RSF Digest            Spring 2024

by Josie Faass                     Comments by Common Ground-OR/WA

We’ll take a look at a couple of the highlights from the RSF’s LVT public awareness & opinion survey, placing them in context by giving examples of the challenges that state legislators face when considering the adoption of the land tax reform option.

Excerpts:

Land Value Tax (LVT) is not a new concept, yet many with an interest in the policy have noticed a recent uptick in news stories and online discussions on the subject, as well as an increasing number of U.S. municipalities and states giving serious consideration to its adoption.  This blog couples descriptions of significant state and community-level efforts with data collected through an online survey, to describe the nature of this apparent increase in interest in LVT.

What is LVT (land value taxes)?  First (and most famously) popularized with American audiences by 19th century social reformer Henry George, land value taxes are an alternative to the traditional type of property tax used across the U.S. Both make use of assessed values for properties’ land and improvements, except rather than leveling a single tax rate on the sum of these values, an LVT taxes land values at a higher rate than improvement values (sometimes not taxing improvements at all).  

In principle, LVT recognizes that the value of land is largely determined by external factors beyond the owner’s control (such as location and access to community infrastructure). Rather than allowing the economic rent associated with these attributes to accrue to private landowners, an LVT seeks to capture that value to support public expenditures, thus closing this fiscal loop more effectively than a traditional property tax. For these reasons, advocates of LVT often describe the policy as more efficient, equitable, and fairer than traditional property taxes.  

Internationally, there are a number of examples of successful LVT implementations. In the U.S., however, adoption of the policy has thus far been restricted to roughly 20 Pennsylvania municipalities and school districts that have experimented with different LVT formulations over the years. Despite the somewhat limited real-world data, studies of these PA examples have found statistically significant evidence that the policy yields a number of potentially desirable land use effects (including increased infill development, an uptick in investments to existing structures, and reduced sprawl development), as well as positive economic impacts (including increases in new business formation and reductions in tax delinquency). For these reasons, LVT advocates often speak about the policy as producing simultaneous positive effects in two major arenas: revenue generation and land-use policy.

Where is LVT under consideration?  Although Pennsylvania remains the only state to see LVT fully implemented so far, in recent years a number of active, public debates on the policy have occurred nationwide.  

A necessary first step towards new LVT implementations is determination of the policy’s legality, since the application of different tax rates to land and improvement values may violate certain states’ constitutional requirements for tax uniformity. In recent years, several states, including Michigan, Virginia, New York, Oregon, and Minnesota, have either passed or introduced legislation explicitly permitting select taxing jurisdictions to adopt a split-rate structure.

Not yet at the point of proposing specific, LVT- enabling legislation, other states, such as Colorado (at the Governor’s behest) and Oregon, have convened tax-focused commissions and committees in which the policy has been given explicit consideration. And although LVT has yet to gain significant mainstream attention in California, many (including CA Assemblyperson Alex Lee) point to LVT as a potential remedy to the distorting effects of the state’s Proposition 13.

Arguably the most visible LVT-focused effort is taking place in Detroit, MI, where in June 2023, Mayor Mike Duggan unveiled a comprehensive land value tax plan for the City, touting the policy’s ability to reduce land speculation and encourage reinvestment.  Although not without opposition, the effort has garnered major media attention, and arguably done more to raise awareness of LVT among the general public than any other state or local effort.  

The RSF Survey: 

What does this increased awareness look like? Google Analytics provides one perspective, illustrated by the LVT Google Searches graphic shown here, which depicts the frequency of searches for “land value tax” in the U.S. over the last decade.  The trend line is clearly positive, indicating an increase in searches over time, with the largest relative number of searches taking place since January 2022.

While Google searches are an important indicator of public interest in LVT, given the Robert Schalkenbach Foundation’s longtime interest in LVT, researchers there wanted to gain a more in-depth understanding of the trend, and conducted an online survey, promoted using the organization’s listserv and social media networks, to learn more.

RSF’s LVT Survey was distributed to the Foundation’s ~3,500-person listserv and across its multiple social media platforms between January 26th and February 7th, 2024. The survey was anonymous and no demographic data were requested.

The eight-question instrument included queries to determine… whether and why they felt it was a good policy, and what they believed to be the greatest obstacles to LVT’s implementation.

Survey Findings: 

There was overwhelming agreement among all respondents with the statement, “In general, LVT is a good policy” (323 or 95% of respondents indicated that they agreed with the statement, 16 or 4.7% felt “It Depends,” and just 1 person disagreed with the statement). And when asked to describe the most important reason they support LVT, the most frequently selected response (140 responses) identified land use effects (i.e. reductions in sprawl development and speculation, encouragement of infill development, etc.) as the primary reason for their support (see Figure 4).   

When asked to identify what they perceived as the greatest obstacle to LVT implementation, concerns over the politics of changing people’s tax bills (113 responses) and the lack of awareness and complexity of the policy (107 responses) were most often cited by the survey sample as a whole. Some version of the idea that LVT flies in the face of the American ideal of rentierism was often described by those who selected “other” as the greatest obstacle to adoption.

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Comment:

Given the growing awareness of LVT’s superior equity, efficiency, and positive economic impacts, it’s baffling to see state legislatures continuing to fuel populist tax revolts and promote unwise approaches to limiting property taxes.

Georgia, Texas, Kansas, Colorado, and Pennsylvania are among the states recently reacting to voter discontent over higher levies by capping property taxes. By 2018, sixteen states had adopted laws limiting annual growth in property assessments. One of the recent examples of this comes from Montana, where conservative activists steered a taxpayer revolt, voicing support for a constitutional initiative modeled after California’s landmark Proposition 13.

The Virginia State Assembly in 2020 added Richmond to the short list of jurisdictions allowed to enact a land value tax. Republican legislators in 2023 killed the authorization bill which would have enabled Charlottesville to become the fifth locality in Virginia to progress towards a land value tax. In this city where a sea of surface lots encircles the city’s downtown, an analysis found that most homeowners would get a break under LVT. In Richmond the current tax structure encourages owners to leave their land as parking lots, even though its value has risen dramatically. “A land value tax could put some pressure on people sitting on valuable downtown land to finally develop it,” said Richmond’s First District representative Andreas Addison. But Richmond still has not been given the authority to implement LVT.

The RSF survey did in fact conclude that “rentierism” was often described by some respondents as the greatest obstacle to adoption.  This form of ‘rentier capitalism’ consists of land holdings that generate economic rent from ownership rather than from capital investment in buildings or labor employed for production.  Perhaps what motivated these LVT opponents was an attraction to the idea that accumulated equity from holding onto land is a suitable form of investment.  However, this view is contrary to the Georgist principle that accrued value belongs to the creator of that value, which in the case of land is the public sector.  Value added to the land portion of real property is created from the presence of public infrastructure and services.  On the other hand, value added to the improvement portion is created by the owner’s capital investment or labor, hence should remain in the hands of the owner. John Stuart Mill and Adam Smith and other classical economists also recognized this, and that concentrated landownership leads to rentier behavior

Oregon’s property tax revolt in 1990 resulted in the adoption of Measure 50, separating taxable assessments from real market values. Baked into the constitution, it limits the annual growth of taxable value to 3% annually, well below average rate of land value inflation. By setting assessed values based on 1995-96 market levels and capping the annual rate of growth, Measure 50 permanently locked into place assessed value imbalances, allowing similarly valued property to pay dramatically different property tax amounts. Unlike in California and Georgia, assessment limits do not reset when a property is sold but instead are permanently attached to the property.

Circumstances around the Oregon case suggest that legislators’ opposition to LVT is not the main obstruction to its adoption. In fact, meetings with state legislators and the votes taken on LVT bills during several legislative sessions show bipartisan support. Democrats favor the LVT option on the basis of equitability; Republicans speak positively of LVT because it is “pro-growth” – it rewards development. Nevertheless, there is some hesitancy among legislators in general due to their constituents’ lack of understanding of the complexity of the property tax system and the uncertainty of tax burden shifts.

Perhaps the more challenging obstacle to the adoption of LVT is the constitutional limits that M-5 and M-50 impose. LVT is a split-rate tax whereby the land assessment of all property is subject to a higher tax rate, and the improvement portion is taxed at a proportionately lower rate. A Measure 50 permanent rate could not be split because that would necessitate imposing a rate that is greater than the M-50 established rate on land in order to achieve revenue neutrality when the improvement rate is lowered.  The M-50 limit would also be exceeded because the land rate would be raised to a higher level than the mill rate of $15, as the improvement rate is proportionately lowered in the split-rate LVT. 

Another constitutional hurdle appears in the uniformity clause, which states in Article 1 of Sec. 32 that all taxation shall be uniform on the same class of subjects within the territorial limits of the authority levying the tax. That is, all classes of real property and the parcels within them shall be taxed at the same rate.  If this is interpreted to mean that land and improvements are two different classes, the split-rate tax would be prohibited.  But, if land and improvements are viewed as two components of property, a reasonable understanding is that “classes” refers instead to categories of land use, e.g. residential, commercial, industrial, vacant.  This clarification means that classes of land use cannot be taxed at different rates, but the two components of each parcel can be taxed differentially, thus affording LVT constitutional legality.  Common Ground – OR/WA has requested a legal opinion from the Oregon Attorney General on this question. 

Finally, the hiccup in this tangle of meanings:  Generally, “uniformity” requires that state laws apply equally to all persons under the same conditions and in the same circumstances.  With regard to taxation, the burden must be alike on all properties under the same conditions and in the same circumstances within the taxing jurisdiction. This is the definition of horizontal equitability.  If this understanding is the correct constitutional intent, then M-50, by separating assessed value from market value, virtually assures that horizontal equity would be violated. After 30 years of a widening gap between taxable and real market assessments, tax burdens across the urban landscape are highly inequitable. Taxable values grow 3% annually regardless of what is happening to market value. This means that properties with rapid market value growth over time are under assessed compared to properties with slower market value growth.

This is the right time for state legislators to take note of the opinion of the majority of citizens who agree that land value taxation is good policy, and that limitations – particularly on assessments – are bad policy. Georgia, Texas, Kansas, Virginia, Oregon, and New York too – let’s step up and make the wiser choice for property tax reform.

Tom Gihring, Research Director

Common Ground – OR/WA
commongroundorwa.org