By Mike Curtis, M. A., Henry George School of Social Science
April 27, 2011
Welcome to the urban dilemma: why our cities can’t sustain themselves–and how they could.
Why shifting the source of revenue from confiscatory taxes to a charge that is based on the value of benefits received becomes an incentive to create the maximum number of jobs and dwellings that are economically desirable within every community.Why shifting taxes from income and wages, sales, and the value of buildings to the rental value of land creates the incentives to rebuild our cities and promote an orderly development of the suburbs and rural areas–one that will make the most efficient use of our roads, sewers, and everything else that governments provide.
I’m not going to tell you anything that you couldn’t figure out on your own–simply that taxes on income, wages, sales, and buildings actually diminish, proportionately, the incentives to put each parcel of land to its highest and best use.
By shifting the incidence of taxation to the value of each location, it not only provides the incentives needed to create jobs, housing, and a healthy, efficient economy, it also increases the desirability and the value of each parcel of land.
In the most distressed areas of any city, the adoption of Land Value Taxation becomes synonymous with an Enterprise Zone. There are no city taxes at all in the worst areas and proportionately less taxes in the poorer neighborhoods.
At the same time, the city will get more revenue from the valuable areas because all parcels of land that are un-developed and under developed will have to pay exactly the same as those parcels that have been put to their highest and best use. The result will be sufficient revenue from jobs, affordable housing, and the revitalization of the city.
For thousands of years cities have been the most economical places to live and work. If you have anything to sell, the city supplies the largest number of potential customers. If there is anything you want to buy, the city has the largest and best selection, and in most cases, the cheapest possible price.
Why do so many American cities seem unable to sustain themselves and make the transition from manufacturing to high tech and financial services? Wasn’t Philadelphia once considered the Workshop of the World? I’m sure there were plenty of pollution, corruption, inefficiency, slums, and crime; but Philadelphia proper once had enough jobs and housing for more than 2 million people. It’s not only lost one fourth of its population, but it lost it during a period when the total population of the country doubled.
Cities have enacted laws requiring the proper maintenance of buildings and outlawed slum lording, abandoned buildings, and vacant lots, but it hasn’t worked. Most cities are in debt, and their tax bases are shrinking from unemployment, abandoned buildings, and vacant lots. Many cities have tried to annex the surrounding suburbs in order to broaden their tax base. In the case of Philadelphia, they already did it over 150 years ago when the entire county became a part of the city. And they did it by mutual consent.
State governments have been subsidizing cities from the general revenue, and now, in the midst of the Great Recession, the appeal for help from Washington is bigger than ever.
We’ve heard about running cities and governments like a business. It does make perfect sense, but, for some reason, no one has actually tried it. Every city has within its borders the potential to generate the revenues that are necessary to support its infrastructure and public services, without, in any way, diminishing the rewards that are equally necessary to stimulate the reconstruction of buildings and economic activity. Every city has the potential to become a model of efficiency with plenty of jobs and dwellings and a much larger population than it has now.
The key to “urbanology” is the reason why two identical buildings—whether apartments, offices, or commercial buildings, rent for significantly different amounts of money. They say it’s the most important factor in real estate appraisal. What is it? Location–Location–Location. Every building sits on a piece of land at some location. Every productive activity takes place on a piece of land at some location. So, let’s make a distinction between the buildings, and the land on which they sit.
What determines the value of a building? It will be relative to the cost of labor, materials, and what they cost to produce. Actually, it will be the cost of reproduction, minus any wear and tear. By contrast, land has no cost of production, much less a cost of reproduction.
And yet, we know how to measure the value of land. If it’s residential, what do we consider–the proximity to jobs and shopping, access to public transportation, the quality of public schools, the level of safety and beauty, and even an atmosphere of community? Where is the most valuable industrial land in any city? It is along the river with access to a deep water port, rail roads, high voltage electric, industrial water lines, and access to the inter state highway system. How about being in an area with a skilled work force? And, if it’s commercial land, many factors are present. What is the most important consideration? Is it not the number of potential customers?
Now, what actually creates the value of urban land? Can two people build a house more than twice as fast a one person working alone? Suppose one group grows food, another makes clothing, and a third builds shelter. Each group develops special knowledge and skill; they accumulate tools and machines designed for each specific job. Far more would be produced by this group effort than if each person were independently making his or her own food, clothing and shelter. With a denser population, there is a greater potential to sub-divide labor, to accumulate tools and machines for each facet of each production, and to produce in greater and greater economies of scale.
Imagine trying to set up an auto assembly plant in a community with less than a thousand people. You need workers at the grocery store and the gas station. You need barbers, plumbers, roofers, and doctors, and the list goes on.
As the population grows, the level of productivity grows. At some point, transportation is hampered by mud, and the same rivers that connect one city to another also impede transportation within the economic community. Well water is harder to get, and human waste is harder to get rid of. At this point, does each new person increase the level of productivity, per-person, more than the last? Or, have we reached the point of diminishing returns?
Should we limit the number of people who are allowed to live within a city? By paving the streets, constructing bridges, building water and sewer systems, establishing gas and electric along with police and fire departments people can live and work in multi-story dwellings and factories with greater subdivisions of labor, and larger economies of scale. Each worker becomes far more productive when he or she is working in a city.
Are wages any higher in cities? If you make a loan for use in a city do they pay you higher interest?
Workers may be paid more dollars in New York, but in terms of what you can buy or a standard of living, do they live substantially better in New York than they do in your town? If they did, we would all move to New York, and the competition would soon bring our wages back to the common level.
The least productive workers are assured the minimum wage. All others receive only what it takes above and beyond that for the supply of each type and level of skill and knowledge to meet the demands of the market. The return to buildings, machinery, and inventory is never more than is necessary for the supply to meet the demand.
The greater productivity that results from superior opportunities and denser populations, which is enabled by the infrastructure and public services, attaches itself to the land. That greater productivity over and above what goes to labor and capital is exactly what gives value to land.
Suppose the city government dissolved. All the police and fireman went home, followed by the sewer and water and street repairmen. Off goes the street and traffic lights.
It wouldn’t cost any less to build a building or bake a loaf of bread. No police, no clean water, and roads that require, at the least, a jeep. The cost of production would go up. Things produced within the city would tend be more expensive than before. What would fall is the value of land. What is the value of land right now in Port a Prince, where the infrastructure was destroyed?
The value of land is equal to the sum total of all the advantages, minus the disadvantages. The expenditure of public revenue, no matter how well the money is spent, does not increase the value of labor, buildings, clothing, or food. The only value that governments help to create is the value of land.
And yet, when governments like Philadelphia, go to finance public expenditures that help to increase the value of land, they tax wages, buildings, sales, and profits. In Philadelphia, only about 4.5% of the total revenue comes directly from the value of land that is the only thing that the government actually helped to create. However, in the process of taxing wages, sales, and buildings, they indirectly tax the value of land.
Suppose you’re looking for a house. You see two houses within four blocks of each other. One is within the borders of Philadelphia and the other is in the neighboring county. The houses are identical, the neighborhoods are equally safe and desirable, and their owners are asking the same price. Which one will you buy? The answer is the one in the neighboring county.
The reason a house in Philadelphia is worth less than an equally desirable one in the suburbs is because everyone knows that anyone who lives in Philadelphia will earn more than 3% less pay after the wage tax. But you can’t say that the house is worth less. It costs every bit as much to produce as the one in the suburbs. What is worth less is the land because anyone who lives on that land will lose more than 3% of his or her wages in taxes. Or course, if you’re retired, you might be better off living in the city, all other things being equal.
The higher the sales tax, the lower the volume of sales. The lower the volume of sales the less potential profit. The lower the potential to make a profit the less valuable the location or the value of land. It doesn’t diminish the cost of the building or inventory or the wages of the employees.
The tax on buildings is pretty much straight forward. Without the buildings the income from urban land would be very little.
The income from land is whatever is left after the interest on the buildings and the maintenance and management are paid. The tax on buildings adds to the expenses and reduces the income that goes to the landowner by the same amount.
We’ve heard that Philadelphia is losing business because you can’t make a profit in Philadelphia. We know with absolute certainty that it is not true in Center City. How do we know that? It is because that people who pay taxes on buildings, gross receipts, net profits, use and occupancy are still willing to pay millions of dollars per acre for the opportunity to do business in Center City Philadelphia.
They could even raise taxes in Center City, and it would still be profitable. It would lower the income and the selling price of the land, but Center City would still be very profitable.
However, in the worst areas of Philadelphia it is true you can’t make a profit. And the reason we know this for certain is that the land is worth zero. Add up all the advantages and subtract the disadvantages. There is not only trash, crime, and drugs, but there are taxes on buildings, and wages and sales–all of which contribute to the negative values.
In the worst areas you can’t give the land away. The city owns thousands of lots in distressed areas because the real estate taxes weren’t paid. The city would like to give them away. But, even when they have some semblance of a house on them, they still have no value.
Any increase in taxes on building, wages, or sales; and another area becomes unprofitable. All taxes are applied equally at every location throughout the entire city. The land is worthless because, on average, every dollar invested will yield less than it would in the bank. Right now, I suppose you would have to say that you would lose even more than you lose by putting your money in the bank.
That’s when people refuse to reinvest in a neighborhood.
These neighborhoods were once thriving communities. In many cases, they centered around factories. In the 1960s and 70s when they were unable to compete with cheaper foreign products, they shut them down.
They didn’t auction them off to the highest bidder who would put them to some other use, even if the highest bid were 50 cents? They shut them down and left them idle. Perhaps they were waiting for tariff protection, or some other advantage, but they stayed idle.
The workers went to other places looking for work. As the communities declined from lack of jobs, real estate values went down with it. Many homeowners who moved, did not sell. They were thinking that jobs would again return and the value of their homes would reappear.
When it didn’t happen, and major repairs were needed, that was when they put the money in the bank or the stock market rather than replace the roof or make other major repairs. The buildings and land were abandoned, and the city stopped getting revenue.
Brown Fields are also an important factor. When you sell a parcel of industrial land, you must have it inspected by the E.P.A. and bare the expense of cleaning it up–millions and millions of dollars for most industrial sites.
It is said to be much cheaper to let the buildings deteriorate, get the assessments lowered, and continue paying or even owing very low taxes on the value of the land, then pay millions to clean up a parcel of land that might only be worth a fraction of what it cost to clean it up.
Now, if we look at the big picture, it’s pretty simple. Every time you raise tax rates, another area that’s just barely profitable becomes unprofitable for reinvestment. Eventually, the area will yield no revenue at all. This is why some economists think Philadelphia is near the point where if they raise tax rates, they will actually get less revenue.
Now, if we refocus on the prosperous areas. How many empty buildings, and vacant lots are sitting on valuable land that could be sold tomorrow?
In many cases, they get no income from the land or the buildings at all, they’re just sitting idle, and they have to pay the real estate tax of 2 1/2% of what ever the assessor says they are worth every year. If they sold the land and put the money in the bank, they would get something.
Why would they give up getting interest from the bank and continue to pay the real estate tax when they get no income?
And the answer is that they expect the land to increase in value far more than the interest they are losing at the bank and the taxes that they are paying to the city.
In other words, they are land speculators, waiting for the value of the land to increase. The price of land may be falling right now, so anyone who doesn’t sell when the price is going down is thinking that in the long term the price will be going up. We’ve all heard it, “Now is not the time to sell.”
And if they can park cars on it or rent out a dilapidated building with a leaky roof, whatever income they do get offsets the taxes paid to the city, and this adds to their overall profit when they do sell.
The more land that is unused or underused by a land speculator, the less land there is for people to live and work on. It costs as much to pave the streets and maintain the pipes in front of a vacant lot as one that people are working or living on. It costs as much for the police and fire trucks to travel past the empty buildings as all the rest of them. So, they have to raise every body else’s taxes to make up for the lost revenue.
As Philadelphia loses population, their expenses do not diminish proportionately.
And that is how cities work, and that is why they seem to be so dependent upon the broader community. However, by shifting all taxes to the rental value of land, cities could relieve the worst areas from the burden of taxes.
While those areas have streets, sewers, and police and fire protection, they also have trash, crime, and drugs. The market says the disadvantages are equal to or greater than the advantages. They have no land values, and; therefore, no net benefit is received from the city or the community as a whole.
We would get substantially more revenue from the best areas,
and we would also create a stimulus to redevelop all the valuable land within the city.
Redevelopment would start with the most valuable land and eventually radiate back into what were previously worthless slums. As the previously worthless areas became desirable, the increasing value would represent their fair share of the city’s revenue.
You could even remove the exemption from Non-profit organizations. The land value tax is simply a charge for the value of the benefits received from the city. If their services are beneficial to the city, then council can choose on a case-by-case basis to make a donation to that organization in the same amount as its land value tax or any other amount.
To implement this fully, you need to assess the rental value of every parcel of land within the city–what the rental value of each parcel would be, if the city levied no other taxes.
In every area, realtors and renters know exactly what houses and apartments rent for. Realtors and business people can tell you how much per square foot you will have to pay to rent office and commercial space on each block of every street throughout the commercial districts.
All you have to know is the rental value per square foot of floor space for the standard type of building in good condition and the maximum height allowed at every location. The computer calculates what the building would cost to build multiplied by the current rate of interest; and subtracts that plus maintenance, management, depreciation, and insurance from what would be paid for the use of floor space. What is left is land rent, pure and simple.
A tax rate is then applied to the assessment, which gives the city ample funds operate. This is not the full Single Tax as proposed by Henry George. That would collect the full rental value from all the privately held land. There would be no state or federal taxes. And if it were applied to the whole Country, it would free up enough land from speculation that it would recreate the free land frontier. It would not be unlike the Homestead acts of the 19th century. Wages and interest would rise, and the selling price of land would be destroyed. What landholders lost in an unearned income, they would be encouraged to make up by investing in buildings, machinery, and other productive capital.
However, shifting taxes to the value of land in a few cities for municipal revenue will not create a free land frontier. It will not reduce the potential income of landowners. But, it will grossly reduce land speculation and blight within those cities.
As every owner of valuable land puts it to use, the cities will redevelop. They will increase the number of jobs, units of housing, and their population. They will become more desirable places to live and work, and the value of the land within those cities will go up.
Whether all taxes are replaced by the rental value of land, or it is only a partial shift of the real estate tax from buildings to land, the more fully any parcel of land is put to use, the less its owner will pay in comparison to the present tax system. Another way to say it is that the guy with an empty building or a vacant lot will pay exactly the same as the person who maintains their house or other building in excellent condition.
What could be fairer than that? The difference in taxes will vary with the desirability of the neighborhood or the number of potential customers, not the condition of a building or how hard someone works.
In conclusion, I do acknowledge that landowners are, by far, the biggest winners. However, is it not better to have enough jobs for everyone who is capable of working? Is it not better to have everyone living in a house or apartment instead of the street? Is it not better to get rid of the slums and abandoned buildings, even if landowners are the biggest winners?
(Mike Curtis is the former Education Director of the Henry George School of Philadelphia and then of the Henry George School of New York City. He may be emailed at firstname.lastname@example.org)