What Is Land Value?

Gilbert M. Tucker

[Reprinted frm the Henry George News, June 1948]

A letter from an old-time Georgist raises a question which, simple as it is, has perplexed many. He puts it this way: "If we tax only land values, as taxes increase land values decrease, until there will be no value left to tax -- nothing on which to levy?" The difficulty comes from failure to understand and define terms. Barret Wendell emphasizes the necessity of using words not only correctly, but also in one uniform sense. Recall what he says about the word "choir," meaning, to a musician a group trained to sing together; to an architect, a certain portion of the church structure; and to the frivolous-minded a social group in which the tenor elopes with the soprano. All are perfectly good definitions, but for logical reasoning we must use only one at a time.

Now what of "value" and its correlative "price"? I won't quarrel with other definitions; I see price as value expressed in terms of money, but, in the case of land, we determine true value far more accurately from the annual use price, which we call rent, than from sales price -- for sales price covers only a part of true value. State constitutions, law, usage and custom, long ago established the fact that the ultimate title to land is lodged in the State, the sovereign, the people or however we may denominate the common interest, and a deed passes only partial ownership to the purchaser - ownership secondary, like a second mortgage, to the claim of right of the State. The unquestioned right of the State to impose a tax on land witnesses to the valid claim of the people to all the land.

Suppose you pay $1,000 for a piece of land, borrowing the money at 4 per cent. In my town you will also pay a city tax of approximately 4 per cent so the lot will have to carry an overhead obligation of $80 a year - half to cover interest on purchase money and half to pay the tax bill. Now the recognized method by which we arrive at a market value is to capitalize the net return of $40 (after paying taxes) at 4 per cent and this sets the price at $1,000. But the lot costs you $80 a year and, if money is worth 4 per cent, is obviously worth $2,000. Have you put one over on the seller and gotten something at half price? Not for a minute! He has sold you only his equity in the lot and, no matter what the deed says, the city has a preferred claim and a recognized equity.

Grasping this principle does much to clarify thinking. It establishes the fact that there is a joint ownership between title-holder and city, and the claim of the city is a just one, for the earth is the common heritage of all men from their Maker. Its value -- the fact that it commands a price -- is due entirely to the common life. It also makes it clear that true land value is reflected in ground rent and not in market value and that this true value is not affected by the way in which ground rent is shared between title-holder and government. The land is worth $80 a year, whether the entire sum goes to the former or the latter or is divided between the two. Were the government to collect all the ground rent, although the sales price would theoretically fall to zero, the lot would be worth just as much as ever, and the tenant would pay the same rent as before, even if it were all taken by the tax collector without the intervention of any landlord. One can also see why it is justly said that such a method of raising public revenues is not taxation in any true sense of the word for taxation is "the compulsory exaction for the support of government," and ground rent is only payment for values and services received.

We say that the true value of land is not affected by the way in which the ground rent is shared but this is not strictly true. Practically the proposal for the city to take ground rent is correlated with the exemption from taxation of all buildings. In cities, vacant, unused land seldom brings in much besides tax bills and, to earn an income, a building must be erected.

It is the building and not the land which earns a return and anything which increases the earnings of buildings will react to support and increase the value of the sites. Obviously an untaxed building is more profitable to the owner than one which is taxed. If the taxation of buildings is heavy enough (and it is) it throttles building (and it does). Hence we have a housing shortage, badly aggravated by the fact that taxation is often so oppressive that good and useful buildings are razed, or allowed to fall to pieces, because the tax collector takes all their earnings. The first stage in the decadence of urban realty is seen in the destruction of buildings to cut tax bills; then, when the owner finds it economically impossible to replace the old structure with something modern, because of heavy tax costs involved, the next step, in creating a "blighted area" is to quit paying taxes add forfeit ownership of the land.

If Governor Dewey would look out of his office windows at a couple of properties directly across State Street from the Capitol, he could learn something of the housing problem in Albany at least. One good house was razed some years ago and almost adjoining the high board fence surrounding that lot is a fine old residence, windows broken or boarded up, deserted and dropping to pieces. Looking down the intercepting Hawk Street he can almost see the "Dudley Row" of fine old brownstone houses, where there is one house burned out and never restored, another collapsed and the remainder all disintegrating. These properties are not more than a couple of hundred yards from the Capitol entrance through which pass our Governor, out legislators and many housing "experts." If they would open their eyes and rid their minds of prejudice, they would see another and a better answer to the riddle of housing than bond issues, subsidies, grants and hand-outs.

Making building profitable by untaxing it would mean ample housing and it would restore many disappearing land values, re-establishing; the finances of many a city. It would benefit many, including even landowners whose taxes would be increased by putting the entire burden on land values, and I speak from experience. I had to take a terrific licking on a house because a crazy tax system made it impossible to displace an obsolete structure with a modern and profitable building. Had the city followed a wiser course taxes would have been increased on this holding by nearly four hundred dollars. A new untaxed building, appropriate to today's needs, would then have been possible and would have made a "white elephant" into a desirable investment. Incidentally the city would have been assured of a larger tax income and housing would have been provided for about sixty families.

But it is often asked how taxes can be assessed if values based on sales prices evaporate. Think in terms of ground rent - what use and occupancy is worth - and assess on that basis, not on capitalized values. Since ground rent is the basis of market price, certainly there will be no more difficulty in determining ground rent. When realty is forfeited for tax delinquency let the city continue to hold title, instead of trying to force unsound sales. Offers on leaseholds of forfeited property would give an approximate index to just ground rents during the transitional period, although it is extremely doubtful whether there would be much, if any, future tax delinquency or forfeiture. Taxes would be paid instead of becoming delinquent; land values would rise materially with building exemption. Every wise public improvement would be reflected in higher land values and consequently in higher ground rents. Most public improvements undertaken by the city could be made self-liquidating and sometimes highly profitable. City, realty owners, tenants and everyone would benefit in the long run.