Letter to the California State Legislature
California should study carefully the effect of a land value tax shift
AB 362, introduced by Assemblymember Alex Lee on February 1, 2023, would require the California Department of Tax and Fee Administration (CDTFA) to study the efficacy of a statewide land value tax (LVT) as an alternative to the current methods of property appraisal and taxation. We at Progress and Poverty are proud to strongly endorse this bill.
A thorough study of land value taxation for California is strongly justified by the current social issues facing the Golden State; the traditional principles of taxation; moral principles which are fundamental to the American way of life; and both economic theory and empirical evidence. Furthermore, the arguments offered in opposition to this bill can only truly be tested through a rigorous study of LVT, which is the very study that this bill would commission. Refusing to even study this policy would be gross negligence of the State’s duty to her residents.
We discuss each of the above topics in turn, along with a consideration of this bill’s intersection with Proposition 13 (Prop 13).
a) LVT may tackle many of California’s ongoing social issues
California is, in many ways, a victim of its own success. Endowed with natural beauty, a golden coastline, mediterranean climate, lively cities, cutting-edge research and a relentlessly productive economy, CA is one of the most desired destinations not just for Americans but for workers the world over. Unfortunately, these features have collided with a sluggish housing supply, driving up housing prices and creating exorbitant location rents for the underlying land. This has unfortunately ensured that most of the benefits of the state’s tech-boom have been captured by landowners; better that these be shared widely among all Californians. Meanwhile, the existing property tax system heavily protects existing property owners from rising taxes, dulling the economic forces that would normally provoke urban densification.
The consequences are plain to see: California has become one of the most expensive places to live on the planet. Consistent with the predictions of the 19th century American economist Henry George, rising land rents have driven many landless Californians to the brink of destitution, producing rampant homelessness which is driven primarily by the unaffordability of housing. LVT is an essential part of any solution to all of the above problems. By capturing and sharing rising land rents, LVT can ensure that California’s rising tide will lift all boats. By penalizing land speculation and putting a price on exclusionary zoning, LVT can spur the construction of much-needed housing and more efficient land use, which will ensure that houses get built in exactly the locations where they are most needed, help to ease the crushing burden of housing costs, and produce the substantial revenues that will be necessary for providing subsidies to struggling tenants and supportive housing for the state’s homeless population. With land rents being a key driver of ongoing racial inequality, sharing these rents more broadly can help to promote the inclusive growth towards which many Californians aspire.
Given the myriad ways in which LVT promises to help ease so many of California’s major social issues, it is essential that the State conduct a thorough study of the policy, as enabled by AB 362. We proceed to explore some of these promises in greater detail, beginning with the classical principles of optimal taxation.
b) LVT is an Ideal Tax (or at least the least-bad)
Land value taxation is highly consistent with the so-called ‘principles of taxation’, which are applied the world-over by policymakers seeking to design their ideal tax system. Let us consider each bolded principle in turn, with an explanation in italics, followed by an explanation of how this principle applies to LVT:
Efficiency (taxes should not distort economic decision-making): the supply of land at a given location is perfectly inelastic, meaning that LVT cannot be avoided and landowners cannot adjust the supply of land in response to the tax. This means that there is no deadweight loss associated with LVT, it is a perfectly efficient tax. Property taxes do not have this vital characteristic, as the tax burden increases when a property owner builds additional dwellings on their land, an effect which discourages renovation and redevelopment.
Vertical equity (the tax burden should increase with ability-to-pay): land value is a key component of household wealth, meaning that LVT is also highly correlated with wealth. It is also perfectly correlated with the privileges associated with ownership of California’s most precious natural resource.
Horizontal equity (equal treatment of those in equal circumstances): LVT treats $1m of land in the same way, regardless of whether it is a small urban lot or a large rural lot. Neighboring plots of land tend to have similar land values per square foot, and are therefore taxed in a similar manner.
Revenue Integrity (minimize avoidance behavior): land is immobile so LVT cannot be avoided.
Simplicity (minimize costs of compliance): California already has a register of land ownership and property assessments. This means that LVT is administratively simple, and does not require the invasive and complex process faced by property taxation when attempting to assess the value of buildings.
Transparency (give taxpayers certainty): land owners will have clear information about the assessed value of their property, with land rents tending to move predictably over time.
Broad-base, low-rate: LVT will broaden the tax base, and enable lower tax rate to be applied to other tax bases (incomes, sales, buildings).
LVT is highly consistent with the principles of optimal taxation, and CDTFA should be given the opportunity to test LVT against these principles, with comparison to the complexities of the existing tax system.
c) LVT is consistent with the moral principles of Californians
Land value taxation is consistent with many of the moral principles to which Americans in general and Californians in particular aspire.
Land is a scarce natural resource, so all citizens should share in the value it creates: during the gold rush, California understood that her rich mineral endowment should serve to uplift the standard of living for all residents, and codified this through royalty charges on mining income in the 1872 Mining Law. Likewise, the value of California’s most precious natural resource, her land, should also be shared among all residents of the state.
Land values are generated by society as a whole, so should be captured by society as a whole: land value is not created by the land owner, but rather by nature (desirable location, amenities), government (guaranteeing property rights, security, infrastructure investment) and society at large (LVs higher in areas that are more productive, have more jobs or social opportunities). Just as the collective activity of all Californian’s are embedded into the value of her land, so too should they be shared among all Californians rather than individual landowners.
Meritocracy: we all benefit if our social systems incentivize productive activity. LVT prevents land owners from profiting through passive ownership of land, and instead rewards work and investment by enabling lower taxes on workers, sales, businesses and buildings.
Tax what you take, not what you make: Instead of taxing workers based on the value of income they have created, LVT taxes households based on the value of the land they are occupying (which inherently excludes other households from the privilege of also occupying that location).
These underlying principles of LVT are strong, consistent with the ideals born out of the California gold rush and developed into the American dream. AB 362 will provide an opportunity for these ideals to be explored in more detail, and fitness of the existing tax system tested against these ideals.
d) The arguments for LVT are well-supported in economic evidence
Both economic theory and empirical evidence strongly support land value taxation, and it enjoys strong support among economists. It is certainly better than taxes on the productive economy like incomes, investment or improvements. We summarize the many benefits that LVT promises to deliver, with hyperlinks to relevant peer-reviewed publications:
LVT discourages land speculation and lowers vacancy rates, increases the rate of housing construction, ultimately lowering housing rents.
LVT increases the rate of business formation
LVT increases employment and output
LVT increases tax compliance and lowers rates of tax foreclosure
LVT incentivizes optimal municipal governance, as it makes good public investments self-funding
LVT reduces inequality by challenging the increasing role of land rents in driving wealth inequality
LVT can smooth the business cycle and prevent economic shocks and recessions
LVT corrects racial & class inequalities by taxing exactly those individuals who are enjoying disproportionate benefits from owning & accessing premium locations
Clearly, there is a wide body of research indicating the massive potential benefits associated with land value taxes. Rejecting the opportunity provided by AB 362 to explore these benefits and estimate how they could improve wellbeing would be an abrogation of California’s duty to her citizens.
e) Arguments in opposition to AB 362 are weak & prejudge the outcomes of an LVT study
Most of the arguments that we have observed being offered in opposition to AB 362 are fundamentally flawed insofar as they criticize LVT as a policy rather than explaining why a study of LVT is a bad idea in its own right. If LVT is such a horrible idea for California, surely opponents would eagerly request a thorough study, confident in their assertions that the evidence will strongly reject LVT.
We submit that opponents of LVT would paint themselves in a better light if they instead switched to supporting AB 362 and instead focused their energies on identifying the precise terms of reference that will ensure that CDTFA’s study will produce fair & balanced conclusions about LVT for California.
To engage with some of the specific arguments being offered by opponents of AB 362.We describe these common arguments in italics, before giving our response:
LVT will harm property owners’ tax certainty: To the contrary, tax certainty is guaranteed under LVT so long as assessment is regular, professional, and transparent. To the extent that CA desires to protect low-income homeowners against rising tax bills, this would ideally be achieved via direct subsidies for low-income households, roll-up schemes for delaying payment, and other modes of flexibility, not via a permanent short-circuiting of optimal property taxation.
Revenue certainty for local governments will be lost: We do not find this credible: LVT can help to suppress the wild fluctuations of the property market, land rents climb quite predictably, and mill rates can be adjusted annually to ensure revenue security. The regular, predictable hollowing-out of revenue for localities is the true legacy of Proposition 13.
LVT will incentivize landowners to develop their land, threatening open space: While it is true that LVT will spur housing construction (a fact which is highly desirable given excessive housing costs and high homelessness), housing densification can in fact make it easier to provide greenspace within close proximity of many households. Further, to the extent that open space has social value, it will boost nearby land rents, providing municipalities with strong incentives to provide or subsidize the provision of greenspace directly.
Voters support Prop 13: Voters must be given the opportunity to fully understand land value taxation before deciding whether they support or oppose it. This speaks directly to the pressing need for the type of reporting on LVT that would be enabled by AB 362. In particular, tenants in California may not fully comprehend the harms that are currently inflicted by the lack of ad valorem taxation in terms of housing supply and the ultimate affordability of their rent payments.
Local governments will subsequently increase their revenue takes: even with a LVT in place, local governments will continue to be democratically elected, and their voters will be empowered to decide whether they would like more revenues and public services, or less; LVT is irrelevant to the total volume of taxes. In addition, localities in California have seen a relative decline in revenue and public services in the last 45 years compared to localities elsewhere; for revenue to increase is a necessary correction.
LVT will cause businesses to flee California: LVT does not alter the user cost of access to land, it just switches it from a large up-front cost to one spread out over time. Evidence suggests the reverse: businesses activity and building construction rise under LVT. We note that both businesses and households are already fleeing exorbitant Californian land prices for neighboring states with demonstrably higher property tax rates, such as Arizona and Texas. In addition, it is conclusively proven that commercial landlords do not pass along these costs to their commercial tenants. A system in which we see less windfall profits for landlords and more affordable rents for small businesses is exactly what we want to see.
Homeowners will face higher taxes: can only be conclusively proven via a study. Other research has shown that LVT tends to increase taxes for: commercial land, center-urban landowners, and the owners of vacant or severely underutilized land; with taxes falling for residents of multi-family housing.
Existing studies from the last 100 years have already rejected LVT: CalTax provide no such examples of this type of study, and in fact multiple studies elsewhere have supported land value taxation.
CDTFA are not equipped to study land taxes: This strikes us as a particularly bad faith argument, given that Article 31(b) of AB 362 explicitly provides for such a study to be contracted out to a third party expert. Opponents lobbying this argument should have instead provided positive suggestions to improve the terms of reference and opportunities for expert comment, rather than attempting to torpedo good faith inquiry which could serve the interest of Californians.
With the arguments in opposition to AB 362 both prejudging the outcomes of a study of LVT and being misguided in their claims, we suggest that these opposing arguments should largely be dismissed by the Committee. It is instead essential that Californians be given the opportunity to hear the potential benefits and the true implications of LVT for their state.
A Note on Prop 13:
We would be remiss not to mention the existence of Prop 13, which currently caps both the assessed values and mill rates applied to current property taxes in CA. We firmly believe that Prop 13 is an outdated policy tool, rooted in racialized tax revolts, which serve to protect the wealth of older, whiter homeowners over younger, minority renters, ultimately “undermining equality by entrenching property wealth across generations”. However, we are also sympathetic to the need to provide property tax relief to low-income homeowners, just like low-income tenants should also benefit from rent relief. These objectives must also be balanced against the need to ensure that prime locations within California are leveraged for the flourishing of all people, not just a lucky few homeowners.
Thus, we would like to highlight that an essential component of any research commissioned as a consequence of AB 362 must necessarily entail a thorough investigation of how land value taxation can be implemented both with and without Prop 13. This analysis should consider the role of Prop 13 (or alternative policy mechanisms) for promoting the many valuable goals identified above: optimal tax systems, building the housing supply, densifying areas which are in high demand, boosting inclusive growth, fostering equity, and promoting tenure security for struggling households. This analysis will need to consider the entire space of ways in which LVT can be implemented with no changes to Prop 13, with some compromise changes, or with Prop 13 repealed. We posit that these complexities are not a good reason to refrain from passing AB 362, but rather are a vital component of the subsequent study of LVT.
Conclusion:
This letter has provided a brief exploration of the many ways in which land value taxation can help tackle many of California’s social ills. We have measured LVT against the principles of optimal taxation, the moral principles of Californians, and demonstrated the wide body of economic research supporting LVT. Given all of the above, and the fairly weak nature of arguments given in opposition to AB 362, we strongly endorse this bill. We urge the Committee to ensure that this bill receives an affirmative vote, and eagerly await a good faith investigation of the ways in which LVT can help to serve the Golden State.