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Should a Land Value Tax Replace a Property Tax?

Are these rates fluid?

In states like CA, housing prices would be devastated if you replaced all taxes with LVT. It's much like ill conceived concept of the Fair Tax.
 
Deacfreak07 said:
Isn't this the same argument about business not growing and hiring because their taxes would go up?
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Not really. The business growth issue deals with combined rates somewhere between 25-45% depending on the specifics, and there is no ancillary non-economic personal benefit/enjoyment from the growth to the business owner.
With property taxes and home improvements you're talking 1-2% rates on the improvement (if they are even assessed at all), and the primary purpose is usually the non-economic personal benefit/enjoyment to the owner.
 
Property tax probably doesn't impact home improvement as commonly understood (i.e. renovating your kitchen etc.). A wise homeowner would consider it before undertaking a major addition, but again most people don't make those decisions on that basis.

Where it does make an impact is on commercial property, including single-family rentals. If you upgrade a property in a way that will add value (say, adding a deck or adding on a bedroom) your property tax will go up. A wise owner will calculate whether the marginal return she is likely to get from being able to raise rents or add tenants will outweigh the property tax increase. Likewise, property tax has an impact on the development or redevelopment of dilapidated or vacant commercial property. Improving the property means a certainty of higher property tax expense, but not necessarily a certainty of additional revenue (if the landowner can't find tenants, or if the the local rental market goes south after a few years). Accordingly, a property owner may choose to just keep his low-value parking lot that generates a little cash, rather than take a risk and build something on it that may or may not lease up.

Before a strawman appears, let's be clear that what we are talking about here is a negative incentive against building at the margins, not some kind of absolute bar on development because people are afraid of property tax. Clearly in strong rental markets, the landowner is going to have confidence that her increased revenue from improvements or development outweighs the marginal tax increase. The idea is that the LVT would remove that disincentive, however marginal it may be, while also helping the public get a return on its investment in infrastructure that benefits the underlying value of the land no matter what may or may not be built on it.
 
I am by no means an economist, but I do read The Economist cover to cover every week, along with the business section of WSJ and most of the weekend NYTimes.

Articles like this one intrigue me, because they get at ideas that economists across the board seem to think is good practice, but politicians won't touch.
 
Deacon923 said:
Property tax probably doesn't impact home improvement as commonly understood (i.e. renovating your kitchen etc.). A wise homeowner would consider it before undertaking a major addition, but again most people don't make those decisions on that basis.

Where it does make an impact is on commercial property, including single-family rentals. If you upgrade a property in a way that will add value (say, adding a deck or adding on a bedroom) your property tax will go up. A wise owner will calculate whether the marginal return she is likely to get from being able to raise rents or add tenants will outweigh the property tax increase. Likewise, property tax has an impact on the development or redevelopment of dilapidated or vacant commercial property. Improving the property means a certainty of higher property tax expense, but not necessarily a certainty of additional revenue (if the landowner can't find tenants, or if the the local rental market goes south after a few years). Accordingly, a property owner may choose to just keep his low-value parking lot that generates a little cash, rather than take a risk and build something on it that may or may not lease up.

Before a strawman appears, let's be clear that what we are talking about here is a negative incentive against building at the margins, not some kind of absolute bar on development because people are afraid of property tax. Clearly in strong rental markets, the landowner is going to have confidence that her increased revenue from improvements or development outweighs the marginal tax increase. The idea is that the LVT would remove that disincentive, however marginal it may be, while also helping the public get a return on its investment in infrastructure that benefits the underlying value of the land no matter what may or may not be built on it.
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The bold makes two major assumptions:

1. That the land itself can be accurately valued across the board. I've handled hundreds of property tax apppeals at both the County level and before the PTC, it is hard enough to agree on an accurate value of property with structures on it, for which similar comparables are usually generally available. Pretending those structures don't exist and valuing the land alone seems like a pretty impractical and useless academic exercise simply for the purpose of being academic. The value of land is what someone will pay for it, which in most cases (tear-downs excluded) necessarily includes the structures on it; pretending the structures don't exist is just creating a pretend value, which seems like a waste of time.

2. That certain land isn't over-utilized by its function. In certain instances, the public may be getting a larger return on its infrastructure investment because of the construction on a parcel than if the land was valued in comparison to other land in a similar location. For example, a manufacturing plant in the middle of nowhere is going to generate more in property tax revenue because of the building on it than a land value tax would yield with adjusted rates.
 
2&2 Slider To Leyritz said:
The bold makes two major assumptions:

1. That the land itself can be accurately valued across the board. I've handled hundreds of property tax apppeals at both the County level and before the PTC, it is hard enough to agree on an accurate value of property with structures on it, for which similar comparables are usually generally available. Pretending those structures don't exist and valuing the land alone seems like a pretty impractical and useless academic exercise simply for the purpose of being academic. The value of land is what someone will pay for it, which in most cases (tear-downs excluded) necessarily includes the structures on it; pretending the structures don't exist is just creating a pretend value, which seems like a waste of time. Totally agree.

2. That certain land isn't over-utilized by its function. In certain instances, the public may be getting a larger return on its infrastructure investment because of the construction on a parcel than if the land was valued in comparison to other land in a similar location. For example, a manufacturing plant in the middle of nowhere is going to generate more in property tax revenue because of the building on it than a land value tax would yield with adjusted rates.
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1. Totally agree. Probably the #1 reason this hasn't caught on, it's just too practically difficult to implement.
2. This cuts both ways, though, doesn't it? Arguably an LVT is better for the taxpayer AND for the property owner. In a hypothetical conversion from a property tax to LVT that is revenue neutral to the taxing authority, some property owners (like your manufacturing plant in the middle of nowhere) might get a tax cut while others (my hypothetical parking lot owner who is just sitting on his property instead of developing it) get a tax increase. Under property tax, both owners had some incentive not to further improve their property; now (at the least) that disincentive is removed.

Now let's add to the hypothetical. Let's say that the city builds a beautiful walking trail beside the parking lot, or builds a railroad line running past the manufacturing plant. Under the property tax, the taxable value of the two lots does not change. Under the LVT, both owners get an increased tax bill because the infrastructure has made their lot more valuable. The landowner can decide how to respond to that - and in the case of the parking lot owner, might find that the taxes have gone up so much he needs to get off his butt and develop the property to produce more income (or sell it to someone who will).

But I agree it is largely hypothetical and academic precisely because the implementation problems are somewhat daunting.
 
Deacon923 said:
1. Totally agree. Probably the #1 reason this hasn't caught on, it's just too practically difficult to implement.
2. This cuts both ways, though, doesn't it? Arguably an LVT is better for the taxpayer AND for the property owner. In a hypothetical conversion from a property tax to LVT that is revenue neutral to the taxing authority, some property owners (like your manufacturing plant in the middle of nowhere) might get a tax cut while others (my hypothetical parking lot owner who is just sitting on his property instead of developing it) get a tax increase. Under property tax, both owners had some incentive not to further improve their property; now (at the least) that disincentive is removed.

Now let's add to the hypothetical. Let's say that the city builds a beautiful walking trail beside the parking lot, or builds a railroad line running past the manufacturing plant. Under the property tax, the taxable value of the two lots does not change. Under the LVT, both owners get an increased tax bill because the infrastructure has made their lot more valuable. The landowner can decide how to respond to that - and in the case of the parking lot owner, might find that the taxes have gone up so much he needs to get off his butt and develop the property to produce more income (or sell it to someone who will).

But I agree it is largely hypothetical and academic precisely because the implementation problems are somewhat daunting.
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Not to nitpick too much because I think we are on the same page, but I do think that the taxable value of the lots would change in your hypothetical of the walking trail or, especially, the rail line. The assessors routinely adjust for location features; if they have comps without material surrounding ameneties, then they will bump up the land value component of the property that can capitalize on the material ameneties.

But in general, I agree that the practical implementation problems completely outweigh any marginal benefit gained by switching systems at this point. And hence why it only appears in an academic publication and isn't taken seriously by anyone actually dealing in the matter.
 
A follow-up academic question, then. Should practical complications always outweigh ideal solutions?

Reforms to the tax code are a perfect example. The code is so beyond fucked and complicated, it's very challenging to make meaningful reform. Does that mean it's too messed up to fix?
 
TownieDeac said:
A follow-up academic question, then. Should practical complications always outweigh ideal solutions?

Reforms to the tax code are a perfect example. The code is so beyond fucked and complicated, it's very challenging to make meaningful reform. Does that mean it's too messed up to fix?
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I think the federal income tax code is a very different matter from the property tax. The property tax has its issues but in most jurisdictions it's pretty easy to understand and very easy to comply with. It's pretty much doing its job; maybe an LVT would do that job marginally better but it's kind of a "not broken why fix it" situation. That does not apply to the tax code at all. We know it's badly broken and not doing the job. We know how to fix the tax code; we have Bowles-Simpson and a million other white papers and studies, plus it was done before in 1986. It's simply a matter of getting the political will together to do it.
 
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Wouldn't the LVT need to be extremely high if it were to replace all other taxes? Would that drive values down?

If it drove values down, how would diminished values of homes and properties be addressed? How would individuals and banks be made whole?
 
RJKarl said:
Wouldn't the LVT need to be extremely high if it were to replace all other taxes? Would that drive values down?

If it drove values down, how would diminished values of homes and properties be addressed? How would individuals and banks be made whole?
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I think the idea is that it would replace local property taxes, not all taxes.
 
Deacon923 said:
I think the idea is that it would replace local property taxes, not all taxes.
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Under certain perfect conditions regarding labor mobility and returns to scale, the annual ground rent of a given economy is equal to the public goods expenditures in that economy. So it couldn't replace all taxes, but you might possibly be able to use just LVT and Pigouvian taxes to fund all levels of government, measurement issues notwithstanding.

Of course, taxing the entire ground-rent is basically the same as collectivizing all land (but crucially not collectivizing the structures on the land) and would be deeply unpopular, especially among powerful auto dealers whose tax bills would possibly exceed those of downtown commercial landlords.
 
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TuffaloDeac10 said:
Under certain perfect conditions regarding labor mobility and returns to scale, the annual ground rent of a given economy is equal to the public goods expenditures in that economy. So it couldn't replace all taxes, but you might possibly be able to use just LVT and Pigouvian taxes to fund all levels of government, measurement issues notwithstanding.

Of course, taxing the entire ground-rent is basically the same as collectivizing all land (but crucially not collectivizing the structures on the land) and would be deeply unpopular, especially among powerful auto dealers whose tax bills would possibly exceed those of downtown commercial landlords.
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It also wouldn't make sense in today's technological world. A company that gains most of its revenue from online transactions would be basically un-taxed, while some poor bastard farmer would be left holding the entire tax bill. The theory that wealth is derived primarily from physical space, such that land is a good measuring stick for prosperity and thus taxability, is not necessarily the case any more.
 
2&2 Slider To Leyritz said:
It also wouldn't make sense in today's technological world. A company that gains most of its revenue from online transactions would be basically un-taxed, while some poor bastard farmer would be left holding the entire tax bill. The theory that wealth is derived primarily from physical space, such that land is a good measuring stick for prosperity and thus taxability, is not necessarily the case any more.
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No, we'd just wind up paying $20 for a carrot. Sorry DeacHoops.
 
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