OVERNMENT FINANCE BRIEF NO . 13

Property Taxation: Economic Aspects

TAX F O U N D A T I O N, I N C .

This pamphlet is 2dapted hors a paper by C. Lowell Harries on Economic Evaluation of Real Property Taxation : Municipal Income Tares, Pro- credin s. the Academy of Political Science, Colum- bia University. Ed. by Robert H_ Connect. Vol. XXVIII. No. 4. January 1965 7r. Harries is the Foutsdationis Economic Consultant and Professo r of Economics at Columbia L-nh-ersit -The views ex - pressed are Dr. Harris ow t- . Tax Foundation is a private, non-profit organiza- tion founded in 19-7 to engage hi nonpartisan re - f search and public education on focal and manage- ment aspects of government. It serves as a national information agency for individuals and organiza- tions concerned with government fiscal problems.

Covvnunmt Finance Brief No. 1.3 + August 1988

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Copyright Im - I TAx For%vAm.N, 1%-c- 50 RMWeller Pbra - hew Yak, . Y. 10030

- I Property Taxation: Economic Aspects

By C- Lowell ;4acriss

TIu pL-trs :t role in tool.cs of takiiiz d+-)ILtr. €iam the t-; xpay r and . o etuntent finance Lame eitmigh to aur- aiug tliltii to :i ~government trcaiurv- prise Iiialli- tihsrrvers. The tax takes 1he- julrerse. rituircre nue• ctFeru "in be snore• trip.-i taxl;ta c ps ,!rill eves Ixfere ul In+ire than wimr significance- Iitost Ik r •'diili'CF, iI- CiC~fl:ti eii CtttLYfeiitf flltt;tii. vvrnffila- when the t. x rites :ire at the ?N!Irert — sand hringis niorr Into localtzov- hitz-h levels found in numerous coiiununi- erntnetit treamirico . u"tria- t:1 billion ties to day. this fi-ssul ymm about S1.10 per ripita- or S7,11t1 fora family of five oil the aver-ag of hxal governments tile piroperty iup f nn VSi and -S-415 rt.--%pt,-,tively ill um tun conilxare favorably with aitermt- 1965 dollars in 195£ . The outflow of tive revenue sources within limits . It expenditures- how-ever. lists risen more shous tip 1o;tdly- however- when used as rtpicih•.t Such will continue to he the intrusively as in a relative fea. (but itn- case- Ina tuasiv localities. property-t:tx portant I counininities today. Poor ad- vielels will not _row so rapidly as Iex:11 Ministration pla-111cs the tax more geri- r_overnntent spending, allowing for c•ralla- than is nect-mtra•. Achievements in grants-in-aid_ etc-- unless effective prop- iiiinte•rous places have denioustrated tha t erty-t:cx rates keep risin~. Iiut even if adininistration ran lx• improved- And th e .1de•+luate- rite increases were passibl e atnrrirare• of the t;tx could also Ix- inuch constitutiomilty. poli:;callv.;utd eeonoin- iniproved. This Impe•r % ill not deal with would irtlla•. they are not :assured. Nor oiie• structural problem the taxation of incre=ases he de--irable cohere rites are personal property. Another structura l alrcadv :s hi-di as in some localities. el!-latent. tice relative reliance on laud Every t=ax has effects oth--r than those and buildings, will get :attention later.

What the Property Tax IsAnd Is No t

The property tax falls on IWO111c . exclusively a source of revenue for foca l "Things" tlo not, in a meaningful sense, government. in four states only real bear tax. The property tax must lie property is taxed . Most states, hou•- thougfit etf as a device to tax people ac- ever, lx-rntit localities to tax tangibl e cording to their ou-inurship. use, and personal property — inachiner% . inven- other tics to praperty. The tax is almost ton•, furniture•, etc. In fact, however. is

i . n .+s t;ia. :t .a>- .,, tta,.+ .:a t .,s y; ., .i~ ! cx :~ls,-~ .ct ( L .,alit 1{atttaa, !(ar.JG.>n~ ut S:att and lws:.tt l;ua~ er,rtrt Ftsartt INce Yoti. : Yaa Fautndattat. Lnc.. 1964) .

1 a rule only the m.-AM-:1 prole:ty of lmsi- property which fields s wr vent to the nesaes and atitonnilbilcs are taxed- lit a acct:ICS_ An Increwmvtit 46 l)t•rLviat will il d fvw states there ix still more tlLui liit-or- rc-duct• the a motint renuinin- after tax nliss L ration of isitaia ible persomil h! such "Ise- ht- about S per cent.11 - property — securities and Ixlnk lxilatices. property tax differs in essenti :al_[ from ::It iliconic tax- E ad, should lx judged 11W tax is shat a Ie,.v till isidilidual net zc7,xtrdisl-_- to criteria applicable to it, not wealth. Tfte justification for they tax does to the other- not refit u_ on :. l)rtsz2nilYf adrt?d.Iilnt of h;Aen to a Ixrsorl s net ;rortlt_ Tlae ixast• 11-t- tax in inost le.. :alitics is Lir_cly a of tl:e IXX is :en a stillLite of the worth of hunlcst on lui.rsin_. tint substantia l c.ch particularpicceof property-chiefly ainounts : re collected from Isaisincsst .- real estaty. itbout re- and f )roily debts \t, hell a rpresst-d in the rune ternils as a a-g aillst it- III ::hnost all "LSes aswun.esif retail saic-s txc. the propertv t-: c cctuabr rild colle.-Vorr are local functions. Many :ill per cent of pure occ-ulunc: cyst of state coustittstious. local charters- and hatishiLz in sonic• localities_ Ina r=te:l ec a- state statutes %oreniitrI local affairs pre- tust:sic 4vivic. the pre3perty Lim oil real scrip- in axinitatn txK rates. Their practi- e-Mate is itc)t one t:-r but two of cntcialh- cal effettiveneys differs widely_ - _ different natures — :a levy on land an d one oat intFl•orenienfs. The condetnna- Although property-tax rates when ex- tort comments which inake up nicist o f pressed its a percentage are snrall. they what follows apply chiefly to tile secont . cpp rt to capital cattier and are often aspect. Ciat is. the burden on improye- -high_ Comparison of property-t:u rates inents-Be tax on pure land values. ac- with inconi or stiles-tax rates can be cordin-, to a long and respected —and deceicin-_-_ A 3 per cent property- twc correct — tradition of economic analhais equals 33 per cent of the pre-tac income stands as one of the ]lest possible means —and half of that after tax—front a of getting torsi reyenue-

A Powerful Argument Favoring Property Taxatio n Property taxation deserves support for frderd finances generally? Conclusions a n:isoll soli)etinies slighted by critics inav differ. "spiflovers- can Ili- cited to the tax pays for benefits -;Oita" to those rc efuire inodifieation of tht- central point. who bear most of the ba.rden. True, we Yet the basic validity_ stands. Canpot relate the tax paid by aily partic- hefmty is not the only I0evant crite- ular renter or howcowner to the benefit s - ion. Efficiency in resource allocation is of local-government spending which h e ant.th,-•r. The :allocation of resott-,-es will receives. For the group. however, th e tend to conform more closely to publi c case is clearer. The tax which is collected preferences when both tax and spendin g loe:dk :aid Spent loo all• goes to bem-fi t are hxal than when one is decided at a the people of the area. Thus, paynn•nt o f diFtance front the other Tltc argunien t the• cost of governnu•nt conforms closel y here :applies with less complete validity to i ene•fit on an area hasis . in this respect to verb- large cities than to smaller con) - is not the property tax result fairer, more niunitics. Yet its basic nierit extends "Mitable, than in the ease of state; and broadly indeed over the country.

2 Who Really Bears the Ultimate Burden Of the Property Tax?

To judge a. tax %viwly. there is need t o 1-le property tax uns coulter to one kno v who re allc lw:irs it. he may be a concept of fairness by burdenin-, lou•- Iverson vet s• different from the one who inctinle groups chore heavily iI! relation writes the cluck. Sometimes when to incJtnc than those with larter in- are 5.1ifted—froth building- oxvner to cotnes. A reeremiee clement exists. And tenant—the process wods rather clearly. rt~,re ieih is generally believed to b e Often. however. the process is both ob- inequitable. conflictin g, with vc tical scure and slow. The sunituary here must _t•(t;tity." _\felt of goMwill (7111 disagree somewhat dogmatic_ in the degree of their condemnation o f re-,re~sivity as such . But all wid proh- A challt.e. in tax tvill fall on the owne r ahly he distressed to le am how heavv or user. depending upon calatract and are the property- tax burdens oil persons market conditions- With the passage of with Imir and inodest incomes. where tine. the incidence can clianze- Of the property ta.; rates :are :s high as in some potion of the which will h:(ve cities. In this case. however. the benefits been in effect for some year--that is. paid for by the tax Iaive a very large most e:f the rate—the burden on struc- `pro :oW-1111.0111_ bias. Moreover. the turev is borne by the user. great hulk of the ree enue conics fro m The tax on land %-.lines reduces the taxpayers in the income range in xnich worth of land. In effect. the ownerat the the burden is not so mach regressive as time; of each jump in tax rate will have roughly proportional- suffered a loss of capital .value. Conse- quentl}•. present users of I:and as they Still another source of criticism o f pay tax are not in fact truly worse off by high property taxes lies in "horizontal the :amount they pay. If the tax were Ilattplllt~ "_ taxpayers within tach income lever, they would have paid a higher group do n it receive essentially similar price or rental rate_ tax trtahnent . ha every commmnity some families are required to pay more prop- he search for tax equity rests upo n erty tax than do others with about the the lest of instincts . Taxation repre- same income and in generally the same sents governments use of coercion. And circumstances. But communities have i t all use of compulsion should be just. But within their power to reduce such in - what constitutes fairness in sharing the equalities substantiall} . costs of government? Would further in- creases in property-tax rates be a fair Properties of the same type (six-stor% gray to finance the rising cost of loca l apartments, gas stations, or departmen t government? "Fairness" has more tha n stores) are treated differently. Assess- one aspect. My comuactats, once again , nients sometimes vary greatly from one are summary. type of property to another. Assessment

2. For a more ce•iptete analssis see w. J . %huh ., and c. 1 .oweal harms . American Public Firawe . Slh ed . (Fn~ICx,xW (10k. N . J . Wof . Cisrptcrc XV111 and XIX. Die .hs:rn.i . n in the presene raper omits reference li t the eftcas of dcduclihrlity for purposes of income taxation. They motFfy the sukturu somewhatin amount but not direction .

3 inequalities are pr►ixib.y- •grc.t,er than this hidden loss (ern be explained, bu t tLe corresponding int•sltialitics tolcrite d - the aillouIits a:ltillot be pleasured. in other t;axes_ Not all t;tx1my ers have Illy e_tlensir per eilbic foot of ,oil- equal opportunity to -_,et a prole rts--t r struetino of residential units drelincs a s ;lss smnent rcrfeircif for jxs_v0h1rcorrcc- the size of the house- aIxtrtment . or other tion_ Although -oil jmjv ' every- owner tulit increases' lit terms of one of the has the same access to facili!ies for ap- sss:aior titan• ~,emerelIr drsire.•(1 in hous- there:al-tifcdifficttliics y:Irk . peal. g-reatly ilr,—clthie waitstits--tillli cost drops as Aulang the Ion• ineoine groups. those room ±ire mere:t_+e._ One estimate- for %Vito lice ill Private hotLCin. xvifl Ixty i e•xansple. finch- that if the oust per e_•ubi c more property tax per family tkin those latest of a more or Irss typical. •,&xxl qu .A_ who lire in public" housing. its-_ single family re•.idencr of DXYJ The pro=erty tax nuis counter to one uivare feet is lash_ the cost per cubi c concept of ft_rncss by burdeltint-, sons foot for the same type of eoustruetiou types of consumption snore than others_ •gtv-s tip to 115 if the unit has only TOO 1'.ur(lens xury ac-cording to lxittenrc o f sottare• feet and drops to SG if the size constimption- ror example. families i% I.( XL For another type of c•(utstnle- which choose to use above-avert're por- tion. with DO) stplare feet size ;is 100. tions of their income for housing Ixn- the cubic foot cost is 23 per cent higher more of the cost of local goyernni nt_ ' for a 701 foot unit . and 0 per cent less for one of 1,4W foot - These aspects of horizontal inequality leave no doubt that the property tax The deeline• ill eonstruction expense would licit shone Ilp ;t_s a nuxlel of fairnes s per unit of spaev rrffects the fact that in the distribution of bur(ien anion, enhie emitent rises more than propur- families . With the better quality- of :i(1- tionately to floor. -%-all. and ceilirg ara. ministration which is possible. it would Moreover. inuelt the saner plunihing. score marke(liy ]letter in most plaice s wirin-. kitchen. he;ttimgr. ;lit( other fa- thin it does today. editiescaul st•rye larger as w0l as smaller rexmis and buil(lings through a range of sizes_ The per:] public yve lf:re e::) lx• st•rved best by the construction of rooms . Inducement to Smaller Structures : I:uusrs. and buil(lings of lariter. as op- Sacrifice of Potential Benefi t posed to smaller. size. The property tax. however. by adding to occupant•}• cost s The property tax oil buildings pro- creates pressures for h-lilding snuffle r duces rarch• recognized effects which traits; in loin- so. the '.ax nutk(s fo r impose hidden burdens on the public- poorer resource alloc: tion. - u•h;tt economists call "excess hurdt•n .•• I'll(- tax (leprives the consunu•r of more A study of Ei mih• spending show s re;tl benefit thaii the dollars %%-]licit are• that. as out• would expect. the higher the p;kid to the government . The source: of price of housing, the wialler the giiam-

J . Retail airs taecs C%Cnl+l rcniah; c,cn aRCr alhmin,t b,r mdire .t eflcct.. one finde hnntn} taxed lightly under sales taxes . The m :mnc tai treat%w^nct-:atpant. favorAlC.. i . W . A . Motion. llorurnr Toxnmon (Madtwo ; Univ . of Wti ;onitn recs . 1955) tleselopt the point. of Spacr purchased- Similarly. the in nu", he sv-raller bec=ause of t=ax. (We ,juality- the alliellIties . enjoyed will he i!,Iaore the land portion of Ilse tax- 1 It! less as their coast goes lap. 'line property essence. resources ;arc freed for use in tax Iw addin ,g to price will reduce th e praltidin!- government services. But per demand for loth quantity and quality. unit of input—the materials ;in,; labor Each one per-Lent-age point of higher mied in producing such space—the knit s housing cost h:ads consumers to settle c:3stiug 8133:3 per year lr-fore tax will for about one Iereenta ge Ioint less of pta'ide less it, cubit contents. les. of qu=antity. including, amenities-5 _lvera! what people want. than if =.i. xd in pro- in-, over the years. it secins. the dollar ducilig housil '= eailits to cost t2.00I al . - - amounts spent oil housinlg by a f;aalily of nu;aflt-. Tlle• re=al res?aa m" prieeluee less --iven income will Ix about tile saille of what Ix-ople start than would be oil- whether tax is high or low- To make tap taita;ablc- 11, ; ;it govemluent ual em tri ll for ;a hid her price due to tax, however- the resources it 'lets will scarcely illake the cuuount and quality of sp=ace o13- tap for this indirect loss. tained will be curtailed- The past will not be (lone over. Thv Over time, therefore, the property tax public must live in housing whose qual- —thron'_ i the effects on demand—g ill i'.y has ileen adversely influenced bt - Irul to the construction of rooms. ;ap art- effeets of the tax in the past on tt•Ixs o f inents. and buildings snmewla ;at smaller c,nutnaction as described above. Tlae than would b built in he absence o f future. however. is ours to make. Being tax. The smaller units ;arc not so ?,rod forewarned. society "lit troy more ration- and yield less utility per unit of input . ally to ;avoid ;avoidable errors. `b xcess burden- results. The public un- knowingly deprives itself of opportunity Taxation and Housing Quality: to e=xploit fully the potential benefits Maintenance versus Deterioration f: om -lacy of the cube.- Thus. the public Most Americans must live most of hearsa hidden burlen by sacrificin- , the their lives in "not nits- housin!a. Much benefits of !--rc Ater economics in enn- will have been built before their birth . struction, per unit of space and qualit . I lousint, will gr duall}• lose its ability t o Ali illustration trill be helpful . Assume provide satisfactory shelter unless labo r that a family would spend S2010 a year and materials are devoted to offsettin g on housing. In a market free from hous- the effects of tiny• and use. 3'he qualit } in , taxes. it would get that a111411110 o f of thr residential space actually avail - pure occupancy. But in fact the tax is able will depend !greatly upon the main- 30 per cent. Thep the total cost for equa l tenance of the stock of housing . Unfor- f teilities would be 52,66. However. out tun=ately. much of it is already poor, no t of 81 spent. around :3 cents goes for only because it was "inferior when hnusing and ?; cents for tax. The family originally built. but also bec=ause it ha s spends 820M. of which 51 ;5.33 is for been allowest to deteriorate more than space- and S-167 for tax. The ph%. siead 11C4'ssart-. Under-maintenance forms oil( - amount (allowint, for qe• p ity) of hous- way -by which in owner caul reduce hi s

5 . Did %ever. Jxnnnnrii, nl the rf"PeM T.rs (Wasltmc[un : lice 111,r1kincc Intritulion . 1%66 . 63 If .. drawing on stargaw Reid. Unuriaz anj Income. (Chicago ; Unic. of Chicago trcss . l96 .) . net inwc-Stiltent ill a building. His actions duixrs avera!,c qu:alit _~ l Ire dollars rased affect others- to Imy tax ;are Hot al-ail:ahle- to finance maintenance- Owner-oeculmuts . for ex- ?file maintenance done. or not done Inple. (zamtot use the fulad. which '_'o on eal'ia a minority of properties caul to the lexaI trecsun- to keep the propert y materially affect :1 larger neighborhood in goexl condition- —for ill or !good. Outl;ays for mainte- nance can be combined with spendin g The owner may believe that ntainte- for improvement. Over time. the o%vners natacr expenditures will Iead to hi~,her t and oec•1upmits) of housing nazis- do assessments- The higher the tax rate, o f course. the ~,rc C more than lnereh• preserve earlier qual- :ater are likely to he his it-. Good effects due to be tterinent wil l feua and thus. :ah;o. his incentive t o spill oye r into the ticighborhood- Any avoid actions which may raise his assess- MisollAbl• complete social system for ment_ Purcl uliaintetlancruutl:avssho►ilcf tusking the best of the huge st-ac : of not affect ;assessed v:aiues except by in - existing structures will assign key roles Iuencin- the rate of deterioration ove r to the prevention of new deterioratio n time. Ali omnier seeking to :act in a Ingl- and the m-oid :ance of discouragement of eal cease would not he ueterred by real improvement. estate tax in maintaining his property i f c such investment offer"I the hest after- High property taxes on buildings tax return. In fact. however_ misconcep- --work against us on both counts. The in- tions can exert undue influence. With or fluence is a matter of degree. of course. without good rea,on . the owner may and in most communities will be littl e fear that a -repair :and mainten:atuc- job if any worse than one must expect in on e h avin!, visible results ~ or even one re- wav or another front any tax. It is in ported to the authorities for getting a older cities with high rates. however. hit-ligg permit) will result in ;tit ap- that adverse effects can become deplor- preciable :assessment increase . ably large. flow? Property taxes influ- Iligh property-tax rates on buildinl,s ence maintenance in three %% ays . T:ax do seem to deter maintenance even more payments reduce the net return front than ration ;alit• would justify property and thus its :attractiveness a s . And the types of maintenance which owners d o in investment . Owners who rent ou t make are not those which ;are --wisest some of their properties but do not ge t economically, structurally . or aestheti- it s;atisf:actorv- return on investment will calh- :uacl socially. Owners seem to favor naturally her sensitive to taxes as a cost . fonts which ;ire not likely to trigger an Any increase in tax will be especiall % onerous if a considerable time is re- upward reassessment, "inside" a s against "exterior." quired for full shifting to tenants . The incentive to make outlays needed fo r \f;anv owners of real estate :are not maintenance will hardly benefit. Ali%- well versed in property management . force depressing net }field will probabl y Many suppliers of rental housing ow n induce Sollie decline• in tit(- supply of one or a few properties—a two- or four- housing by under-m;ainten:utce ;is it rc- family building acquired ;is a home acrd

6. Sec James iteilbrun . Kral. Estate Tuxes and Urban !lousing ( : Columbia Univ. Ptess. 1W) .

6 as sourer of rental income. t1:e place the quality of urban housing . When a s where the fa mil• business is a rried on. recent surety asked tenement landlords- inherited prop ert'. etc. Their :attitude. ;about the factors which detennined beliefs. information. and financial capa- their outlaws for maintenitnce and im- cities will. of course. differ in almost provement, the replies indicated tha t even' coucrivable way— But we can be rising tax rates lid hindered unainte- sure of one thin!: the cumulative effect uauce by reducing the income from in - of their decisions about property main- vestments and by adding to the fear of tenance will have it naaateriaal effect ota upward reassessment?

Perverse Character of Burden in Relation to Cost of Governmen t

Tlu• property tax as it applies to private and public—taxes do not help to structures i not the portion falling on harnnonixe for society as it whole- land) distorts resource allocation per- The users payment for the serv versel' where there is older property, ices of local government goes down, relatively. especially in urban areas. New, vwell- as the building gets worse constructeci. hi!_h-quality buildings are . even though taxed far more heavily per unit of space public expenses attributable to the prop - than slums and -junk.- Can justification .erty are unchanged or mat• even increase. for such discrimination be found in the The 'junkier" the building, the less the cost differences which the two types of payment for government irrespective o f property a nd their occupancy impose on expense to the government . In short, the local government per unit of space? tax element of cost of occupancy oper- ates perversely as regards governmen t Most probably, no—just the conu.uy. The badly nun-dome and less heavil y costs and benefits. Occupants who pu t taxed building is more likely to be as- the community to relatively heave• ex- pense pay less in tax. other things being sociated with the greater costs, if onl y the same, than the occupants of highe r for fire and police protection . quality buildings. The social and economic evils associ- The person who wishes to shift fro m ated with slums should not be ignored poorer to better quality housing. or busi- in this connection ; but the cause-and- ness propert}', cannot do so without also effect relations are complex . Neither paying more toward the cost of govern- poverty nor public assistance and simi- nnents—SI of taxes for each $3 to 84 of lar welfare outlaws are assumed here to pure occupancy expense . Ordinarily, be either a cause or aun effect of low- however, such a shift to better facilities quality housing in an%- simple relation - will not add to services received from ship. A valid conclusion, however, wil l , or the expense to, government stand : When high- or low .quality build- . ings are being compared according t o The property tax on structures create the sort of calculus recommended by an incentive against upgrading of qual- economists—matching henefits and costs, ity in just those parts of older cities

r.-Sec George Sicrnlich, The Tenement Landln .d (hicw Brunswick : Rutgersnic State University, 1966) . Fos analysis of the theory scc Iteilhrun, ap, cit .

7 where need seems greatest. Such dis- %with better ones. The two :spects of the couraging of private effort to raise qual- protx rty tax noted above have- in a ity serves no useful public purpose. The highly significant sense. been reverse d tax on pure land element, in contrast. from the roles which would lx- optimal. cam work to hasten putting land to bet - Fortunately, reform seems well with our ter use by replacing old improvements power.

Obstacles to Urban Renewa l Heavy taxation of new buildings must naitulent to pay property tax for catch of stand :s a tragicall apt example of man- sixty years. The nta,gnitude of these fu- kind creating needless obstacles fo r ture tax obligations can be expressed in itself. Cities which urgently need to terns of tod:n=s dollars. For doing so. replace obsolete, decayed. -degrading each of the sixty tax bills must be dis- buildings nevertheless put powerful ta x counted at some rate of interest to com- impediments in the way of progress. pute the present worth . If one assumes Nobody planned to set up a tax system 5 per cent and a tax rate of 3 per cen t with such influence. No one tried delib- a year on the construction cost, making erately to base local finance on a tax roe-h allowance for reductions in assess- that would favor holding on to the de- ment as the building, ages, then the crepit structures, many of which spread present ratite of the taxes clue over the evil influence through :t larger area , life of the building will equal about 30 while penalizing the new. the good, the per cent of the construction cost .' source of benefit to a whole neighbor- hood. M"hatever the precise figures in a par- ticular case, the property tax bill on a An annual tax of 3 to 4 per cent o n pared goes up when a new building full value is high in relation to what replaces an old one . The more that i s most property produces—30 per cent o f spent for quality, etc., the larger is th e gross income, sometimes more. In rela- new tax liability. And, of course, the tion to net income, of course, the burden higher the tax rate, the less the desir- looms larger. abilitr of putting funds into new build- Let us look further. If the construction ings. The property tax our structures, i n of a new building requires demolition o f short. creates a clear, and at present rates an old one, the cost which the builde r in some large cities a substantial. bias faces will include not only the land an d against the replacement of old building s the new construction ; his expenses will by new ones. also include the value remaining in th e The amount of tax oil land will not af- old building plus demolition costs—a sor t fect the quantity in existence. The tax oil of deadweight burden . land (ran influence the availability and Let us assume that a new building the use made of particular parcels 9 Any will have a life of sixty years . Its con- muh-r-assessnu'nt of land will actuall y struction involves the owner in a com- curtail incentives :end pressure for urba n

N . M . Mawn Gaftnq . "Properly Taxcs and the Frcyucn.y of Urban Rcnc%al ; Pracerdings . . . National Ta x Tax Association . . . i964 (Harrisburg : National Tax Association, 19651, pp. 12-185 .

8

renewal. Iii practice_ it scents, sonic such duction. Unlike W-UgCs, for example. inappropriate under-assessment may property taxes do not pad- for service° follow- front implicit or even explici t received by businesses and thus helping attempt to truisutit to the land the de- to create inconie. Lawmakers hend to pressed valuationts which are properl powerful temptations to tax people in- attributable to the deteriorated condi- directly throe-li business. rather than tion of the strnettire. The motivation for directly on their receipt of intone or such assess bent practices may stein use of it in con suniption. commendable—hut not the results. The The significance of property effect in reducing pressure on the owner tax for business will depend in part upon th of the land to use it more productively e relation between the tax and the govern- will be to slow- art.t renewal even more mental services. Most ser ices provide thiin clots the property tax when it oper- v d ates -normall:_` For in this respect the by local gov rnnients—education . w-el- fare. sanitation tEfference between the two elements of . protection—arc more fo r real property taxation—land and build- the consumer than frr business as such . ings—has great significance. The expenses of city government are. not of :i type to be. in lark measure. of any direct benefit to business firn s." Property Tax as a Business Tax: Competition for Industry Managers must take account of prop- erty taxes in making business decision::. The property tax is not merely a tax such as where to locate. Most locationde- on housing its a frrnt of c-onstiniption. cisions affected by property tax are not The tax also falls on business, :affecting individually dramaticperhaps u7ircel- both prices and the processes of produc - identifiable—but in total they can lava tion. lit other words, it influences ]lot h significant. - the quantities of productive properth- denianded for use and business decision s Soinc businesses . of course, are finnl on when . where. hob- much, and in ghat attached to a location, e.g., those provid- jorinx to operate and to invest in pro- ing local services. They will not leave if ductive facilities. the tax rate goes tip, but their grrwth or decline will be affected . Firms which The influences which grow out of ta x dual in tzig A\ competitive markets e an considerations will rarely be constric- - littt ;afford to incur avoidable costs w jtich tive in the sense of helping companie s do not. in return, either yield it to produce snore efficiently salable . In general. output or reduce other costs . tax-created additions to business-oper- ating p spense are undesirable."I lhisi- Each rise in property tax unless clearly nesses ;ur overwhelmingly the source o f matched by iniprovenients in local serv- income. In taxes, however, they encoun - ices to business as such tends to rechice ter inipedinients--costs for which ther e the business use of structures because a n are usually no identifial,le aids to pro - element of cost has gone tip . The :amount

v. Ibid. . P. 280. 10. For more a6mpktc disunion% %cc Committee on Fcdcral Tait Policy. Financing .4nrerietas Future (Kew York : The Committee . 14 west 51 tit . . IWO ) . (h . 111 : C . Lowall liarrm,. "Taxing and Untaxing llusiness . . ." Tnx Rctiew . Vol . XXVI . No . 1 . January 1965 . Tax Foundation . It . llasincsux do not. Of routcc. h.oc the right to %otc. Managas. owners. cmplokccs, and comurttcts will hav e no cote in some iocalitics which seek to tax them . 9 of ixoduc:ion in the locality will tend to voritism. -No locality can escape such fall below what would otherwise be the competition- Xaturaily. communities case. going down- not at once pe.-hips would hike to be able to include within not abs.-ra ably. but gradually. In a %en- theirboundaries ct-apar:ie s which would emlly expanding econostir. the effect in pay high property taxes while selling most localities,, ould be a slower grova t h outside. People elsewhere. in effect. rather than any absolute decline- --vouuhi then pay some of the coats of local government where the plant is lo- The cornmutiov with tax rates on cated- Competition. houvver, limits th e buildings generaih in line with rates pos-sibility of one IorarliWs getting much eh%-where will probably not experience revenue from non-resident consumers. appreciabk competitive loss of busing Each of the countless communities Rhc-n rates are alrcadv much above -ranting property tax favors, in a sense. average. tIli long-run dangers are quite tells"the potential consumer elsewhere_ another matter-1 2 Emily exaggerated -You can buy prod_zts created by fac- Yes. But also easi ly assumed aaray" tories. or services rendered . aaithin our when in fact they will persist. Along borders without paring (much I towar d with other elements. they will operate the cost of our local government- What- ,gradually. in amounts not me:, mrable ever one may think aba.-t the desirabil- but ct tainh unwelcome- ity of such policies, they exist. Commu- nities which do impose high taxes on th e The competition among communities reproducible property of businesses :are for industry grows. Some competition Icss able to maintain and build their takes the form of property tax favors. economic b,se by attracting industry. occasionally on. in the open, but often anv tax on business will have such tend - concealed m the foray of assessment fa- ea ies-except a tax on pure land values-

Tax Islands and Central City Difficultie s

Differences in full-value tax rates :among the numerous localities in the among loc lities have other nonreve: nue general area. a fen- with tax resources results. One. though related to business which are much above average in rela- location. must be disting uished. hates tion to service obligations can get by much above average in one locality wil l with lower tax rates. They can attract do more than discourage business in- investments and lvecome low-tax en- vcstme nt there. The high rate will also claves, perhaps predominantly indus- reinforce opportunities and incentives trial and commercial. The firms operat- for creating "islands" of relatively low ing there thus incur little property ta x true rates nexadw per unit of output. They get something

12. The use of the -catra hi-,h" tax Vms must affect the results c ni .eIr . If ditfer :rdi3W high expenditures go for scrsxes which the ptopre matting the dr ision about business location wart and arc able and witfirn(Z to pay Ax. high taxes wilt riot have the had results dcscrtbed in the teat_ Nut as the test indicates, the benefits from local satndlnr do not pr Lt r.wh to busar--w. as its famdrts . IhBcrtnces to quasar of kwai ednCation will he srgntficant for empioyers. Yet will mx wage rates be higher wI- -re schooling turns out more productive wtwkers Ptobaht. to . Will waists lot enough higlvc: to otlses all p rcniial benefits which business may have espccttd from htghcr progwm wa cs for better schools? The answer does not seem clear m- them. and- cmpincal cvidatcc is not available.

10 of a ccxnpetitice advanu!ze while con- outlying m4ithborlwods. aggravated in- tributing little to help pay the expenses forms which awe encouraged b.- . tax of loyal govvrnnsent anywhere. The differ-rnes. number of such localities must be tiny. in relation to the caxxxuv as a whole: Unk ss the users believe that the bene- but particular cases can be of impor- fits of loc-a. government go up with tax tance for a metropolitan neon_ obligatiexm the repelling forces gather mrni-gth- A destructive process gauss Other communities with autonomy force. on smirt-what self-reinforcing. over taxes. pinups ba- the use of Zoning but perhaps s<-ueeh Ix-m- ptible front power and building codes. are st le to one election to :uaother. The existem.}e exclude tapas of property associated of c atclaa~c aches tax rates on structures with high governmental expanse_ They re natively limy. -t.-ax islands.! does may. for exampk% prohibit high-detuita- more than hinu neighboring localities --yang which brings many children . and accentuate the difculties of older and htavv school costs. per acme The armThe,whole region tasty suffer. Such parts of a maetropolitan area which sue - ~txation teems arbitrarily to favor hori- cc A in such policies can hope to finance- :outul over rrrtical growth in mc-tropoli- rol atively high-quality local service wit h tan arcs. Ilk---h taxes on land. however. a propert tax rate wluch is Iess N-rden- do not have this ape of effLet but rather soine than the rates nearby Ilu- latter the contran. rates, however. tend to go up. or services are at a Iow-er level. The ad.- antages of The- higher the tax on buildings in th e freedom, and the opportune for differ- city center or sonar part of the whole) . enes in trays of living, must be rec g, the greater is the indueenxmt for fami- Inez-1 as h;aing kxs welcome results lies and businesses to move to "tax bemuse of competition . shelters Other residents of the :area who also %ish to escape the urban cen- As regards buildings but not land . ter t for r axons anon? which taxes may - loaner tax rites here and there on th e or tn.-ar not, rank high) must then `leap- fringzs of an urban area encourage dis - fro;,~` over the enclaves with their poli- =x i 1 and the deveIopinent - far out- of cies of exclusion, going further out_ Th e activities. including housing . which in resulting Iand use imposes higher costs a full economic sense ought not to b e on the whole society than if the popuLt - so distant_ Property nearer the cente r tion were spread more rationally. The will dx ~-ubicrt to high tax rates- an d extra disadvantages take the form o f each rite increase reduces the value o f costs in time and money of traveling the property and the tax base . Much greater distances front home to wort: will alre:adv have deteriorated but ve t (and for recreation and perhaps school - have years of useful life, and of pro- ing); higher expense of supplying wa- longed de eline. before replacement be - ter. sewer, and utility services f rther comes economical . As tale tax base --oes from central lo-cations; and reduction in down . such decline in itself adds to the the economic and social benefits whic h need for still higher tax rates . Business population concentration brings . properties. especicallV ellmmercial . be- conic vulnerable: to competition front This tendencies In av be of sit-gill force

lI

in the total vcotamny. They ought not to thent by rearranging the tax to shift be iguored. however. \or shexil . we burden from structures to land as indi- overlwk the possibility of counteracting cated late x

Encoufagementof "Socialization" Iligh property-tax rates stimulate The argument will not ordivan . be. sonlenitat the expannion of the scope of `toys finance alai build in woos which -,ovcnnlc-tlt:-1 actiLitt by -ivin. linis- permit users to escape costs of govezil- leadItlg aipnals of the relative dcsirabil- ulellt_e More IikeIy. adi-mcates will sa.-- ity of --ovrnunentaI. as coulpaned with -tats call he kept down by tax exemp- private. ownership_ The property ta x tioii -- The -saving in costs- howe%--L iiow clnalunels oine-fifth to mt -third of salves the public absolutely nothing in what the occupants pay for the use of the sense that schools, streets. or other property into treasitrim to finance gov- _facilities can be less expeKnsi%e than they c-nnniental services- The higher the tax would need to be if the building were portion. the smaller the anwtmt which taxed- renecii.s to pay the expense of pure oc- cupancy costs. including return on in- A shift from private to governmenta l veAlneint . PWIle_h- taxes by affecting ownership by exempting some property, the ixt ;morn oti private investment in however- will tend to bring !tc avier tax Iwifdings will reduce supply. Because rates on other property-. Eketrie and the true forges occupants to pay n_eorc, it other utility services can give rise to is-ducrts tk- quantity and quality of much the same argument_ Sponsors O space used Ilelow what would otherwise municipalization of public ownership prevail- Such tendencies. however, wil l can hold out :he prospect of providing lead non of good will to search for something at less cost than can the tax- something better. Can we not provide paying supplier ifand the -if- is im- buildings whose use will cost less: Yes. portantthe respective contributions to One u:ty to do so will be to free the the cost of government are ignitred. ?I user front the need to pay the full prop- difference in money costs between the ertv-tax c le-_.e nt. But how ! Government- alternativesgovernmental and private ally sponsored l tax exempt I projects ownershipinduces distortion and mis- seem to offer an answer. ( Exemption allocation. Private ownership yield s from oil materials for new gov - more than the services involved directly. ernmental buildings will tend toward It also helps pay for governmental serv- the swine result_) ices.

Pressure for Exemptions The growth of exemptions from prop- Who, for example will not sympathize erty tax properly- arouses concern . The with an old couple living on a r..odest re:Isons for granting exemptions differ. income which they have no opportunity Some groups, we often feel, deserve to noise and who are called upon to pay help; one way to provide it is to gran t ever higher property- taxes to finance tax exemption_ - school expansion :Although the t.-.: it-

12 self may not, in fact. be a large part of can appear easier than an increase- in the source of distress. it cut be a focus expenditure directed toward the par- of pressure for relief- Hers- is smaething ticular recd. In fader- lmve cr. exetup- govviminent mn coutrcl. .agricultural Lion tends to be a crude and inefficient land ore the urban fringes presents an - device in that the benefits provided to other type: of case which sometimes those in real need are small per dolla r seems to call for relief when taxes as of revenue loss. well as values go up but the issues Be that as it inav, pressures for relief anti desirable policies art by no mcaus fronn property tax will grow if tax rates so supple as rnag appear. go up. The higher rates aggravate the To Iawntakers—aril the public--grant - problem and enlarge the, effect Re worth ing relief in the form of tax excnnption of the exentp;:on-

Land Versus Improvements As rioted earlier. -the property tax the number of dollars put in each— cep be thought of better if one wishes t o which will field a satisfactory after-tax :n al 7.e the econoinnc aspects as tiro rs-tunt_ IA--.s housing. in quantity and levies, one :)n land and one out improve- quality. and less investment in other rnerits- High property taxes will swt defter hers of buildings arc: to be experted- appreciably the esnwunt of land in e_-ist- assuming, as semis reasonable. that al- e7ncr. But will the height of the rate ternative uses of savings are available- infiuence the use of land? If so, how If the property tax were a minor ele- The hi~ger the tax rate on LAM, the mcnt of expense . any possible diseau- greater will be pressure on the owner to ageinent of new construction mrould put the land to the `highest and best cause little concern. But the tax already use- Society can actually be-tefit fron t Iooins large--:end provides incentives in a tax other than merely-getting funds the evrong direction in some cities. espe- to pay for government - cially older ones. It reduces the attrac- A point of great significance scenes tiveness of new buildins to add to the valid ImLav" ;s it was even be fe7r- Henry total supple- and to replace older struc- George evrote so eloquently- The extrav- tures—mithout a corresponding reduc- agance of the claims of some advocates tion in the need for government spend- of the Single Tex or site value: taxation ing. -have hurt a good cause, namely the A tax on land reduces the price o f effort to distinguish between the ceo- Iand. In effect, a new purchaser will pad• noniic effects of tax on land front thos e less in price after a hand tax has been on improvements . Different results niust imposed than lac• would have paid be - follow from the two. fore•. But he will then pa} more each Every decision involving the construe. year as tax. Government in a meaningful tion or use of real properly must he seise has changed the conditions o f weighed against the tax results. The oaership . 9niong other things, tie• greater the tax. the smaller the number ehang:• favors the person with less capi- of investment projects—:and the smaller tal, without burdening or making things

13

hauler for the person more amply sup- -is :a start tuu-ard mforut of a make r plied pith capital. A lmycr can acquire t::z_ one whi"41 will eotitilue to play a with stualler outlay of his owns resourves Lame rok ill our stxiety. such shift of plus lxwrrou-ed funds and with lower cnephl=lsis St-vilIS Ili!-Iilr attractive. Tae annual fitmu in!g chime interest plus sucstion here is that to increase the amortization . the niust. however. them total revenue frill : e -two taxes but pad- more each year to govirnment. to rculigu the proportions_ Origival financing becomes somewhat Icss of a problem_ (hi the avera ge. property owners would pay the sallle amount of tax. But Assuming that no reduction in total few u-euild he at just the average. Sub- revenue is a realistic possibility- call stautialhy Iti;ghar rite on Lind values auxtbin-, he done to alleai:ate the an- would induce owners of low-use land to desireble tendencies Yes. at le--st in convert to lli!~lle-r--a-; cue uses. %Ivau- theory- A shift of the proportions of while. the lovrer tax rates on buildings property tax could be be lefic 11 . Sup- would encourage replatetuent of ol d pose that the rate on Lind values were structures ha- iw%v ones. as well as net three tilale the rate Oil improvements— additions_ The benefits. I subunit, could or other proportious which would no t be highly significutt—not revolutionary- alter the total revenue for the locality- not cartlishaking. but not insignificant.

Urbcr Aid, Land Prices, and Taxatio n

A final point. one of great significiinc The statue sort of thing must he ex- and some urgency- Programs of urban pected in urh an aid unless new policies aid which direct funds and resources of come into effect. Future residents and any type into particuLer :areas uill tend other users will ,et very inch less ad- to wise Land prices. Under present ar- vantage than is intended because land rau-rem nts. much of the intended bene- prices will rise to absorb the worth of fit will almost inevitably be incorporated special aid of a localized nature. Carrot into gains for Iandowners. Thev are not some-thing be done now to avoid such necessarily. or prilnariIy. the persons for frustration of !-ood intentions by the whoma the assistance is designed- Expe- conversion of assistance into higher Lui d rience should alert us . r eriris expen- pricks. i.e.. :apital grains for Landowners" sive farni programs have had the effec t The property tax is not the ideal instru- predicted by economic analysis bu t ment for dealing with this challenge . largely ignored in public discussion s Perhaps. however. it can play :a part in when policy has liven made : Subsidies a more comprehensive effort . - have been capitalized. to considerable extent, in higher land pricks to the bene- .\It)st of the analysis of proixrty ta x fit of owners of land A the tinie. Fain problem. has, quite naturally, lien can - operators, present and future. must theft ee pirated rtm the ideal level . The making -~ pay more for use of laud and thus get no of national polio- has tended to give less benefit from subsidy. attention to the broad aspects of this big

14 tax tkin the general welfare warrants. ways des rable- And today. efforts to fit Ctxnporc4 with other w:tvs of finaming such nfonn into a broader appruadt to lowl government. the property tax does = .-tn progress scent both urgently need - [cave %rc:a merit . But it has avoidable ed :rid pedraps more promising of posi- tiefects. Efforts to n-duce- them art- at- tiv:- results than ever Ix-fore-