The Case for Land Value Taxation

Michael Curtis

[The transcript of a talk prepared by Mike Curtis
for delivery before public audiences, 2010]

Good Evening! I have come to tell you about Land value taxation. It will create an Enterprise zone with no city taxes at all in the most distressed areas, and proportionately less taxes in the poorer neighborhoods.

At the same time, the city will get more revenue from the most valuable areas, because those parcels of land that are un-developed and under developed will have to pay exactly the same as those parcels of land that have been fully developed.

The result will be sufficient revenue with jobs and affordable housing and the revitalization of the city.

What I will show is why a shift from confiscatory taxes to those that are based on the value of benefits received will produce the maximum number of jobs and dwellings that are economically desirable within every community.

Why shifting taxes from income and wages, sales, and the value of buildings to the rental value of land will create the incentives to rebuild our cities and promote an orderly development of the suburbs and rural areas - one that will make the most efficient use of our roads, sewers, and everything else that governments provide.

I'm not going to tell you anything that you couldn't figure out on your own - simply that taxes on income, wages, sales, and buildings actually diminish, proportionately, the incentives to put each parcel of land to its highest and best use.

By shifting the incidence of taxation to the value of each location it not only provides the incentives needed to create jobs and housing, but by building a healthy and efficient economy it also increases the desirability and the value of each parcel of land.

For thousands of years Cities have been the most economical places to live and work. If you have anything to sell, here is the largest number of potential customers.

If there is anything you want to buy, here is the largest and best selection. And in most cases, the cheapest possible price.

Why do so many American cities seem unable to sustain themselves and make the transition from manufacturing to high tech and financial services?

Philadelphia was once considered the Workshop of the World.

I'm sure there was plenty of pollution, corruption, inefficiency, slums, and crime, but Philadelphia proper once had enough jobs and housing for more than 2 million people. It's not only lost one fourth of its population, but it lost it during a period when the total population of the country doubled.

Cities have enacted laws requiring proper maintenance of buildings and outlawed slum lording, abandoned buildings, and vacant lots, but it hasn't worked.

Most cities are in debt, and their tax bases are shrinking from unemployment, abandoned buildings and vacant lots.

Many cities have tried to annex the surrounding suburbs in order to broaden their tax base.

In the case of Philadelphia, they already did it over a hundred and fifty years ago when the entire county became a part of the city.

State governments have been subsidizing cities from the general revenue, and now, in the midst of the Great Recession, the appeal for help from Washington is bigger then ever.

We've heard about running cities and governments like a business. And it does make perfect sense, but, for some reason, no one has actually tried it.

None-the-less, every city has within its borders the potential to generate the revenues that are necessary to support its infrastructure and public services, without in any way diminishing the rewards that are equally necessary to stimulate the reconstruction of buildings and economic activity.

Every city has the potential to become a model of efficiency with plenty of jobs and dwellings and a much larger population than it has now.

The key to urbanology is the reason why two identical buildings --- apartments, offices, commercial buildings, rent for significantly different amounts of money. And we all know the three reasons: Location, Location, and Location.

Every building sits on a piece of land at some location. Every productive activity takes place on a piece of land at some location.

So, let's make a distinction between the buildings, and the land on which they sit.

The value of buildings will be relative to the cost of labor and materials; what they cost to produce. Or, the cost of reproduction, minus any wear and tear.

By contrast, land has no cost of production, much less a cost of reproduction.

And yet, we know how to measure the value of land. If its residential, we consider the proximity to jobs and shopping, and access to public transportation, the quality of public schools, the level of safety and beauty, and even an atmosphere of community.

The most valuable industrial land has access to a deep water port, rail roads, high voltage electric, industrial water lines, and access to the inter state highway system. How about being in an area with a skilled work force?

And, if its commercial land, many factors are present --- and the most important is the number of potential customers.

Now. What actually creates the value of Urban Land?

Can two people build a house more than twice as fast a one person working alone?

Suppose one group grows food, another makes clothing, and a 3rd builds shelter. Each group develops special knowledge and skill, they accumulate tools and machines designed for each specific job; and they experience economies of scale. Far more is produced than would result if each person were independently making their own food, clothing and shelter.

The denser the population, the greater the potential to sub-divide labor, to accumulate tools and machines for each facet of each production, and to produce in greater and greater economies of scale.

Imagine trying to set up a auto assembly plant in a community with less than a thousand people. You need workers at the grocery store and the gas station. You need barbers, plumbers, roofers, and doctors, and the list goes on.

As the population grows, the level of productivity grows, but, at some point transportation is hampered by mud, and the same rivers that connect one city to another, also impede transportation within the economic community. At some point well water is harder to get, and human waist is harder to get rid of.

At this point, each new person does not increase the per-person level of productivity more than the last. We have reached: the point of diminishing returns.

Do we limit the number of people who are allowed to live within a city?

Or, do we pave our streets, construct bridges, build water and sewer systems; establish gas & electric, police & fire departments? Now we can live and work in multi story dwellings and factories with greater and greater subdivisions of labor, and larger and larger economies of scale.

Each worker becomes far more productive when they're working in a city.

………………………………………………… Are wages any higher in cities? If you make a loan for use in a city do they pay you higher interest?

Workers may be paid more dollars in New York, but in terms of what you can buy, or a standard of living, do they live substantially better in New York than they do in Chester County?

If they did we would all move to New York, and the competition would soon bring our wages back to the common level.

We know by observation and experience that Wages and the return to buildings and machinery tend to an amount below which productivity would fall.

The least productive workers are assured the Min. Wage. All others receive only what it takes above and beyond that for the supply of each type and level of skill and knowledge to meet the demands of the market.

The return to buildings, machinery, and inventory is never more than is necessary for the supply to meet the demand.

The greater productivity that results from superior opportunities and denser populations, which is enabled by the infrastructure and public services, attaches itself to the land.

That greater productivity over and above what goes to labor and capital is exactly what gives value to land.

Suppose the city government dissolved. All the police and fireman went home, followed by the sewer and water and street repairman. Off goes the street and traffic lights.

It wouldn't cost any less to build a building or bake a loaf of bread. No police, no clean water, and roads that require, at the least, a jeep. The cost of production would go up. Things produced within the city would tend be more expensive than before.

What would fall is the value of land. What is the value of land right now in Port a Prince?

The value of land is equal to the sum total of all the advantages, minus the disadvantages.

The expenditure of public revenue, no matter how well the money is spent, does not increase the value of labor or buildings, clothing, or food. The only value that governments help to create is the value of land.

And yet, when governments like Philadelphia, go to finance public expenditures, which help to increase the value of land, they tax Wages, buildings, sales, and Profits.

In Philadelphia, only about 4% of the total revenue comes directly from the value of land, which is the only thing that the government actually helped to create.

However, in the process of taxing wages, sales, and buildings they in-directly tax the value of land.

Suppose you're looking for a house. You see two houses within four blocks of each other. One is within the borders of Philadelphia. The other is in the neighboring county. The houses are identical, the neighborhoods are equally safe and desirable and their owners are asking the same price. Which one will you buy? And the answer is the one in the neighboring county.

The reason a house in Philadelphia is worth less than an equally desirable one in the suburbs is because everyone knows that anyone who lives in Philadelphia will earn more than 3% less pay after the wage tax.

But you can't say that the house is worth less. It cost's every bit as much to produce as the one in the suburbs. What is worth less is the land, because anyone who lives on that land will lose more than 3% of their wages in taxes.

Or course, If you're retired, you might be better off living in the city, all other things being equal.

The higher the sales tax, the lower the volume of sales. The lower the volume of sales the less potential profit. The lower the potential to make a profit the less valuable the location, or the value of land.

It doesn't diminish the cost of the building or inventory or the wages of the employees.

The tax on buildings is pretty much straight forward. Without the buildings the income from land would be virtually nothing.

The income from land is whatever is left after the interest on the buildings and the maintenance and management are paid for.

The tax on buildings adds to the expenses and reduces the income that goes to the landowner by the same amount.

We've heard, that Philadelphia is loosing business, because you can't make a profit in Philadelphia. We know with absolute certainty it is not true in Center City.

How do we know that - because people who will have to pay taxes on buildings, gross receipts, net profits, use and occupancy .

are still willing to pay millions of dollars per acre for the for the opportunity to do business in Center City Philadelphia.

They could even raise taxes in Center City, and it would still be profitable. It would lower the income and the selling price of the land, But Center City would still be very profitable.

However, in the worst areas of Philadelphia it is true. You can't make a profit. And the reason we know this for certain, is that the land is worth Zero.

Add up all the advantages and subtract the disadvantages. There is not only trash, crime, and drugs, but there are taxes on buildings, and wages and sales --- all of which contributes to the negative values.

In the worst areas you can't give the land away. The city owns thousands of lots in distressed areas because the real estate taxes weren't paid. The city would like to give them away. But, even when they have some semblance of a house on them, they have no value.

Any increase in taxes on building, wages, or sales, and another area becomes unprofitable.

All taxes are applied equally at every location throughout the entire city.

The land is worthless, because, on average, every dollar invested on it will yield less than the bank.

Right now, I suppose you would have to say: you will lose even more than you lose by putting your money in the bank.

That's when people refuse to reinvest in a neighborhood.

These neighborhoods were once thriving communities, in many cases they centered around factories. In the 1960s and 70s when they were unable to compete with cheaper foreign products, they shut them down.

They didn't auction them off to the highest bidder who would put them to some other use, even if the highest bid was 50 cents? They shut them down and left them idle.

Perhaps they were waiting for tariff protection, or some other advantage, but in fact they stayed idle. And the workers went to other places looking for work. As the communities declined from lack of jobs, real estate values went down with it.

Many home owners who moved, did not sell. They were thinking that jobs would again return and the value of their homes would re-appear.

If it doesn't happen, and a major repair is needed, that is when it is clear that it would be a better investment to put the money in the bank or the stock market than replace the roof or do some other major repair.

That's when buildings and land are abandoned, and the city stops getting revenue.

An important factor is called Brown Fields. When you sell a piece of industrial land, you must have it inspected by the E.P.A. and bare the expense of cleaning it up - Millions and millions of dollars for most industrial sites.

It is said to be much cheaper to let the buildings deteriorate, get the assessments lowered, and continue paying or even owing very low taxes on the value of the land, than pay millions to clean up a parcel of land that might only be worth a fraction of what it cost to clean it up.

Now, if we look at the big picture, it's pretty simple. Every time you raise tax rates, another area that's just barely profitable, becomes unprofitable for reinvestment. Eventually, the area will yield no revenue at all.

This is why some economists think Philadelphia is near the point where if they raise tax rates, they will actually get less revenue.

Now, if we refocus on the prosperous areas. How many empty buildings, and vacant lots are sitting on valuable land that could be sold tomorrow.

In many cases they get no income from the land or the buildings at all, they're just sitting idle, and they have to pay the real estate tax of 2 1/2% of what ever the assessor says they're worth every year.

If they sold the land, and put the money in the bank, they'd get something.

Why would they give up getting interest from the bank and continue to pay the real estate tax when they get no income?

And the answer is -- they expect the land to increase in value far more than the interest they're loosing at the bank and the taxes they're paying to the city.

In other words, they're Land Speculators, waiting for the value of the land to increase.

The price of land may be falling right now, so anyone who doesn't sell when the price is going down is thinking - long term, the price will be going up. We've all heard it: "Now is not the time to sell".

And if they can park cars on it or rent out a dilapidated building with a leaky roof, what ever income they do get off sets the taxes paid to the city, and this adds to their overall profit.

The more land that is unused or underused by a land speculator, the less land there is for people to live and work on.

It costs as much to pave the streets and maintain the pipes in front of a vacant lot as one that people are working or living on.

It costs as much for the police and fire trucks to travel past the empty buildings as all the rest of them.

So, they have to raise every body else's taxes to make up for the lost revenue.

As Philadelphia loses population, their expenses do not diminish proportionately.

And that is how cities work, and that is why they seem to be so dependent upon the broader community.

However, by shifting all taxes to the rental value of land, cities could relieve the worst areas from the burden of taxes.

While those areas have streets, and sewers and police and fire protection, they have trash, and crime and drugs. And the market says the disadvantages are equal to or greater than the advantages.

They have no land values, and, therefore, no net benefit is received from the city or the community as a whole.

We would get substantially more revenue from the best areas.

And we would also create a stimulus to redevelop all the valuable land within the city.

Re-development would start with the most valuable land and eventually ~ radiate back into what were previously worthless slums.

As the previously worthless areas became desirable, the increasing value would represent their fair share of the city's revenue.

You could even remove the exemption from Non-profit organizations. The land value tax is simply a charge for the value of the benefits received from the city.

If their services are beneficial to the city, then council can chose on a case by case basis to make a donation to that charity in the same or any other amount.

To implement this fully, you need to assess the rental value of every parcel of land within the city - What the rental value of each parcel would be, if the city levied no other taxes.

In every area ~ realtors and renters know exactly what houses and apartments rent for.

Realtors and business people can tell you how much per square foot you will have to pay to rent office and commercial space on each block of every street throughout the city.

All you have to know is the rental value per square foot of floor space for the standard type of building in good condition ~ and the maximum height allowed at every location.

You calculate what the building would cost to build multiplied times the current rate of interest; subtract that plus maintenance, management, and insurance from the rents that are paid. what is left is land rent, pure and simple.

A tax rate is then applied to the assessment, which gives the city ample funds operate.

This is not the full Single Tax as proposed by Henry George. That would collect the full rental value from all the privately held land. There would be no state or federal taxes And if it were applied to the whole country, It would free up enough land from speculation that it would re-create the free land frontier. Remember hearing about the Oklahoma land rush back in 1889?

Wages and interest would rise, and the selling price of land would be destroyed.

What landholders lost in an un-earned income they would be encouraged to make up by investing in buildings, machinery, and other productive capital.

However, shifting taxes to the value of land in a few cities for municipal revenue, will not create a free land frontier. It will not reduce the potential income of land owners. But It will grossly reduce land speculation and blight within those cities.

As every owner of valuable land puts it to use, the cities will re-develop. They will increase the number of jobs, units of housing, and their population. They will become more desirable places to live and work, and the value of the land within those cities will go up.

Whether all taxes are replaced by the rental value of land, or it is only a partial shift of the real estate tax from buildings to land, the more fully any parcel of land is put to use the less its owner will pay in comparison to the present tax system.

Another way to say it, is that the guy with an empty building or a vacant lot will pay exactly the same as the person who maintains their house or other building in excellent condition.

What could be fairer than that. The difference in taxes will vary with the desirability of the neighborhood or the number of potential customers, not the condition of a building or how hard someone works.

In conclusion, I do acknowledge that landowners are, by far, the biggest winners. However, is it not better to have enough jobs for everyone who is capable of working - is it not better to have everyone living in a house or apartment instead of the street; is it not better to get rid of the slums and abandoned buildings even if landowners are the biggest winners.

Now, I'd like to show you a little power point that explains how this works with land that's profitable for high-rise buildings.