What Is Land Value?
Gilbert M. Tucker
[Reprinted frm the Henry George News, June
1948]
A letter from an old-time Georgist raises a question which, simple as
it is, has perplexed many. He puts it this way: "If we tax only
land values, as taxes increase land values decrease, until there will
be no value left to tax -- nothing on which to levy?" The
difficulty comes from failure to understand and define terms. Barret
Wendell emphasizes the necessity of using words not only correctly,
but also in one uniform sense. Recall what he says about the word "choir,"
meaning, to a musician a group trained to sing together; to an
architect, a certain portion of the church structure; and to the
frivolous-minded a social group in which the tenor elopes with the
soprano. All are perfectly good definitions, but for logical reasoning
we must use only one at a time.
Now what of "value" and its correlative "price"?
I won't quarrel with other definitions; I see price as value expressed
in terms of money, but, in the case of land, we determine true value
far more accurately from the annual use price, which we call rent,
than from sales price -- for sales price covers only a part of
true value. State constitutions, law, usage and custom, long ago
established the fact that the ultimate title to land is lodged in the
State, the sovereign, the people or however we may denominate the
common interest, and a deed passes only partial ownership to the
purchaser - ownership secondary, like a second mortgage, to the claim
of right of the State. The unquestioned right of the State to impose a
tax on land witnesses to the valid claim of the people to all the
land.
Suppose you pay $1,000 for a piece of land, borrowing the money at 4
per cent. In my town you will also pay a city tax of approximately 4
per cent so the lot will have to carry an overhead obligation of $80 a
year - half to cover interest on purchase money and half to pay the
tax bill. Now the recognized method by which we arrive at a market
value is to capitalize the net return of $40 (after paying taxes)
at 4 per cent and this sets the price at $1,000. But the lot costs you
$80 a year and, if money is worth 4 per cent, is obviously worth
$2,000. Have you put one over on the seller and gotten something at
half price? Not for a minute! He has sold you only his equity in the
lot and, no matter what the deed says, the city has a preferred claim
and a recognized equity.
Grasping this principle does much to clarify thinking. It establishes
the fact that there is a joint ownership between title-holder and
city, and the claim of the city is a just one, for the earth is the
common heritage of all men from their Maker. Its value -- the fact
that it commands a price -- is due entirely to the common life. It
also makes it clear that true land value is reflected in ground rent
and not in market value and that this true value is not affected by
the way in which ground rent is shared between title-holder and
government. The land is worth $80 a year, whether the entire sum goes
to the former or the latter or is divided between the two. Were the
government to collect all the ground rent, although the sales price
would theoretically fall to zero, the lot would be worth just as much
as ever, and the tenant would pay the same rent as before, even if it
were all taken by the tax collector without the intervention of any
landlord. One can also see why it is justly said that such a method of
raising public revenues is not taxation in any true sense of the word
for taxation is "the compulsory exaction for the support of
government," and ground rent is only payment for values and
services received.
We say that the true value of land is not affected by the way in
which the ground rent is shared but this is not strictly true.
Practically the proposal for the city to take ground rent is
correlated with the exemption from taxation of all buildings. In
cities, vacant, unused land seldom brings in much besides tax bills
and, to earn an income, a building must be erected.
It is the building and not the land which earns a return and anything
which increases the earnings of buildings will react to support and
increase the value of the sites. Obviously an untaxed building is more
profitable to the owner than one which is taxed. If the taxation of
buildings is heavy enough (and it is) it throttles building (and it
does). Hence we have a housing shortage, badly aggravated by the fact
that taxation is often so oppressive that good and useful buildings
are razed, or allowed to fall to pieces, because the tax collector
takes all their earnings. The first stage in the decadence of urban
realty is seen in the destruction of buildings to cut tax bills; then,
when the owner finds it economically impossible to replace the old
structure with something modern, because of heavy tax costs involved,
the next step, in creating a "blighted area" is to quit
paying taxes add forfeit ownership of the land.
If Governor Dewey would look out of his office windows at a couple of
properties directly across State Street from the Capitol, he could
learn something of the housing problem in Albany at least. One good
house was razed some years ago and almost adjoining the high board
fence surrounding that lot is a fine old residence, windows broken or
boarded up, deserted and dropping to pieces. Looking down the
intercepting Hawk Street he can almost see the "Dudley Row"
of fine old brownstone houses, where there is one house burned out and
never restored, another collapsed and the remainder all
disintegrating. These properties are not more than a couple of hundred
yards from the Capitol entrance through which pass our Governor, out
legislators and many housing "experts." If they would open
their eyes and rid their minds of prejudice, they would see another
and a better answer to the riddle of housing than bond issues,
subsidies, grants and hand-outs.
Making building profitable by untaxing it would mean ample housing
and it would restore many disappearing land values, re-establishing;
the finances of many a city. It would benefit many, including even
landowners whose taxes would be increased by putting the entire burden
on land values, and I speak from experience. I had to take a terrific
licking on a house because a crazy tax system made it impossible to
displace an obsolete structure with a modern and profitable building.
Had the city followed a wiser course taxes would have been increased
on this holding by nearly four hundred dollars. A new untaxed
building, appropriate to today's needs, would then have been possible
and would have made a "white elephant" into a desirable
investment. Incidentally the city would have been assured of a larger
tax income and housing would have been provided for about sixty
families.
But it is often asked how taxes can be assessed if values based on
sales prices evaporate. Think in terms of ground rent - what use and
occupancy is worth - and assess on that basis, not on capitalized
values. Since ground rent is the basis of market price, certainly
there will be no more difficulty in determining ground rent. When
realty is forfeited for tax delinquency let the city continue to hold
title, instead of trying to force unsound sales. Offers on leaseholds
of forfeited property would give an approximate index to just ground
rents during the transitional period, although it is extremely
doubtful whether there would be much, if any, future tax delinquency
or forfeiture. Taxes would be paid instead of becoming delinquent;
land values would rise materially with building exemption. Every wise
public improvement would be reflected in higher land values and
consequently in higher ground rents. Most public improvements
undertaken by the city could be made self-liquidating and sometimes
highly profitable. City, realty owners, tenants and everyone would
benefit in the long run.
|