Municipal funding - sales tax, property taxes and income taxes.

Utah has this curious situation where the 'host' muni gets a share of the sales tax. (Prior to which, munis did not zone for commercial, due to the traffic nuisance). Consequently, there is a bear-pit fight between munis to get commercial development, offering all sorts of inducements (taxes-breaks, infrastructure) to get the development, so they can get the taxes, to pay for the development. Prior to reading a lot of Strong Towns, I had been under the impression such a system was a local peculiarity. Regardless, I was much an advocate for it's abolition, as an inducement to sprawl.

Dan Sullivan of the 'Effective Georgism' Facebook group pointed out that this might not be the case, noting: "In Delaware, which has no general sales tax, commercial land values are exceptionally high, which means the municipality gets far more revenue from land that is zoned commercial". So even if Utah did away with sales tax rebates, munis would still engage in the same fruitless competition. Bleak.

I also commented on this to a Utah Developer, who argued for the sales tax as preferable to a property tax: a sales tax reflects the amount of business actually done, reflecting ability to pay, while a constant property tax might sink a business in a bad year. I might argue that while that's nice for the business, it's hard on the municipality--revenue goes up and down.

But recent readings suggest I may have it backwards--using sales tax may actually be kinder to the muni in the larger context. Tax assessments are also prone to all sorts of political gamesmanship, both over-assessing political opponents, and failing to re-assess. Rustbelt cities (Cleveland, Pittsburgh, Detroit) are famous for having property value assessments that are decades out of date--some of them reaching back into the 50's. (Don't even get me started on the obscenity that is California's Prop 13).

The peculiarity of Utah having the counties assess properties, rather than cities, has never made so much sense. The county isn't (as) reliant on property taxes to fund it's operations, and so it has less incentive to 'game' the process.

I'm still uncertain about sales-tax funded transit. When the economy crashed, UTA cut service, just when demand for transit-use was surging. However, property tax assessments to fund infrastructure are political non-starters (barring concentrated examples such as local improvement districts for things like streetcars). I know of no income-tax funded transit systems, although I expect one must exist--NYC used to have a income-based 'commuter fee' funding the MTA. Cities with specialty districts (airports, convention centers, tourist meccas) are reliable about harvesting that revenue scheme through per-use fees (rather than ad valorem taxes). I've seen both hotel and rental car fees in my travels. And even, in one curious case, a district (downtown) specific sales tax on beer.

Untaxed or unfee'd, it would be reasonable to see those charges capitalized into land values. And those land values mis-assessed (under or over). So perhaps a fee or sales tax based system is preferable to a property-tax based system.

Georgism and affordable housing

From the stand of basic economics, land value taxation makes sense to me: A bond with a higher interest rate is worth more than one with a lower one, ceteris paribus. Hence, a bond with a negative interest rate (one that costs your money to hold) must be worth less than one with a positive ones. And in the case of two bonds with negative interest rates, the one with the less negative rates is clearly more valuable. And hence costs more.

The same analogy applies to land: All else equal, prefer the parcel of land with lower property taxes (the lower negative interest rate). The higher the tax rate, the less the land is worth. If you want to keep land values low (and affordable to more people), raise the property tax.

LVT keeps housing affordable

LVT has such a powerful dampening effect on idle land speculation that even the land portion of the real estate tax keeps housing affordable. Cities with the highest real estate taxes have the most affordable housing. Texas and California were the two fastest growing states in the second half of the 20th century. Texas, which relies heavily on property tax, having no personal income taxes, has four of the six most affordable cities in the nation. California, which dramatically curtailed its property taxes, has 23 of the 25 least affordable cities.

It is only logical that a tax on buildings would discourage construction and reduce the supply of buildings, increasing real estate prices and rents. However, LVT is such a potent disincentive to idle landholding that it has a much stronger opposite effect. 

-http://savingcommunities.org/issues/taxes/landvalue/

Rents are primarily set by location value, only secondarily by actual quality of housing stock. Affordable locations are affordable due to low site value, which doesn't change under Land Value Taxation. But as vacant urban land was forced into use by Land Value Taxation, landlords would have to compete on quality of housing instead of just location, so they would have incentive to improve housing stock just to charge the same rents. This would mean higher quality affordable housing. Luckily, under Land Value Taxation, landlords would no longer face higher property taxes for improving their buildings.

-Erïch Jacoby-Hawkins 

A rescued comment

I've 'rescued' the following comment from here, to amplify the signal. 

There is a major factor that far too few experts understand. Urban areas can have a median multiple of around 3, and a low, flat urban land price curve - if they have unrestrained sprawl ex-fringe. This has the beneficial effect of anchoring site values everywhere, including the central core. This is not just obvious in the sprawling median-multiple 3 cities today, it was true in New York for decades. Hence the very dynamic building "up" that occurred in Manhattan.
But when ex-fringe sprawl is curtailed by something like a boundary or zoning, the entire land market is altered in the way prices are derived; the prices become "elastic" to all inputs, rather than anchored in "differential value to rural land". Under these conditions, site values become "elastic to allowed density". This has the perverse effect that upzoning inflates site prices faster than actual redevelopment of additional floor space occurs. Site owners have more incentive to "hold" (in anticipation of further capital gains) than they have to "redevelop". Manhattan-type building "up" becomes LESS likely, not more likely. Houston is the fastest-intensifying city in the USA today because of its sprawl and its disciplined, flattened urban land rent curve. 

...I strongly recommend the book "Economics, Real Estate and the Supply of Land" (2004); Alan W. Evans. There are other academics also from Britain, who are much clearer about this subject, because in Britain they started to ration the supply of land back in the 1950's and they have decades of evidence of the perverse effects for housing supply. Paul Cheshire of the LSE is also an outstanding author.

-ThePhilBest • 8 months ago

This seemed like nonsense when I first read it (and I called it such).  Eight months later (and some reading on housing affordability) I get what was being said. To me, this is the 'nut' of it: 

 "Site owners have more incentive to "hold" (in anticipation of further capital gains) than they have to "redevelop". Manhattan-type building "up" becomes LESS likely, not more likely"

It's a real, and inescapable phenomena, and one of the things that drives me more and more toward a Georgist Land Value Tax as being the only solution. Also makes me wonder if zoning has been holding down value values--I seem to recall an article being published to that effect, regarding Chicago zoning. It would certainly follow. Also suggests to me that the way to maintain the affordability of small single family homes (and prevent their replacement by monster homes) would be to downzone the lot, from just single family use to "single-family, no more than .25 FAR" or some similar form-based code solution.

Doom Loop

So, let me posit an argument: As long as the accessibility supplied by highway outstrips the dis-accessibility of congestion, urban areas can keep expanding. As long as the supply of urban land keeps growing at the same rate as demand, land prices remain low. When this ceases, the price of existing urbanized land begins to rise. As those values rise, fewer and fewer people are able to buy, and the rents from that land ownership accrues to fewer and fewer people. This rents enable the purchase of more land, so there is a self-reinforcing feedback loop. Over time, fewer and fewer people own their houses.

Now, this cycle has two possible outcomes: Socialism or Communism. In the Communism case, you get violent revolution by a oppressed proletariat renter class. The US is largely immune, because we have a functional democracy, and can enact 'regime change' non-violently.*

In the socialism case, governments recognize housing has outstripped private ownership for the majority of the population, and start producing 'social housing', where the government owns/rents the land. This is basically where Europe went with post-war welfare states (Britain, Germany). Britain sold off all of it's social housing under Thatcher, permitting people to buy it. It created a one-off surge of Tory home-owners. But now the same problem has re-occurred: The population needs housing, the land is owned by rentier land-lands, and the rent is too damn high.

Fools (conservative and liberal) would like to believe that this dynamic can be fixed by making it easy to buy homes: downpayment assistance, subsidized mortgage rates, mortgage interest tax deductions, home owners property tax deductions. It's foolish because it ignores the underlying dynamic: A fixed supply of land driving increasing land rents.

It's also grossly inegalitarian; it disproportionately benefits the wealthy. Having money (enough to become a landowner) should not be reward by a government handout. Arguably, if it reaches enough people, it's re-distributive. But what share is that? And how shall it be measured? Using the home ownership rate is almost criminal in its duplicity: It reflect people who could buy homes in the last 50 years, not people who can buy houses now.

To my mind, the solution is Georgist: The value of land is not created by private action, but by public investment in transportation. Those outlays should be recouped, in proportion to the degree of value they have created.









*Assuming we have fair boundaries, rather than 'pocket burroughs' owned by one party through gerrymandering....