Unwise Taxation as a Burden on Housing

Harold S. Buttenheim

[Excerpt reprinted from the Yale Law Journal, December, 1938]

CONCLUSION

The search for a rational tax system must harmonize two major governmental objectives -- the production of ample public revenues and the promotion of permanent public welfare. Our present method of taxation seems particularly deficient in the second essential, at least in regard to the task of providing cheap and decent housing for the mass of the people. Suggestions for reform are therefore not amiss.

As allegedly preferable to the usual American system of assessing real estate on an ad valorem or capital value basis and taxing land and improvements at equal rates, the British system of "rating" property on an income or annual use basis is urged from time to time by real estate boards and others. Careful study by tax experts indicates, however, that all is not so well with the British system of real estate taxation as some of its proponents would have us believe.[1] One such student points out two grave and insurmountable defects in "income" as a basis of assessment: (1) the fact that it puts a premium upon holding land idle and upon retention of obsolete buildings, and (2) that it is in its higher ranges in reality a peculiarly pernicious tax on room space. A tax rate based upon income from real property thus would only aid in the perpetuation of poverty.[2]

"The very property now most insistent on a change of assessment procedure, viz., the most highly improved, would lose most under the English system, which is based not only on assessment of the rental of improved property, but also on exemption of agricultural, unimproved property, improved but unoccupied property, and in part manufacturing. In other words, vacant lands, poorly developed lands, and unoccupied improved property are unburdened in whole or in part, resulting in highly developed lands being additionally burdened. Valuable land withheld from use contributed nothing on its value towards public expenditure. Other valuable sites occupied by obsolete or tumble-down buildings contribute little."[3]

Discrimination between land and improvements as bases of taxation would seem to be the first wholesome revision necessary to the solution of our American problem. Shifting the larger or entire burden on to land would lower the price of land, stimulate building construction, and secure to the government communally created values. The change to a system of land value taxation, however, should be made gradually, at an increased rate of not more than 10 per cent annually, to avoid any sudden drastic upset of investments. At the 50 per cent mark, the plan can be reconsidered in the light of its accomplishments and then extended only if of proven benefit. In any event, the graded tax plan should be but one segment of a triple tax base which includes levies on incomes and inheritances, for both the "ability to pay" and "benefits received" are sound fundamentals of taxation. Taxes derived from land value could be used for municipal and county revenues, while the other two sources could be tapped to defray state and national expenditures. But not until the fundamentals of a graded tax system are adopted will it become possible, except by tremendous government subsidies, to achieve decent housing for the "lower third" of the American people.

NOTES

1. Testimony is not lacking from England as to dissatisfaction with established methods of assessing and taxing real estate. The governing body of England's metropolis -- the London County Council -- and some 230 other local government bodies throughout England, Scotland and Wales have adopted resolutions urging Parliament to authorize lower tax burdens on goods and buildings and higher rates on the ground rental value of both improved and vacant sites. "Site value," says the London County Council in a 1936 report, "is the measure of the commercial, social and industrial advantages attaching to a site, which arise from the existence of the community and from community services provided out of the public purse. It is a value which has not occasioned any cost of production to the owner; and consequently the rating of site values is, in effect, a means of securing to the public a value which it has itself created." LONDON COUNTY COUNCIL, RATING OF SITE VALUES, (1936) Report No. 3202, p. 17.

Parliament refused the request, but the London County Council has determined not to let the matter drop. At its meeting on July 26, 1938, the Council adopted, by a vote of 83 to 44, another report of its Finance Committee on the rating of site values. This proposes that Parliament empower the administrative county of London to levy, in addition to the present real estate tax, a yearly rate of 2 shillings to the pound (that is, 10 per cent) on the annual site value of land. The report suggests that as and when it is deemed desirable to increase the rate of this proposed land-value tax, the question of further legislation should then be considered, and that future increases should be applied gradually over a period of years in order to ease the burden. LONDON COUNTY COUNCIL, RATING or SITE VALUES, (1938) Report No. 3373, p. 2.

2. Griffith, Real Estate Assessments: Capital or Income Bases (1936) 3 TAX POLICY 2.

3. Zangerle, Assessing Real Estate on Its Income (1936) 8 (No. 3) MUNICIPAL FINANCE.