What those not intimately familiar with the true economics of property taxation is that housing units (any building) is a depreciating asset. From the moment of completion of construction the building requires ongoing spending for maintenance. Then, every decade or so, the building's systems must be replaced. An annual tax on the depreciated value of a building imposes an added cost of ownership that in the recessionary periods of economic (essentially credit-fueled and speculation-driven property-driven) cycles, results in deferred maintenance. If owner income declines significantly due to prolonged unemployment or the loss of business profits, the building will eventually be abandoned and left to an accelerated depreciation.
The annual taxation of any depreciating assets makes no sense. Taxing the one asset -- housing units -- that is most essential to the individual household is worse than economically inefficient; it is counter to the societal objective of ensuring that all persons have access to decent, affordable housing.
Public capture of the economic rent of land parcels is the one public policy approach that rewards productive investment and provides a financial incentive for owners of vacant or under-utilized land parcels to bring them to their highest, best legal use, or sell to someone who will.
One thing that wasn't mentioned in the article: another problem with property taxes (at least equal rate property taxes, not necessarily split rate property taxes) is that they act as a drag on the LVT component and prevent you from raising it to 100% - because if you do, the property tax portion will be so prohibitively large that nothing will get built.
And another thing that was briefly mentioned but is worth highlighting - even existing buildings constantly undergo maintenance and renovation. Property taxes discourage that. So even if you had a city with no space for new buildings, a property tax would still harm it.
Building taxes do capitalize into land value a bit. As building tax goes up, then land is less valuable because building on that land is more expensive.
But, if we separate the taxes, then we can tax the land not the building, which would raise the value of the land in the sense that building is cheaper (less building tax)!
Mason Gaffney covered this quite well in his "Philosophy of Public Finance" piece when discussing both ATCOR and EBCOR (p.14+)
"5. The Excess Burden of Building Taxes
THE ANALYSIS above treats only of taxes actually collected from existing buildings. It says nothing of how the threat of building taxes suppresses buildings and replacement and so destroys taxable surplus before it is created. But that, too, is important. After all, one of the main reasons for preferring the land tax is to avoid impairing incentives"
Erdmann’s argument has an interesting similarity to that put forward by rent control advocates:
When you look at a particular building, government imposed rent control can seem quite persuasive. The capital was already commited in the past, the owners today are just extracting rent at this point. When there are rent increases, that largely comes from the city around them becoming more in demand (in Manhatten say), not from anything the landlord does. So rent control neatly redistributes unearned, windfall gains in the economic value of the building from the owners of capital, to renters.
The problem, of course, is the same as Erdmann's: "reasoning only about an individual parcel in isolation, with a structure that has already been built". Introducing rent control affects the incentives of building new rental units (or converting properties to rentals). Over time it leads to less building and a shortage of units on the market.
[I don't mean to discount the other issues with rent control that do apply to existing structures, such as landlords compensating for a lack of rental income by skimping on maintenance. But I think rent control advocates tend to imagine these can be easily managed through regulation etc]
"The average property tax in the United States is ~1%."
Man, oh man. I wish mine were that cheap!
I bought my house for under $100,000 in 2008. The EAV for the homesite is $3,900 and for the dwelling, $37,850. Total value set at $125,250.
My total bill, which I'm about to pay myself for the first time, is $3,114. This is a real hardship for me and will only get worse. I put back money I actually need for other basic expenses every month because I do not want to lose my biggest asset. And I easily could, as time goes by.
Greg's argument about the harm of general property taxes compared to land value taxes is absolutely correct, but let's put this in political context. General property taxes collect more rent with less dead-weight loss than do payroll taxes or sales taxes. (The original income tax was designed to fall mostly on high income rent, but has partially devolved into a payroll tax.)
As actually administered, general property taxes have loopholes to partly compensate for disincentive effects, such as a multi-year total property tax break in New York's 421a program for new multi-family housing. Discounts for senior or veteran or handicapped homeowners also compensate. Of course such breaks tend to favor the rich and powerful. While allowing that property taxes are maladministered, especially in New York City, we still need to forcefully defend them against proposals to replace them with local income or sales taxes.
No amount of taxation puts money into people’s hands to develop land. All it would do is make the person say “go on, repossess it” and then the state gets another useless parcel of land or building that they have to take care of. I see this a lot in my town.
The lot is not developed because it’s too expensive to make mixed use over just investing the money in the stock market; there aren’t enough small businesses that can afford the rents, and probably not enough tenants for the apartments that can afford it either. They can’t make the rents cheaper either, because they are building new not using a building that is getting older over time.
If you live in a smaller town, you understand this; that lot could have been a gas station at one point, and the cost to fix the area is well above any profit you could get from it, so it lies fallow and people hold it hoping someone would buy it when they have deep pockets or fortunes change in the area.There’s no way to make small shops a competitor to big box ones so the downtown lays fallow mostly since it’s too expensive to create new retail chains or lifestyle businesses short of the owner blowing his retirement on them.
Problem is that construction/renting/retail is expensive over software, and you aren’t getting investors who want to put up with it over the least expensive way to invest. Even the state…my state hasn’t reopened many offices they closed during covid or expanded its services. You’d need to tax software or other types of gains versus “hard” improvements to balance the risk out, and even then a lot depends on the demographics of the city.
Sounds like your area has very low land values. But there is $50 trillion of land value in the US. It's just hyper targeted on very urban areas. I don't purport that taxing land will cause development across the entire United States, nor is that what I want--I like nature. Instead, I want our urban cores to be more developed, that's all! And I do strongly content that shifting tax burden from buildings to land is a strong mechanism to do that.
The urban cores are even more expensive to develop in, which is why downtowns are the first to go compared to suburbs. You are not going to get the retail or business to fill out the bottom of a mixed use, and you are probably not going to see people trade a house in the suburbs for a worse house/apartment in an urban area on average.
You cannot isolate one part of the thing and think taxing it will fix it. The land wouldn't be fallow now if there were more money to be made off of making it active. Making it more expensive to own doesn't change this fact; it doesn't make materials and labor less expensive, or convince people to sink their money into starting up businesses or rentals there.
Did you read the article? I am not trying to increase taxes.
I want to decrease the building tax... that tax that makes building more expensive. For precisely the same reasons you care about making building cheaper.
Then, to ensure we can fund our cities, we can offset the decreased building tax by increasing the land tax. The article explains why this is fundamentally different. It brings down the selling price of land (which means developers need less access to up-front capital). It also means folks sitting on vacant land can no longer speculate on it... waiting two decades and doubling their profit just by sitting on land while the city around it grows. This is where you go wrong when saying: "The land wouldn't be fallow now if there were more money to be made off of making it active." On the margins, folks can sit on land right now and make tons of money just throw a city growing. I want to change that.
If this is the article I think it is, basically the observations are entirely explained by pervasive rent control, combined with a law that specifically allows rent control to be relaxed when property holding taxes are increased.
Combine these two things:
Rent control already suppressing land rents far below actual market rates, AND
A new tax triggers the “okay you can raise rents by exactly the amount of the tax”
And of course you see the ‘pass through.’ However, it’s not true pass-through, it’s rents mechanically rising closer to true market rates. The entire logic of LVT not being passed on to tenants assumes that rents are already at market rates, which is not the case in this example.
The conclusions drawn from the study are as you say, but since I don’t see where they even looked at rental data, I find it hard to believe that they could draw such conclusions, rent control or otherwise. I suspect rent control is a strawman for bad research design. But I’m not a researcher, so maybe Dunning Kruger here. Can’t just read the study or rely on AI summaries which grab primarily from the conclusions on this one, unfortunately. (Not to say that you are doing this, but I did this at first and it led me astray.)
I wonder if there is any way out of this when the multinationals and faceless corporations wield so much of the power in government. Does it matter how individuals are taxed if the starting price is more than the earning power.
This article has a good explanation. The examples are simple enough to see where the distortions happening.
I also like the idea of a land value tax as it is fairer for private citizens who want to own a home. They are only responsible for the tax on their small portionof nature they inhabit and not on the inflationary price of buildings. If the basic tax for a house was similar before and after the switch from property to land value tax then in theory nothing changed for the citizen at first. However his tax will not climb with construction inflation and will be more tightly linked to the slower increase in land value.
Now I can see how this fits nicely with my dreal of the Adult Resident Citizen Dividend (ARCD) a concept similar to UNCONDITIONAL Basic Income but more radical. All of a states income is divided amongst the Adult Resident Citizens. so in essence they would receive back their share of the national land tax and have to pay their personal land tax. This means small land owners would not be inconvenienced by the tax.
What those not intimately familiar with the true economics of property taxation is that housing units (any building) is a depreciating asset. From the moment of completion of construction the building requires ongoing spending for maintenance. Then, every decade or so, the building's systems must be replaced. An annual tax on the depreciated value of a building imposes an added cost of ownership that in the recessionary periods of economic (essentially credit-fueled and speculation-driven property-driven) cycles, results in deferred maintenance. If owner income declines significantly due to prolonged unemployment or the loss of business profits, the building will eventually be abandoned and left to an accelerated depreciation.
The annual taxation of any depreciating assets makes no sense. Taxing the one asset -- housing units -- that is most essential to the individual household is worse than economically inefficient; it is counter to the societal objective of ensuring that all persons have access to decent, affordable housing.
Public capture of the economic rent of land parcels is the one public policy approach that rewards productive investment and provides a financial incentive for owners of vacant or under-utilized land parcels to bring them to their highest, best legal use, or sell to someone who will.
Edward J. Dodson, M.L.A.
One thing that wasn't mentioned in the article: another problem with property taxes (at least equal rate property taxes, not necessarily split rate property taxes) is that they act as a drag on the LVT component and prevent you from raising it to 100% - because if you do, the property tax portion will be so prohibitively large that nothing will get built.
And another thing that was briefly mentioned but is worth highlighting - even existing buildings constantly undergo maintenance and renovation. Property taxes discourage that. So even if you had a city with no space for new buildings, a property tax would still harm it.
Yup!
And to expand further:
Building taxes do capitalize into land value a bit. As building tax goes up, then land is less valuable because building on that land is more expensive.
But, if we separate the taxes, then we can tax the land not the building, which would raise the value of the land in the sense that building is cheaper (less building tax)!
Mason Gaffney covered this quite well in his "Philosophy of Public Finance" piece when discussing both ATCOR and EBCOR (p.14+)
"5. The Excess Burden of Building Taxes
THE ANALYSIS above treats only of taxes actually collected from existing buildings. It says nothing of how the threat of building taxes suppresses buildings and replacement and so destroys taxable surplus before it is created. But that, too, is important. After all, one of the main reasons for preferring the land tax is to avoid impairing incentives"
https://www.masongaffney.org/publications/G44Philosophy_of_Public_Finance.CV.pdf
Gaffney is a large source of inspiration!
Erdmann’s argument has an interesting similarity to that put forward by rent control advocates:
When you look at a particular building, government imposed rent control can seem quite persuasive. The capital was already commited in the past, the owners today are just extracting rent at this point. When there are rent increases, that largely comes from the city around them becoming more in demand (in Manhatten say), not from anything the landlord does. So rent control neatly redistributes unearned, windfall gains in the economic value of the building from the owners of capital, to renters.
The problem, of course, is the same as Erdmann's: "reasoning only about an individual parcel in isolation, with a structure that has already been built". Introducing rent control affects the incentives of building new rental units (or converting properties to rentals). Over time it leads to less building and a shortage of units on the market.
[I don't mean to discount the other issues with rent control that do apply to existing structures, such as landlords compensating for a lack of rental income by skimping on maintenance. But I think rent control advocates tend to imagine these can be easily managed through regulation etc]
"The average property tax in the United States is ~1%."
Man, oh man. I wish mine were that cheap!
I bought my house for under $100,000 in 2008. The EAV for the homesite is $3,900 and for the dwelling, $37,850. Total value set at $125,250.
My total bill, which I'm about to pay myself for the first time, is $3,114. This is a real hardship for me and will only get worse. I put back money I actually need for other basic expenses every month because I do not want to lose my biggest asset. And I easily could, as time goes by.
$260/mo.
What is rent there?
Greg's argument about the harm of general property taxes compared to land value taxes is absolutely correct, but let's put this in political context. General property taxes collect more rent with less dead-weight loss than do payroll taxes or sales taxes. (The original income tax was designed to fall mostly on high income rent, but has partially devolved into a payroll tax.)
As actually administered, general property taxes have loopholes to partly compensate for disincentive effects, such as a multi-year total property tax break in New York's 421a program for new multi-family housing. Discounts for senior or veteran or handicapped homeowners also compensate. Of course such breaks tend to favor the rich and powerful. While allowing that property taxes are maladministered, especially in New York City, we still need to forcefully defend them against proposals to replace them with local income or sales taxes.
No amount of taxation puts money into people’s hands to develop land. All it would do is make the person say “go on, repossess it” and then the state gets another useless parcel of land or building that they have to take care of. I see this a lot in my town.
The lot is not developed because it’s too expensive to make mixed use over just investing the money in the stock market; there aren’t enough small businesses that can afford the rents, and probably not enough tenants for the apartments that can afford it either. They can’t make the rents cheaper either, because they are building new not using a building that is getting older over time.
If you live in a smaller town, you understand this; that lot could have been a gas station at one point, and the cost to fix the area is well above any profit you could get from it, so it lies fallow and people hold it hoping someone would buy it when they have deep pockets or fortunes change in the area.There’s no way to make small shops a competitor to big box ones so the downtown lays fallow mostly since it’s too expensive to create new retail chains or lifestyle businesses short of the owner blowing his retirement on them.
Problem is that construction/renting/retail is expensive over software, and you aren’t getting investors who want to put up with it over the least expensive way to invest. Even the state…my state hasn’t reopened many offices they closed during covid or expanded its services. You’d need to tax software or other types of gains versus “hard” improvements to balance the risk out, and even then a lot depends on the demographics of the city.
Sounds like your area has very low land values. But there is $50 trillion of land value in the US. It's just hyper targeted on very urban areas. I don't purport that taxing land will cause development across the entire United States, nor is that what I want--I like nature. Instead, I want our urban cores to be more developed, that's all! And I do strongly content that shifting tax burden from buildings to land is a strong mechanism to do that.
The urban cores are even more expensive to develop in, which is why downtowns are the first to go compared to suburbs. You are not going to get the retail or business to fill out the bottom of a mixed use, and you are probably not going to see people trade a house in the suburbs for a worse house/apartment in an urban area on average.
You cannot isolate one part of the thing and think taxing it will fix it. The land wouldn't be fallow now if there were more money to be made off of making it active. Making it more expensive to own doesn't change this fact; it doesn't make materials and labor less expensive, or convince people to sink their money into starting up businesses or rentals there.
Did you read the article? I am not trying to increase taxes.
I want to decrease the building tax... that tax that makes building more expensive. For precisely the same reasons you care about making building cheaper.
Then, to ensure we can fund our cities, we can offset the decreased building tax by increasing the land tax. The article explains why this is fundamentally different. It brings down the selling price of land (which means developers need less access to up-front capital). It also means folks sitting on vacant land can no longer speculate on it... waiting two decades and doubling their profit just by sitting on land while the city around it grows. This is where you go wrong when saying: "The land wouldn't be fallow now if there were more money to be made off of making it active." On the margins, folks can sit on land right now and make tons of money just throw a city growing. I want to change that.
It's all revenue neutral.
Request for another contra article:
https://andersyding.com/wp-content/uploads/LandValueTax.pdf
- Was there actual land rent data being analyzed?
- Does it make sense to build the model the way they did?
If this is the article I think it is, basically the observations are entirely explained by pervasive rent control, combined with a law that specifically allows rent control to be relaxed when property holding taxes are increased.
Combine these two things:
Rent control already suppressing land rents far below actual market rates, AND
A new tax triggers the “okay you can raise rents by exactly the amount of the tax”
And of course you see the ‘pass through.’ However, it’s not true pass-through, it’s rents mechanically rising closer to true market rates. The entire logic of LVT not being passed on to tenants assumes that rents are already at market rates, which is not the case in this example.
The conclusions drawn from the study are as you say, but since I don’t see where they even looked at rental data, I find it hard to believe that they could draw such conclusions, rent control or otherwise. I suspect rent control is a strawman for bad research design. But I’m not a researcher, so maybe Dunning Kruger here. Can’t just read the study or rely on AI summaries which grab primarily from the conclusions on this one, unfortunately. (Not to say that you are doing this, but I did this at first and it led me astray.)
I wonder if there is any way out of this when the multinationals and faceless corporations wield so much of the power in government. Does it matter how individuals are taxed if the starting price is more than the earning power.
https://lawyerlisa.substack.com/p/you-will-own-nothing-acceleration
This article has a good explanation. The examples are simple enough to see where the distortions happening.
I also like the idea of a land value tax as it is fairer for private citizens who want to own a home. They are only responsible for the tax on their small portionof nature they inhabit and not on the inflationary price of buildings. If the basic tax for a house was similar before and after the switch from property to land value tax then in theory nothing changed for the citizen at first. However his tax will not climb with construction inflation and will be more tightly linked to the slower increase in land value.
Now I can see how this fits nicely with my dreal of the Adult Resident Citizen Dividend (ARCD) a concept similar to UNCONDITIONAL Basic Income but more radical. All of a states income is divided amongst the Adult Resident Citizens. so in essence they would receive back their share of the national land tax and have to pay their personal land tax. This means small land owners would not be inconvenienced by the tax.