Land Value Taxation

Robert Tideman

[Reprinted from Inland Architect, July 1973]

Problems of land use have grown large enough to be of concern to the AIA. Yet one of the most powerful tools for the control of land use - Land Value Taxation-remains virtually unknown to the average architect. Can we afford to leave this information in the exclusive hands of academic economists, who are not in a position to use it? Is it not this very lack of public knowledge that has permitted it to lie dormant for so long?

The Chicago Chapter, AIA, has appointed a committee - of which the writer is a member to look into the idea of Land Value Taxation, with its interesting possibilities.

As everyone knows, buildings must be constructed on land, but when land is expensive, construction lags. High land prices and the fact that land is held out of use for speculative purposes have more to say as to where and how - and if - men build, than do building codes or zoning or questions of financing.

Yet we have long passed the time when the problem of access to land could be solved by the methods of the early European agriculturists, with their system of temporary tenure. We cannot do without permanent tenure of the land under even our gas stations, let alone our John Hancock, Standard or Sears towers.

Who will build, unless he has permanent tenure of the land he builds upon? And yet, on the other hand, how can we assert our common interest in seeing that potentially useful land is not held at a price so prohibitive as to discourage construction, or locked out of the market altogether for the purposes of speculation?

Site or Land Value Taxation, as a method of achieving this, is receiving wider and wider notice from economists and planners.

Situ Value Taxation proposes that real estate taxes be converted from the existing tax on the values of both land and buildings^ to a tax on only land value-site value - so far as practicable. (In Cook County, the farthest this could go at present would take the form of classifying land and buildings separately for the purposes of taxation - they are already appraised separately - and taxing land more heavily and buildings less heavily, up to the constitutional ratio of 2-1/2 to 1. It is only with the adoption of the new State Constitution that the opportunity to achieve this limited degree of land value taxation has opened.)

Proponents of Land Value Taxation point out that real estate is actually two different things, with different characteristics: (1) Buildings, created by men, and erected on (2) Land, created by, so to speak, God.

The value of buildings is created by their builders, for if there were no buildings, there would be no building value. An increase in the tax on building value is therefore passed on to the users, because unless this is possible, men will not build.

The site value of land, on the contrary, is created not by the owner of the title or by those from whom he bought it, but by its locational advantages. Some of these advantages result from the presence and activities of other citizens, and some from government-financed services like streets, alleys, lighting, water and sewer lines and treatment, municipal transportation, garbage collection, police and fire protection, parks, libraries, schools.

An increase in the tax on site values, because it cannot increase these locational advantages, cannot be passed on to the land user in the form of higher land rents or land prices. On the contrary- being paid by the landholder himself out of gross land rent - it instead tends to reduce his net and to lower land prices and make land more easily available to builders.

In fact, since taxes on land values continue whether the land is used or not, an increase in the tax. by making it less profitable to hold valuable land out of use or in a poorly improved state, will tend to induce the landholder to use it well for those purposes to which it is adapted, or sell it to those who are prepared to do so.

The owner of an average value piece of land with an average value building on it will be unaffected by such a change in the direction of Land Value Taxation; the higher taxes he will pay on his land will be offset by the lower taxes on his building. And since the municipal services furnished by the city, and all the other advantages of the urban location which create the value of his land, will remain unaltered, his property will remain as valuable to him or to others as it is today.

The lower tax on the building will tend to raise the value of his land in the same degree that the higher tax on the land will tend to lower it. They will cancel each other out.

Landholders who have erected particularly useful and handsome buildings will be in a relatively favorable tax position, which all who have to pay higher taxes on vacant or poorly improved land will be encouraged to attain, either by building themselves, or - through brokers, whose business will materially increase - selling to those who will. Men will not continue to keep land vacant or poorly improved at a loss.

The resulting double encouragement to building, through taking taxes off improvements and raising the taxes on land, will bring about more construction, to the advantage of architects, engineers, real estate brokers, contractors, construction tradesmen, building material manufacturers and distributors, lending institutions - and the public -- while not lessening government income.

And, oddly enough, in Australian cities like Brisbane and Melbourne where Land Value Taxation was adopted, it even financially benefited landholders, by leading to a rise in total urban land values, land tax or no tax, because of the resulting surge in construction. Such a building boom will not only provide many more construction jobs. The resulting housing will ease pressures on rents, giving slum dwellers a better chance to escape, as urban redevelopment is accelerated at no cost to taxpayers. Commercial and industrial construction will likewise be stimulated, providing more jobs of all kinds. New buildings will be built better and many existing buildings will be improved when we stop penalizing construction.

And why should we fine those who build? (We call the fine taxes). What do they do that is so wrong? And why do we reward those who speculate in land and do nothing with it, with higher values for the land which they keep away from us indefinitely? What do they do that is so right? This is a "decentive" system with a vengeance.

Yet to lower the tax on buildings without raising the tax on land is to make vacant or poorly improved land even more valuable for building purposes, since a building built on it need pay less taxes; an arrangement which, by bringing about yet one more rise in land values, merely in the long run makes it still harder for the developer to secure land - and increases, not diminishes, the problem.

But can land be appraised separately from buildings in order to tax it separately? Certainly. It is done all the time. Urban land is typically appraised by the front foot; sometimes, in large tracts, by the acre. The methods are standardized. Anyone who has hired a private appraiser is aware that, dollar value for dollar value, appraisers charge less for appraising land than they do for appraising buildings, because they find it easier.

If Chicago land is at present poorly appraised by the Cook County Assessor, it is because - like the public that elects him - he does not yet understand the principles underlying Land Value Taxation, and regards separate land appraisal as an unnecessary nuisance.

Assessors are never entirely satisfied with the quality of their land appraisals; but this is equally true of their appraisal of buildings, a yet more laborious task. Yet even if they might sometimes mistake land values for building values and so discourage construction, is that any reason for always discouraging it? Or a good reason for always taxing land at a low rate and encouraging those who hold it vacant or poorly improved to keep it off the market and out of the hands of builders?

The change would have other wide effects. Landholders with the most valuable unused land suited to any particular use, and therefore the most highly taxed, would be the most interested in having it built upon. Those who hold land of lesser usefulness would pay less taxes and be under less pressure to build. Buildings would therefore tend to be first built on the best land available for any particular use, an inherent zoning effect.

Beyond this, site value taxation is what the economists call "neutral" with respect to land use, something they regard as one of its great merits in a day when taxes twist production in strange ways. It does not in itself favor one industry over another, or one kind of construction over another. It does assure that land will be put to its "highest and best" legal use, the best land first.

Builders will no longer be driven far out into the country to urban fringe land, leapfrogging over land held at prices which make its current use unprofitable. Urban sprawl will be contained not by regulatory measures, but by the fact that men will not spread onto flood plains or to places without railroad service, when good land closer to the city is available.

And when less land close-in is passed over, we will save millions of dollars wasted by sprawl, for all municipal costs are multiplied by distance. With more compact and efficient urban areas, city planning, including the co-ordination of improvements, can be done with more foresight and a better opportunity to lead and shape urban development.

At the same time. Land Value Taxation in the central city, by reducing pressures on urban fringe land, will permit many efficient commercial and truck garden farmers to continue their highly advantageous enterprises.

This acceleration of the development and redevelopment of the city may require a certain amount of rethinking about zoning. We of course will no longer be able to trust to the land speculator to limit average intensity of land use by keeping the land he controls vacant or poorly utilized, if we make it unprofitable for him to do so. And, on the other hand, is downtown going to suddenly sprout 100-story office towers on every lot? Who would build them? Who would use them?

Those who want towers anywhere in the city, to the extent permitted by zoning, could more easily have them; but the tendency would be to have "taxpayer" buildings, at least, erected on every lot, "taxpayers" automatically bigger and more useful than today's.

Yet if we really do not want well-placed land to be intensively used, with a maximizing of vertical smog-free transportation provided at private expense; if we fear that given a choice men will crowd themselves closer together than they want to be, we must look forward to more realistic zoning controls. When we make it unprofitable to hold land vacant or poorly used, we must not be surprised if there is a tendency to use it to its legal limit.

The same influences must affect our vision of proper parklands. We will not longer be able to trust private landholders to leave some lots vacant. If we want open cities, we must continue to extend our system of public parks. Nor should this be difficult or expensive, with all that land on the market, seeking buyers. But we do need to be aware of the needs and opportunities which would open to us.

Land Value Taxation will also help municipal finances. When we collect back into the public treasury the values created at public expense, the city becomes solvent.

That our cities have survived financially at all, suggests that the wind has been tempered to shorn lambs. We spend government money on improvements intended to raise the quality of urban life. That quality cannot be fully enjoyed while walking on public streets, however handsome and clean, 24 hours a day. It gets cold out there, and sleeping is difficult. To enjoy it, one must enter upon privately held land, and the cost of doing so - the land rent or its concomitant, land price - rises in proportion to the government services furnished. Yet instead of taxing land values to collect back the expense of bringing them about, we cast about indiscriminately for any other source of government income, taxing the things individuals produce and . discouraging their production.

No private corporation could survive on such a basis, giving away its product to some people and taking away the product of others; it should not be too surprising that even a public corporation like the city finds survival on this basis difficult.

As Dick Netzer, dean of the Graduate School of Public Administration at New York University, writes: "Aside from its revenue productivity, the positive attributes of the property tax are insignificant compared to its defects. There is one form of property taxation, however, for which an entirely different, and favorable, balance of advantages and disadvantages can be struck.

'This is the taxation of bare site values -the land alone, without any tax on the building on the site - an old idea vigorously espoused by Henry George a century ago. The land value tax is the economist's ideal: it is equitable; it is neutral in its economic effects; and it is positively desirable as a replacement for the conventional property tax with its many bad economic effects."

Carl H. Madden, chief economist of the U.S. Chamber of Commerce, puts it this way: "A powerful tool for rebuilding urban centers through private initiative lies in reforming the property tax. Higher taxation of location values and lower taxation of improvements would help to push land into more effective use."

Site Value Taxation suggests that there is no necessity for us to throw away a used city and get us a new one; that all we require is a method of securing access to building sites, to the surface of the Earth, within the boundaries of the cities we already have; and that, it will provide. And ought not this be done? For is not the Earth the common inheritance of mankind?