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Thread: Taxing the underlying value of the land and not its improvements

  1. #1
    Cyburbian
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    Taxing the underlying value of the land and not its improvements

    Everyone seems to agree that this system makes sense, but how can the idea be implemented, especially in places like California where Proposition 13 has given an especially good deal to older land owners?

  2. #2
    Cyburbian Raf's avatar
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    Quote Originally posted by Pragmatic Idealist View post
    Everyone seems to agree that this system makes sense, but how can the idea be implemented, especially in places like California where Proposition 13 has given an especially good deal to older land owners?
    The will of the voter... and these days, you won't. Mess with property taxes in the state, prepared to be lynched.
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  3. #3
    Quote Originally posted by Pragmatic Idealist View post
    Everyone seems to agree that this system makes sense, but how can the idea be implemented, especially in places like California where Proposition 13 has given an especially good deal to older land owners?
    This idea has been around for over 100 years now. Has any place in the US actually gone or this?

  4. #4
    Cyburbian
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    If property taxes in the short term remain the same for everyone and if, in the case of California, Proposition 13 was to remain in effect, then could not selling the idea as an opportunity to improve properties without incurring greater taxes be politically-palatable.

  5. #5
    Cyburbian Linda_D's avatar
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    Quote Originally posted by Pragmatic Idealist View post
    Everyone seems to agree that this system makes sense, but how can the idea be implemented, especially in places like California where Proposition 13 has given an especially good deal to older land owners?
    Who exactly is this "Everyone" that agrees "that this system makes sense"? As far as I know, this idea has been around since at least the 1880s, and has never been implemented anywhere. I'm more than willing to eat crow on that if somebody can come up with examples from any 20 or 21st century1st world country that uses this practice. This is just another one of those pie-in-the-sky economic schemes that appeals to academicians because it purports to painlessly "solve" problems. I believe George's (the main advocate in the 1880s) claim was that it would get rid of slums in cities by doing away with the evils of speculation.
    Last edited by Linda_D; 04 Dec 2010 at 6:23 PM.

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    Cyburbian mike gurnee's avatar
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    I agree with those who disagree. George had a great idea, but no in the real world one listened.

  7. #7
    Cyburbian
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    Quote Originally posted by Linda_D View post
    Who exactly is this "Everyone" that agrees "that this system makes sense"? As far as I know, this idea has been around since at least the 1880s, and has never been implemented anywhere. I'm more than willing to eat crow on that if somebody can come up with examples from any 20 or 21st century1st world country that uses this practice. This is just another one of those pie-in-the-sky economic schemes that appeals to academicians because it purports to painlessly "solve" problems. I believe George's (the main advocate in the 1880s) claim was that it would get rid of slums in cities by doing away with the evils of speculation.
    If you're going to quote me, you might want to quote complete sentences because I used the verb, "seems." I have never met anyone who thinks this idea does not make sense, but, evidently, you are among those who believe so. And, your reasoning is that the notion is "just another one of those pie-in-the-sky economic schemes."

    Well, who can argue with that logic? (By the way, the irony and the sarcasm are intentional.)

    My undergraduate schooling is in economics, so aligning incentives with desirable outcomes is kind of my thing. And, I'm legitimately curious about the pitfalls of implementing such a system. Who said that property taxes should necessarily be based on the land and its improvements, especially when the improvements are depreciating assets?

    Making more efficient use of the land and avoiding excessive levels of speculation seem to be very good things. And, the last couple of years ostensibly warrant us revisiting this idea.

  8. #8
    Cyburbian Raf's avatar
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    Quote Originally posted by Pragmatic Idealist View post

    Making more efficient use of the land and avoiding excessive levels of speculation seem to be very good things. And, the last couple of years ostensibly warrant us revisiting this idea.
    Making more efficent use of land starts with your local council, not at the property tax rolls.
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    Cyburbian
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    The current tax structure encourages disinvestment in established communities.

    City Councils have only so much power to promote reinvestment. And, if you live in California, you know that large swaths of the State have been converted into a wasteland because our tax structure is making people behave like locusts.

    We are at an inflection point that demands re-examination of the status quo.

  10. #10
    Cyburbian Linda_D's avatar
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    Quote Originally posted by Pragmatic Idealist View post
    If you're going to quote me, you might want to quote complete sentences because I used the verb, "seems." I have never met anyone who thinks this idea does not make sense, but, evidently, you are among those who believe so. And, your reasoning is that the notion is "just another one of those pie-in-the-sky economic schemes."

    Well, who can argue with that logic? (By the way, the irony and the sarcasm are intentional.)

    My undergraduate schooling is in economics, so aligning incentives with desirable outcomes is kind of my thing. And, I'm legitimately curious about the pitfalls of implementing such a system. Who said that property taxes should necessarily be based on the land and its improvements, especially when the improvements are depreciating assets?

    Making more efficient use of the land and avoiding excessive levels of speculation seem to be very good things. And, the last couple of years ostensibly warrant us revisiting this idea.
    My undergrad schooling included economics, too, along with a big chunk of history and psychology, which is why I understand economic theory but don't worship at its altar. Economics assumes that people are motivated by economic rationality, but they aren't. People will improve their property for any number of reasons that have nothing to do with the tax code.

    If you've "never met anyone who thinks this idea does not make sense", then you have now, and I suggest that you broaden your circle of acquaintances. If it made so much sense to everyone, then somebody would have tried it somewhere in the last 130 years. That they haven't speaks volumes.

    Quote Originally posted by Pragmatic Idealist View post
    The current tax structure encourages disinvestment in established communities.

    City Councils have only so much power to promote reinvestment. And, if you live in California, you know that large swaths of the State have been converted into a wasteland because our tax structure is making people behave like locusts.

    We are at an inflection point that demands re-examination of the status quo.
    It's NOT "current tax structure encourages disinvestment in established communities" any more than it was "land speculation" that created slums in rapidly growing cities in the 1880s. In the 1880s, slums were created by rapidly increasing urban populations created by industrialization.

    The current land use pattern has been caused by changes in society, transportation, and expectations as well as the rise of the consumer economy not by the tax code. Moreover, I would argue that city governments' unresponsiveness to citizens' needs/concerns have contributed as much to the "disinvestment" in cities as anything else. People look to live in safe, quiet neighborhoods with decent public schools and reasonable amenities. When cities fail to provide that, people leave.
    Last edited by NHPlanner; 07 Dec 2010 at 3:59 PM. Reason: double reply

  11. #11
    Cyburbian Cardinal's avatar
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    The problem with economics is that it relies on a principle of a "rational" person, and also that it tends to ignore many other variables when coming up with a theory. If we were to make a switch, assuming we could get past the huge political issues, we would need to develop a taxation system far more complex than what we have in most places today. Just consider a few possibilities:

    - Historic structures: Located in the older parts of town where the taxation system forces density, there would be tremendous pressure to level blocks of historic homes and commercial buildings. So much for history...

    - Industry: people need to work, but will a business want to locate where it has high taxes? We already see this problem in gentrifying urban communities, where the industry is forced out to be replaced with residential - for wealthy newcomers. The long-time residents lose their jobs or acquire a long commute, until they are forced out of the neighborhood by escalating rents...

    - Displacement: homeowners and renters facing sometimes massive increases in property taxes are forced to move...

    - Speculation and real estate crisis: Developers can no longer afford to sit on vacant land, so they begin to construct thousands of new residential units and millions of square feet of commercial space. At the same time, residents who can no longer afford their homes put them on the market. Units for sale outnumber buyers by several times. Units do not sell, or the selling prices begin to drop precipitously. Owners are underwater. Developers go belly up. There is a tremendous wave of mortgage foreclosures...

    Just a start.
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    Cyburbian ColoGI's avatar
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    Quote Originally posted by Linda_D View post
    My undergrad schooling included economics, too, along with a big chunk of history and psychology, which is why I understand economic theory but don't worship at its altar. Economics assumes that people are motivated by economic rationality, but they aren't. People will improve their property for any number of reasons that have nothing to do with the tax code.
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    Quote Originally posted by Linda_D View post
    If you've "never met anyone who thinks this idea does not make sense", then you have now, and I suggest that you broaden your circle of acquaintances. If it made so much sense to everyone, then somebody would have tried it somewhere in the last 130 years. That they haven't speaks volumes.
    Mee three. I also suggest widening of the OP's circle of influence.

  13. #13
    Cyburbian
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    Quote Originally posted by Linda_D View post
    People look to live in safe, quiet neighborhoods with decent public schools and reasonable amenities. When cities fail to provide that, people leave.
    And jobs. People go where the jobs are, sometimes even if the other features are lacking.

    I'm not sure I even understand what y'all are proposing here.

    The observable value of a property less the capitalized value of cashflows associated with uses attributable to the property equals the land residual. You agree on this basic principle right? You would also agree, I hope that the land residual may be either positive or negative. Cities proxy the second term of this equation with a valuation of the improvements but generally set taxes based on only the observable total value of the property as proxy (of course, since it is the only observable value). The land residual and the intermediate cashlows attribuatable to improvements are always subjective - based on a builder/investor/land-owners judgment call. Which term are you proposing to tax here? The land residual? How do you propose to calculate the land residual given that it's not an observable value? Effectively, you would be proposing a tax on somebody's financial strategy, not a financial reality. Since the land residual will change radically as a function of the valuation of the second term in the equation, are you proposing to change the taxation as well when this happens? Who will determine how this will change? Aren't you opening yourself up to a ton of externalities if you were to try to do this (such as how the development of adjacent parcels will effect the land-residual of your parcel)?

    In order to make the land residual observable separate from the value of improvements, one would need to have enough data to separate the two. This would generally mean that you would assess the land+improvements and then the land (based on hopefully enough comparables for just sales of land), and subtract the second from the first in order to get at the value of improvements. I think this is how two-rate millage systems work. Unless your entire system is designed around this way of thinking, you will have difficulty observing a separate land residual value - since your precedents are based only on what people actually buy, which is land+improvements (or residual plus capitalized use cashflows). This is fine for rural areas or areas with lots of vacant land, but I don't really see how this would work in an established city (that hasn't been doing it this way all along).

    Retroactively breaking a one millage rate system into a two-track system would be very difficult to do.
    Last edited by NHPlanner; 07 Dec 2010 at 3:59 PM. Reason: double reply

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    Cyburbian JimPlans's avatar
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    It seemed to me that some places had adopted something like this proposal, so I checked and found that some Pennsylvania cities and towns (including, at one point, Pittsburgh) intentionally tax land at a higher rate than improvements (two-rate taxation). Some claim that areas in PA with two-rate taxation are more likely to have development occur within them.

    I also found that there actually are places with single taxation-like systems on the local level (Arden, Delaware and Fairhope, Alabama). They are actually large land trusts, where all residents lease their land from the trust and the trust pays one County land tax bill that covers all leaseholders (leaseholders still seem to pay County taxes on their improvements only). It's also legal in Maryland, but AFAIK no jurisdiction implements it.

    Off-topic:
    I just noticed that the slogan for Hyattsville, MD (the first and only place in MD to implement the single tax) is "A World Within Walking Distance." I like that.
    Last edited by JimPlans; 07 Dec 2010 at 3:16 PM. Reason: OT

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