LAND VALUE TAX SHIFT ANALYSISBURLINGTON, VTMarch 4, 2004

Report by:Gary Flomenhoft, Research AssociateGund InstituteBurlington, VT

Analysis by:Bill BattCentral Research GroupAlbany, NY

“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

ECONOMIC BACKGROUND

Polanyi-Great Transformation“Fictitious commodities”Sold in markets for the first time

LAND: Commons or feudal to markets

LABOR:Humans sold on labor market

MONEY:means of exchange to commodityC-C C-M-C M-C-M* M-M* (95%)

FACTORS OF PRODUCTION:

LAND=R (natural resources)

LABOR=L

CAPITAL=K

Initially: Labor transforms land (raw materials) into capital

Then: Labor and capital applied to land makes more capital

CLASSICAL ECONOMICS ~1650-1890

RETURNS TO FACTORS:

LAND (R) = RENT

LABOR (L) = WAGES

CAPITAL (K) = INTEREST

CLASSICAL ECONOMICS

HISTORICAL FIGURES

CAPITAL (K) = Adam Smith

LABOR (L) = Karl Marx

LAND (R) = Henry George

CLASSICAL ECONOMICS

=

Land (Ingredients)

Labor (Chef )

Capital (Mixing bowl)

+

+ BreadCapital (oven)

CLASSICAL ECONOMICS

=

NEO-CLASSICAL ECONOMICS 1890-

No Ingredients, only labor and capital

P = f(L,K)= ALa . BKb (Cobb-Douglas multiplication)

Labor (Chef )

Capital (Mixing bowl)

xBread?Capital (oven)X

=

NEO-CLASSICAL ECONOMICSINFINITE SUBSTITUTABILITY:

2P = f(L,K)= 2ALa . 2BKb

More Chefs

or Bigger Mixing bowl

x

More Bread?

TAX ON BUILDINGS - production cost

S1

D

P

Q

p1

q1

CS

PS

S1

D

P

Q

p1

q1

CS

PS

tax

S2

p2

q2

tax

Deadweightloss

TAX ON BUILDINGS - production cost

TAX ON LAND - no production cost

D

P

Q

tax

S

P1

tax?

Q1

tax

“Buy land, they ain’t making any more.”

-Will Rogers

Q*

P*

LAND SPECULATION

Q: Why is speculation bad?

A:

Drives up price of land

Creates Sprawl

Produces nothing

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

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

LAND SPECULATION

Q: How does speculation create sprawl?

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

LAND SPECULATION

Q: What is the formula for return on speculation?

A: ROI = Annual return - holding cost

Return = annual land inflation + annual income

Holding cost = property tax(land + improvements) + bank interest on loan + maintenance

MAXIMIZE RETURN

Annual Return = annual land inflation + annual income

= 16.4% + ?

YEAR BURL MEDIAN HOME PRICE

% increase

Annual increase

1970 $21,500

2000 $127,600 493.5% 16.4%

MINIMIZE EXPENSES

Holding cost = property tax (land + improvements) + bank interest on loan + maintenance

= land tax + improvement tax + int + maint

(1.7% x land) + (1.7% x blds) + int (5%?) + maint.

Incentives:Minimize land assessmentMinimize building improvements = slumsLow interest rateMinimize maintenance=slums

2004

Return on speculation

What makes housing expensive?

70% homeowners are passive speculators: zero sum game

Land value

PAINE:

RECYCLE

LAND RENT?

RENT COSTS

“Whether it is the man or the earth I own, the bird or its food, it is essentially the same thing.

---Arthur Schopenhauer

RENT COSTS

VT FAMILY INCOME

FROM:

HOUSING&WAGES IN VERMONT

VT HOUSING COUNCIL

RENT COSTS - CLT

“Land is not the only monopoly, but it’s the mother of all monopolies.”

---Winston Churchill

Community Land Trust (CLT) creates perpetually affordable land by taking land off the market.

Created by Swann and Borsodi - Georgists

CLT

Land costs

According to Georgist theory taxing land at its full “Rental value” would reduce the price to zero.

This would create “leasehold” vs. “freehold ownership

Tax essentially becomes a lease payment for land.

Leashold Examples

Hong Kong - 99 yr leases

Canberra, Australia - municipal leasehold (backtracking)

3 Ways to control land prices

1) Community land trust

2) Municipal leasehold

3) Tax land at rental value

What makes land valuable? Publicly created

Populationdemandnatural features public improvementspublic services: fire, police, schools, wasteprivate investment in the areabusiness activitylimited supplyzoninggrowth restrictions (Santa Cruz)growth boundaries

Not due to private effort

What makes land valuable? Publicly created

“Takings”- private compensation when government action reduces property value

“Givings” - public compensation when government action increases property value

“Value Recapture” of public investments

Wright Act 1889: Tulare, CA Irrigation DistrictFinanced by tax on land value. Trees, vines, structures, etc. on the land were exempt

CA Central Valley Irrigation Districts

San Juacquin Valley Agriculture

80% produce in US

“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.

What makes buildings valuable-Privately created

Work

Investment

Materials

Architecture

Etc.

Value created through private effort

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”

NW Green Tax shift includes LVT

SOURCES

SITES

SINKS

WORK

INCOME

SALES

SUMMARY OF INCENTIVES

HISTORICAL BACKGROUND

CLASSICAL ECONOMISTS ON LAND

PhysiocratsQuesnay; agricultural basis of economy: L’impot unique = land tax

David Ricardo-Law of Rent=Difference in production (return) over the worst land=RentUnearned increment=unearned profit from land inflation

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.”

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.”21 years of dividends

2002 $1,540.762001 $1,850.282000 $1,963.861999 $1,769.841998 $1,540.881997 $1,296.541996 $1,130.681995 $990.301994 $983.901993 $949.461992 $915.841991 $931.341990 $952.631989 $873.161988 $826.931987 $708.191986 $556.261985 $404.001984 $331.291983 $386.151982 $1,000.00

Alaska Oil Dividend

RENT DIVIDENDS-BASIC INCOME

21 years of dividends2002 $1,540.762001 $1,850.282000 $1,963.861999 $1,769.841998 $1,540.881997 $1,296.541996 $1,130.681995 $990.301994 $983.901993 $949.461992 $915.841991 $931.341990 $952.631989 $873.161988 $826.931987 $708.191986 $556.261985 $404.001984 $331.291983 $386.151982 $1,000.00

Alaska Oil Dividend

HISTORY OF LAND VALUE TAX

Henry George: Progress and Poverty 1879.

“To abolish all taxation save that upon land values”

“The taking by the community, for the use of the community, of that value which is the creation of the community.”

“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.”

The “single tax”. Forerunner to modern day Green tax shift: “tax bads, not goods.”

Basis of modern assessments.

HISTORY OF LAND VALUE TAX

NY Mayoral election of 1886:Abraham Hewitt (D)-stolen by Tammany hallTheodore Roosevelt (R)-3rdHenry George (Labor)-won

Attacks from left and right:

“Capitalists last ditch.” ---Karl Marx

“If George wins landowners should go out on their vacant land and hang themselves.” --- “Boss” Croker

NY Mayoral election of 1897: George died 4 days before.

SINGLE TAX ADVOCATES

TOLSTOYSUN YAT SENHELEN KELLERALBERT EINSTEINCHANG KAI SHEKTEDDY ROOSEVELTMARK TWAIN

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

HISTORICAL APPLICATIONS

Denmark: 1790’s, 1950’s, 1960’s

California: 1890’s irrigation districts

Australia: 1930’s-present, Sydney, Canberra-leashold

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

MODERN APPLICATIONS

Australia, New Zealand

Pennsylvania, date adoptedAliquippa Schools '93Aliquippa '88Clairton '89Coatesville '91Connellsville '92DuBois '91Duquesne '85Harrisburg '75Lock Haven '91McKeesport '80New Castle '82Oil City '89Pittsburgh '13+Scranton '13+Titusville '90Washington '85

MODERN APPLICATIONS

City Ratio

PittsburghScrantonHarrisburgMcKeesportNew CastleWashingtonDuquesneAliquippaClairtonOil CityTitusville

5.61 to 13.90 to 14.00 to 14.00 to 11.75 to 14.35 to 15.61 to 116.20 to 14.76 to 11.23 to 18.68 to 1

MODERN APPLICATIONS

Philadelphia

City Controller-Saidel

Tax Reform Commission

Board of Realtors

10,000 Friends of Pennsylvania

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.

Vermont Property Land Tax-shift Study

Application to Burlington

1) Revenue neutral

2) 50% or 100% shift to land value tax statewide

3) Total revenue divided by total land assessment =land value tax rate

Vermont Property Tax-shift Study Criteria

1) Single rate statewide & city by city

2) No separation of school district from municipal tax district

3) No adjustment for common level appraisal

Vermont Property Tax-shift Study Limitations

Burlington Current System yr-2000 by GPC

Current combined TaxYield is 100% from total assessmentLand Yield from total assessment =33.18%Current Single Rate = $24.65 per $1000

Gross Property # Building Land Total

bld/ land Total % total

class Parcels Value Value Value Ratio revenue Yield

Agricultural 5 $114.9M $419.5K $408.0K 0.27 $10K 0.00%Commercial/ Industrial 1,130 $377.4M $153.4M $519.7M 2.46 $12.8M 32.6%

Residential 8,925 $699.2M $375.0M $1073.5M 1.86 $26.4M 67.40%

Total 10,060 $1,076.7M $528.8M $1,593.6M 2.04 $39.3M

Burlington 100% of tax from land

Example of Tax on 100% LandIncreasing the yield from land to 100%Reducing the yield from improvements to 0%Land Rate =$74.27per $1,000Improvement Rate = $0.00 per $1,000

Total Diff w/ % Diff w/ Ave diff % Total

100% land 100% land 100%L per parc Yield

Agricultural $31.1K $21.1K 210% $4,220 0.1%Commercial/ Industrial $11.4M -$1.4M -11% -$1,252 29.00%

Residential $27.9M $1.4M 5% $156 70.90%

Total $39.3M

2000 BLD LAND TOTAL RATIO

State $12.2B $5.4B $17.8B 2.26%

68.8% 30.4% 100%

Burlington $1.1B $.53B 1.59$B(8.9% of state)

2.04%

67.6% 33.2% 100%-13.5%/yr

5 YR SHIFT-1 54.1% 45.9% 100%

2 40.6% 54.4% 100%

3 27.1% 72.9% 100%

4 13.6% 86.1% 100%

5 0% 100% 100%

ASSESSMENTS-2000

GrossPropertyClassNumber_of_Parcels

AvgParcelDiffFromCurrent

Agricultural 1319 $8,916

Commercial/Industrial 3082 $8,283

Not Available 5 $6,528

Residential 68916 $3,144

Total 73322 $3,464

Statewide WINNERS and LOSERS BY GPC

LOSERS

WINNERS

GrossPropertyClassNumber_of_Parcels

AvgParcelDiffFromCurrent

Agricultural 324 -$6,714

Commercial/Industrial 5794 -$10,927

Not Available 5610 -$6

Residential 87837 -$2,198

Total 99565 -$2,597

Burlington WINNERS and LOSERS BY GPC

GrossPropertyClassNumber_of_Parcels

AvgParcelDiffFromCurrent

Agricultural 4 $11,443

Commercial/Industrial 605 $11,088

Residential 6,437 $2,617

Total 7,046 $3,350

LOSERS

WINNERSGrossPropertyClass

Number_of_Parcels

AvgParcelDiffFromCurrent

Agricultural 1 -$1,256

Commercial/Industrial 525 -$14,080

Residential 2488 -$3,820

Total 3014 -$5,606

Burlington BIGGEST LOSERS

Acres Prp Cl Owner Name Street Name $ Diff

6.21 CL MCAULEY SQUARE HOUSE 123 ST PAUL STREET $534,736

16.72 RL FLYNN EST J J TRUSTEE ATTN PRISCILLA S $324,133

2.16 C DONOHOE O'BRIEN BOX 119 $237,471

4.89 C LAKE CHAMPLAIN KING STREET $200,695

2.06 CL PAM-RADISSON 60 BATTERY STREET $198,870

1.21 CL DONOHOE O'BRIEN BOX 119 $152,246

3.3 CL UNIVERSITY OF VERMONT C/O LAND $147,935

1 CL CODY CHEVROLET INC ET L C T $126,370

1.79 C HOWARD BANK N A 111 MAIN STREET $110,327

0.31 CL CHITTENDEN COUNTY OF L C T $95,316

0.85 C CHITTENDEN TRUST CO P O BOX 820 $90,503

Acres Prp Cls Owner Name Street name $ Diff

0 C RAD-BURL L L C PAM-RADISSON -$268,344.00

0 C STARR FARM C/O VENCOR INC -$241,677.00

25.93 CA NORTHGATE HOUSING P O BOX 3094 -$225,725.00

0.25 C BURLINGTON SEVEN P O BOX 119 -$206,911.00

0.91 C VERMONT SUBACURE LLC P O BOX 1103 -$194,112.00

0 CC PECOR, RAYMOND C JR KING STREET -$189,769.00

1.77 C THE MAY DEPARTMENT 611 OLIVE STREET -$156,388.00

0 C FIRST HEALTHCARE CORP 3300 AEGON CENTER -$145,538.00

0 C DONOHOE O'BRIEN BOX 119 -$140,337.00

0 C BURLINGTON SQUARE CURTIS CENTER -$130,232.00

Burlington BIGGEST WINNERS

Prop Property Bldg/

Cls Class # Building Land Total Land Total Total Diff w/ % Diff w/

Code Name Parcels Value Value Value Ratio Current 100% Land 100% Land 100%L

C Commercial 368 $184,002,513 $81,786,800 $264,356,721 2.25 $6,515,422 $6,074,324 -$441,099 -7%

CA Commercial Apartments 350 $101,175,845 $28,664,900 $129,709,145 3.53 $3,196,854 $2,128,948 -$1,067,906 -33%

CC Commercial Condo 83 $30,107,301 $804,500 $30,858,401 37.42 $760,546 $59,750 -$700,796 -92%

CL Commercial Land 57 $5,029,400 $15,577,000 $11,573,000 0.32 $285,232 $1,156,907 $871,675 306%

CR Commercial 212 $30,013,355 $17,267,200 $47,280,555 1.74 $1,165,292 $1,282,439 $117,147 10%

CRC Commercial 1 $40,600 $119,800 $160,400 0.34 $3,953 $8,898 $4,944 125%

E Education 11 $2,592,000 $504,600 $3,096,600 5.14 $76,320 $37,477 -$38,843 -51%

EU Education - Utility 1 $26,500 $43,600 $70,100 0.61 $1,728 $3,238 $1,510 87%

F Farm 2 $78,900 $237,700 $262,200 0.33 $6,462 $17,654 $11,192 173%

FL Farm Land 3 $36,000 $181,800 $145,800 0.2 $3,593 $13,502 $9,909 276%

I Industrial 14 $16,645,107 $4,429,900 $21,075,007 3.76 $519,422 $329,010 -$190,412 -37%

IL Industrial Land 4 $300,800 $1,300,500 $1,289,700 0.23 $31,786 $96,588 $64,802 204%

MH Mobile Home 124 $2,493,000 $26,200 $2,519,200 95.15 $62,089 $1,946 -$60,143 -97%

ML Mobile Home on Land 6 $146,200 $116,700 $262,900 1.25 $6,480 $8,667 $2,188 34%

R1 Residential < 6 Acres 5,098 $372,403,300 $283,223,300 $655,493,000 1.31 $16,155,495 $21,035,057 $4,879,561 30%

R2 Residential >= 6 Acres 1,114 $77,587,300 $50,129,300 $127,716,600 1.55 $3,147,745 $3,723,114 $575,369 18%

R3 Residential 344 $29,072,700 $15,466,100 $44,538,800 1.88 $1,097,718 $1,148,671 $50,953 5%

R4 Residential 239 $22,914,800 $10,950,800 $33,865,600 2.09 $834,663 $813,318 -$21,344 -3%

RC Residential Condo 1,757 $191,790,100 $931,100 $192,721,200 205.98 $4,749,870 $69,153 -$4,680,717 -99%

RL Residential Land 199 $853,800 $12,887,100 $13,191,900 0.07 $325,132 $957,128 $631,996 194%

TE Education 29 $7,503,602 $2,905,600 $10,210,602 2.58 $251,654 $215,800 -$35,854 -14%

V1 Vacation 1 44 $1,938,400 $1,282,500 $3,220,900 1.51 $79,383 $95,252 $15,868 20%

Municipal Totals 10,060 $1,076,751,523 $528,837,000 $1,593,618,331 2.04 $39,276,840 $39,276,840 0 $0

Burlington RESULTS BY PROPERTY CLASS

LESSONS FROM THE PAST

Get zoning/set-asides in place to protect environmental/agricultural assets

Get assessments right

Don’t implement at same time as reassessment (Amsterdam, NY, Pittsburgh, PA)

Implement gradually ie: over 5 years

Alaska dividend-irreversible