I’ve been a Henry George and Jane Jacobs fan for a long time.

Keep up the good work!

David

The 1920 and 1930s saw Scranton raising most of its property tax revenue from the land value tax, and the impact showed, as this article from a 2005 article in the Scranton Times-Tribune demonstrates:

“Scranton adopted the two-tiered system in 1915, two years after the state Legislature made it an option for Class 2 cities. Scranton is now a Class 2A city — the only one in Pennsylvania — but the law still applies.

It’s meant to spur development on vacant or underdeveloped lots, and it apparently did that in the 1920s. According to the Times-Tribune files, the change from a flat rate to a dual rate prompted owners of some valuable downtown lots to replace smaller buildings with multistory structures.”

Today, in Scranton and elsewhere, old buildings have historical status conferred upon them which reduces the land valuation sometimes to a dramatic degree.
I also agree with Wyn that the diner that everyone loves is a perfect example of a bad land use, and they often come into being when the total urban economy is weakened. These are “en passant” uses, like parking or used care lots, mean to pay the bills until the speculative price of the landowner is paid, or until the government despairing of the market not working overpays for the lot the diner sits on.

“http://www.canada.com/montrealgazette/news/story.html?id=ddf32d26-d72b-4312-912e-fbdf6d851fb7

What would be more fair than the present property-tax system? Here are five proposals

LINDA GYULAI, The Gazette | Monday, September 11, 2006

1. Land-value taxation

In Quebec and most of North America, property tax is charged on the value of land and building together. But many counties in Melbourne, Australia, and a few other places in the world, tax the land alone, not the building on it.

A variant form is called “split-rate” property tax, in which land is taxed at a higher rate than the building. It’s used in parts of Pennsylvania, for example.

Unsal Ozdilek, a real estate professor at Universite du Quebec a Montreal’s Ecole des sciences de la gestion, has studied assessment systems around the world and advocates for land-value taxation. It existed in western Canada in the early 1900s.

Land-value and split-rate taxation make it costly for speculators to sit on vacant land because they pay the same tax as the owner of an office building on the same size land, he says.

Studies show land-value taxation discourages speculation, encourages development in the short term and helps curb urban sprawl, Ozdilek says.

Building improvements don’t add to property assessment or taxes under land-value taxation so it removes a disincentive for renovations and stimulates demand for construction materials and employment, he says.

The idea developed with Henry George, a 19th-century editor and political economist in the United States who argued speculators shouldn’t profit from rising land value because they’ve contributed nothing to it.

Still, Ozdilek says the system would be best applied uniformly across Quebec and Canada, otherwise speculators would have only to move to another jurisdiction to avoid land-value taxation.

A possible downside is that a large, luxury home could, in theory, be taxed less than a modest one if it’s built on a smaller lot.

Also, a city would have to decide whether to assess land at its current use or on its best possible use. And a scarcity of vacant land sales could make it difficult to determine fair market value.”

Well, it isn’t lot size so much as it is lot location, and if speculators left town, who would lose? That seems to me to be a situation to be devoutly hoped for!

Land should be assessed for its highest and best use. A single-story diner downtown on a 1/4 acre should have the same assessment as the midrise building next door on a 1/4 acre lot. And soon, the diner operator would find it to his benefit to be operating a coffee shop on the first floor of a midrise building on that site, which would then create office space or living space for lots of other people, on the same footprint.

The other 4 suggestions are far less desirable, and some downright undesirable!

“Georgist taxation would make it very expensive to keep old buildings in areas where land values had increased. The tax burden would require their rebuilding to whatever use carried the highest rent.”

I envision this somewhat differently … I think ongoing redevelopment of the central business district would occur, with sites progressing from being single family homes to multi-family homes, from single-story diners and dry-cleaners to low-rise multi-use to mid-rise m-u to high-ruse m-u. Each piece of land would gradually accommodate more people and more usage. And yes, the landlord would be able to collect more rents from more tenants. More human needs would be served, within an area already served by infrastructure such as city water, sewer, stormwater runoff, emergency services, transportation, etc.

The process of redevelopment will create jobs. But equally important, the redeveloped buildings will create opportunities for entrepreneurs to open businesses in the most productive places, the center of activity. Those business will be able to draw customers, employees and suppliers from a 360 degree radius. And this will lead to healthy competition which will tend to bring prices down and allow specialization.

In my home town, a city of 120,000 people, there is a 4.5 acre site not far from the “100% location” (the highest value site in the central business district) which has been a “hole in the ground” for the 31 years I’ve lived here! The owner’s address is in Manhattan. Meanwhile, Stamford’s residents must walk around it, drive around it, pay for its police protection, sewer maintenance, storm drainage (some years back, an out-of-control car went through the chain link fence, rolled over, and its driver drowned in a “puddle” on the property). In another direction from the 100% location, there are 2-story and 3-story mixed use buildings from the 1940s. And a few blocks away on the very edge of the CBD, a local developer and Donald Trump wanted to build a 37-story luxury condo on a 1/2-acre site; the tallest building in town, new when I arrived 31 years ago, is 22 stories. The downtown restaurant owners were thrilled. Many of the rest of us weren’t, though many suggested the building would be fine over at the more centrally located “hole in the ground.”

These underused properties are a drag on the community. Development sprawls up the main roads which used to have single family homes on them. But our incentives are such that the landlords can sit and wait.

You wrote,

“Currently if a business owns its own building, it is able to ignore the higher rent it could charge if it rented it out. And probably landlords can be lazy about evicting long time tenants or charging them higher rents reflective of the neighbourhood. But with the taxman charging higher land tax, the pressure to convert would be immediate and intolerable.”

Looking at the assessor’s database for my small city, it appears that few businesses here own their own sites. I recall some former neighbors who owned a furniture store and the building it was in. They worked hard. At some point it occurred to them that they could make as much renting the building out to someone else as they were making in the furniture business. They built a house on the South Carolina coast. They still own the commercial property here. (Interestingly, I think their children re-opened a furniture store in part of the building. And the local assessor bases his assessments for commercial property on the income approach, so if they don’t report a large income, they don’t pay as much property tax.

Relatedly, it seems to me that there are two kinds of businesses in most towns. There are the businesses that own their own properties, and the businesses that are tenants to someone else. Oh, and of course that means that there are “businesses” that are predominately landlords. The “third generation” business probably owns its own site, and so has little in the way of locational cost. It is hard for a new business to compete with him, since the new business has to pay a landlord or a mortgage lender.

Think about the doctors, lawyers, accountants, and dentists you know. How many of them own the site on which they conduct their business? And what is the financial situation, on average, of those who do own versus those who don’t? I’m guessing that those who own their business sites probably live far better than those who rent from someone else. Are they better doctors, lawyers, accountants or dentists? Probably not. But their businesses’ cost structure is different because they are their own landlords.

Think about the landlords you know. How do they live? Pretty well. The deck is generally stacked in their favor. As a town or city grows, they are the winners. Their tenants have to pay them more and more for the right to occupy the same space. The landlord hasn’t made any further improvements, but still they must pay him more. Did he “earn” that? The legal fiction is that he did. The truth is that it is an unearned increment, and rightly should be treated as our common treasure. Is he entitled to keep more of the rent when he improves his building? Absolutely. And we all benefit when he improves his building — jobs, places to shop, services, etc. We shouldn’t discourage that.

IF we can remove the perverse incentives that discourage improvements (via taxes on buildings), and add positive incentives to improve well-located properties (via increasing the tax rate on land value), we should be on our way to healthier cities and towns. Will landlording be less profitable? Yes. Will being a buildinglord be less profitable? No, not if he builds the kinds of facilities the market wants. But that’s work and that’s capital being invested.

How do we fix it so that only those who truly do want acreage need to go to the fringe? Find a way to bring down the PRICE of land. (Notice, I didn’t say value of land, just price. If land was lower priced, more of us could afford housing in the places we’d prefer to live.

How do we do that? Well, remember that when interest rates rise, the same monthly mortgage payment (principal and interest) gives the buyer less buying power in terms of what he can pay a seller, which brings down the prices of property (unless there are a lot of buyers who don’t need to borrow in order to buy). A, say, $500 monthly payment on a 30 year mortgage at 6% lets you borrow $166,700; if rates rise to 7%, the same buyer can only borrow $150,300, which will cause offering prices to drop by some amount (assuming that lending rules prevail and the buyer isn’t forced into using higher and higher percentages of his income to service debt in order to buy a house).

Similarly, if the tax on land value increased from, say, 1% of land value to, say, 2% of land value, the value of the land would not be reduced at all, but the selling price would come down. The sellers would leave town with a smaller nest egg. (They didn’t contribute any more or any less to the increase in the value of that land than did the tenant next door!) The buyers would borrow less from the mortgage lender (aw, poor FIRE sector — finance, insurance and real estate), and their monthly or quarterly or annual payment of land value tax, while higher than the 1% they’d have paid before, would now replace taxes currently leveled on their purchases, their wages, their interest, even their houses. The guy who had improved his property wouldn’t pay any more than the one who kept a similar lot next door vacant. So the fabulously located properties, close to the center of activity, would get developed and redeveloped, and in the process, single-family neighborhoods downtown might give way to multi-family neighborhoods, housing many more people close to their work, close to established schools, on sites already served by sanitary and storm sewers, streets, police, fire and ambulances, near hospitals, served by public transportation.

Not everyone wants that. But many who prefer it can’t afford it under our current system.

And the result would be shorter commutes, more use of public transportation, denser cities, smaller metropolitan areas, wilderness that remains wild, agricultural land that remains agricultural land.

Another result, for more complicated reasons, would be higher wages and more jobs.

The bad news? Only that real estate owners and REIT investors, who are generally quite wealthy and (some) known for their philanthropy, might not have pockets that are quite as deep. But since we’d have less need for charity to offset the poverty the current system is creating, we might be able to do just fine without their largesse.