LVTFan's Blog

David Cay Johnston: Can You Hear Opportunity Knocking?

Link: http://taxprof.typepad.com/taxprof_blog/files/120TN0683.pdf
David Cay Johnston, the peerless reporter and commentator on US income tax policy, formerly with the NYTimes, and the author of two excellent books (Perfectly Legal and Free Lunch), now a columnist for Tax Notes, has written a column on the incentives involved in the income tax deduction for interest.

Though I think he sees through a glass darkly on this one, he does make some important points:

He starts out with this:

What we make of life’s opportunities depends on how well we have prepared to take advantage of them. But first we must recognize opportunity when it comes knocking, or the chance is lost. And lost opportunity costs can be huge not just for individuals, but nations as well.

As a Georgist, I am led to wonder about this.  What I think of when I read this is that one of life's biggest opportunities, as we structure our economy right now, is the privilege of claiming for oneself a choice bit of the natural creation or the community creation -- without being required to compensate the community for what one has taken.  The former includes natural resources, such as ports, water, the electromagnetic spectrum, and the oceans -- not to mention breathable air.  The latter includes that which the community has created, through both public spending and private spending: land value, created by the presence of concentrations of population due to favorable climate, attractive views, cultural amenities, and through public spending on such public goods as infrastucture (airports, highway systems, bridges, water delivery, sanitary sewer and stormwater runoff systems, public transportation, schools, emergency services, libraries, public health, parks, etc.), and what might be either public sector or private sector spending, on electricity, cable TV, WiFi, railroads.

All these things conspire to make some land more valuable than other land.  Those who have title to valuable land get to collect rent from their fellow human beings, just as if they, personally, could take credit for all those natural, public and private amenities.  What an opportunity!  Shouldn't the smartest among us be permitted to privatize all that economic value?  Isn't that what opportunity is all about?

NO!   

Advances in Local Emergency Services: How Should We Pay for Them?

Advances in emergency services can make one town a better place to live than another.  Here are two examples from my home town.

• defibrillators in every police car, and every police officer trained in their use, can save lives that would otherwise be lost;
   
• EMS workers trained in therapeutic hypothermia protocol, ambulances equipped with appropriate supplies, and ER and hospital staff familiar with this innovation can save lives that would otherwise be lost
   

Would you pay more to live in a community that had adopted these innovations?

Probably.

The question is to whom you should pay it, and based on what logic.

new Lincoln Institute Study -- Property Tax Assessment Limits: Lessons from 30 Years of Experience

press release: http://www.prweb.com/releases/property_tax/assessment_limits/prweb1130504.htm
The Lincoln Institute of Land Policy in Cambridge, MA, published recently a new study entitled "Property Tax Assessment Limits: Lessons from Thirty Years of Experience."  In 44 pages, it lays out rather well the problems with California's Proposition 13 and Florida's "Save Our Homes" assessment caps, which have led to, among other things, high land and housing prices and high foreclosure rates -- the boom-bust cycle that hurts most of us and helps only the land speculators.

It doesn't speak particularly to the injustices involved, or to the virtues of a portion of the property tax -- the part that falls on land value  -- for creating a vibrant economy and a just society, which are suppressed when assessments are not up to date and consistent with market valuations, for all. This is an important omission.

Nor does it point out that utilizing the property tax allows us to avoid wage and sales taxes which deaden the economy.
It does, however, suggest some alternative forms of property tax relief -- homestead exemptions, classified tax rates, circuit breakers, and tax deferral programs -- though to my mind, it does not weigh in heavily enough in favor of the one I think it far superior to the others (the option to defer some portion of the property tax, with interest, as a lien against the property).  [For more about that, see Bill Batt's article, Property         Tax Relief Measures: Answers to the "Poor Widow " Argument -- also available in PDF here.]

Pragmatic Politics: Proposition 13

Link: Pragmatic Politics. A short excerpt:

"The LA Times article posited Proposition 13 as a culprit in California's current mess. The PC isn't so sure about that. The Times pointed out that some Californians have some of the lowest property taxes in the country. Well, maybe that is true. But, some don't. Anyone that bought in the last 10 years does not have cheap property taxes because house prices were outrageously high. A heck of a lot of people have bought homes in California in the last 10 years. Since Prop. 13 passed in the 1970s (we think), property tax revenues have gone up over 5-fold. Also, California has a huge sales tax (7.75%) rate, high income taxes (but that varies up and down with the economy) and voters keep passing big bond measures for everything from badly needed infrastructure projects the legislators are incapable of funding on their own to stem cell research (mostly a sad waste of money).

For crying out loud, how freaking much money does the state need? The PC does not want to be cheap, but we suspect that there is tons of money that goes into rat holes the public knows nothing about. Those rat holes probably give back not much to the state, especially if that spending is payback for "campaign contributions". After all, if the legislators can gerrymander their districts for their own personal benefit, why can't they waste tons of money for exactly the same reason?"

I have a number of thoughts about this.  First of all, there is a fair amount of expense involved in collecting wage taxes and sales taxes, over and above the excess burden and deadweight loss they impose on our economy.

Leona Helmsley’s Fortune May Go to Benefit Dogs

Link: Leona Helmsley’s Fortune May Go to Benefit Dogs

The living and the dead, the human and the canine.

Leona Helmsley and her husband Harry individually and together accumulated billions of dollars worth of New York City real estate.  Who is entitled to that fortune?

CA & FL account for nearly 1/3 of mortgages in foreclosure or 90 days delinquent

source: http://www.nytimes.com/2008/06/06/business/06mortgage.html:  About 1 in 11 Mortgageholders Face Loan Problems

a few excerpts:

• About 1 in 11 American mortgages were past due or in foreclosure at the end of March, according to a report released on Thursday, a figure that is rising fast as home prices fall and the job market weakens.
• California and Florida, for instance, accounted for nearly a third of all mortgages that were in foreclosure or 90 days delinquent. Home prices, construction and mortgage lending were particularly ebullient in those states earlier this decade. The housing industry accounted for a bigger portion of their economies during the boom.
• “The problems in California and Florida are extraordinary, and they are the main drivers of the national trend,” said Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association.
• In states like California and Florida where they have huge inventories of repossessed homes, some companies are starting to move a little faster by auctioning off properties...

What do California and Florida have in common?

Golf Courses, Assessments, Property Taxes, and Nonmembers

Several articles on the topic of assessing golf courses have come to my attention in the past few days.  I've posted previously on the topic, but will start fresh here.

The first article had to do with assessments in Greenwich, Connecticut, where eight private golf clubs were seeking assessments of just $60,000 per acre.  Now that might seem like a high value to people who live in the heartland of America, but Greenwich is a place where a single-acre building lot (with or without an existing house on it) can sell for well over $1 million, and where roughly 1 in 4 residential transactions results in a teardown, often of a home which would be considered a super-luxury home nearly anywhere else.   The assessor had sought to value the land at a still-very-generous-to-the-clubbers $200,000 per acre.  (By law -- a peculiar law whose justification I don't follow, CT's assessments are to be 70% of actual value, so the $200,000 valuation would be about $285,000 -- still a very generous valuation in a town with high property values.)

Taxes that protect our firefighters

I've been thinking about who the "natural constituencies" for land value taxation are, and there are a lot of them.  But it seems to me that firefighters and their families are a prime ally for those who think that Land Value Taxation is an important contribution to making our country a better place to live for all of us.

Taxes as the Price We Pay for a Civilized Society -- But What Taxes?

As I watched the coverage of the rescue and recovery efforts in China following the earthquakes, I added to my list of the benefits of community several items: building standards and building inspectors, as well as elevator inspectors.  None of these things come cheap, and they are worth every penny in a society which includes multi-story buildings, or buildings which might be subject to hurricanes or tornadoes.

The buyer of a building ought to have some assurance that it meets at least the standards of the era in which it was built, both in terms of materials and construction methods.  The elevator passenger wants some assurance that someone besides the building's owner is paying attention to the maintenance of the elevators.

But how should we pay for such things?

The Price of Land in the New York Metropolitan Area

The Price of Land in the New York Metropolitan Area
by Andrew Haughwout, James Orr, and David Bedoll
at http://www.newyorkfed.org/research/current_issues/ci14-3.pdf

An interesting study was published recently by the Federal Reserve Bank of New York about the price of vacant land in the NY metro area.

It starts by citing a transaction in 2000: a 3.4 acre parcel on the southwest corner of Central Park which sold for $345 million, and whose buildings were demolished to make way for the Time Warner Center.  That's $100 million per acre.  But it certainly isn't a record, even in Manhattan.

And, yes, land value matters.  It matters quite a lot, in ways that most of us don't understand.  (As my mother would have put it, "Our educations have been neglected" -- but in this case, even those who should be teaching us can't, because their educations were lacking!)

Are you going to be part of the problem, or part of the solution?

This was the headline of an email that came into my inbox today.   And it dawned on me that it is a fine angle from which to view the benefits of land value taxation. 

A Few Inconvenient Truths about the Property Tax

I'm pleased to share (with permission of the author) something that appeared on a mailing list I subscribe to. The conversation was along the lines of "how do we share the idea of land value taxation [a reform of the property tax] with people who are used to hating the property tax?"

Roy Langston wrote,

When I encounter the usual unreasoning hatred of property taxes, I just point out a few inconvenient truths, along these lines:

How much is your home worth?

I'm talking about its dollar valuations; "priceless" is not one of the options here  (And think about the trouble that the MasterCard ad series has gotten us into: that using credit to afford a "priceless" family experience is a wise thing to do.)

We get a lot of different valuations on the same piece of property, and it is worth looking at all of them, and understanding the differences among them and the significance of the various figures.  I'll list all the valuations I can think of, and hope you'll add others in the comments.

California's Proposition 13 and Parcel Taxes: Adding insult to injury for new property owners

Link: SignOnSanDiego.com > Parcel tax to bolster schools is proposed.

Readers of this blog are probably aware that 30 years ago California capped its property tax at 1% of a property's assessed value, and capped the increase in assessments on individual properties at 2% per year, until they changed hands, at which point the transaction price would become the new assessed value.  This means that two families in identical neighboring homes on similar lots could be paying very different property taxes: the people who have lived there for 30 years are paying about 90% more than what they paid in 1978 (2% compounded), while land values (and therefore house prices) have risen by hundreds -- often many hundreds -- of percent since 1978.  And yes, the Supreme Court in 1992 managed to say this this was acceptable -- though it is difficult to believe that with another 16 years of data ANYONE could have looked at the results and reached the same conclusion.

This measure has starved local government and made them hungry for sales tax revenue.  It has starved the school systems, taking it from among the most respected in the country to quite far down the list.  Towns have considered closing their libraries for lack of funding.  Parks suffer, as documented by David Cay Johnston in his recent book Free Lunch.

Now there is a proposal to add insult to injury:

Contra Costa Times OpEd -- End the property tax

Link: Richard S. Colman: Your Turn -- End the property tax - ContraCostaTimes.com.

A homeowner in California is complaining about the injustice of Proposition 13.  He has owned his home for 9 years, and is paying 650% of what the fellow from whom he bought it was paying in property taxes.  His solution?

The answer is simple: it's time to get rid of the property tax altogether. Perhaps a tiny income tax would be an acceptable substitute.

Taxes as oppression, taxes as incentives: Alabama

Friday night's PBS NOW and Bill Moyers Journal were a powerful combination.   My local station shows NOW first, followed immediately by BMJ.  NOW showed three families in Alabama, including a hard working couple whose income places them at roughly the poverty level.  They pay sales taxes of 10% on their purchases, even on food.  They only recently got indoor plumbing.

The footage also showed one of my heroes, Susan Pace Hamill, law professor at the University of Alabama, who has written several important papers, all available online [and highly recommended], about the inconsistency of Alabama's tax code [2002] and of the federal tax code [2006] with the ideals we say we hold dear.  I applaud her efforts and her scholarship and her good heart ---  and I don't think she sees the half of it, or the solution.

Still on the mountaintop: Economically rational racism

Link: Still on the mountaintop: Economically rational racism, by Gavin Putland

... So the key to the Promised Land is to reduce the natural rate of unemployment without creating a new class of working losers. To see how to do that, we must revisit some basic economic principles.

For a century and a half, capitalists and socialists argued about ownership of the means of production as if the assets that make up the "means of production" were all of the same kind. But they're not; they fall into two distinct categories.

• In one category are the assets can be produced by private, competitive effort. For convenience I'll call these house-like assets, although they include not only houses but also other buildings, as well as movable plant and equipment.
• In the other category are those assets that cannot be produced by human effort, or at least cannot be produced by private, competitive effort. For convenience I'll call them land-like assets, although they include not only land but also other natural resources, building rights attached to land, and monopolies and privileges of all kinds.

The returns on house-like assets include

• interest, which is the price of time-preference,
• insurance, which is the reward for bearing (quantifiable) risk, and
• economic profit, which is the reward for bearing (unquantifiable) uncertainty.

Those returns are an incentive to produce house-like assets. Any tax on those returns, or on the assets themselves, reduces the incentive. Conservatives repeat this argument ad nauseam but never acknowledge that it's valid only for house-like assets.

The net returns on land-like assets are usually called economic rent. Some people prefer to call them usury. But whatever you call them, they can't be an incentive to produce anything, because no private person or corporation can produce land-like assets, while the rental values of those assets are produced not by the owners, but by the demand from prospective users.

It follows that any fraction of the rental value of a land-like asset can be diverted into the public treasury without discouraging any productive activity, and therefore without raising prices. In other words, taxes on the values of land-like assets are not inflationary.

Revitalizing older cities

Recently, four city mayors in Connecticut proposed that cities ought to  be permitted to impose a 1% sales tax if they chose.  Those who spend much time thinking about incentives recognize this as a poor idea.  I particularly liked this pair of letters to the editor in the New London Day:

Philadelphia, its Wage Tax and its Residents

An article in today's Philadelphia Daily News caught my eye.  Philadelphia is home to several fine universities, some excellent medical schools and teaching hospitals, fine museums, Constitution Center and the birthplace of two of my favorite people, one in the mid 20th century, the other in the mid 19th century.  I visit its suburbs every week, and  have a sense of knowing the territory from having grown up in those suburbs.

The article, entitled Philadelphia targets one of its toughest problems, says, in part, 

Only 14 percent of city residents hold a bachelor's degree, according to the 2005 study "Graduate! Philadelphia: The Challenge to Complete," by the Philadelphia Workforce Investment Board and the Economy League of Greater Philadelphia.

In Boston, that rate is 25 percent; in Seattle, it's 36 percent.

Philadelphia's college attainment rate puts it at 92nd among the 100 largest cities in the country --€” scraping the bottom.

In fact, in Philadelphia --€” unlike Boston, Chicago or Washington, D.C. --€” there are more people who have started college and dropped out than there are residents who actually hold a four-year bachelor's degree.

What could be behind those statistics? 

Connecticut: Should Cities Use a Sales Tax?

Newspapers in New London ("Urban Mayors Push For Local Sales-tax Option") and Stamford ("Malloy: Cities should have sales tax option") had articles today describing 4 Connecticut cities' mayors' aversion to increasing the property tax.

Four urban mayors, including Kevin Cavanagh of New London, urged the legislature Monday to give municipalities the ability to levy a local sales tax of up to 1 percentage point to raise revenue without resorting to property-tax increases.

The articles quote Dannell Malloy of Stamford, Kevin Cavanagh of New London, Bill Finch of Bridgeport, and Dan DeStefano of New Haven as endorsing the idea.

Malloy, along with mayors Bill Finch of Bridgeport, John DeStefano of New Haven and Kevin Cavanagh of New London, said cities need other options for raising revenue besides burdening constituents with more property taxes.

Fixing Wages, and Fixing Housing Affordability -- for All of Us

By this, I mean fixing the problem of low wages -- wages insufficient to support an individual or a family in conditions we consider acceptable on a reasonable number of hours of labor per week.  I don't mean minimum wage legislation, or living wage legislation, both of which I regard as well-intentioned but ultimately destructive for the community they intend to help.  I don't mean measures like the Earned Income Tax Credit, either.  It appears that people must jump through high hoops to get those dollars (which often seems to require professional advice, at a price), and then a significant portion of the money goes not to the wage earner but to his tax preparer/advisor, in the form of fees and interest.

Did someone yell "FIRE" sector? Bailouts for whose benefit??

Link: The Way Out of the Financial Ditch - New York Times.

To the Editor:

Re “The B Word,” by Paul Krugman (column, March 17):

The national mortgage calamity, often dubbed the subprime crisis, will continue for several years as various iterations of adjustable rate mortgages come of age.

Instead of a bailout as outlined in the column, a solution is required that stabilizes home values involving participation from homeowners, lenders and government.

For the last several months I have discussed such a plan with elected officials, government agencies and investment firms that own mortgages at risk.

“Appreciating America” is a plan I put forward that will help homeowners who need to be refinanced to prevent foreclosure.

This plan involves using a shared appreciation second mortgage to finance the shortfall between the amount owed and the current value of the home.

This is a financial instrument commonly used in commercial real estate transactions, and was recently supported in a speech by Ben S. Bernanke, the Federal Reserve chairman.

After five years, the homeowner and the lender will share in any appreciation of the home, giving all involved a stake in preventing foreclosure and rebuilding property values.

The plan can be adopted by all mortgage servicers, promoted to ailing homeowners and supported by the Federal Housing Administration. It can be carried out immediately.

Let’s not talk about bailouts until we provide bootstraps and solutions.

Nicholas Bratsafolis, Chairman and Chief Executive Refinance.com
New York, March 18, 2008

ConservativeHome's Platform: Mark Wadsworth: Time to look at Land Value Tax?

Link: ConservativeHome's Platform: Mark Wadsworth: Time to look at Land Value Tax?.
I commend this discussion to your attention!

Mark writes,

The total value of all privately-owned residential property is currently around £4,000 billion, of which three-sevenths relates purely to land/location values, i.e. £1,700 billion. If and when house prices fall to their long run average of five times disposable household income, then land/location values will fall by two-thirds to £570 billion.

This would be exactly the right time to introduce LVT - the fiscally neutral rate required to replace all existing taxes on residential property in their entirety (see list above) would be about 6% per annum on site-only land/location values. The tax would act like an extra interest rate, so in future, price rises would be dampened and values/prices would be kept low and stable. There would be no windfall gains to land- and home-owners, but just as importantly, there would be no risk of land- and home-owners suffering ‘windfall losses’ – what doesn’t go up can’t come down.

Earmarks, nightlights and windfalls - Individual, or Community?

I've heard this point made a couple of times recently, but particularly liked the way Gail Collins expressed it in her recent column, George Speaks, Badly:

Besides being incoherent, this is a perfect sign of an utterly phony speech. Earmarks are one of those easy-to-attack Congressional weaknesses, and in a perfect world, they would not exist. But they cost approximately two cents in the grand budgetary scheme of things. Saying you’re going to fix the economy or balance the budget by cutting out earmarks is like saying you’re going to end global warming by banning bathroom nightlights.

The relative magnitude of earmarks relative to total federal spending or total discretionary federal spending may be rather small.  But earmarks do have tremendous potential to do good locally. They can fund projects that may not be feasible for local government to fund, which can contribute mightily to local economic activity and economic rent.

The question, I think, is what happens AFTER the earmark project.  Will the local community that benefits from that federal spending collect the benefit from the local residents who are benefited, or will that benefit keep accruing to particular individuals, and continue to be just a nice permanent federal gift to them? 

The Taxpayer at 72nd and Madison

In today's NYT, there is an article about the building on the southwest corner of 72nd and Madison in NYC.  Twice in the article and once in the caption to the photos, the building is referred to as a "taxpayer" or "taxpayer-style building."

The article describes the 2 buildings which have occupied the 48' by 100' lot on the sw corner of 72nd and Madison: the first was a 5-story mansion built in 1894, which was occupied by an ex-wife of William K. Vanderbilt II.  On the northwest corner stood Louis Tiffany's grand house, and Gertrude Rhinelander was building her chateau, now the Ralph Lauren store, on the southeast corner.  The mansion remained a private home until 1951, when it was

... replaced with a two-story-high taxpayer-style building, designed by Boak & Raad with severe simplicity.

Ralph Lauren acquired the old Rhinelander mansion for its flagship store in 1986, and seven years later took over the taxpayer on the site of the Cutting house. It has operated a store there since then.

Fortunes Made in Real Estate

Americans have a tendency to respect those who are "self-made men."  This seems to include people whose fortunes have been made in real estate.  The latest example in the news is the outgoing governor of New York, whose father, Bernard Spitzer, reportedly has a $500 million portfolio of properties, most or all in NYC.

I have nothing against real estate developers in their role as developers.  They bring large amounts of money and multiple talents to bear to create new modern buildings on sites previously occupied by more modest buildings suitable to another decade or century. And when they build they generally create the venues in which dozens, even hundreds, of entrepreneurial visions can be made into reality, and where thousands, sometimes tens of thousands, of people can be employed in a single building.  Appropriate development of choice sites, served by existing infrastructure such as NYC's elaborate transportation system and things as prosaic as city water, sanitary sewers, stormwater runoff, and all the other systems that are paid for by we-the-people: schools, public safety, public health, libraries, courts, hospitals, etc., means that specialized work can take in the center of the central business district, conducted by people who come from a 360 degree radius.  It minimizes sprawl on the fringe, and makes the economy work more smoothly.

But there are other facets of the real estate business that I think are "opportunities for plunder" that should be restructured to serve the common good instead of the private good.  This involves a revision of our notions of what is right, what is just, what is rightly private property and what legitimately belongs to the commons.

Affordable housing -- for all of us. What policies promote it?

Link: http://www.sun-herald.com/Newsstory.cfm?pubdate=030808&story=tp1ch5.htm&folder=NewsArchive2

A front-page article in the 3/8/08 Charlotte (County, FL) Sun entitled "Not Affordable Enough" speaks to some interesting and important issues regarding Florida's housing.  A few excerpts:

The current downturn in residential real estate sales has created the closest thing to a buyer's market Florida has seen since the 1990s.

While that might be great news for a Northern couple looking to retire in Punta Gorda or Port Charlotte with their life savings, Charlotte County's median home price -- about $175,000 according to recent Florida Association of Realtors figures -- is still a barrier for many local wage earners ...

Despite North Port's reputation as a haven for working families, the median sale price in the Sarasota-Bradenton market remains about $260,000

Referring to recent problems in the housing market,

"It's a blip on the screen really, and in a year, we're going to be thankful that we did some investing in affordable housing," said Ron Thomas, executive director of Enterprise Punta Gorda, the city's economic development bureau. "When everybody says that there's plenty of affordable housing, we have to qualify that by saying that there is plenty of affordable housing for people who are in the 80 percent or above the median income. This doesn't have any positive effect for anybody in the 30 to 80 percent median income bracket."

"Even as low as (housing) has come down, it still might not suit firefighters, police, and school teachers. They're still struggling," said Bill Albers, Punta Gorda city councilman. Albers is the council's liaison to the Punta Gorda Housing Authority.