Explorations In Urban Land Economics

Mason Gaffney, et al.

[Abridged from a monograph of the conference proceedings, which took place on the campus of the University of Hartford on November 15, 1969]

INTRODUCTION / John J. Sullivan

The objective of the conference, sponsored by the John C, Lincoln Institute, was to explore current issues in urban economics: fiscal imbalances, ghetto economic development, housing and urban development. A deliberate effort was made to include in the program papers from scholars in the field whose work is not yet widely known.

In recent years, there has been a renewed interest in site value taxation. Much of this interest stem-s from- the criticism levied against the property tax and the search for some viable alternative. Contemporary advocates of site value taxation base their argument on three points:

1. The well demonstrated efficiency of site value taxation.

2. The demonstrated efficiency of this tax in discouraging the holdings of land out of use or in eggregious under-use.

3. The a priori argument that such a tax would encourage greater intensity of urban land use, resulting in more compact cities, with less urban sprawl, would discourage land speculation and might bring down exorbitantly high land values.

Despite these alleged advantages of site value taxation, it has been criticized on the grounds of equity, revenue adequacy, and difficulty of administration. Daniel Holland's paper addresses itself to these criticisms. Among one of his many findings is that the case against site value taxation on lack of revenue grounds is weakened because of the great under-assessment of land value and the failure to allow for dynamic adjustments that would raise land rent when buildings are untaxed.

In the second paper, Duncan MacRae presents an alternative to Cost-Benefit analysis. He applies linear decision theory to evaluate urban development using the Empiric model of location, Goals and values are chosen over the planning period for the change in the endogenous variables, population and employment, and the change in the policy variables, which he labels accessibility and utilities service. Given land developability as the exogenous variables, MacRae then determines the policy variables which best satisfy the goals and variables. He concludes that this approach provides guidance in the design of housing, employment, transportation and other urban development programs.

It has been recognized that blacks are under-represented in ownership and management positions in the U. S. economy. Professor Tabb's paper discusses the reasons for the lack of black entrepreneurs. He considers three alternative proposals for encouraging black business in the ghetto. First, programs to create black capitalists are discussed and the conclusion reached that few jobs are to be created in this way and the establishment of black owned marginal businesses are outmoded strategy. Second, schemes to bring large white corporations into the ghetto to create jobs for blacks is discussed and rejected as too costly and not likely to create either the jobs or the independence desired by the black community. Third, attention is given to proposals for community ownership corporations, locally owned and managed. Tabb concludes that these corporations would face severe political and economic problems, but are to be encouraged not simply because they may be expected to bring community development, but more importantly because they are ideal agencies for community organization. They offer tangible reward for involvement in neighborhood political organization. Such a group could articulate the needs of a community and demand funding to carry out black economic development projects.

In the last paper, Irving Silver develops a model for testing hypotheses about housing demand. It consists of two parts: the determination of the value of housing services acquired, whether in fee or rental, by those who move from one dwelling to another; and the determination of the probability of a move in a particular period for all households in existence at the beginning of the period.

IMPLEMENTING SITE VALUE TAXATION / Daniel M. Holland

INTRODUCTION
Looking back over the paper as it evolved and, therefore, writing an ex post introduction, it should be noted that the discussion that follows is not directed as much to its assigned title -- "Implementing Site Value Taxation" - as it is to the several major pre-conditions of this step. Thus, it is not concerned with the specifics of how to go about instituting a tax on site value. It does address itself, however, to two major questions; unless affirmative answers can be given to them there is little point in going into further particulars concerning the implementation of a tax on land value.

(a) Will there he enough revenue in a site value base (and at what rates) to warrant our thinking seriously of adopting it?

(b) Can land values be estimated well enough to base a tax on them?


MY ROLE

Let me at the outset state my qualifications for rushing into a discussion where wiser men have feared to tread. I lay no claims to the expertise and balanced judgement that long study of a problem would develop. My role, rather, is that of a reporter. Early last year, I agreed to help organize a Conference for TRED (The Committee on Taxation, Resources and Economic Development) on the assessment of land value, with particular reference to implementing a site value tax. The Conference, held in June, 1969 was the occasion, I think, for a number of important contributions several of which I will put before you. Look on me, then, simply as a middleman in this exchange of ideas. (The papers presented at this Conference -- the eighth in the annual series held by TRED -- and a summary discussion will make up a book to be published in 1970).

I lay no claims for originality. Everything I say has been already said by others. My purpose is to transmit some ideas which, I think, cast doubt on some criticisms of the feasibility of site value taxation that appear to he widely accepted. I think it is important to air these ideas because the case in theory for site value taxation appears to be gaining support, while the case against it on practical grounds appears to be widely accepted. There would be little point in advocating an alternative to the present property tax, no matter how desirable that alternative might be in principle, if it would not work. At our Conference, however, good reasons were put forth for scepticism about the alleged infeasibility of taxing site value, Therefore, it could well be that preferences based on principle need not be ruled out as impractical. This is an attractive prospect, well worth a further look.

In so doing I hope to reconcile in favor of a land value tax the two conflicting trends of opinion summarized on the one side by the quotation from a recent article by Pechman, which stresses economic effects:

"The property tax encourages real estate operators to let their city properties run down, and to hold on to vacant land in the suburbs in the expectation that it will appreciate substantially. Nowhere are the high land values which are created largely by the action of local governments taxed to the extent that equity and economic considerations warrant. One does not necessarily have to subscribe to all the dogma of the 'single tax' to see the merits of heavier taxation of land values or of increases in land values." [Joseph E. Pechman, "Tax Policy for the 1970's," Public Policy, Fall, 1969, p.82.]

And on the other by Frederick Stocker's epigram; "Site value taxation may be one of those places that is simply impossible to get to from here. which is dubious about its feasibility.


THE ARGUMENTS AGAINST THE FEASIBILITY OF SITE VALUE TAXATION

The primary arguments against site value taxation have been put succinctly by Netzer.

"The first is the difficulty of separating site values and improvement values in the case of improved property; this appears to be a real difficulty administratively but not conceptually. The second is an equity argument: large windfall losses and gains would stem from a shift from the present sys -tem to the site value tax and would be intensified by the fact that many present landowners have not been the recipients of the 'increased increments' but have paid prices reflecting these to previous owners. The third is the problem of revenue adequacy. It has been estimated that to replace the present yield of American taxes on real property would absorb more than the extra (before-tax) rent of land. " [Diok Netzer, "Property Taxes," International Encyclopedia of the Social Sciences. Volume 15 (The Macmillan Co. and The Free Press), p. 549.]

My discussion will be addressed, in the main, to the first and third of his points -- the difficulty of administration and revenue adequacy -- which I will take up in reverse order.

Adequacy of the "Static" Case

Start with a static statement of the case, If a tax presently levied on all real estate, i.e., land and improvements, is replaced by one levied only on land, the tax on land will, of course, have to rise, To how much depends on the current rate of tax on real property and the relative importance of land and buildings in the present base.

Table I [not reproduced here] summarizes the possibilities for a variety of alternative assumptions about the ratio of the value of buildings to land and relevant tax rates. Thus, if, in the aggregate, buildings are 50% more valuable than land, and the effective property tax rate is 2 per cent, the rate of site value tax that would keep revenues unchanged would be 5 per cent. These particular ratios are roughly representative of the "country as a whole" (excepting agricultural and personal property). The conclusion, then, for the "country as a whole" would be a substantially heavier tax on land value than is presently levied on the aggregate of real estate, but not one that is likely to expropriate land rent.

This conclusion, by the way, is somewhat different from one that has been widely accepted -- Heilburn's for 1957. He concluded "that the yield of the American real estate tax itself is now catching up with or perhaps has already passed the sum of all that economic surplus." [James F. Heilburn, Real Estate Taxes and Urban Housing (New York: Columbia University Press, 1966), p. 150. By "economic surplus" he means the land rent, the capitalized present value of which would be the base of the site value tax.]

If, in fact, 3 per cent is a more appropriate value for the effective property tax rate (excluding agricultural and personal property) for the "country as a whole, " we would reach substantially the same conclusion as Heilbrun.

But the "country as a whole" is not a particularly relevant economic entity, and some would argue that a different ratio of building to land value is more correct. And, perhaps, more important than these qualifications is the reminder that these are static estimates, In a paper presented to the TRED Conference mentioned earlier, Mason Gaffney criticized estimates of this kind on two major counts:

1. Land is underassessed to a greater degree than the usual data indicate.

2. The untaxing of improvements could lead to a pronounced increase in the land value base.

The thrust of his analysis was that the static values tend to be overestimates of the ratio of buildings to land because there is a downward bias in the land valuations, even on an omnibus parabus basis, and also because in the face of a shift to land value taxation all other things will not remain unchanged. In fact, the adjustments will be in the direction of adding to land rents (or values) thus tending to soften the rise in the tax rate on land that would accompany the shifts to it as the base of property tax, what follows draws heavily from his paper, "Adequacy of Land as a Tax Base." All the quotations in this section, unless otherwise indicated, are from Gaffney's paper.

Estimates that place the value of buildings at 60 to 65 per cent of the market value of urban property, are generally derived from Census data which correct assessed values by assessment-sales ratios to arrive at "true" values, Gaffney contends that the use of assessment-sales ratios fails to even out all of the assessment discrimination in favor of land - he cites the assessment ratio of 23% for vacant lots and 55% for "Commerce and Industry" in Wisconsin as shown by the 1967 Census of Governments as an example of the relative underasseasment of land -- for two reasons.

1. Properties that are not sold do not enter into the derivation of the assessment-sales ratio. Smaller properties, which are not as likely to be underassessed, are over-represented, and the larger properties that tend to be more heavily under-assessed are underrepresented. Assessors may engage in "window-dressing, " using high rates of assessment on the properties that turn over to get a higher official assessment- sales ratio for county equalization purposes, and a lower contribution to county taxes. Some circularity is involved, too, since higher assessments tend to speed-up sales of vacant land.

2. The assessment-sales ratio fails to capture those land values that have been transformed into "amenities" - what Gaffney describes as "the element of latent plottage," citing as examples the fact that wider lots sell for less than narrower ones per front foot, as do lots in areas of low density zoning or subject to covenants compared with lots that do not, etc. In effect, these arrangements transform land values to amenities and accepting the market value of the land so hampered is, likewise, accepting under-assessment. Mapping techniques will show this, Gaffney notes; but assessment-sales ratios will not.

Moreover, he holds, considerations of this kind also suggest, although they do not prove, that the land share of improved properties is also understated compared to buildings. This suspicion is reinforced, indeed strongly established, in his judgment, by land value mapping studies for Milwaukee that he and some associates have done.

As Gaffney explains:

"To measure all these factors, and others, that combine in the underassessment of land, requires an independent 'audit' assessment. The audit of course must avoid the several biases toward malassessment.

"The only way to do this is to gather data on sales of land, bare and on the eve of demolition, and piece them into a 'cadastral' map, i.e., a map of land values. From the map one measures the area in different value zones totalling them for the city's land value."

This he and several co-workers have done for the city of Milwaukee. Starting with the "records of several thousand sales of bare land, " as the basic data, and relying on additional evidence from a variety of sources, they developed land value maps from which they obiamed an estimate of $2.4 billion as the total of taxable land value for Milwaukee in 1965, a figure that is over three times as large as the equalized assessed value of land of three-quarters of a billion. The "official" equalized assessed value of buildings and land was $3.4 billions. So the equalized assessed value of land was 22 per cent of the total. But Gaffney's estimate of the "true" land value came to 70 per cent of this total.

He does not "conclude that the share of land in the city's real estate is actually that high. Probably the equalized full value is too low - certainly its land component is." However, it is fair to conclude, I think, that the commonly accepted 40 per cent for land's share of the total value of property - a figure Gaffney notes that most assessors in older cities like Milwaukee would cite in this connection and the value Ecker-Racz used for his illustration cited earlier (and also the ratio Manvel obtained for all property including agricultural, for which see "Trends in the Value of Real Estate and Land, 1956 to 1966," in Three Land Research Studies, Research Report No. 12 of the National Commission on Urban Problems, p 4), could well be substantially too low. Indeed, instead of improvements being half again as valuable as land, they could be considerably smaller relatively, because land is heavily under-assessed in ways that assessment-sales ratios will not capture and correct for.

If, for example, the value of improvements were only two-thirds as great as land, then, as is indicated in Table I, even in jurisdictions with property tax rates as high as 4 per cent, shifting to a site value tax would not "confiscate" land rent, assuming that 7 per cent or so is a good measure of the return on land (both cash flow and capital gains). The site value tax would, of course, have to be quite high and would represent a stiff annual charge against the income. Moreover, of course, much of what Gaffney's mapping uncovered as land rent, people--including land-owners and assessors -- do not see falling in this category. They consider it to be amenities obtained at the sacrifice of land value. So while, in truth, they partake more of land rents than is commonly believed, there would be opposition to this base. However, if taxpayer opposition were to be taken as a disabling factor, there would be no government sector at all.

Gaffney goes on to point out that there are good a priori reasons to reinforce the differentially greater under-assessment of land that his land value maps suggest. There are, in other words, a number of factors biasing land assessments downward.

1. Assessed values of buildings are accepted by the IRS as the basis for the depreciation charge that can be recouped free of Federal income tax, Taxpayers will pressure for and assessors will tend to accede to a breakdown between depreciable improvements and non-depreciable land, that understate the latter. (Incidentally, this suggest that the gain to the Federal fisc from a more accurate assessment of land value would be an important fringe benefit of site value taxation.

2. Land ownership is highly concentrated. The relative few who hold a large fraction of it can seek legal "redress, " and otherwise bring pressure to hear, thus tending to a downward bias in land assessments.

3. Assessments lag behind market values, and this has more severe consequences for land which appreciates than for buildings that depreciate. Also, the practice of correcting for these lags discontinuously, means changes are very sharp and, hence, heavily resisted.

4. Land values are interdependent. If an assessor raises the value of one holding, he will generally have to do it for adjacent ones This leads toward quiescence on this score. As Gaffney notes: "Assessnr Watson of Los Angeles defended his under-assessment of Governor Reagan's Malibu Mountains ranch by noting that if he corrected it he would have to raise 100, 000 acres round about, held by Bob Hope, Marlon Brando, Jack Benny, and Edie Adams, among others."

Adequacy - The "Dynamic" Case

To talk about the "country as a whole" or the "urban sector as a whole" is to talk about a unit that is non-meaningful operationally. So let us instead, more realistically, consider the case of an average or typical city. Similarly, we should seek greater realism on another dimension. For would it not be true that the illustrative rates on land, calculated earlier, would apply only in the first instance. In other words, would we not expect these higher rates to result in lower market values for land and, therefore, would we not require even higher rates?

So Ecker-Racz argues for example.

"Land values, of course, would not remain unchanged in the face of tax increases of this magnitude. In most instances, a 7.5 per cent tax would confiscate much of the net income and even some of the gain anticipated from land ownership. Since landowners presumably could not pass the tax forward to consumers, land values would fall drastically to a level where the rate of return on lower land values would be comparable to that available from alternative investments. As land values declined, tax rates would need to be increased to preserve total revenues. " [L.L. Ecker-Racz, op. cit.]

To this process Gaffney's answer is no. Further decimation of the land tax base and higher tax rates than those initially levied on land will not occur in the city that has shifted to a site value tax because while the levy on land is raised the levy on buildings is lowered. Land rent is larger by the amount of the rescinded tax on buildings, and land value is enhanced by the capitalized value of this increment. As Gaffney explains: "Local land supply is inelastic; local labor and capital supply are elastic. Therefore any tax nominally levied on buildings must reduce land rent. Conversely, lowering building taxes must increase land rent by an equal amount. Taxable surplus is not lost or destroyed by untaxing buildings; it simply pops up elsewhere.

Summary on Revenue Adequacy

I find Gaffney's arguments persuasive. In my view they add up to a major qualification of the conventional wisdom on the revenue inadequacy of a site value tax. Netzer, for example, considers revenue inadequacy of a site value tax to be a "serious drawback," and feels that "the general conclusion must be that 100 per cent revenue replacement through exclusive taxation of land is not a practicable alternative... " [Dick Netzer, Economics of the Property Tax (Washington: The Brookings Institution, 1966), pp. 210 and 212.]

Because such judgments fail to account as fully as they might for the greater under-assessment of land value and fail to allow for the dynamic adjustment that would tend to raise land rent when buildings are untaxed, as regards any particular city at least, the case against site value taxation on lack of revenue grounds is not as strong as has generally been held. Or, to look at it more positively, a goodly number of cities might very well he able to "afford" site value taxation. In any event, we should not be put off by the data of Table 1 as they are usually read. …


A PARTIAL REPLACEMENT

If the aggregate value of land relative to buildings is (or would come to be) higher than the two-thirds it is usually taken to be, then cities with effective rates of property tax even as great as 4 per cent should not find revenue inadequacy a limiting factor.

It is no surprise that 'this exercise proved too much for the valuers" or that they "found beyond their capacity the degree of imagination which required them to value, for instance, site after Site in Regent Street as if in turn each Site was covered only with 'sedge, grass or other natural growth, ' all other buildings remaining intact.

But these are unduly broad questions - to anticipate perfectly the best possible future development or to bring back, in imagination, land to its native state, We do not impose such comparably difficult requirements on other tax bases, and we need not do it on site value to have it achieve substantially in practice what has been claimed for it in theory. I am talking here, of course, about reasonable claims including those that find a good deal of the virtue of taxing land value to lie in the sin of taxing improvements.


CAN SITE VALUES BE SATISFACTORILY DETERMINED?

We turn now to the second of the major problems noted earlier -- the difficulty of determining site values, particularly for properties that have improvements on them, which are, of course, the large majority of properties in the typical older city. The argument, usually offered here is not that it is impossible conceptually to derive site values under these conditions, but that it is very difficult to do satisfactorily. And, moreover, because rates on the land value base would necessarily be considerably heavier than those currently levied on real property if revenues are to remain unchanged taxpayers would be more sensitive to error and imprecision. Thus, there is a sort of double-squeeze, the critics say. With rates 50 much higher accuracy of assessment should be greater than under the current property tax; but, in fact, the Opposite is likely to eventuate. It is useful to insert the reminder here that only in the case of vacant lots would the rates under a site value tax on the whole of the property be as high as those in Table 1. on all other properties, the site value component would bear rates this high, but the land value would be only part of the total value of the property. Indeed, on properties with higher ratios of building value to total value than the average, the total tar would be lower, etc. However, since it is fairly characteristic, presently, because the division between land and building assessed value is without property tax consequence, to overstate the assessed values of buildings for the income tax advantages of an enhanced depreciation charge, shifting to a site value base which would require a more careful assessment of land and buildings could mean tax increases even for those properties that are developed to an average or above average degree.

What are the administrative difficulties of site value taxation? Netzer has summarized them this way.

"All this suggests that there is no fundamental conceptual problem in valuing sites for taxation, but there would be formidable difficulties in practice, related to problems such as encumbrances. Moreover, the market evidence - sales of unimproved sites comparable to improved sites - is rather scarce, which makes assessment even more difficult, and would make testing of assessment levels and quality virtually impossible in many circumstances. A further difficulty in valuation which is hard to surmount is the problem of distinguishing the value contributed by old improvements to land, such as grading and fertilization, from the bare site values."

While these problems are not considered "fundamental" conceptually, they are deemed "formidable" in practice. It is important therefore to reach some conclusion on how disabling "formidable" is. For this purpose I shall draw very heavily on the judgment of Kenneth Back Finance Officer, Government of the District of Columbia, who presented a paper to the Eighth Annual TRED Conference on "Land Value Taxation in Light of Current Assessment Theory and Practice." Again, in what follows, unless otherwise indicated, the material quoted is from Back's paper. The TRED Conference developed a fruitful exchange between students of tax principles and students of property tax practice who are also practitioners and, hence, much closer to the firing line. Because he is deeply involved in day-to-day administration of a property tax, Back's judgments are particularly relevant.

Right at the start of the paper be states his conclusions.

"… I take the position that from a technical point of view, land values can be established and maintained with reasonable accuracy provided that the assessor is not asked to calibrate his crystal ball" so finely as to directly force a desired market objective in the valuation process. It is one thing to project a potential use and market value based upon legal effective zoning but quite another to disregard the forces of supply and demand and project a use and market value in accordance with someone's social or economic objectives. " It is feasible, in other words, to expect that assessors with good training, hard work and ample resources would be able to determine reasonably good approximations of market value for land, Market values incorporate some weighted average set of expectations about the course of development and the uses to which land could and will be permitted to be put. To go beyond this and specify values consonant with some particular scheme of development would pose extremely difficult problems for the assessor both in estimating land values and in justifying them to the taxpayer.

This leaves us with a question. Is current market value, i.e., the "salvage value of land" (as Gaffney puts it in his paper referred to above) sufficiently close an approximation to the "ideal" site value base? This depends on the purpose to be served. If the objective is to replace a tax that heavily penalizes development and depresses it unduly with one that would be substantially neutral in these respects, then I would hold that the market value of sites is a sufficiently good base. To this matter we will return later.

Now, however, it is necessary to point out that Back is talking about what could be done, not generally what is being done. In current practice, "the preponderance of effort is normally expended on improvements." He estimates that subject to variation among jurisdictions, 60 per cent or even a little more of the time of assessing staffs is spent on buildings. "This is not surprising since in most urban areas the improvements account for the larger part of the total assessed value and generally present a more difficult valuation problem than does land." (Underlining mine) And he goes on to note that although valuing land is neither easy nor cheap ..... it is obvious that if an assessor had to value only the land, his task would be greatly simplified and, given the same total staff resources, his valuations would be more accurate."

He is not unduly discouraged by the fact that for the typical older city there is nothing near a sufficient body of vacant sites to permit fairly direct "analogizing" of the land value of developed properties. In passing he notes "...that there is, in fact, a larger body of direct site value evidence than most assessors appreciate..." But, more importantly, methods are available despite the lack of direct sales evidence tor vacant sites to permit reasonably good assessment of land values. These methods are standard, have always been available to assessors, but have not always been used by them.

In this connection Back stresses particularly the Allocation Method which though widely discussed is like ancient Danish wedding customs -- "more honour'd in the breach than the observance." Back considers that "Potentially, however, it is the key to accurate and uniform land evaluation" which would permit the derivation of a meaningful allocation of the value of land and buildings for every parcel of improved real property... if the assessor subjects a modicum of information about a number of properties having similar use and located in an homogeneous area to some rather elementary statistical procedures."

His own office has used a modest version of this technique -- the equivalent of a simple regression analysis which could be made more ambitious and complex, and, hopefully, more accurate -- and it has been very useful.

Of course, successful application of this and other techniques requires money and professional competence; both of these resources unfortunately are lacking in many assessing jurisdictions, But this has as much to say about the administrative difficulties of the current property tax as the site value tax that might replace it, An additional administrative difficulty posed for site value taxation is that "Land appraisal actions have been so neglected as to create an almost universal imbalance as between the assessment levels of land and improvements." Moreover "too many assessors are predominantly building oriented in their approach to the assessment task."

By way of encouragement he cites the example of his own assessing jurisdiction which by a vigorous concerted program of land reappraisal raised assessment-sales ratios for all categories of properties, with greatest proportionate rise coming in vacant land, and lowered the coefficients of dispersion, again, most pronouncedly for land.

This program, of course, also generated numerous appeals, But as Back remarks, "It is evident that a shift in incidence of the property tax, which must invariably accompany an energetic land reappraisal effort, will motivate considerable taxpayer reaction, But I suppose it is only fair to say that any reassessment program can be expected to do the same thing. " Many owners of commercial properties did not object to the total value placed thereon, but did object to the greater value on land vis a vis buildings, since this meant they could charge off less in the way of depreciation.

He sums up this way: "Our own experience with a land valuation program would indicate that from a technical point of view current assessment theory and practice could accommodate a system of land value taxation."

But then Back makes it very clear that this is subject to a number of caveats:

1. We would need far more precise assessment techniques than those presently employed in most jurisdictions. For the assessor will not be able to make up the error on land via compensating adjustments in connection with improvements to arrive at a pretty good figure for the value of the total property. The taxpayer pressure on him will be greater.

2. Satisfactory site values can be determined by experts, but most assessors are not experts.

3. A lot more information on the determinants of market values of land would have to be developed.

4. "It has been my experience that the average taxpayer has a better understanding of the total market value of his property than he does of either the land or building portion. Thus, under a system of site value taxation, the assessor would most likely be subjected to considerably more pressure than he is under the present system of property tax."


POSSIBLE ADMINISTRATIVE SIMPLIFICATIONS

Should we worry about administration at all? The real thing many advocates of a site value tax are after is a change in economic effects. Remove the present excise tax which deters construction, and replace it with one that does not, And this can be achieved by any tax that will not vary in amount with any economic action of the taxpayer. The important thing is fixity, not accuracy. So get a pretty good assessment of land value and just make sure the tax base is not varied with the development decisions of the landlord. But this simplistic view neglects, of course, considerations of tax equity which is usually evaluated by taxpayers themselves by reference to a discernible base. There is no reason to expect that as regards land value taxpayers will be less vigilant about their relative tax liability than they are with any other base.

Assessing land on the basis of its current market value and using that value as the basis of the tax means, of course, a departure from the pure site value concept, since different degrees of improvement -- grading, draining, clearing, public facilities.

private amenities, etc. - have been made to the land. And these would be taxed. In his paper to the Eighth Annual TRED Conference, "Defining Land Values for Tax Purposes" William Vickery suggested as a possible way around these difficulties the concept of a "standard state" representing a specified package of such improvements as was reasonable in a particular place at that particular time and assess land values with reference to it. The Conferees tended to show division along professional lines on this question however. The "theorists" felt it was a neat compromise, while the practitioners were highly dubious of their ability to make the concept operational.

A simple compromise that seems quite practical was offered for consideration by C. Lowell Harriss in his paper (prepared for this same TRED Conference) "Transition to Land Value Taxation: Some Major Problems," He suggested that as of the time a site value tax was adopted from then on owners would be permitted to deduct improvements made to land per se from the tax base, just as buildings would be exempt. Land owners, of course, would have to keep records of such outlays.


CONCLUSION

Very briefly, this summary of other men's ideas and findings has reminded me of the importance of that old proverb: "Where there's a will there's a way. " For many communities "Where there's a will" to shift to site value taxation, considerations as to revenue adequacy and problems of assessment administration do not constitute such formidable obstacles in its "way" a seems to be generally believed.

But remember, I have said nothing about legal difficulties which could be very important - or institutional obstacles, of which there could be many. Hopefully the knowledge that money and administration do not block site value taxation will help encourage efforts to overcome the other factors that stand in the way.

And it would also help create a more receptive environment for the extensive educational process--both for the public and practitioners, particularly assessors and judges -- which Harriss, in the paper just cited, explains will be a necessary prerequisite for site value taxation.

We should note explicitly that our discussion has, with one exception, set a very severe constraint on a site value tax, viz, that it raise as much revenue as the property tax it would replace.

Under the rules of differential incidence analysis this constraint is deemed scrupulously fair. In fact, it may be over-scrupulous for a number of reasons. For one thing, if a site value tax would have "better' economic effects than a tax that hits improvements as well as land, should there not be some trade-off between revenue loss and improved economic effects? Or, for another, we might well get an additional source of revenue to help support the change-over to a tax on land values, e.g., a specified percentage of the Federal income tax or some other form of revenue sharing. Or if revenue loss were a real concern (i.e. in cities of very high effective rate of property tax) we could move partially toward site value taxation by "untaxing" buildings to some degree: two illustrative possibilities are incorporated in Tables 2 and 3. Finally, instead of a tax on site value as such, we might substantially tax increments in land value as suggested, for example, by four members of the National Commission on Urban Problems.

COMMENTS / Mason Gaffney

Professor Tabb serves an important role here. He speaks with the voice of the young idealist. The rest of us are either over thirty, and not to be trusted, or else represent valueless "positive" economics, systems analysis, technical expertise that advises on means while others define ends, and other retreats from moral responsibility.

The older generation has grown hardened to certain double standards, We accept concepts of "equity" in which maintenance of property values is basic, and one may speak seriously of compensating property owners for paying taxes, Yet we confiscate several years of life, and a risk of life and limb, from young male conscripts, under an inequitable draft law, without compensation, And can you imagine the outcry if we started focusing property taxes on the losers in a national lottery! We have imposed a payroll tax (sometimes called "the income tax") that confiscates 25-50% of wag& and salary income, and no one has thought to compensate these victims for the higher rates they suffer because property income has achieved a high degree of tax exemption-by-loophole. We let professional associations and unions fence off the most attractive jobs, and old man's "equity" does not demand that we compensate those fenced out.

Little wonder, then, that we alienate the young. They do not buy this double standard. It was not made for them. Instead, they keep the pressure on, as they should, Mr, Tabb is here to remind us of these other interests, and the need to address the problems of the outsiders, the dispossessed, the ghetto.

It is. however, a mistake to insulate the economics of the ghetto from the rest of economics, and carve out a new subdiscipline. It is an intellectual mistake which discourages integration of the topic with existing disciplines, and it leads to a policy mistake, viz, attacking the newly defined "ghetto" problem as an entity calling for specifics -- usually some form of subsidy financed by an already inequitable tax system--instead of one of the several problems stemming from prevailing public policies.

Mr, Tabb appraises the prospects for three routes to black capitalism. He rejects out of hand the SBA approach, He gives no real argument against it, but asks us to assume a kind of postdated Marxist fatalism. He gives longer shrift to mothering by large corporations, but faults this for--pardon the expression--paternalism. He favors a third device, the "local development corporation". He leaves a careful definition of this device to any discussant foolish enough to be led by the many ques -tions he poses. But that is the proponent's burden, and he has dropped it. So, instead, let me discuss how he might better integrate his topic with existing lore, and especially with the major conference topic of Urban Land Economics. The plight of the blacks is, after all, the logical outcome of a host of policies whose critics have long predicted that enhancing the welfare of some by fencing out others implies that the excluded shall remain outcasts.

In the process, we should also move towards a higher morality than underlies the Tabb paper. He overlooks the vital question why subsidies and aid should go to blacks as blacks rather than to the poor as such or the deserving as such. The implied reason, however, is that blacks as such have developed ways of organizing to riot. This is a political reason, like why we subsidize "farmers" as such. It is not economic, and it surely can claim no superior morality. The black problem is part of a larger problem. Partial solutions are foredoomed to be, like our farm and labor policy "solutions", part of the problem.

Let me suggest that small business deserves a longer look. Mr. Tabb is projecting the galloping merger movement of the last several years. But historically, merger movements go in cycles. Marxist fatalism views the trend as secular and inevitable, even desirable, because technological. No serious student of industrial organization views modern mergers as technologically inspired. They are due to scale economies in finance, political influence, tax favoritism, lobbying, public relations, and other organizational and institutional matters. They are only as inevitable as voter behavior makes them.

Voters may be irrational but they are not consistent. Action breeds reaction; mergers and concentration breed attacks on hugeness. I do not allude primarily to FTC and Anti-trust Division suits. There are more subtle and pervasive influences at work.

Consider the fate of the lumber industry concentration that aroused such concern around 1911. Exaggerated reports of impending scarcity inspired speculative agglomeration that created an artificial scarcity well before the fact, and a rapid price rise that fed on itself. One result was gradual upward reassess~ mg of timberlands for property tax, That in turn raised carrying costs and forced overglutted holders of timber to disgorge. Small mills revived and small business came back.

Today, International Paper holds eight million acres, mostly domestic. (The area of Connecticut, for reference, is three million acres.) Georgia~Pacific has four and a half-million; Weyerhaeuser four million. These giant holdings are more favored now than in 1911 by income tax loopholes; but they are still vulnerable to the rise of property taxes, which, unless halted or misdirected, must ultimately loosen their stranglehold and release these reserves to small business.

And what has this to do with ghetto business? A great deal. For a small beginner, these same corporate giants hold large lumberyards in cities. Consider Professor Holland's paper and its proposal for property tax reform. Lumberyards are a prototype of the real estate whose property taxes would rise if we followed the course of untaxing buildings and up-taxing land, for they are more yard than lumber. Heavy land taxes would evoke some release of surplus yards to the market, where smaller business might get at them.

Lumberyards are a small matter compared to other businesses. A. a P. controls 4.600 urban sites; Safeway 2, 000. These in turn are nothing next to gas Stations, of which there are 324, 000 in the United States --mostly apron, with land value greater than improvements even when new; mostly owned by major oil companies. Many are promotional or premature, losing money currently, and reflect mainly the tax sheltered position of giant companies. They are vulnerable to high land taxes, just like the timberland empires. Then, too, United States cities are full of old stockyards, rail yards, coal yards, junk yards, cinema yards, old mansion yards in central locations -- all kinds of yards turned obsolete for the present purpose, but being released all too slowly by their giant owners to small businessmen. Land taxation would speed the supersession.

Another aid to small business would be reform of the income tax. Now, most small business income is "ordinary" and fully taxable. Loopholes are tailored to those with large and diverse assets, who are never without "other" income against which to credit "expenses", fast write-offs, and losses. They are tailored to the wealthy whose capital can wait, and turn slowly. They are tailored to absentee investors and large landowners. Viewing these questions, one quickly abandons any notion that big business wins by being efficient, and small business needs subsidies to survive. Government does not need to encourage small business, but to stop murdering it with discriminatory tax policy.

Some reply fatalistically, the bias of government for big business is "inevitable". But once we thought prejudice and discrimination were inevitable, also. Those who dare fight one should not quail before the other. Historically, cities and ghettoes are the nurseries of small business, for here is where a small man can break in with minimal capital required, making fractional use of the city1s huge capital infrastructure.

The struggle of the poor in America has been fought before -- and won, It has been a continuous, repetitive fight throughout our history. The nation has survived and thrived because the establishment has generally had sense enough to give some ground and accommodate, however grudgingly, the aspirations of the dispossessed.

That process requires pressure--that we have, It also requires know-how--that we seem to have lost.

Pressure alone is useless, If the rioters could rout toe police and loot a whole town, they would have at best a one-shot gain. The stolen goods would not return to be looted again. I hear ghetto people speak of needing "instant" solutions, and I applaud their reacting thus to stalling and temporizing, but beware: an instant may be as long as the solution lasts.

But know-how is lasting. There is permanent revolution built into the system itself. It is not bloody or destructive. It is legal, with the police coming down on the side of the poor. But every new wave of poor must find out for themselves how to use this revolutionary mechanism, It is not that no one will tell them, Rather, so many people tell them so many things, mostly wrong, they bave to study and think to know which to believe.

The method is taxation, which might be called "orderly looting". It takes a piece of the city's property for the poor, yet, being orderly, can be managed constructively so as not to repel capital.

Each black as a citizen owns a share of all the taxable property in the city. It is a much larger share than he may think. At a 4% tax rate, some 20%-25% of the gross income of a new building might go into property taxes, The share going to the site owner, after deducting interest on and depreciation of the building cost, may be much less.

Many people today advocate lowering or abolishing the property tax. The critics used to say it was too focused on the wealthy and encouraged public extravagance because the poor could soak the rich. Now critics say it is regressive, and commend us to replace it with a sales tax, a payroll tax, or some other well-known progressive levy. Little wonder the poor are confused!

So let's look who pays the property tax, I recently ranked the property owners of the west half of the CBD of Milwaukee by assessed value of holdings in the area. The largest is the William Plankinton Trust, with indicated market value of $6 million in that area. That is the same as 1,200 slum dwellings at $5, 000 or 2,400 slum dwellings at $2, 500. Are there any at that price? The rule of thumb in Milwaukee's ghetto is a slum unit is worth 30 months' rent. You figure it out. Over half the dwelling units in Milwaukee are pre-1919, that is more than half a century old.

Six million is what Plankinton Trust holds in our small area only. They probably hold more elsewhere, and/or under other names - -most large owners do. For example, one of the giants in the area of study is the Schlitz Company, with about $2.8 million market value, This omits the enormous brewery that made Milwaukee famous; the 200 acre "9 mile farm" along the lakefront in Bayside, the choicest residential land in Milwaukee County; and the family Polo Grounds on Good Hope Road, for beginners.

The total market value in our little study area is $98 million. The largest 10% of the owners have over half the total valuation. The smallest 50% who qualify as "small businessmen", are clearly not bearing the brunt of the property tax. It is big business that owns big property.

So if we wonder why small business is not thriving in ghettoes, and why today's poor are not traveling this traditional route of escape from poverty, one answer may be found in today's "reformed" tax system which relies less on property and more on sales taxes, user charges, payroll taxes, and other charges that fall heavier on small business. Remember that capital:output ratios generally vary with size of business, so taxes based on property tend to hit larger businesses harder; taxes based on activity or gross output or labor input hit small businesses harder.

Several economists have undertaken to show the property tax is regressive by assuming it is shifted forward to consumers. These studies are among the most vulnerable economic assertions extant, and heir authors are sitting pigeons for any bright young critic. But to the extent there is some forward shifting it is due to the tax on buildings, not on land. Over the last 50 years, assessors have allocated more and more of the real estate assessment to buildings. The reform Professor Holland proposes would put the emphasis hack on land, stopping any shifting of the property tax, and make it unambiguously progressive.

The effect in our Milwaukee study area may be inferred from these figures. For the smaller 10% of the owners, 36% of the assessed value was land. For the largest 10%, 73% was land.

The effect on ghetto businessmen may be inferred from the fact that most ghetto locations are worth very little, and would bear little land tax. It is widely believed that slums are worthless buildings in prime locations. Many slums are, in transitional areas, but most are not. Bad as ghetto buildings are, they are generally on lots of even less value; at least that is my finding in Milwaukee. So a land-based property tax would go easier on the ghetto, at first. It would rise when and if prosperity came to the ghetto. But remember, most ghetto property is absentee-owned. It is not the ghetto businessman but his absentee landlord who would pay.

The sums of money involved in taxation are far beyond any conceivable subsidy to the ghetto. So why speak of petty palliatives? The ghetto is one of the wastebaskets of a society that has let ingroups treat outgroups like wastepaper, partly under the cloak of social reform (income tax, farm controls, job security, social security, oil conservation, restraining cutthroat competition, etc.). Ghettoization results from these massive programs; deghettoization requires equally massive reconstruction of a society grown tight, oversheltered, scared -- and fretting with inarticulate yearning to regain its self-respect.