Two Property Tax Relief Measures:
Land Value Taxation to Stabilize and
Deferral as Provisional Tax Relief
H. William Batt
[Testimony to the Suozzi Commission, Albany, New York, 23 April 2008.
GroundSwell, May-June 2008]
The property tax structure in New York, as in most other places,
has many problems, but with a bit of attention and tweaking it could
be the perfect tax.. I've written extensively on this, about a
hundred articles,. but I will deal with only two matters here.. I
want to address what has often been called the "poor widow"
problem, the person who fears being expelled from her home by lack
of ability to afford her property taxes.
First, one must understand that the property tax is really two
taxes to an economist, a tax on land values and a tax on improvement
values, each with its own dynamic.. We should just get rid of the
tax on improvements, now something easy to do in light of new
computer assessment technology and what we know about the
destructive impact of taxing them.. Experience shows that doing so
is the most effective tool available to revitalize economies.. But,
along with many others, I have dealt with that elsewhere.
The tax on land value can be corrected with better assessments,.
shifting the rates, and allowing for payment at a time when it is
not burdensome.. But one has to understand what land value is first
of all.. Then one can understand a land value tax and its virtues.
The value of any parcel site is a function of the flow of what
classical economists know as ground rent.. Ground rent, or economic
rent, is different than rent for payment for using a house or car..
More importantly, it reflects the economic vitality of a
neighborhood or a region and has nothing to do with what any one
titleholder does or doesn't do on his property.. If all the market
transactions and productivity were to leave a place, there would be
no rent to flow and the land values would fall to zero.
One can no more alter or eliminate the flow of rent in any area
than one can stop the force of gravity.. The more productive
enterprise a region has, the higher the flow of rent.
People in this country, even many economists, don't understanding
that rent is a flow; they often think of land value as a stock, like
a house, or a car, or an industrial plant.. It is actually more like
a river, or an emission from a radioactive mineral. Viewed in this
way, land sites, just like other natural resources like water, air,
the spectrum, and even occasionally time; all have a yield value,
even when they are not used. That's because the value is reflective
of the broader community's activity.
The total value of rent flow through a location is a constant. It
can be broken up into pieces, however, and this offers us a
solution:. whatever is not paid in a land tax, which is really an
expression of rent recapture by the community, is then capitalized
in market price.. The volume of rent can be captured all at once or
over a period of time. The assessment of land is its capitalized
rent flow, and this is clearly manifest when a parcel is bought and
sold.. It is also reflective of capitalized transportation costs.
Because the flow of rent is constant and continuous, the more that
is captured in taxes,. the less remains to be capitalized in a
site's market price.. If the tax on land value were totally
abolished, all the rent would accrue to parcel sites and escalate
their market price accordingly.. Relieving households of the burden
of their property taxes through caps, circuit-breakers, homestead
options, or any other exemption simply results in the increased flow
of rent to, and ultimately the market price of property.. But the
higher the cost of real estate, the less attractive a location
becomes to outsiders: areas of California, to take one example, have
become prohibitively expensive. When property prices escalate beyond
what the flow of rent dictates, speculators move in to generate
bubbles of expectancy, resulting in even higher prices than what the
community's productive enterprise is able to generate. Ultimately
there comes a corrective, even a crash -- witness what Japan
experienced and what we may be going through now, and that downward
slide can be as economically painful as the initial euphoric rise in
parcel prices earlier.
So, one way to maintain a viable and stable economy is to tax land
according to its market value and even out site values. The higher
the payment in taxes, the lower the market prices for land sites..
From a strictly economic viewpoint, taxing all the economic rent
would lead to a sale price of zero and a rental value commensurate
with its continuing flow, and this creation of a perfect market for
locations would foster very healthy economies.. It could totally
supplant taxes on wages and capital that result in so much lost
productivity and economic drag (Economists call this deadweight
loss.). The reality is that rent, left to stick in parcel sites,
often "gums up the works" in a way that slows down
markets.and makes economies less efficient.. Better to remove it,
and taxing it away is the best way to do so.. Significantly, one
might note, those governments that employ land value taxation have
weathered economic cycles most easily of all places.
Ultimately, all tax burdens are shifted to land in any case, as
Professor Mason Gaffney so clearly explains:
"After-tax interest rates are determined in world
markets and the local supply of capital funds is highly elastic..
So, local taxes on capital do not stick to capital.. Even national
taxes on capital typically fail to stick, because capital is a
citizen of the world. Local labor supplies are also pretty elastic,
although not so totally.. Local taxes on labor, therefore, do not
stick to labor, either.. Payroll taxes. drive people out of
localities that impose them, for example... Ditto for sales taxes.
Customers move, or shift their purchases, to where taxes are lower,
or zero.. Sellers shift, too, to the extent they bear the tax.. What
else is left?. Just land, and land cannot emigrate or immigrate from
the local jurisdiction.".
Professor Fred Foldvary follows up by asking..why not just put the
tax on land from the start and improve economic efficiency.. Finally,
because a tax based solely on rent would supplant taxes on wage labor,
and on products of people's hands and minds, it would be on windfall
gains only, and be essentially painless.
But that's not likely to happen, at least soon. What we can do,
however, is 1) foster economic vitality by phasing out taxes on
improvements,. 2) shift the burden to land values in a revenue neutral
manner, and 3) allow households to pay their property taxes when they
have the means to do so -- when they cash out. They would do this when
they sell their property, paying a portion of the gain to the
community along with any interest due.. Some 24 states and the
District of Columbia do this, and it is the fairest solution of all.
How can this all be implemented?
By state law, assessors must separate out the land value of each
parcel from its total value.. This is standard assessment practice..
Economists have known since the time of Adam Smith that taxing just
the land value is the ideal way to raise revenue.. "Groundrents,"
he avowed, "and the ordinary rent of land are . . . the species
of revenue which can best bear to have a peculiar tax imposed on them.".
Some 700 places worldwide do this, with remarkable results... In
Johannesburg, there is no tax on buildings at all.. So, effectively,
does Hong Kong. Twenty cities in Pennsylvania do it,. and the power of
computers and available data now allow simulation of results so it's
no longer a matter of just appreciating the economic theory.. It's not
my place to reveal anything, but I'm now working with two cities in
New York State exploring this option.. Gradually phasing out of the
building tax rate and raising the land tax rate in a revenue neutral
manner could be done in a decade.. If the assessments are good, about
2/3 of homeowners pay less.. Parcels underused relative to their
assessed land value pay more.. This gives them an incentive to improve
their parcels or sell to someone who will.
The deferral option is fair to both the homeowner and the community..
Relieved of any fear that the tax collector will evict a household, it
can live assured it can reside in place so long as it wishes.. This
addresses the concern that many households may be very equity rich,
even if they are income poor.. It also assures that the locality will
ultimately, even if not immediately, receive its fair share of
property taxes due; no special favoritism is involved.. The capital
gain when a parcel is ultimately sold provides the income necessary to
pay the tax office with appropriate interest.. One should appreciate
that the deferral provision is not only fair and accommodating, it
also comports with all the textbook principles of sound tax theory..
As I've explained often elsewhere, deferral of payment is neutral,
efficient, equitable, administrable, stable, simple, and certain..
This is important at a time when we have come to realize how much the
property tax fosters sprawl. development, leads to under use of
strategically valuable site parcels urban cores, how much it fosters
real estate. speculation, and how much it dis-equilibrates the whole
market in housing.
I won't go into detail on the various formulas and permutations of
the deferral option that states employ;. I have sent the staff some
material on that.. Sometimes only homeowners beyond a certain age can
defer their property taxes.. Sometimes there are income caps and
thresholds for eligibility, sometimes it is restricted to homes below
a certain assessed value, sometimes only a portion of the tax can be
deferred or only a certain component -- school and not municipal,
special assessments and not utilities.. Sometimes the provision is
statewide, sometimes it is a local option.. It is interesting to see
that some states impose an interest rate on deferred obligations so
high that it prohibits its extensive use -- 10% in Tennessee, 8% in
Texas.. I think the option should be broadly available, and interest
Some observers compare it to a reverse mortgage, but experience shows
that there are many more abuses involved there, and it is frequently
far more burdensome financially.
There may also be concern that municipalities might incur a
transitory deficit when many households first avail themselves of the
option. Some states have allowed a bridge loan from state sources
until revenue streams have once again stabilized. A bond backed by the
same necessary liens against properties are another answer.
Yet the deferral option, where legal, is not extensively employed..
This is because homeowners often don't want to forfeit any of the
equity they might have built up in the course of many years of
ownership.. People often see any home appreciation as their rightful
gain.. The availability of the deferral option, however, exposes those
who are shedding crocodile tears about their property tax burden while
salivating over future windfall gains, as opposed to those who may
have a genuine hardship. Here is why:
Houses, a Federal Reserve study. shows, depreciate at about 1 percent
annually, so that net appreciation a home typically has is due to the
appreciation of the land value and any inflation.. Again, buildings
depreciate; only land appreciates. I have already explained that the
land value is a function of the flow of economic rent, and has nothing
to do with what the titleholder has done; rather it is due to the
social enterprise of the community. The community's recapture of land
rent in the form of taxes is, morally speaking, a claim of what it,
the public, is properly due. Even if the real estate industry and
banks argue that homeownership is an assured way to "build
equity," the parcel title provides a passive that gain is morally
problematic. "Landlords,". John Stuart Mill observed, "grow
richer in their sleep without working, risking or economizing. The
increase in the value of land, arising as it does from the efforts of
an entire community, should belong to the community and not to the
individual who might hold title."
Offering homeowners the opportunity to pay taxes on their property
with appropriate. interest and at a convenient time in their lives is
a fair and equitable solution to both the community and to all
households at risk. Taxing away the surplus economic rent that runs up
the parcel values to prohibitively expensive and speculative levels
assures that real estate markets are more stable, more competitive and
attractive on a wider scale.