Why Land Tax Exemptions Are Unsound
Robert Tideman
[A paper presented at the Eleventh International
Conference on Land-Value Taxation and Free Trade. New York. 30 August
thru 5 September, 1964]
The amount of ground rent available for public use can be altered in
different ways. Assessment practices, tax enforcement procedures,
centralised controls and aids can affect public rent collections as
much as a shift of the local tax base from buildings to land. Those
who want to improve the public revenue system can do so more
effectively if they are familiar with all such avenues of advance.
An avenue of advance which is already important and which will be
more important in years to come is abolition of the special tax
exemptions enjoyed today by certain private lands. Much public land is
also tax exempt, but this presents a different problem, as will be
shown.
Special exemption from the tax rates imposed on land generally is, on
its face, a violation of the principle that land rent belongs to the
public. The rent is not collected; it is forgiven. It remains in
private hands.
Defenders of exemptions do not permit the case to be closed so
summarily, however. The exemptions, it is argued, are given only to
certain "non-profit" or "welfare" organisations
which perform "public" services. The rent they keep is
therefore devoted to "a public use." In this view, the
exemption does not violate principle after all, but constitutes, along
with the leasing and taxing, a third alternative for socialising rent.
If it is determined that certain welfare organisations are indeed
performing public services and deserve the support of public money,
tax exemption is not the only way to provide it. Direct subsidies
could be given. Direct subsidies, being known in amount and subject to
reconsideration every year by the same elected representatives who are
responsible for the public budget, would be subject to the established
controls. The annual reconsideration of existing exemptions is no more
than a tedious formality which weighs neither the value of the service
performed nor the value of the land exempted. Exemptions is not
expenditure. It is non-collection. It is private retention of rent
unaccounted for.
In the USA many state constitutions allow land to be held tax-exempt
by certain types of welfare organisation to whom appropriations of
public money are, as a matter of policy, denied. Here is a profligate
settlement. The smaller privilege of controlled appropriations is
denied. The greater privilege, uncontrolled retention of ground rent,
is permitted. The inconsistency stems from the habit of seeing all
taxes as invasions of a sphere that is rightfully private. The
exemption of land from taxation is not seen for what it is - the
denial of a common right. Taxes are looked upon as a necessary evil
from which, if it were only possible, all should be relieved, and from
which we can at least relieve those deemed worthiest.
It would make as much sense to relieve such welfare organisations of
their municipal water bills. Taxes upon land are not invasions but
dues. They should be collected with the same firmness a municipal
water department shows to its customers. If a desperate, deserving
water customer cannot pay his bill, he turns not to the water
department for exemption, but to the welfare department for a
grant-in-aid. Land taxes should be levied with the same inflexibility.
The familiar evils that result from exempting all land from taxation
are visible when some land is exempted. Consider land speculation, for
example. Exempt interests are placed in a particularly favourable
position to speculate in land values, since they are not even subject
to the small taxes other land speculators must pay. Many a welfare
organisation, faced with the question whether or not to move from land
that is unnecessarily valuable, postpone the move in anticipation of
getting a higher price later. Were they subject to taxation the same
as other landholders, the annual tax bill would promote better use or
surrender of the land to someone who could use it better.
The same kind of inequality that results when land generally is
relieved of its financial obligations exists on a proportionate scale
when certain lands are tax-exempt. One welfare body may occupy
extremely valuable land in a growing business district; another may be
in a poor residential neighbourhood. Tax exemption may be of immensely
greater benefit to the one in the growing business district, yet the
organisation in the poor residential neighbourhood may be better
located for performing its service. A third welfare body, possibly
more useful than either of the other two, may be a non-landholding
tenant, and therefore incapable of benefiting from tax exemption. A
marginal business which, by strictly objective standards, may be of
greater public service than any of the nonprofit welfare
organisations, is also excluded from the exemption privilege.
Or consider the snoopy regulations, the red tape and paper work
necessarily involved in land-tax exemptions, as in any other form of
special privilege. When certain land uses involve the privilege of
holding land tax-exempt, definitions of that use must be established,
applications and reports must be devised to make sure that use is
continued, and borderline cases must be resolved. Privilege and
regulation inevitably go together. The exemption privilege also
involves the possibility, realised in more than one modern nation,
that tax-exempt interests will acquire large areas of valuable land.
Whatever their intentions, whatever the sentiments in their favour,
these interests, because of their privilege, stand separate from the
common man, vulnerable to the claims of equal justice.
Where land and buildings are taxed together, they are generally
exempted together. The proper solution, of course, is to exempt the
building and tax the land. If a choice is to be made between taxing
both or exempting both, taxation has two advantages: (1) It avoids the
worse alternative of a non-property tax which does not fall at all
upon land as such, (2) It enlists welfare bodies in the drive to untax
buildings. Exemption of both their land and buildings places welfare
bodies in a position where they stand to lose rather than gain from
the advent of sound taxation. This is not the way to win allies.
The underlying sentiments which today favour land-tax exemptions are
two: (1) Partiality to an exempt interest, (2) Distrust of democratic
government; private welfare organisations are felt to perform public
functions more effectively than publicly elected representatives.
As to the second, two points must be made: (l) Government efficiency
is related to the source of public revenue. Direct taxes on land
promote efficiency. (2) Surrender of the public revenue to private
welfare bodies amounts to abandonment of common rights to land. The
rent fund is no longer administered by delegated representatives, but
by a select aristocracy. We must choose between representative
government and unequal rights to land. There is no third position.
|