Equity and Efficiency Considerations in Use Value Taxation

Use value taxation is used in almost every state in the country to provide property tax relief to owners of farmland, forestland, and, in many cases, land available for recreational use. Created in the last half of the 20th century as a mechanism to protect land on the urban fringe from conversion to sprawling suburban development, use value taxation has had reasonable success in its stated intentions. However, this tax break also has potential equity and efficiency effects. Our study explores several of these equity and efficiency concerns in two states, Massachusetts and New Hampshire. We tested first for whether there is an inter-municipal equity issue involving wealthier communities taking greater advantage of use value taxation than poor communities. We did not find this to be true in either state. We then tested for an internal equity issue involving the shifting of tax burden from taxpayers who have their land classified in use value taxation to other taxpayers in the community via higher property tax rates. We were able to demonstrate this effect in New Hampshire, but not in Massachusetts. Finally, as an efficiency concern, we tested whether the amount of land in use value taxation had a measurable negative impact on housing production. We did not find that the amount of land receiving this tax break had an effect on housing production in either state.

Overall, use value taxation seems to reduce development pressure in some fringe communities. In Massachusetts, this does not appear to impose either an equity or efficiency burden. However, in New Hampshire, where use value taxation is much more prevalent and where the property tax is a more important source of municipal revenue, the reduction in development pressure comes at the cost of higher tax rates on the rest of the community. The increased tax burden may or may not be justified by the apparent salutary effect of use value taxation on urban sprawl.