Public Rent Collection: Partial vs. Full
Modern reformers have taken George’s advice to use existing systems of property taxation to implement the remedy. “Two-rate” property tax reformers seek to raise the tax rate on land while lowering the tax rate on buildings, thus gaining more local revenue from land values, and less from improvements. Wherever this has been done, it has been followed by a surge in new construction and a revitalization of the local economy — to a greater or lesser degree, depending on the degree of the shift. The two-rate proposal is offered as a revenue-neutral shift; that is, it proposes a shift to greater reliance on land values to raise the same amount of revenue.
In Progress and Poverty George described how the public collection of land rent would decrease, and eventually remove, the selling price of land (more on this). The selling price of land depends on the annual rent that the owner can collect; a tax on rent would reduce that amount — and thus, all else being equal, lower the selling price. Experience has shown, however, that when cities adopt a revenue-neutral shift to higher taxes on land values, their land prices tend to go up! Does this mean the formula is wrong? Not at all; it simply means that all else is not equal. The tax shift places a greater burden on holding land idle, and reduces the penalty on buildings. These incentives stimulate more construction, bringing in more people and economic activity, and making locations within the city more valuable. If these developments increase the rent more quickly than it is taxed away, then land prices go up. This gives the city an opportunity to further enhance prosperity by raising its land value tax rate (and lowering its rate on buildings — ideally, of course, buildings should not be taxed at all). In Pittsburgh, this was done many times after the initial shift to the graded tax in 1914. However, once the reform has increased a community’s land values, its private landowners want to reap the reward. Therefore, a vigilant political and educational effect is called for, to demonstrate the connection between the two-rate tax policy and local prosperity.
Land value tax will not decrease land prices unless it recovers a greater portion of the land rent than is created by the incentive effects of the tax. By stimulating a local construction boom, LVT can raise local wages temporarily. But for land value taxation to fulfill its promise of raising the general level of wages and interest, it must be applied to a sufficient degree to raise the margin of production. This suggests that, while local and incremental implementation efforts are important, the Georgist remedy will not come to fruition without a long-term, broad-based education effort.
Specific Examples
Denmark — Denmark collects much revenue from taxes on incomes and products. However, she has a heritage of land value taxation that still has some effect on the national economy. Local governments collect a grundslyld (ground rent) averaging 2.4% of assessed value, and a 1% property tax at the national level. Unfortunately, LVT had more more influence in the past. In the 1960s, Denmark used a land value increment tax, and offered a national farm-lease program.
Australia — Like Denmark, Australia has a long history of land value taxation practice, which achieved good results, but has been eroded by political pressure. Still, all six states and a majority of the municipalities in the Commonwealth of Australia tax land values to a certain degree, and some exempt improvements in whole or in part. Many studies show the efficacy of LVT in Australia, and high-quality land assessment practices are maintained.
Norway — Revenues from Norway’s sizable oil exports have been collected and administered by the national government. Some of the oil royalites have been invested in education and public works, but more has been invested in a national fund, whose value has been as high as three-fourths of the country’s GDP. Norway boasts the world’s highest standard of living.
Canada — Western Canada had a long history of exempting urban and rural improvements from taxation, but in recent years has reverted to conventional forms of property taxation. Alberta obtains considerable revenues from oil leases, rentals and royalties (a form of land rent, which has made possible a “Heritage Fund”).
Two-Rate Property Tax Reform — Seventeen jurisdictions in Pennsylvania now apply what is termed the “graded tax plan” whereby land is taxed at a higher rate than improvements. This was an important factor in Pittsburgh’s “Renaissance II” in the 1980s. Unfortunately, however, after a reassessment in 2003 inaccurately penalized many small homeowners, Pittsburgh abandoned the two-rate tax. Nevertheless, other Pennsylvania cities, most notably the capital city of Harrisburg, have undertaken the two-rate shift with great success. The city of New London, Connecticut has recently adopted this reform.
California — In 1909 the California legislature required new irrigation districts (and gave the option to established ones) to tax land values only, exempting improvements, crops, etc. Speculation was eliminated, and California’s pre-eminent role in US agriculture began during that period.
Alaska — The state owns much of the oil land around Prudhoe Bay, and collects a 12% royalty. This has resulted in abundant revenues beyond public expenses, and has made possible a per capita dividend and a cancellation of the income tax.
Fairhope, Alabama — This is a colony operated by the Fairhope Single Tax Corporation which owns much of the land in Fairhope and leases it to its residents. With the economic rent it collected, the corporation paid property taxes levied by the state, county and city, and used the remainder is used for public improvements. Fairhope far outstripped its neighboring towns in growth. Unfortunately, internal political pressure has led the Corporation to discontinue this effective rent-collection policy.
The Three Ardens, Delaware — In Arden, Ardentown, and Ardencroft, the land is leased to its users, and no taxes are collected on improvements. Arden’s land rent fund pays real estate taxes for its residents, and a portion of it is sometimes used for maintenance of public improvements. These towns are well-known as beautiful residential communities. However, land prices in Arden are as high as those in neighboring communities that are equally desirable, showing that the community does not collect anywhere near the full rental value of land.
The Historical Record
Nowhere yet has the principle of the public collection of land rent, with abolition of all other taxes, been fully applied. But partial applications indicate results commensurate with the degree of application. The history of all such efforts is presented in Land Value Taxation Around the World (Third edition, 2000, Blackwell, 490 pp.) The following remarks are excerpted from the introduction to that volume by its editor, Robert V. Andelson.
In 1955, when the first edition of this book came out, land-value taxation seemed to be advancing steadily if not dramatically; it was spreading at the local level in Australia and New Zealand, and its extension in Denmark was backed by all three parties that made up the coalition government. By 1997, the year of the second edition, serious reversals had occurred in New Zealand and Denmark, the nations where it had seemed most firmly entrenched, and there is now a definite possibility that what little remains of it in Denmark is about to be discarded. Although nowhere actually rescinded in Australia, it had been minimized there by growing reliance on users’ charges….
Meanwhile, public capture of economic rent had become a major feature of several countries on the Pacific Rim, and is being adopted ever more widely on the municipal level in the state of Pennsylvania. Now that Scotland has its own parliament, land reform is high on its agenda, and efforts are being made to point that reform in the direction of land-value taxation. The idea has also gained strong support among several of Russia’s most prominent political leaders, and has been endorsed without dissent by the Union of Russian Cities at a conference representing eighty of that nation’s largest metropolitan jurisdictions.
True, the system has in some few cases been abolished, but never because it was a failure. In Denmark, the explicitly Georgist Justice Party was voted out of Parliament and the advance of land-value taxation halted, but this happened at a time of unprecedented prosperity and for political reasons that had nothing to do with land-value taxation as such. In New Zealand, it was done away with in the three largest cities in which it was in place, but this came in the wake of major jurisdictional reconfiguration, and was never submitted to the voters for approval. In various smaller municipalities, where the public had an opportunity to vote on whether to reject or retain it, the overwhelming decision was to retain.
Hence, to those who share George’s vision, retrogression is not unalloyed by gains. Yet it must be stressed that these gains are slender, tentative, and by no means secure. In point of fact, many of the “success stories” hailed… in Georgist literature have been quite exaggerated. The implementation of land-value taxation has really been extremely modest, and its impact, where genuine, all too often blunted by countervailing policies, usually at other levels of government…. sober realism [is better] than naive complacency.