LAND VALUE TAX SHIFT in Downtowns, a tool for SMART GROWTH May 11, 2010 Gary Flomenhoft

1. LAND VALUE TAX SHIFT in Downtowns, a tool for SMART GROWTH May 11, 2010 Gary Flomenhoft Research Associate/ Lecturer CDAE, Fellow, Gund Institute UVM, Burlington, VT

2. “There is nothing more difficult to carry out, more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For those who would institute change have enemies in all those who profit by the old order, and they have only lukewarm defenders in all those who would profit by the new order.” ---Nicolo Machiavelli, 1490

3. HISTORICAL BACKGROUND

4. CLASSICAL ECONOMISTS ON LAND • Physiocrats • Quesnay; agricultural basis of economy: L’impot unique = land tax • David Ricardo- • Law of Rent=Difference in production (return) over the worst land=Rent • Unearned increment=unearned profit from land rent

5. CLASSICAL ECONOMISTS ON LAND Adam Smith: “Ground rents are a species of revenue which the owner, in many cases, enjoys without any care of attention of his own. Ground rents are therefore, perhaps a species of revenue which can best bear to have a peculiar tax imposed upon them.” John Stuart Mill: “Landlords grow richer in their sleep without working, risking, or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.”

6. CLASSICAL ECONOMISTS ON LAND Thomas Paine, Agrarian Justice 1797 “Men did not make the earth...it is the value of the improvements only, and not the earth itself, that is individual property...Every proprietor owes to the community a ground rent for the land which he holds.;...from this ground rent...I...propose to create a national fund, out of which there shall be paid to every person...a sum.” Alaska Oil Dividend

7. HISTORY OF LAND VALUE TAX Henry George:Progress and Poverty 1879. “Poverty deepens as wealth increases, and wages are forced down while productive power grows, because land, which is the source of all wealth and the field of all labor, is monopolized.” “To abolish all taxation save that upon land values”: The “single tax”. Forerunner to modern day Green tax shift: “tax bads, not goods.” “The taking by the community, for the use of the community, of that value which is the creation of the community.” Basis of modern assessments.

8. Modern Economists Right: “Land tax is the least bad tax” ---Milton Friedman Left: “Usurious rent is the cause of worldwide poverty” ---Joseph Stiglitz Green: “Taxation of value added by labor and capital is certainly legitimate. But it is both more legitimate and less necessary after we have, as much as possible, captured natural resource rents for public revenue.” ---Herman Daly

9. Economics 101 A Little Economics

10. TAX ON BUILDINGS - production cost P S1 CS p1 PS D q1 Q

11. TAX ON BUILDINGS - production cost S2 P S1 CS p2 Loss of CS Deadweight loss p1 Loss of PS PS tax tax D q2 q1 Q

12. TAX ON LAND - no production cost S “Buy land, they ain’t making any more.” -Will Rogers P P* tax? P1 tax tax D Q* Q1 Q

13. Q: What Causes Sprawl? One factor is land speculation. How? A: By withholding land from the market, and holding for gain, price is driven up, and people have to move further out from center city to find available affordable land. (30% vacant land-Brookings) “The most comfortable, but also the most unproductive way for a capitalist to increase his fortune, is to put all monies in sites and await that point in time when a society, hungering for land, has to pay his price.” ---Andrew Carnegie

14. LAND SPECULATION Q: Why is speculation bad? A: • Drives up price of land • Creates Sprawl • Withholds land from market • Creates slums • “Flipping” VT anti-speculation tax: only applies to >25 acre industrial and forest land PROP 13: corporations avoid through selling shares

15. LAND SPECULATION Q: What good or service does a land speculator provide to the market? A: Nothing. “The land speculator profits in direct proportion to the damage done to society” -Winston Churchill

16. ANNUAL RETURN Annual Return = annual land inflation + annual income = 6.65%/yr + ? “Land is not the only monopoly, but it’s the mother of all monopolies.” ---Winston Churchill

17. Return on speculation

18. HOUSING GAP FROM: HOUSING&WAGES IN VERMONT VT HOUSING COUNCIL

19. 3 Ways to control land prices Community land trust Municipal leasehold Tax land at high enough rate to deter speculation

20. Tax Increment Financing-TIF (Wikopedia) Tax Increment Financing, or TIF, is a tool for redevelopment and community improvement projects throughout the United States for more than half a century. With federal and state sources for redevelopment generally less available, TIF has become an often-used financing mechanism for municipalities. Similar or related approaches are used elsewhere in the world. See for example, Value capture. TIF is a tool to use future gains in taxes to finance the current improvements that will create those gains. When a public project such as a road, school, or hazardous waste cleanup is carried out, there is an increase in the value of surrounding real estate, and often new investment (new or rehabilitated buildings, for example). This increased site value and investment creates more taxable property, which increases tax revenues.

21. “Value Recapture” (Wikopedia) Value capture refers to a type of innovative public financing in which increases in private land values generated by a new public investment are all or in part “captured” through a land related tax to pay for that investment or other public projects. Value capture refers to the process by which all or a portion of increments in land value attributed to "community interventions" rather than landowner actions are programmed in advance and recouped by the public sector. These "unearned increments" may be captured indirectly through their conversion into public revenues as taxes, fees, exactions or other fiscal means, or directly through on-site improvements to benefit the community at large… Value capture can be thought of as a fully contained sub-set of land value tax, however with a much more focused domain of application as indicated here.

22. “Value Recapture” of public investments Wright Act 1889: Tulare, CA Irrigation District Financed by tax on land value. Trees, vines, structures, etc. on the land were exempt CA Central Valley Irrigation Districts San Joaquin Valley Agriculture 80% produce in US

23. “Value Recapture” of public investments Crossrail – the London rail project now under consideration to fund by land tax. Studies say public transit could pay for itself through capture of increase in land values around transit stops.

24. What makes land valuable? Publicly created Population demand natural features public improvements public services: fire, police, schools, waste private investment in the area business activity limited supply zoning growth restrictions (Santa Cruz) growth boundaries Not due to private effort

25. What makes buildings valuable-Privately created Work Investment Materials Architecture Etc. Value created through private effort

26. SUMMARY OF INCENTIVES LOCATION TAXES ARE CONSTRUCTIVE Encourage building upkeep Strong anti-blight influence Stimulate new construction Lower land prices Bring land into use Discourage sprawl Pro-labor, creativity & effort IMPROVEMENT TAXES ARE DESTRUCTIVE Penalize buildings & improvements Reward rundown buildings Promote slums and blight Raise land prices Encourage sprawl Subsidize unearned land speculation Anti-labor, anti-creativity & anti-effort

27. LAND TAX IS PART OF GREEN TAX SHIFT “Pay for what you take, not for what you make” Tax “bads” not “goods” “Tax waste not work”

28. HISTORICAL APPLICATIONS Denmark: 1790’s, 1950’s, 1960’s California: 1890’s irrigation districts Australia: 1930’s-present, Sydney, Canberra-leasehold New Zealand: 1930’s-present 80% site only South Africa: Jo-berg Hong Kong: leasehold Singapore: rent collection Taiwan: 1940’s-land to the tiller NY city 1920’s: 10 yr. abatement of improvements Pennsylvania: 1913-present

29. MODERN APPLICATIONS Australia, New Zealand Pennsylvania, date adopted

30. MODERN APPLICATIONS City Ratio

31. Harrisburg-Poster Child for LVT 1983 listed as 2nd most distressed city in US. * The number of vacant structures, over 4200 in 1982, is today less than 500 (1994) = 80% reduction in vacancy. * With a resident population of 53,000, today there are 4,700 more city residents employed than in 1982. * The crime rate has dropped 22.5% since 1981. * The fire rate has dropped 51% since 1982. * Number of businesses tripled to 3000 * 3.5B invested in projects These results are especially noteworthy when one considers the fact that 41% of the land and buildings of Harrisburg cannot be taxed by the city because it is owned by the state or non-profit bodies.

32. EVIDENCE

33. EVIDENCE

34. EVIDENCE

35. Average Annual Value of Building Permits Dun and Bradstreet Data (Rustbelt)

37. Evidence for development • 45 studies prove that when towns adopt LVT, a spurt in new construction and renovation results. • 63 studies conclude that towns switching from taxing buildings to taxing land always out-constructed and out-renovated their neighbors who were subject to the same economic-growth influences. • Contact: • Steven B. Cord (Professor-Emeritus) • 10528 Cross Fox Lane, Columbia MD 21044 • 1-410-997-1182 (phone/fax) • economicboom@yahoo.com (e-mail) • www.EconomicBoom.info

38. Vermont Property Tax Shift-Statewide

39. VT Tax Revenue 2004 Property taxes comprising 35% Personal income 20% Sales and use 12% Energy taxes 12%

40. VT Tax Revenue-Property split Buildings 24% Personal income 20% Sales and use 12% Energy taxes 12% Land 11%

41. VT Tax Revenue-Existing Green Taxes

42. Recommendations: • Apply LVT only in “growth centers.” • Reverse current ratio to generate 2/3 of state property tax revenue from taxes on land. • Work with established growth boundaries being developed by the Vermont Smart Growth Collaborative. • Maintain Revenue Neutral.

43. Revised State Green Tax Revenue

44. 2004 Vermont Property Taxes:

45. Vermont Property Taxes

46. Proposed Property Tax Revenue

47. Vermont Property Tax-shift Study Criteria Revenue neutral 50% or 100% shift to land value tax statewide Total revenue divided by total land assessment =land value tax rate

48. Vermont Property Tax-shift Study Limitations Single rate statewide & city by city No separation of school district from municipal tax district No adjustment for common level appraisal

49. ASSESSMENTS-2000

50. Statewide DECREASE and INCREASE BY GPC INCREASE DECREASE