place by no means lessens the store of water, since whether it is drunk or spilled or left to evaporate, it must return again to the natural reservoirs — so is it with all things on which man in production can lay the impress of his labor.

Hence, when you say that man’s reason puts it within his right to have in stable and permanent possession not only things that perish in the using, but also those that remain for use in the future, you are right in so far as you may include such things as buildings, which with repair will last for generations, with such things as food or fire-wood, which are destroyed in the use. But when you infer that man can have private ownership in those permanent things of nature that are the reservoirs from which all must draw, you are clearly wrong. Man may indeed hold in private ownership the fruits of the earth produced by his labor, since they lose in time the impress of that labor, and pass again into the natural reservoirs from which they were taken, and thus the ownership of them by one works no injury to others. But he cannot so own the earth itself, for that is the reservoir from which must constantly be drawn not only the material with which alone men can produce, but even their very bodies.

The conclusive reason why man cannot claim ownership in the earth itself as he can in the fruits that he by labor brings forth from it, is in the facts stated by you in the very next paragraph (7), when you truly say:

Man’s needs do not die out, but recur; satisfied today, they demand new supplies tomorrow. Nature, therefore, owes to man a storehouse that shall never fail, the daily supply of his daily wants. And this he finds only in the inexhaustible fertility of the earth.

By man you mean all men. Can what nature owes to all men be made the private property of some men, from which they may debar all other men?

Let me dwell on the words of your Holiness, “Nature, therefore, owes to man a storehouse that shall never fail.” By Nature you mean God. Thus your thought, that in creating us, God himself has incurred an obligation to provide us with a storehouse that shall never fail, is the same as is thus expressed and carried to its irresistible conclusion by the Bishop of Meath:

God was perfectly free in the act by which He created us; but having created us he bound himself by that act to provide us with the means necessary for our subsistence. The land is the only source of this kind now known to us. The land, therefore, of every country is the common property of the people of that country, because its real owner, the Creator who made it, has transferred it as a voluntary gift to them. “Terram autem dedit filiis hominum.” Now, as every individual in that country is a creature and child of God, and as all his creatures are equal in his sight, any settlement of the land of a country that would exclude the humblest man in that country from his share of the common inheritance would be not only an injustice and a wrong to that man, but, moreover, be AN IMPIOUS RESISTANCE TO THE BENEVOLENT INTENTIONS OF HIS CREATOR.... read the whole letter

Rev. A. C. Auchmuty: Gems from George, a themed collection of excerpts from the writings of Henry George (with links to sources)

WHEN we speak of a community increasing in wealth we do not mean to say that there is more land, or that the natural powers of the land are greater, or that there are more people (for when we wish to express that idea we speak of increase of population) or that the debts or dues owing by some of these people to others of their number have increased; but we mean that there is an increase of certain tangible things, having an actual and not merely a relative value — such as buildings, cattle, tools, machinery, agricultural and mineral products, manufactured goods, ships, wagons, furniture and the like. . . . The common character of these things is that they consist of natural substances or products which have been adapted by human labor to human use or gratification, their value depending on the amount of labor which upon the average would be required to produce things of like kind.— Progress & Poverty — Book I, Chapter 2: Wages and Capital: The Meaning of the Terms

WEALTH is not the sole object of labor, for labor is also expended in ministering directly to desire; but it is the object and result of what we call productive labor — that is, labor which gives value to material things. Nothing which nature supplies to man without his labor is wealth, nor yet does the expenditure of labor result in wealth unless there is a tangible product which has and retains the power of ministering to desire. — Progress & Poverty — Book I, Chapter 2: Wages and Capital: The Meaning of the Terms

IT will be well for a moment to consider this idea of accumulated wealth. The truth is, that wealth can be accumulated but to a slight degree, and that communities really live, as the vast majority of individuals live, from hand to mouth. Wealth will not bear much accumulation; except in a few unimportant forms it will not keep. The matter of the universe, which, when worked up by labor into desirable forms, constitutes wealth, is constantly tending back to its original state. Some forms of wealth will last for a few hours, some for a few days, some for a few months, some for a few years; and there are very few forms of wealth that can be passed from one generation to another. Take wealth in some of its most useful and permanent forms — ships, houses, railways, machinery. Unless labor is constantly exerted in preserving and renewing them, they will almost immediately become useless. Stop labor in any community, and wealth would vanish almost as the jet of a fountain vanishes when the flow of water is shut off. Let labor again exert itself, and wealth will almost as immediately reappear. Accumulated wealth seems to play just about such a part in relation to the social organism as accumulated nutriment does to the physical organism. Some accumulated wealth is necessary, and to a certain extent it may be drawn upon in exigencies; but the wealth produced by past generations can no more account for the consumption of the present than the dinners he ate last year can supply a man with present strength. — Progress & Poverty — Book II, Chapter 4: Population and Subsistence: Disproof of the Malthusian Theory

... go to "Gems from George"

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894)

Note 69: Demand for consumption is satisfied not from hoards of accumulated wealth, but from the stream of current production. Broadly speaking there can be no accumulation of wealth in the sense of saving up wealth from generation to generation. Imagine a man's satisfying his demand for eggs from the accumulated stores of his ancestors! Yet eggs do not differ in this respect from other forms of wealth, except that some other forms will keep a little longer, and some not so long.

The notion that a saving instinct must be aroused before the great and more lasting forms of wealth can be brought forth is a mistake. Houses and locomotives, for example, are built not because of any desire to accumulate wealth, but because we need houses to live in and locomotives to transport us and our goods. It is not the saving, but the serving,, instinct that induces the production of these things; the same instinct that induces the production of a loaf of bread.

Artificial things do not save. No sooner are the processes of production from land complete than the products are on their way back to the land. If man does not return them by means of consumption, then through decay they return themselves. Mankind as a whole lives literally from hand to mouth. What is demanded for consumption in the present must be produced by the labor of the present. From current production, and from that alone, can current consumption be satisfied.

"Accumulated wealth" is, in fact, not wealth at all in any great degree. It is merely titles to wealth yet to be produced. A share in a mining company, for example, is but a certificate that the owner is legally entitled to a proportion of the wealth to be produced in the future from a certain mine.

Titles to future wealth may be both morally and legally valid. This is so when they represent past labor or its products loaned in free contract for future labor or its products; for example, a contract for the delivery of goods of any kind today to be paid for next week. or next month, or next year, or in ten years, or later.

They may be legally but not morally valid. This is so when they represent the product of a franchise (whether paid for in labor or not) to exact tribute from future labor; for example, a franchise to confiscate a man's labor through ownership of his body, as in slavery, or a franchise to confiscate the products of labor in general through ownership of land.

Or they may be both legally and morally invalid, as when they are obtained by illegal force or fraud from the rightful owner. ... read the book

Fred Foldvary: Geo-Rent: A Plea to Public Economists

Mason Gaffney:  Sounding the Revenue Potential of Land: Fifteen Lost Elements

Michael Hudson: The Lies of the Land: How and why land gets undervalued

YOU MAY THINK the largest category of assets in this countrly is industrial plant and machinery. In fact the US Federal Reserve Board's annual balance sheet shows real estate to be the economy's largest asset, two-thirds of America's wealth and more than 60 percent of that in land, depending on the assessment method.

This price appreciation is actually a "land gain," that is, it's not from providing start-up capital for new enterprises, but from sitting on a rising asset already in place, the land. Its value rises because neighbourhoods are upgraded, mortgage money is ample, and rezoning is favorable from farmland on the outskirts of cities to gentrification of the core to create high-income residential developments. The potential capital gain can be huge. That's why developers are willing to pay their mortgage lenders so much of their rent income, often all of it.

Of course, investing most surplus income and wealth in land has been going on ever since antiquity, and also pledging one's land for debt ("mortgaging the homestead") that often led to its forfeiture to creditors or to forced sale under distress conditions. Today borrowing against land is a path to getting rich -- before the land bubble bursts. As economies have grown richer, most of their surplus is still being spent acquiring real property, both for prestige and because its flow of rental income grows as society's prosperity grows. That's why lenders find real estate to be the collateral of choice.

Most new entries into the Forbes or Fortune lists of the richest men consist of real estate billionaires, or individuals coming from the fuels and minerals industries or natural monopolies. Those who have not inherited family fortunes have gained their wealth by borrowing money to buy assets that have soared in value. Land may not be a factor of production, but it enables its owners to assert claims of ownership and obligation, i.e., rentier income in the forms of rent and interest. ...

Hiding the free lunch

BAUDELAIRE OBSERVED that the devil wins at the point where he convinces humanity that he does not exist. The Financial, Insurance and Real Estate (FIRE) sectors seem to have adopted a kindred philosophy that what is not quantified and reported will be invisible to the tax collector, leaving more to be pledged for mortgage credit and paid out as interest. It appears to have worked. To academic theorists as well., breathlessly focused on their own particular hypothetical world, the magnitude of land rent and land-price gains has become invisible. But not to investors. They are out to pick a property whose location value increases faster rate than the interest charges, and they want to stay away from earnings on man-made capital -- like improvements. That's earned income, not the "free lunch" they get from land value increases.

Chicago School economists insist that no free lunch exists. But when one begins to look beneath the surface of national income statistics and the national balance sheet of assets and liabilities, one can see that modern economies are all about obtaining a free lunch. However, to make this free ride go all the faster, it helps if the rest of the world does not see that anyone is getting the proverbial something for nothing - what classical economists called unearned income, most characteristically in the form of land rent. You start by using a method of appraising that undervalues the real income producer, land. Here's how it's done.

IF THE APPRAISAL controversy is framed in terms of business cycle analysis, then the statistician finds no reasonable alternative to seeing that when the cycle rises and falls, the difference must be in the land, not buildings. What people are buying are not reproduction costs, whose fluctuations over the course of the credit cycle are relatively minor. They are buying site value, which is in limited supply, akin to a natural monopoly. Most of all, real estate investors and homeowners are buying the right to resell their property as prices are bid up by what they expect to become an increasingly affluent economy fuelled by an abundant supply of mortgage credit.

The land-residual approach appears to work as long as a fairly constant proportion of land to buildings is maintained. Statistically, this can occur only when property prices are rising at about the same rate as commodity prices and wages. But business cycles snake around the economy's basic trends, rising steadily and then plunging sharply. This fluctuation is what causes the most serious problems for statisticians.

In a thriving real estate market appraisers typically use a rule of thumb in allocating resale prices as between land and buildings to reflect their pre-existing proportions. Buildings typically are assumed to account for between 40 percent and 60 percent of the property's value. As a result, building values are estimated to grow along with a property's overall sales value. This appraisal practice is made to appear plausible as the pace of asset-price inflation tends to go hand in hand with rising construction costs, and hence in the theoretical replacement cost of buildings.

As noted, the anomaly occurs when real estate prices fall. Real estate prices are volatile, while construction costs rarely dip more than slightly, if at all. When real estate prices turn down, they often plunge below the reproduction cost of buildings. Hence, the residual ("land") rises and falls much more sharply than do building replacement costs (which are estimated as rising at a fairly steady pace) and overall property values.

The result is a curious asymmetry. Building prices seem to be responsible for the rise in real estate prices, while land prices are held responsible for their decline. When the fall in property values intersects the rising reproduction-cost trend, the land residual turns negative. ...

INCOME TAX LIABILITY may be minimized in two ways.

• The most general -- and also the most economically pernicious -- is through the tax deductibility of interest. The working assumption is that interest charges are a truly inherent business expense, not simply the result of a business decision taken by investors to leverage their equity. For interest to be an inherent business expense, interest-bearing debt would have to be a factor of production, which it is not. Properties would yield their rent regardless of how they are financed. Investors choose to rely on debt rather than equity financing because the tax laws favor it, thanks to the political lobbying of institutional creditors ("the debt lobby"). Homeowners too deduct interest payments, which encourages borrowing.
• The second way to minimize tax liability, is to depreciation the building, that is, annually deduct from taxable income part of the purchase price until it's all deducted and the building is "written off" It's the most unique tax advantage enjoyed by the real estate industry. Investors are able to depreciate their buildings based on their assessed acquisition price, regardless of the actual building costs involved or the level of economy-wide land-price inflation. Investors depreciate buildings at rising prices even when prior owners already have depreciated these structures once or even many times. For real estate owned by households and partnerships (the latter being the preferred legal instrument for holding residential apartment buildings and office buildings), the Fed has estimated much higher proportions of land to buildings, but these estimates also overvalue buildings relative to land. Every time a property changes hands at a higher price, building assessments are raised proportionally - and begin to be re-depreciated for these higher valuations, regardless of how often the buildings already have been written off! There is no limit as to how often a building can be re-depreciated. What matters is simply how often the property changes nominal hands.

This fiscal privilege has created a phantom real estate economy. Buildings acquire death-defying lives, metamorphosing time and again for the purpose of enabling their owners to avoid paying income taxes. For commercial real estate investors as a whole, the repeated depreciation of buildings has made commercial real estate investment largely exempt from the income tax. Homeowners are not permitted to charge depreciation on their own residences, but only on buildings that they rent out.

The tax laws governing depreciation thus turn largely on how much value is assigned to buildings relative to the land, which is not depreciable. Like manufacturers, real estate owners are permitted to count part of the revenue over and above their current expenses as a return of their capital investment, as distinct from taxable earnings on capital. No income taxes are levied on this part of their revenue. That is only fair, because an investor who buys a $100 bond only pays tax on the interest, not on the original $100 principal. Likewise, industrialists can recover their initial investment in plant and equipment without being taxed. Their "sunk cost" gets reimbursed, so that they get their capital back by the time the equipment wears out or becomes obsolete.

For real estate, however, the economics are unique. Machinery rarely can be re-depreciated, but this is not true of buildings as long as they are kept in proper repair. Maintenance and repairs typically consume about 10 percent of the rental value. For business owners, the explicit purpose of this expenditure is to maintain the building's value intact, so that it can survive year after year and avoid obsolescence while its site value rises. If a building is sold at a higher price, its assessment usually is raised. Suppose a property is sold for twice the $1 milliuon the owner paid for it. The local appraiser is likely to say; "I see you've sold your building for $2 million. Under my rule of thumb, I appraise the land as half this value, and the building as half, so that gives you a $1 million dollar building." Under this rule, the building that was formerly priced at $500,000 can be re-depreciated at a price that builds in this $500,000 gain. In this way a substantial portion of the rise in site value of non-depreciable land is treated as depreciable building value.

These "capital gains" for households are part of the new phenomenon that has been popularized as "labor capitalism." As Margaret Thatcher's crowd has put it, "Sorry you've lost your job; I hope you've made a killing on your Council House or home in the real estate market." The free lunch.

For the two-thirds of America's and Britain's populations who are home owners, this free lunch from asset-price inflation of land has proved to be a silver lining in the post-industrial economy. For the remaining third of the population, however, the price of access to home ownership is receding rapidly. Today it hardly is possible for most renters to earn the money to acquire their own homes. The entry price has been bid up too high by those hoping to gain from asset-price inflation even as labor's earnings have been declining.

For hundreds of years property's value has been calculated by discounting its flow of rental income at the going rate of interest. The lower the interest rate, the higher the price a given rental stream will justify -- or as property owners express it, the more years' rent a property will bring. What is so striking about land values today is that they are rising for reasons independent of their earnings stream. The major new consideration is their prospect for future "capital" (that is, land-price) gains. In sum, the ultimate aim of real estate investors no longer is so much to seek income -- most of which is pledged to their bankers as interest payments on the property they acquire -- as much as to seek property gains. Politically opportunites abound. Merely changing zoning in New York City in the 1980s to allow using commercial loft spaces for residential purposes had the effect of multiplying asset values five or tenfold.

Whether the gains come from selling the property or from borrowing more money against it, the essential phenomenon is the rapid growth in asset values and real estate's uniquely favored tax treatment. That's why investors choose real estate instead of bonds or stocks, and much of the strategy underlying corporate takeovers has followed the strategies they developed over the past half century.

Nationwide the capital-gains dimension needs to be incorporated into the rental revenue statistics to measure real estate's total returns. This sector's nearly complete success in escaping the tax collector has placed an enormous tax burden on everyone else.  Read the whole article

Mason Gaffney: Land as a Distinctive Factor of Production

a. Appreciation is current income.

b. Landowning yields large non-cash service flows.

• Reassess Land Frequently
• Use the Building-Residual Method of Allocating Value
• Federal Income Taxes

• A. Rich and Poor
• B. Timber and Timberland
• The Role of Timber and Timberland
• Two More Areas Deserving Attention
• Offshore Oil
• Tax All Natural Resources Uniformly and Comprehensively

It is equally important to use the "Building-Residual Method" of allocating value between land and buildings. This means you value the land first, as though it were vacant, based on highest and best use. You subtract this land value from the total value of land-&-building as currently improved: the residual, if any, is building value.

Valuing one lot or parcel this way, you have information needed for valuing neighboring and other comparable parcels. Using a map with value contours, you can value a whole city this way with surprising ease and speed.

Using this method, I valued Milwaukee land in 1963 and 1967. The building-residual method nearly tripled the land values reported by the City Assessor, who was using the assessor's usual inconsistent mix of various other methods. How's that again? Did I say tripled? Yes, I really said "tripled." By his methods, buildings on the eve of demolition were carrying values higher than their sites; by the building-residual method these old buildings had no value at all, which of course is why they were being torn down. Besides depreciation and technological obsolescence, many buildings suffered severe "locational obsolescence," owing to shifting demand patterns. The land was re-usable, and had as much or more value without the extant buildings.

Using the building-residual method requires no change in present laws. It is within the latitude of assessing officials, who, in turn, respond to public opinion. The conscientious citizens' move is to educate and bring pressure, just as the old single-tax campaigners like Jackson Ralston did. In the process of "losing" they won over half of what they sought, just by taking a stand and making the effort.

One of assessors' greatest problems today is the strong pressures from owners who want to allocate as much value as possible to buildings that they may depreciate for federal income tax purposes. Here is where we must study how the parts form the big picture. Here is where federal and local tax policies intersect. Some Georgists have neglected or misunderstood the income-tax treatment of land income. Let us see how this works.

Congress and the IRS let one depreciate buildings, but not land, for income tax. This important distinction harks back to when the income tax was new, and Georgist Congressmen like Warren Worth Bailey, from Johnstown, PA and Henry George Jr., from Brooklyn were instrumental in shaping it.

When a building is new, the depreciable value is limited to the cost of construction. The non-depreciable land is the bare land value before construction. So far, so good. Over time, however, building owners have converted this into a tax shelter scheme. Owner A, the builder, writes off the building in a few years, much less than its economic life, and sells it to B. "A" pays a tax on the excess of sales price over "basis." The basis is reduced by all depreciation taken, so any excess depreciation is "recaptured" upon sale. It is defined by Congress as a "capital gain," and given the corresponding package of tax preferences:

• deferral of tax,
• lower rate,
• step-up of basis at time of death,
• tax-free exchanges, etc.

Thus far, any tax preference goes to A, the builder, and may be seen as a wellconsidered building incentive. Watch, however, what happens next. "A" sells to B and B depreciates the building all over again, from his purchase price. To do so, B must allocate the new "basis" - i.e., his purchase price - between depreciable building and non-depreciable land.

How shall B allocate the new basis? Enter the local tax assessor. Here is where local assessment intersects with Federal income tax policy. The IRS does not try to assess land and buildings. Instead, IRS instructions tell taxpayers they may use locally assessed values to allocate basis between depreciable buildings and non-depreciable land. The IRS accepts this allocation as conclusive. As a result, local owners of income property press their assessors to allocate as much value as possible to buildings, and as little as possible to land. This does not affect their local taxes, but lowers their federal taxes. It lets them depreciate land.

Local revenues are not immediately affected. Local assessors have little reason not to accommodate their constituents, local landowners, to help them depreciate land for federal and state income tax purposes. They have little reason to use the correct "building-residual'' method of allocating value, and a compelling reason to use the wrong method that understates land value. Thus they convert non-depreciable land value into depreciable building value. It is the modern version of "competitive underassessment." In the process, they also convert the local property tax from a land tax into a building tax.

After a while B sells to C, who in turn sells to D, so each building is depreciated many times. So is a large part of the land under it, time after time, although it should not be depreciated at all. This is carried so far that real estate pays no federal or state income taxes at all.

The solution to this lies with the U.S. Congress. The need is to limit depreciation to one cycle only. It is a most urgent problem for both federal and local treasuries. We all have Congressmen. Write to them and raise their consciousness. They are brokers who respond to public opinion. It is we who are derelict. Read the whole article

Charles T. Root — Not a Single Tax! (1925)

Now imagine for a moment the effect upon the appearance of a city and upon the comfort of its population which would result from the change of fiscal policy which this article proposes. At present, a tempting premium is placed upon keeping land unimproved or inadequately improved, while a heavy penalty is imposed upon improvement. Most land appreciates constantly. All buildings depreciate from the moment of completion. Yet the building is taxed equally with the land.

What incentive does such a system offer the speculative landowner to put up a commodious, well-lighted modern structure in place of the old ruin which now pays him so well? The old one cannot depreciate much more, and while paying a trifling tax because of its physical worthlessness, he is thereby enabled to collect and pocket the economic rent of the ground, which the community is continually rendering more valuable. The new building would absorb a large amount of capital, would begin to run down even before it could be occupied, and would be taxed to the limit. Why then is not the landlord justified in letting well enough alone, enjoying the growing economic rent, and waiting till he can get a fancy price for the right to collect it?

But reverse the conditions. Reclaim for the community its natural income, making it expensive either to keep needed land vacant or to withhold it from the ready and willing to improve it to the full extent of its possibilities.

Does it require severe intellectual effort to foresee the results? Better and better houses, apartments, tenements, offices and stores, more employment for labor in all enterprises now held back by the shadow of the tax-gatherer, an end of all tax-lying, tax-evasion and tax-injustice, and withal, a public revenue adequate to all real public needs.

What a contrast to the existing plan of pouring public money into the laps of individual landowners ... read the whole article

Bill Batt: Comment on Parts of the NYS Legislative Tax Study Commission's 1985 study “Who Pays New York Taxes?”

Except in the implicit recognition involved in their analysis of shifting, the distinction between land and improvements was opaque. This is a remarkable oversight, because improvements typically depreciate at the rate of 0.5 to 1.5 percent annually; only land values appreciate.9 And in view of the fact that assessments in New York localities have historically been very infrequent, one can understand how the land values are in reality a far higher proportion of parcel value than assessments would suggest.10 This means that in a period of seven years, for example, a property parcel could easily increase in price by 50 percent, far more if recent real estate market history is to be illustrative. Moreover real estate prices varied greatly in their rates of change during this time span; upstate New York was largely stable, but downstate localities experienced huge booms and busts.

Recognition of this would tend to favor what is known as the “new view” of property tax incidence, an acceptance of the idea that ”the burden of the tax on improvements remains with the owners of capital in the form of a lower net return instead of being shifted to users of property in the form of higher rents or prices.”11 Proponents point out that “the tax on improvements is essentially a nationwide tax on capital . . . [and therefore] its incidence will depend on the characteristics of supply and demand for capital nationally rather than on a single market.”12 The effect of this is to make the tax ”highly progressive.”13 Nonetheless, in a small footnote, Messrs. Pomp and Phares elected to go with the “old view” in stating that, “it seems most appropriate to assume that the new view does not apply to the analysis of tax burdens within one specific state (underlining in original). Thus, the old or traditional view was adhered to in the analysis. . ; that is, the excise effect of the tax was considered dominant.”14 The ubiquity of New York's property tax, and that it has over 1,300 local assessment and tax districts, may well have escaped their notice. ... read the whole commentary

Jeff Smith and Kris Nelson: Giving Life to the Property Tax Shift (PTS)