Land value taxes are an attractive approach to public finance.
Only to theorists who don’t own or expect to own land, and who don’t acknowledge the political and public choice hurdles to ANY significant change of property ownership and taxation.
The current practical and emotional costs of a forced move make all of this moot, but it’s a nonstarter anyway, unless it’s close to revenue-neutral. And that’s a lot less attractive to the proponents.
As a spot-check on what “ownership” means under this regime, what happens to binding covenants and long-term leases when a forced ownership change happens?
Land value taxation is designed to make land ownership more affordable by lowering the cost to buy land. Would it change the value of property as an investment for current owners? I’m not sure, one one hand, land values would go down, but on the other, land would get used more efficiently and deadweight loss of taxation would go down, boosting the local economy.
As for the public choice hurdles, reform doesn’t seem intractable. Detroit is considering a split-rate property tax, and it’s not infeasible that other places switch. Owners hate property taxes and land values are less than property values. Why not slowly switch to using land values and lower everyone’s property tax bill? That seems like it could be popular with voters, economists, and politicians.
This proposal doesn’t involve any forced moves, owners only auction when they want to sell their land.
> Owners hate property taxes and land values are less than property values. Why not slowly switch to using land values and lower everyone’s property tax bill?
Separately, I would suggest being very careful about claims like this.
Lower values for the tax base don’t mean lower taxes in dollar amounts. The previous state I lived in assessed property at about half the market value but more than made up for it in the rates.
A non-trivial revenue-neutral tax reform by definition has to produce some losers. Yes, technically we’ll be paying less “property” tax and more “land value” tax over time as it switches over, but I suspect most folks would put both in the same mental bucket (and unless I’m specifically trying to make a distinction between a land value tax and more traditional property taxes, I do too).
Also, assuming folks would be writing just one check/year during the transition and not two separate ones, that’s another factor leading folks to think of them on a combined basis.
>This proposal doesn’t involve any forced moves, owners only auction when they want to sell their land.
The article already lists two counterexamples that aren’t uncommon situations...
>There will be situations where the valuation growth from point 5 outpaces the true value of the house. The owner can update the land value by putting the land up for public auction, but they have to win that auction fair and square. If they win the auction, the land value is updated to their new bid, but no money changes hands (essentially, they pay themselves for the bid).
So if my land value has ratcheted up faster than its true value, my choice is: get gouged on taxes, or roll the dice on losing control of the land. The odds of this problem grow over time, so people caught by this will tend to be 1) long-time residents and 2) older.
> Fourth, auctions are a fairer way to allocate land, preventing families from passing land wealth down the generations without updating their valuation.
So if I want to keep my parents’ house in the family after they die, I again have to roll the dice. (I also wonder if this tends to be regressive since wealthier families have a greater ability to bid high for sentimental reasons and absorb the extra tax burden, so the folks featured in news stories as victims of this policy will be those of more modest means—this is more speculative though.)
In neither situation does the current owner actually want to sell.
Note that these sorts of situations are perfectly foreseeable from the perspective of owners. They know precisely what they will pay each year in taxes based on their bid. It’s prudent to re-value the home every once in a while if taxes drift too much, but the owner can keep the same schedule if they want. They can also use the public listing of local bids, so they know what to bid and can feel pretty safe that they will keep their home. They truly have the highest valuation of all the bidders in most cases.
The thing is, every system of land ownership faces a tradeoff between investment efficiency and allocative efficiency. This is a topic in the next post, where I’ll discuss why the best growth rate of taxes closely follows the true growth rate of land values. Essentially, you want people to pay their fair share. Unfortunately, any system that has taxes move along with land values will risk “taxing people out of their homes”, there are legitimate ways to do land policy on either end of the spectrum.
The neat thing about this system is that you can choose where on the spectrum you want to be! If you want high investment efficiency (i.e. people can securely hold their homes and don’t have to worry about re-auctioning) then just set the tax growth rate to zero; that way the owner pays a fixed amount each year indefinitely. In net present value terms, the indefinite taxes will be finite and the tax rate can be set to adjust this amount up or down.
If for some reason you want allocative efficiency, you can crank the growth rate high enough to trigger annual auctions. This is bad for physical land, but this could be valuable for other types of economic land like broadband spectrum.
Only to theorists who don’t own or expect to own land, and who don’t acknowledge the political and public choice hurdles to ANY significant change of property ownership and taxation.
The current practical and emotional costs of a forced move make all of this moot, but it’s a nonstarter anyway, unless it’s close to revenue-neutral. And that’s a lot less attractive to the proponents.
As a spot-check on what “ownership” means under this regime, what happens to binding covenants and long-term leases when a forced ownership change happens?
Land value taxation is designed to make land ownership more affordable by lowering the cost to buy land. Would it change the value of property as an investment for current owners? I’m not sure, one one hand, land values would go down, but on the other, land would get used more efficiently and deadweight loss of taxation would go down, boosting the local economy.
As for the public choice hurdles, reform doesn’t seem intractable. Detroit is considering a split-rate property tax, and it’s not infeasible that other places switch. Owners hate property taxes and land values are less than property values. Why not slowly switch to using land values and lower everyone’s property tax bill? That seems like it could be popular with voters, economists, and politicians.
This proposal doesn’t involve any forced moves, owners only auction when they want to sell their land.
> Owners hate property taxes and land values are less than property values. Why not slowly switch to using land values and lower everyone’s property tax bill?
Separately, I would suggest being very careful about claims like this.
Lower values for the tax base don’t mean lower taxes in dollar amounts. The previous state I lived in assessed property at about half the market value but more than made up for it in the rates.
A non-trivial revenue-neutral tax reform by definition has to produce some losers. Yes, technically we’ll be paying less “property” tax and more “land value” tax over time as it switches over, but I suspect most folks would put both in the same mental bucket (and unless I’m specifically trying to make a distinction between a land value tax and more traditional property taxes, I do too).
Also, assuming folks would be writing just one check/year during the transition and not two separate ones, that’s another factor leading folks to think of them on a combined basis.
>This proposal doesn’t involve any forced moves, owners only auction when they want to sell their land.
The article already lists two counterexamples that aren’t uncommon situations...
>There will be situations where the valuation growth from point 5 outpaces the true value of the house. The owner can update the land value by putting the land up for public auction, but they have to win that auction fair and square. If they win the auction, the land value is updated to their new bid, but no money changes hands (essentially, they pay themselves for the bid).
So if my land value has ratcheted up faster than its true value, my choice is: get gouged on taxes, or roll the dice on losing control of the land. The odds of this problem grow over time, so people caught by this will tend to be 1) long-time residents and 2) older.
> Fourth, auctions are a fairer way to allocate land, preventing families from passing land wealth down the generations without updating their valuation.
So if I want to keep my parents’ house in the family after they die, I again have to roll the dice. (I also wonder if this tends to be regressive since wealthier families have a greater ability to bid high for sentimental reasons and absorb the extra tax burden, so the folks featured in news stories as victims of this policy will be those of more modest means—this is more speculative though.)
In neither situation does the current owner actually want to sell.
Note that these sorts of situations are perfectly foreseeable from the perspective of owners. They know precisely what they will pay each year in taxes based on their bid. It’s prudent to re-value the home every once in a while if taxes drift too much, but the owner can keep the same schedule if they want. They can also use the public listing of local bids, so they know what to bid and can feel pretty safe that they will keep their home. They truly have the highest valuation of all the bidders in most cases.
The thing is, every system of land ownership faces a tradeoff between investment efficiency and allocative efficiency. This is a topic in the next post, where I’ll discuss why the best growth rate of taxes closely follows the true growth rate of land values. Essentially, you want people to pay their fair share. Unfortunately, any system that has taxes move along with land values will risk “taxing people out of their homes”, there are legitimate ways to do land policy on either end of the spectrum.
The neat thing about this system is that you can choose where on the spectrum you want to be! If you want high investment efficiency (i.e. people can securely hold their homes and don’t have to worry about re-auctioning) then just set the tax growth rate to zero; that way the owner pays a fixed amount each year indefinitely. In net present value terms, the indefinite taxes will be finite and the tax rate can be set to adjust this amount up or down.
If for some reason you want allocative efficiency, you can crank the growth rate high enough to trigger annual auctions. This is bad for physical land, but this could be valuable for other types of economic land like broadband spectrum.
Death is foreseeable?
(Well, okay, yes, but the timing often isn’t.)