New York State Commission on School Property Tax Alternatives

H. William Batt

[Reprinted from GroundSwell, September-October 2005]

The following testimony was given before the New York State Assembly Minority (Republicans) Commission on Alternatives to School Property Taxes on August 10, 2005 in Saratoga Springs, NY. Besides the testimony, an envelope of materials was distributed to them.

To really solve the problems of school finance in New York State, as for all public finance matters, we need to look outside the conventional framework of economics that has prevailed for the past century. It was when the economics profession abandoned the tradition of thinking that existed from Adam Smith to the beginning of the 20th century that tax policy got into trouble. Classical economists believed that the proper source of tax revenue came from the collection of what was called economic rent. Today, that term has almost been discarded in mainstream neoclassical economic thought, even though many among its leading thinkers will accede to its importance when pressed. Yet the amount of economic rent available to be taxed is fully adequate to support government; recent studies show that it can approach 30 percent of a nation’s economy, despite the figure of about 2% that is typically offered by the U.S. Government’s National Income and Product Accounts. Data from Australia, which keeps statistics in a more accurate way than the U.S. government does, was used by Harvard Economist Terry Dwyer to show that natural resource rent is at least 27 percent of its GDP.

The really important point to note is that taxes on any components of economic rent are essentially painless. Unlike taxes on people’s labor, or on their capital and savings, any tax on rent is windfall income. Rent is the community-generated surplus that is generated by the economy that circulates until it comes ultimately to rest on and accrete to land sites. It is for this reason that real property appreciates in value. We can easily understand that real property has two components, structures and land. Structures depreciate in value, much like cars, computers and refrigerators; only land appreciates in value. And because that rent is the byproduct of society’s enterprise rather than the result of any individual’s work, it makes sense for society to recover that value as its tax revenue.

To the legal profession, land ownership is perceived as a “bundle of rights,” and they are held in what is called usufruct title. No freehold ownership in real property is absolute. While titleholders may well be rightful owners of land for some purposes, their right to the retention of the economic rent that accretes to those sites is very questionable. That is why so many notable figures in recent history, and of all political persuasions, have come to endorse the taxation of rent: Tom Paine, John Stuart Mill, Leo Tolstoy, Sun Yat Sen, Winston Churchill, Theodore Roosevelt, Mark Twain, John Dewey, and Robert Hutchins among them. Figures in today’s politics speak highly of the taxation of economic rent on both ends of the political spectrum: William F. Buckley and Steve Moore on the right, and Molly Ivins and Michael Kinsley on the left. Organizations such as the Heartland Institute on the right have also endorsed the practice of taxing land rent.

I will offer a few quotes from other notables to show how commonplace such ideas once were. Ben Franklin wrote: “Our legislators are all landholders, and they are not yet persuaded that all taxes are finally paid by the land ... therefore, we have been forced into the mode of indirect taxes.” Theodore Roosevelt wrote that “The burden of taxation should be so shifted as to put the weight upon the unearned rise in value of land itself, rather than upon the improvements.”

How is this done in practice? It is not difficult, as economic rent, sometimes also called land rent or ground rent, settles on any location of market value that has an inelastic supply. Land has this attribute, and that’s why it is a safe investment: as Will Rogers said, “Buy land. They ain’t making any more of the stuff.” At the same time, however, the image of the land speculator has always been a bit unsavory, even if many people don’t quite understand why. The answer is that the land speculator is reaping for himself what is really socially created wealth. If we recover the wealth by taxing it, we implement a design that accords with all the principles of sound tax theory: it is totally neutral in its effects upon social behavior, it is efficient by not incurring any excess burden upon economic productivity, and is progressive because land, being inelastic, sees the tax capitalized in its market price and cannot be shifted to tenants. Moreover, because most households have property somewhat peripheral to the urban cores of metropolitan areas, they typically see their taxes reduced from what they are likely to pay under the today’s conventional property tax.

The land value tax can be phased in over years, as has been done in some twenty municipalities in Pennsylvania and in some 700 places worldwide. It involves simply and gradually increasing the rate on the land values and reducing the rate on improvement values. If it happens that the taxes continue to be onerous in particular instances, the payments can be deferred until such time as the titleholder sells, dies, or otherwise cashes out. Some 24 states already employ some form of deferral, and this offers people the chance to remain in their homes much as they might if they have a reverse mortgage. Unlike other means of mitigating hardship cases such as the circuit-breaker or homestead exemption, deferral provisions are in no way inequitable or distortionary.

Under a land value tax, there is every incentive to use high value land sites in an efficient way. Those sites which are at the urban centers are induced to have high value structures, and those sites at the periphery which have far lower market value are relieved of the pressures of sprawl development. The centrifugal forces of sprawl are thereby averted, and even reversed. Because developers then find their most attractive locations more affordable, they are under less pressure to select suboptimal sites, and urban centers are revitalized as a result. Whenever a titleholder of a land site elects to improve its value there is no penalty, as exists at present, for his doing so. Moreover, because the carrying costs of holding underused parcels are increased, land speculation and vacant land in urban areas is discouraged. In the case of Harrisburg, Pennsylvania, which has been phasing in land value taxation since 1982, the number of boarded up old brownstones has been reduced from an original 5,000 to practically none today. And the mayor, Steve Reed, is so popular for having initiated this policy that he remains in office today.

By New York State law, assessors must list the land value separately from the total value, and if the assessments have been done properly, about 40 percent of the revenue yield will come from the aggregate land value of a municipality. Using a two-rate tax regime, this can be gradually increased by 10 percent annual increments to the point where there is no tax on improvements whatsoever. The consequence is to send incentive signals to developers that will likely increase building permits immediately and go far toward revitalizing cities.

Who pays more under a regime of land value taxation? Underused sites: parking lots, drive-in services such as banks, fast food establishments, gas stations, and other such. All the while homeowners typically see their taxes stay the same or go down. And because of the increased economic vitality which typically follows from such a change, momentum grows in a way that continues to relieve the burden upon homeowners over time.

These ideas have been understood for over a century but while always plausible in economic theory, they were not demonstrable. Now, with data and computer power, we can run the numbers and show, to the dollar, who will typically pay more and who will pay less. I have been doing this since retiring from service to the New York State Legislative Tax Study Commission in 1992. I became so excited about these possibilities that I have chosen to advocate them full time every since. I have done work for the state of Minnesota, for the City of Philadelphia, for Polk County, Iowa, and for several other smaller units of government. Some five states introduced legislation that would authorize localities to adopt land value taxation this past session, and, as you well know, it typically takes a couple of years for ideas to circulate before laws are actually passed. I expect that next year we will see successes in Connecticut, Maryland, and Minnesota if not also elsewhere. I would be delighted to see greater interest in my home state of New York, where the practice, having once been explored by the city of Amsterdam, has been deemed legal. I serve on two national foundation boards in support of this agenda, and would be happy to answer any questions you might have.

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