Creative Taxation:
A Tool for Big Cities?

Neil Munro

[Reprinted from The Grand Rapids Press, Grand Rapids, Michigan, 3 December, 1967]

A lot of the people who know the most about city problems think there's a reasonably simple way to help get rid of them. They're convinced slums can be cleared, downtowns revitalized and sprawling suburbs reined in, all without going to the federal government for more bundles of money or more new laws. They even think they can save the middle-income homeowner a dollar or two in the process.

They would put America's prime mover to work: The profit motive.

As of right now, these experts agree, the profit motive is making cities sicker instead of healthier. It's encouraging _ people to let old homes and stores run down. And it's encouraging them to hang onto vacant land in the city and wait for a higher price while suburbanites spend money driving past it to get to work and back, when they could be living on it.

The profit motive would be put to work by changing the way we tax property. Here's how property taxes work now:

Say Mr. Landlord has a vacant store in the middle of downtown. An eyesore. His building isn't worth much so his property taxes are low and he can afford to let it sit there. And he does. More than one Mr. Landlord and you have a deteriorating downtown.

Speculators Encouraged

Mr. Speculator owns a big vacant tract in the midst of new suburban subdivisions. There are no buildings on it so he pays low property taxes and he can afford to keep his land off the market until its price goes up. More than one Mr. Speculator and urban sprawl is forced as builders go further out for cheaper land.

At the same time Mr. Slumlord owns and rents old houses close to downtown. His property taxes are low, too, because his houses are in bad shape. More than one Mr. Slumlord and the entire central city goes downhill.

Meanwhile Mr. Homeowner sits in his Dutch colonial and pays high property taxes because he keeps his house in good repair.

The experts say they can find the same fault with all four cases: The tax assessor has based the property tax too much on the value of the building and not enough on the value of the land.

\ The property tax, they argue, is not one tax but two: A tax on buildings -- and a tax on land.

Would Prod Landlords

It's the tax on land and its social and economic effects that intrigues a lot of people who are trying to solve city problems. Suppose, they say, that most of the tax on a piece of property was based on the value of the land instead of on the buildings. Suppose, further, that the value of the land was not tied to the value of the building on it, but instead that the land's value was based on what it would be worth if it were put to its "highest and best use under current zoning."

What would happen to Mr. Landlord?

Here's what these experts predict: His property taxes would go way up because the downtown lot his old vacant store sits on would be worth a lot of money if it were used like other downtown lots; for a big busy store, for example.

With his taxes now high, Mr. Landlord would lose too much money letting the store sit vacant. He would be forced to put up a new store he could rent, and therefore be able to afford the property tax, or sell it to someone who would.

He would have a better chance of selling his land because its actual market price would go down. Why? Because the higher taxes would make the land itself a less attractive investment. And why wouldn't he be tempted to put up a better building anyway, without a higher land tax? Because the building would be more valuable than the old one and his taxes would go up, actually penalizing him for his enterprise. With the higher land tax he's penalized for a lack of enterprise. In fact, it supposedly would force him to improve his property and, by extension, the community.

And what about Mr. Speculator? If his tax were based on highest and best use, a subdivision, his tax bill would go way up. He too would have to build something so he could afford the tax. And the price of his land would drop because it wouldn't be so attractive an investment with those high tax bills coming in. Furthermore, the builder who bought the land would be able to sell his houses for less because the lots would be cheaper.

The result: More orderly development of land around cities and less expensive new homes.

Discourage Slumlords

And Mr. Slumlord. What about him? Again, taxes would go up. The land his broken-down houses occupy really is very valuable under its "highest and best use." It's the most vatuable residential land in the city; close to downtown, mature trees, all the streets, sidewalks and water and sewer lines are in. He, too, would have to tear down or fix up the old buildings to bring in more money. And, again, the high land tax would drive down the price of the lots to the point that they would be attractive to builders of new homes.

But what about Mr. Homeowner? Most of the value of his property is his house, not his lot. So a relatively high land tax and a relatively low building tax would actually reduce his total tax bill.

But wouldn't this sometimes, in effect, confiscate a man's property by changing the rules in the middle of the game, particularly if he can't afford to fix it up and can't find a buyer?

This is one of the most common objections to a change to heavier taxes on land: that it hurts innocent vested interests. The answer usually is that the vested interests of land speculators are so socially destructive that they must be injured, even if it hurts. Which view is right is, of course, a matter of personal values.

Another and perhaps more telling criticism is that not everybody who owns central city property is a slumlord.

Poor and elderly homeowners who have a struggle keeping their homes, much less fixing them up, would be squeezed by the higher taxes. They have an innocent vested interest, too.

Leon Silverman, writing in the Yale Law Review, suggests that both these objections be met with "gradualism."

He Advocates "Gradualism"

" He says, "Gradual adoption of the new tax, with minimal disruption of the established procedures, may appear to be the best guarantee of public support."

Other objections are that the great pressure for development of land would wipe out open spaces and that the tax is too difficult for assessors to administer.

Advocates generally argue that open spaces can be preserved through government purchase or condemnation, if necessary.

Those who say administration is too difficult usually are the same persons who don't like it on general principles. And those who say it is not difficult are people who want to see it tried.

So why isn't is tried and who are these experts?

There are plenty of people who would like to see it tried, including the Joint Economic Committee of Congress which reported: "State and local governments have failed to make maximum use of the enormous potential inherent in the property tax for either the prevention or cure of poor housing and other blight conditions."

Mayors Propose It

Another group that would like to see it is made up of the nation's big city mayors. They concluded in a recent conference, as reported by Nation's Cities magazine, that "private enterprise must be able to assume without subsidy most of the costs of rebuilding our cities. It will be a lot easier to interest private capital in urban betterment if the local tax system is modified to encourage new construction and better land use, instead of, as now, penalizing improvements and subsidising blight, slums and sprawl."

The mayors said they knew that government subsidies through urban renewal and public housing would never be big enough to replace all the crumbling downtowns and decaying slums; that private individuals would have to be able to do it at a profit.

They concluded, "Most states make their cities collect most of their property taxes, not on land (which is undertaxed) but on improvements which are already so overtaxed that the tax inhibits even some of the most needed improvements."

Among major magazines which have backed heavier land taxes editorially are Life and Fortune, both Time-Life publications. In December of 1965 Life (aid, "Both the local property tax and the federal income tax can be adapted so as to reward the man who maintains his property rather than the slumlord who exploits it and the slothful owner who lets it go."

Property Tax Deductible

Life's reference to the federal income tax stems from the fact that local property taxes are deductible from the income tax. This meant a rich speculator or slumlord in the 50 per cent income tax bracket can deduct 50 per cent of his property taxes from his income tax. It further weakens the land part of the property tax as a social tool.

Fortune magazine said the same year that "almost all economists agree that the social and economic consequences of increased taxes on land are much better than the social and economic consequences of increased taxes on improvements.

House and Home magazine has added its voice to the general support of the idea. Its editor wrote: "The assumption that the federal government has largely preempted the sources of tax revenues, leaving cities helpless, is highly questionable. The biggest source of taxes historically is land. As late as 1914, land carried nearly half the tax load. Today the land values in our cities and suburbs add up to something like a quarter of our total national wealth, but land is so underassessed and undertaxed that it pays less than one-twentieth of the total tax bill. It is the No. 1 reason city land prices are so high that private enterprise cannot meet the need for good low-income and middle-income housing in big cities without a subsidy from someone."

AggravateProblems

The Urban Land Institute contends "there is hardly an urban problem today that is not aggravated by today's practice of under-taxing land an overtaxing improvements."

The list of expert organizations pushing for higher land taxes also includes the Brookings Institute which agate makes the call for change; "Heavy taxation of land values would increase substantially the holding cost of land, and thus encourage more intensive utilization.

And to cap it all, the Urban Land Institute, with the cooperation of the Milwaukee tax commissioner, showed it would be profitable for private industry, without any subsidy, to tear down and replace practically all the obsolete buildings downtown if the property tax were all on the valuable land they cover."

The institute's study concluded: "If we want to minimize suburban sprawl and stop blighting the countryside with premature subdivision, it is foolish not to tax land at its highest "best use" value and pressure owners to release it at a reasonable price when it is needed for orderly urban growth.

New Home Prices Rise

One of the biggest problems they see with the present system is that it is pushing new-home prices beyond the reach of anybody who isn't in the upper middle class. The Michigan State Home-builders Association said this year it is virtually impossible, mainly because of high land prices, to sell even a small three-bedroom house at a profit for law tea UMN. An Associated Press survey of housing in Michigan cities last summer revealed out the cities are running out of land and that what is left is prohibitively priced. A lot in Ann Arbor sold for $12,500. Lot costs here are going up about 10 per cent a year.


And Gene Brewer, president of the United States Plywood Association, says, "… land speculation has pretty well milked all the profit out of the residential building business before anyone else gets a crack at it."

The National Association of Real Estate Boards complains that rising land costs have erased growing efficiency in home building.

So the homeowner has a double stake in the land tax;' lower overall property taxes and lower home prices. That is. if the land tax scheme works in reality as well as it does on paper.

The trouble is nobody really knows how it works in reality because it never _ has been given a good test. And most tax officials in Michigan, including Grand Rapids, are convinced state law prohibits putting it to a test.

Originated by Henry George

The idea of the heavy tax on land was first dreamed up by Henry George, a 19th Century American social reformer who had the notion that the cure for all society's ills lay in taxing only land. Most modern tax reformers do not go quite that far. They are not "single taxers."

But they all accept the economic truth of one of George's basic principles; that a tax on land is the only tax that promotes instead of hinders business activity.

Economic theories are one thing and laws are another. The Michigan constitution demands that all property, that means buildings and land both, must be assessed and taxed at 50 per cent of their market value. On the face of it, the constitution therefore bars any move to tax land more heavily than buildings or improvements. Most assessors are content to leave it at that and have paid little attention to the theory of taxing, as opposed to its efficient administration. They, including Assessor Clarence Thielman of Grand Rapids, stick to following law and leave the speculating on possible changes to others.

But one place where it has been tried in Michigan, in spite of the law, is in the suburban Detroit area city of Southfield. There, Mayor James Clarkson and assessor Theodore Gwartney are convinced of the social value of heavier taxes on land.

Population Boomed

Southfield is a city that had a population of 25,000 in 1958 and expects to have 100,000 residents by 1970. In the last year 2,500 apartment units and 30 office buildings have gone up. Southfield officials don't claim all this prosperity is due to heavier taxes on land. A J. L. Hudson Co. shopping center and a freeway interchange have helped a lot. But they do give their new tax policy some of the credit.

If the law prohibits heavier taxes on land, how does Southfield do it? Thielman insists it can't be done.

Gwartney, Thieiman's counterpart in Southfield, says they do it mainly by reversing what he calls standard Michigan assessment practices.

He assesses land at the full 50 per cent of market value and buildings at about 35 per cent of value. He makes sure the land market value is the highest possible and building value the lowest possible by reassessing every piece of land every year and by cutting down the value of buildings by depreciating them as rapidly as possible.

"We cut the value of a new building by 3 per cent as soon as it's completed," Gwartney says.

He Admits It's Illegal

Gwartney admits that taxing buildings at less than 50 per cent of their market value is illegal. But he contends that it's no more illegal than the practice of most other state assessors who he says assess land at less than its market value.

The result, according to Gwartney, has been to cut the taxes of the average homeowner by 15 per cent. That's because most of the value of the home-owners' property is represented by his building, not by his land.

Another benefit has been that many older homes are being fixed up. There's a big profit incentive because none of the improvements, unless a room is added, cause the assessment and taxes to go up. Grand Rapids has a liberal policy in this area, bat not that liberal.

Southfield, however, hasn't seen a drop in land prices which is what, theoretically, should happen. Because of a heavy demand for land in the booming community, prices are being bid up despite the heavier land tax. But Gwartney says he believes they aren't going up as fast as they otherwise would.

Southfield's Mayor Clarkson, the man who hired Gwartney, and who is a fervent advocate of the heavy land tax, spoke in Grand Rapids last year. But his sales talk on the tax was largely nullified when, in response to a question, he said the Grand Rapids assessing office was doing a fine job.

His Meaning Misunderstood

Local officials took that to mean he agreed with assessing practices here. Clarkson, however, says he meant only that the office was efficient, not that he agreed with its practice of attempting to assess land and buildings at the same rate.

Most local officials, including Mayor Sonneveldt, are aware of the theory, mostly through the efforts of Benjamin Smith of 1801 Breton Rd. SE, who has repeatedly told the land tax story at public hearings and school board and city commission meetings.

The mayor is not completely sold on it but agrees it needs to be studied more. City Planning Director J. Paul Jones won't comment on it arid Urban Renewal-Public Housing Director Donald O'Keefe says he's not qualified to offer an opinion.

Assessor Thielman says, "if it is so good why isn't it used more?"

In spite of this, public debate on the heavy land tax is growing. Gwartney says, "I've seen more stories on it in the last year than in the previous 10 years."