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The property tax is actually two taxes with very different effects and incentives. The tax on land values has very positive incentives: raise it, and good things start to happen. The tax on building values has very negative incentives: raise it, and bad things start to happen. Most municipalities have the same millage rate on land and buildings, so an increase in the property tax has very mixed incentives -- no wonder it is often considered the most hated tax. The alternative is to uncouple the two pieces of the property tax. Let the millage rate on buildings fall. Let the millage rate on land rise. This reduces the perverse incentives and increases the desirable incentives. (It isn't the whole story; there are still other perverse tax incentives to be considered, such as taxes on work and taxes on sales.)
Alanna Hartzok: Earth Rights Democracy: Public Finance based on Early Christian Teachings
Mason Gaffney: The Taxable Capacity of LandMason Gaffney: Property Tax: Biases and Reforms
The unique, remarkable quality of a property tax based on land ex buildings is that you may raise the rate with no fear of driving away business, construction, people, jobs, or capital! You certainly will not drive away the land. However high the tax rate, not one square foot of it will put on a track shoe and hop out of town. The only bad thing to say about this tax's incentive effects is that it stimulates revitalization, and makes jobs. If some people think that is bad, maybe this attitude is the problem.
There is the answer to Governor Wilson' dilemma. I hope here in The Empire State you will supply a practical demonstration of the answer, one we may then use to inspire The Golden State. California now, following Proposition 13, has become a morality play, a gruesome object lesson in what happens when the property tax is pushed down toward zero. It forces higher taxes on production and exchange. Non-property taxes, you know, mostly have the character that they "shoot anything that moves," penalizing and discouraging economic activity. New buildings gain by having a lower property tax burden, it is true; but they bear the brunt of these new taxes and impost fees up front, at the time they are built. These offset the benefits of their lower property tax rate.
Most California land, on the other hand, is now taxed at well below the allowable max of 1%. Speculators may sit on it at little tax cost, however many highways and water and sewer lines run to and past it, however many policemen are guarding it from trespass. Little wonder that California enterprise, once so dynamic, flexible, and vital, is giving way to stasis and decay. We used to lead the nation in making jobs; now in losing them. We used to lead in school quality; now in jail population.
The property tax,
rather than "shoot anything that
moves," is a charge on inactivity. It taxes both lands and
buildings on their market value, regardless of how they are used.
"Hold on," you might say, "how about the very activity of
constructing those buildings?" Yes, touché, the property tax
does shoot at that, and shoot hard. However, that is why we are here
today, to consider modifying the tax to exempt buildings. The
proposal is to make it a tax mainly, or even purely, on "land ex
buildings," a tax on inactivity, a tax just for sitting on a piece
carved from the world's fixed, limited land supply. ...
the whole article
Priority #1. Safeguarding the property tax
We need to uphold and safeguard the property tax as the mainstay of state and local finance. Remember, it is partly a tax on land value. It is the institutional basis for much of the Georgist goal. We speak of reforming the property tax, but first there must be a property tax. Because it exists, we can modify it to tap land rent for public uses in a non-catastrophic way, using traditional laws, administrative agencies, and land tenures. Capping the property tax rate, as in California, ties the hands of reformers.
There has been much ado about Hawaii's phased-in shift to a two-rate property tax plan. However, Hawaii raises only 16% of its state and local revenues from the property tax, so the rate is very low. You can focus the Hawaiian property tax on land values 100%, and still have an 84%-messed-up tax system. Studies would then show little visible result from the reform. Critics would say "Ho-hum, we told you so."
New Hampshire is another story. It raises 64% of its state and local revenues from the property tax, double the U.S. mean of 32%. New Hampshire is called a "low-tax" state, but its property tax is highest in the nation, per capita, at $1344. The U.S. mean is $699 pc (per capita), and it goes down to $174 pc in Alabama.
Politicians whose priority is raising sales taxes for property tax relief might study Alabama's economy overall, and ask if that is the model they aspire to. Its per capita income ranks 41st in the U.S. Meantime, New Hampshire's marshy peneplains, barren granites, icy winters, and impassable mountains are producing the 7th highest per capita income in the nation.
Priority #2: Enforce Good Laws
Reassess Land Frequently Read the whole article
Mason Gaffney: California's Governor-Elect
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." ...
Boskin and Shultz, posing their dismal choice for California, dismissed by silence that we can raise needed revenues while also spurring job creation and stimulating the economy. It is simple: restore that part of the property tax that falls on land, while continuing to cap the rate on buildings. ...
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.
A tax of 1% on that value would yield $15 billions a year. That's from only 2.7% of the urban homes in Calif. The data exclude many sales, country manors, for example. Some well-known lands thus excluded are
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
Mason Gaffney: What happens when a state radically slashes its property tax?
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.
The obvious direct results have been to cut public services, raise other taxes, and lose credit rating. ...
The private sector is doing badly, too. Raising income taxes, business taxes, and sales taxes is no way to stimulate an economy; they are all a drag on work and enterprise. ...
It should give one pause. It is, however, if you think about it, the expectable result of what the voters did.
The predictable result is to inhibit economic activity, and encourage holding wealth inert and stagnant.
David Shulman tersely summarized the distributive effects of Prop. 13 as he left us for Salomon Brothers in Manhattan: "it breached the social compact." ...
1/8 of all new businesses started in the U.S. were in L.A., 1945-50. These were small, creative, flexible, and too varied to classify. No Linnaeus could sort them in conventional categories: the new Angelenos simply stayed here and started producing everything for themselves, some things previously imported, and others never seen before. ...
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. ...
California displayed amazing growth up to 1978, and the resilience to shrug off the loss of war industries after 1945 and still grow "explosively" (as Jane Jacobs put it). After 1978 we have a string of reverses. The timing, along with a priori causative analysis, plus various direct observations too numerous for this time-slot, support an hypothesis that the reverses were aggravated by Prop. 13. Michigan, be warned of our lot, and learn about taxes from us: "This Could Happen to You." Read the whole article
Mason Gaffney: The Property Tax is a Progressive Tax (1971)
"The regressive property tax" has become a common block phrase among economists and in the popular press. President Nixon's support for revenue-sharing is increasingly based on the need to protect the poor from heavy property taxes. Some prominent tax economists are favoring even sales taxes to make the tax system more progressive, by lowering the property tax. (1) Even local income taxes, which are mainly payroll taxes, are being advanced to relieve property and the poor.
I find this implausible. To own property is to be rich, in the measure that one owns, and to tax the quality of richness should not be presumed to burden the poor more than the rich. As to the elderly, it is only traditional for interest groups to hide behind selected widows, and one should rarely take such appeals at face value. And so I propose critically to examine the bases for alleging the property tax to be regressive.
The Founding Fathers regarded property taxes as redistributive and equalitarian. James Madison wrote:
In England, at this day, if elections were open to all classes of people, the property of landed proprietors would be unsure. ... Landholders ought to have a share in the government, to support these invaluable interests, . . . . They ought to be so constituted as to protect the minority of the opulent against the majority.(2)
Madison also wrote ". . . the most common and durable source of factions has been the various and unequal distribution of property." He foresaw that the landless majority might use government to redistribute property. "To secure ... private rights against the danger of such a faction ... is then the great object...... ... read the whole article
Ted Gwartney: A Free Market Strategy to Reduce Sprawl
Counterproductive growth limitations and regulations should be abolished.
Property taxes should not be levied on new construction or existing improvements, when the revenue needed could be obtained from the land values created and maintained by the community.
The property tax could be shifted
to reduce the incentives for
sprawl. If the property tax were taken off urban buildings and
focused on the land itself, this would penalize land speculation and
would reward people who build on their land. Thus land speculation,
which promotes a "leap frog" development out of the city and into the
surrounding countryside, would decrease. The proposed shift from
traditional property tax to a "land value tax" would penalize land
speculation and encourage urban redevelopment. Removing the tax on
buildings makes them cheaper to construct, renovate and operate, and
more affordable to buy or rent. Urban construction creates urban
jobs. Capital and labor both benefit. ... Read the
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper