As I've noted in an earlier post, Lowell Harriss died a few weeks ago. I've been reading some things he wrote during his long and productive career.
The first is a piece he wrote in 1978, a few months after Proposition 13, California's taxpayer initiative which lowered property taxes and "protected" property owners from paying for services through property taxes, was passed. It is entitled "Property Taxation After the California Vote."
He starts with this: What approach to property taxation would
be most in our interest and that of our children?
He provides some history of the property tax, in general and then specifically in California.
Keep in mind that, in California more than in most of the country,
assessments on homes rather promptly reflect market conditions -- in an
environment in which house and land prices have been rising rapidly.
Often, however, local officials did not use the increases in tax base
to finance offsetting reductions in tax rates. Homeowners faced rising
tax bills; cash income, especially for retired persons, did not always
go up correspondingly.
California's colleges and universities were, however, among the best in the US, and surely some significant portion of the public spending was to provide the very services which caused California's property values to rise.
Lowell went on to say,
The full results of Proposition 13 will not appear at once. Only time
will reveal whether new jobs develop now as property owners use the
addition to their disposable income; whether extensive declines will
occur in state-local employment; and how much more erosion of local
authority will result from expansion of state payments to replace
revenues lost by the sweeping changes in real estate taxes.
He continued,
Present owners of property have voted themselves capital gain
"windfalls." The reduction in property taxes will tend to raise real
estate prices. Today's owners, in voting essentially permanent
reductions in annual property taxes, have enlarged the stream of net benefits
(income) to be capitalized in valuing real estate. This one-time
capital gain in effect absorbs much of the future benefit from the tax
cut. In this respect, the specific results of Proposition 13 are
difficult to judge because assessments (but not the tax rate) will rise
after a sale. Future buyers will pay a higher price -- higher by
enough, in general, to offset the tax benefit. "No election will ever
be lost by votes in the future," runs the
conventional wisdom. And certainly California voters did not have
future property owners (or voters) in mind when they rallied to the
support of Proposition 13.
Lowering the tax reduces the cash required to hold on to underdeveloped
land. "Speculative underutilization" becomes less expensive. Waiting
for population growth and inflation to boost prices will cost less. The
current offerings of land will decline -- and thereby prices will be
raised -- because owners face lower cash pressure to sell or develop.
Income tax considerations, of course, complicate individual decisions
and require some caution in generalization, but the net effect on land
use will be some -- or much -- distortion away from the direction of
free-market forces.
Will the California economy get a boost from Proposition 13? Of course
it will. Other things being the same, tax something, and there will be
less of it (land being an exception). The 50- to 60-percent cut in
taxes on man-made capital will alter favorably the "arithmetic" of
construction projects in California. How much so is difficult to say.
This cost reduction will interact with many other factors, including
the forces tending to raise land prices. The change in prospective net
returns at the margin may be more modest than impressive. But one
conclusion is clear: More capital will flow where tax reduction improves the prospects for investment.
He continues,
The once widely accepted criticism that property taxes are regressive
does not survive modern economic analysis. In fact, a persuasive
argument in favor of property taxation for local services can be made on grounds of
equity. Especially important, it seems to me, is the fact that in
effect this tax enables localities to capture some of the fruits of
forces raising prices of land, including public outlays on streets, schools, sewers, and other facilities.
He concludes,
Finally, and probably of greatest potential, there is a real
opportunity in the wake of Proposition 13 for restructuring
fundamentally the way we tax property. We can reduce burdens on
man-made capital and make up the revenue from higher taxes on site
values, a procedure which seems to me eminently desirable on several
grounds. This possibility should be part of the broader public
discussion of the role of property taxation stimulated by the vote in
California.
One change may be politically tempting -- to reduce burdens on
residential property while maintaining or even raising burdens on
business and public utility property. Such moves would not only add to
concealment of costs of government in the form of hidden burdens on
consumers and investors. In addition, the productive portions of the
economy would suffer. Building better communities will not come from
boosting taxes on business.
Americans should be "up in arms" -- or at least doing something -- about
restricting and effectively controlling the growth of government.
"Revolt" seems to me too strong a term; it also seems misleading,
implying as it
does that a single, dramatic action will do the job. Patient, informed,
continuing efforts are required. Among them will be the reform of
property taxation to develop its potential as a high-quality revenue
producer.
Another, earlier paper entitled "Equity of Heavier Reliance on Land Taxation (Location Value) and Less on Improvements" (1970), starts with this:
Greater fairness in sharing the costs of local
government constitutes a prime -- but not the only -- reason for
shifting much of the tax from improvements to land. This country will
be around for a long time. So also, I hope, will meaningful local
government. Effective freedom requires financial independence,
including ability and responsibility for raising revenue.
One of the biggest legacies we leave our children
will be the tax system. We want to make it as good as possible. Equity
is one (again, not the only) element of "goodness" of a tax system.
He proposes a shift to a structure where the millage rate on land is about 4 times that on buildings. He talks about transition issues, and issues of equity during and after the transition:
Two markedly different sets of equity issues command
attention. The one of dominant concern ought to be the situation in
which we (and our children) would carry on our affairs after generally
full adjustment as contrasted with conditions then if present practices
were to continue. The long run in which "we" are not all dead! The
other concern involves the transition. The shift itself would produce
results distinguishable from those to prevail after the economy had
settled down to the new system.
Writing of long-term equity issues -- remember that this was 1970 when you consider the dollar figures --
Community Use of
Values Created by Social Development and Local Government Spending
Over the longer run, landowners would get less of
the increment in the values of location. The general public would get
more in the form of a larger flow of the rising yields of the worth of
location (land) to finance local services. On this score, the equity
results commend themselves very strongly indeed. Socially created
values would go for governmental, rather than for private uses -- and
locally. The absorption of the increments for local, rather for state
or national, governmental use would channel these funds on a benefit
basis geographically.
The localities doing most to make themselves
attractive would have most of this revenue source. In major cities
$10,000 to $15,000 (now often considerably more) of governmental outlay
is frequently needed for each new dwelling unit -- schools, streets,
fire and police, sanitation and health, park and prison, facilities.
Under present arrangements much benefit from such outlays in developing
areas accrues to the owner of locations being "ripened" for more
lucrative use; his payment in taxes (and special assessments) toward
the cost will generally be only a modest portion of the total.
He describes this as a "burdensomeless" tax:
As for the future, the tax on values of location
above their present levels would be almost burdensomeless, except as
owners of land and their heirs get less of the "unearned increment" of
rising values over the decades. Much of the element of true economic
surplus would be used for public purposes. For those parcels of land
whose values drop, the annual tax would also decline. Then, because tax
rates on land would be higher than today, local government would share
more fully in the loss of worth. For landowners the proposal would not
be a one-way affair which assumes that land always rises in price.
No other revenue source seems to me to compare so
favorably on this score of fairness. Future users of land would be
no worse off for the much heavier tax they would pay on the value of
location. The purchase price of land would be correspondingly less. Of
the total flow of yield of location value, interest (explicit or
implicit) would be smaller, taxes higher. Who would be less well off?
The landowners and their heirs who would have gotten the (unearned)
increments!
More of the rise in land value which results from
(1) governmental investment in community facilities and (2) the general
rise in demand due to the growth of population and income would go to
pay for the costs of local government. Such a tax on a pure economic
surplus seems to me about as fair as any imaginable source of funds for
financing community services. The National (Douglas) Commission on
Urban Problems estimated that in the 10 years to 1966, and despite
rising interest and tax rates, land prices rose by over $5,000 per
American family -- $250,000 million. Even a modest fraction
of this amount if used for local government would have permitted quite
a reduction of burden on buildings. The estimated rise in land prices
was over four times the total growth of state-local debt and was
greater than all of the property tax paid in the 10-year period.
And
Land as area is fixed in quantity. Tax it heavily,
and it will not move to some other place, or decide to take a vacation,
or leave the inventory of productive resources by going out of
existence. Tax land lightly, and the favorable tax situation will not
create more space in the community.
Our ethos apparently ties economic justice -- equity
-- to rewards based on "accomplishment." This principle does not lead
to justification of large rewards because of the ownership of land.
Differences, big ones, in payments for human services or for the use of
capital can rest on what the recipients have done. But for the owners
of urban locations such justification can rarely be found; when there
have been private inputs for community development, to the extent
feasible administratively, they belong on the tax rolls as improvements
rather than as land.
And just before he concludes, he writes,
What an owner can get in the form of land price
increases in and around cities has made rich men out of owners of
farmland, vegetable plots, and waste areas. More than one owner of a
few acres of potato land on Long Island or farms on the outskirts of
many a city in the United States, of a small plot of rice land near
Tokyo or Bangkok or Taipei, has reaped handsome gains because of the
pressure of population. In America, North and South, in Europe and
Australia and Africa, private enrichment has come to the passive owner
of land who has done little or nothing to enlarge its worth as part of
the city whose growth has brought his good fortune. In fact he may have
paid no more than an infinitesimal fraction of the taxes which have
financed the streets and other governmental facilities that have helped
to elevate the value of his land.
Next, I moved on to a longer piece, from the same time, and containing some of the same material. I ended up feeling that it is perhaps the best piece I've read in a long time on Land Value Taxation. It is titled "Property Tax Reform: More Progress, Less Poverty" and it is a lecture he delivered at DePauw University in 1970. I commend it to your attention.
Finally, I note a book from the TRED -- Committee on Taxation, Resources and Economic Development -- series (#6) entitled Government Spending & Land Values: Public Money & Private Gain edited by C. Lowell Harriss (1973). Each book in this series came out of a 2- or 3-day conference, held at the University of Wisconsin-Milwaukee. Lowell organized this conference, and wrote the book's introduction. Here's the dust jacket material:
Billions of tax dollars are spent
annually on government subsidy programs which are designed to help
certain groups, areas, and industries, and contribute to the general
welfare. Despite the good intentions of legislators, however,
analysts point to evidence that the programs are not only burdensome
for the taxpayer but often fail to do their intended jobs. Critics
find that major benefits go not to those whom the programs are
designed to help, but to others who can "capitalize" on them.
One major feature of the subsidy benefit pattern -- unintended but
predictable -- is the capitalization of land values. The value of
land will increase when the benefits, chiefly money income, are
enhanced by government subsidization. When the land is sold, the
benefit of a subsidy which seems likely to continue will be captured
by the seller. Thereafter, tax funds that continue to subsidize a
program will not fully benefit those for whom they were presumably
intended, but the seller will have made a capital gain.
A classic example can be drawn from the experience of
federal farm programs. Taxpayers and consumers have been spending
billions annual to aid some farmers. In practice, of course, these
programs have often -- and intentionally -- reduced farm output and
raised consumer prices. The consumer-taxpayer is thus dealt a double
blow, in effect subsidizing an increase in his own food prices. Yet
the operating farmer, burdened with a higher land price, fails to get
the full benefits of the programs established for his welfare.
In farm programs, as in some other subsidy programs, the expected
annual benefits are capitalized into higher land prices. Then, after
land prices have gone up to reflect these benefits, the annual
payments to farm operators in effect support the higher land prices.
In effect, the seller of land realizes the benefits of government
subsidy into perpetuity. A somewhat similar pattern is to be expected
in other public spending programs, including those concerned with
urban renewal, where benefits are localized. The pattern shows that
farm programs do not raise wages of low-paid farm labor, that urban
projects do not rid cities of slums, and that the taxpayer-consumer
bears the burden of both.
This volume explores, and at least attempts to define, the extent
to which land values tend to capture the benefits of subsidies and
other government spending through capitalization. It includes papers
by proponents as well as critics. The contributors, who include some
of the nation's leading economists, discuss the nature and effects of
farm and housing programs, commodity price supports, transportation
outlays, land preservation projects, water resource development, and
urban renewal programs. Their work will be of more than routine
interest to economists, political scientists, lawyers, political
officeholders and government officials, planners, and all others who
seek to unravel the complex fabric of multi-billion-dollar government
spending programs.
Lowell made contributions in many parts of economics; I am probably familiar with only a small portion of his work, but I am grateful for it.
