Carlos Morales-Schechinger ingresó al IHS, el Instituto de Estudios sobre la Vivienda y el Desarrollo Urbano de la Universidad Erasmus en Rotterdam, Holanda, en el año 2008. Dicho instituto internacional atrae estudiantes de todo el mundo, en su mayoría de los países en vías de desarrollo. Algunos programas del IHS están organizados conjuntamente con el Instituto Lincoln.

Anteriormente, Morales se desempeñó como profesor a tiempo parcial en la Universidad Nacional Autónoma de México (UNAM). En los últimos 12 años, ha colaborado en forma regular en seminarios y cursos organizados por el Instituto Lincoln en toda América Latina. Su labor docente se centra principalmente en temas tales como instrumentos de recuperación de plusvalías del suelo, tributación sobre suelo e inmuebles, y políticas preventivas basadas en el suelo como alternativas a los asentamientos informales.

Morales ha ocupado diferentes puestos gubernamentales: se desempeñó como Director de Políticas e Instrumentos de Suelo en la Secretaría de Desarrollo Urbano de México, donde diseñó e implementó un ambicioso programa de reservas territoriales, y como director de política catastral del gobierno de la Ciudad de México, donde manejó una extensa reforma fiscal de los impuestos sobre la propiedad. También ocupó puestos en bancos públicos y privados en México, donde se ocupó de valuaciones inmobiliarias, hipotecas, administración de propiedades y préstamos para grandes desarrollos urbanos y para gobiernos municipales.

Morales obtuvo el título de grado en Arquitectura por la UNAM, un diploma en Financiamiento de Gobiernos Locales por la Universidad de Birmingham, Reino Unido, y una maestría en Estudios Urbanos por la Universidad de Edimburgo, Reino Unido.

Land Lines: ¿Cómo se involucró usted con el Instituto Lincoln?

Carlos Morales: Mi primer contacto fue a principios de la década de 1980, cuando asistí a una conferencia internacional patrocinada por el Instituto que tuvo lugar en Cambridge y que estaba relacionada con mi trabajo para el gobierno sobre políticas de suelo urbano. Las ideas que aprendí allí pude ponerlas directamente en práctica dos años más tarde cuando trabajaba en una reforma para aumentar la oferta de suelos con servicios en ciudades de tamaño mediano y logré subsidio cruzado para lotes con servicios para las familias de bajos recursos en México. A principios de la década de 1990, al estar trabajando para el gobierno de la Ciudad de México en una ambiciosa reforma del impuesto sobre la propiedad, asistí a otra conferencia del Instituto sobre tributación sobre la propiedad.

A partir del año 2000, participé en varias actividades educativas organizadas por Martim Smolka a través del Programa para América Latina y el Caribe. Alrededor del año 2004, el Instituto creó una iniciativa conjunta con el IHS y me contrató como uno de los conferencistas invitados por el Instituto para dictar clases en estos programas. Más adelante, me invitaron a ser parte del IHS a tiempo completo para manejar esta iniciativa conjunta.

Land Lines: ¿Cómo compara usted la efectividad de instituciones como el IHS y el Instituto Lincoln?

Carlos Morales: Creo que son complementarios. El Instituto Lincoln es líder en investigación y educación sobre políticas de suelo, con un enfoque internacional en América Latina y China. El IHS es reconocido por su tarea educativa y de formación de capacidades en temas de gestión y desarrollo urbano para una audiencia mundial, particularmente los países en vías de desarrollo y en transición. Los cursos del IHS se encuentran abiertos a estudiantes de todas las regiones, aunque la mayoría proviene de países de África, Asia, Europa Central y Europa Oriental. Mediante la iniciativa conjunta con el IHS, el Instituto Lincoln tiene la posibilidad de alcanzar a estudiantes de muchos más países de manera eficiente.

Land Lines: La tarea de transmitir conocimientos fundamentales sobre políticas de suelo y gestión urbana a profesionales no es fácil. En su opinión, ¿cuál es el enfoque más efectivo para lograrlo?

Carlos Morales: Es importante la combinación de dos factores: el perfil del profesor y una pedagogía adecuada. Los profesores deben tener experiencia tanto en lo práctico como en lo académico, para poder así responder las preguntas que resultan relevantes para los técnicos profesionales, especialmente cuando las respuestas impliquen alejarlos de su zona de confort y enfrentar algún tipo de desafío.

El objetivo último de las ciencias sociales es precisamente el de cambiar la realidad, no sólo entenderla. La consultoría acerca a los académicos a la práctica, pero no los confronta con el compromiso moral de implementar una política o con la responsabilidad ética de hacer que la política funcione en la realidad. La experiencia en la práctica directa es fundamental. Los programas del Instituto en América Latina emplean profesores con este perfil, quienes han probado ser efectivos al tratar cuestiones tales como el impacto de la tributación y las regulaciones en los mercados inmobiliarios y al escoger instrumentos de recuperación de plusvalías del suelo, ambos temas candentes en la región.

En cuanto a la pedagogía, los técnicos profesionales tienden a ser escépticos acerca de la teoría, ya que la consideran poco práctica y desean probarla para convencerse. El uso de ejemplos de políticas implementadas en otras ciudades resulta muy útil. Algunos estudiantes de países en vías de desarrollo no aceptan casos de países más desarrollados, ya que sostienen que sus estructuras de gobernanza son demasiado diferentes. Otros estudiantes prefieren casos de situaciones diversas, ya que, a pesar de las diferencias contextuales, aspiran a lograr mejores oportunidades de desarrollo para sus propios países. Un profesor debe tener un arsenal de casos diferentes para examinarlos cuando surjan las preguntas.

Los juegos de simulación también resultan una técnica muy efectiva. Los juegos de roles en los que los participantes compiten entre sí son los más útiles para comprender los mercados inmobiliarios y ayudar a resolver problemas. Los juegos de roles son muy reveladores, aunque los participantes no logren resolver los problemas, puesto que los motiva a preguntarse qué ocurrió. He visto cómo los participantes que experimentaron el fracaso en un juego comienzan a cooperar y a diseñar reglamentaciones ingeniosas por su propia cuenta. Otra estrategia es la de asignar a los participantes un rol que sea contrario a sus creencias o experiencias. Por ejemplo, los funcionarios gubernamentales que representan el papel de desarrolladores piratas descubren las grandes cantidades de dinero que tienen que gastar los pobres sólo para tener acceso a los terrenos.

Jugar al abogado del diablo funciona bien cuando se debaten conceptos controvertidos, como si los participantes estuvieran en un tribunal de tierras. Esta no es una técnica nueva, a menos que se juegue con algunas variaciones. Un ejemplo sería determinar los criterios para la compensación por expropiaciones. En este juego, un equipo sostiene ideas a favor de los valores de uso actual, y otro equipo, los valores de uso futuro. Se brinda literatura de apoyo e información práctica para que cada equipo pueda elaborar sus argumentos. Los profesionales de diferentes países pueden referirse a ejemplos de expropiaciones normativas, ya sean las expropiaciones ocurridas en China, las restituciones de terrenos en Europa Oriental o la venta de derechos de construcción en Brasil.

Debido a que los participantes deben defender una postura con la que no están de acuerdo, les resulta necesario estudiar y trabajar con más ahínco. En muchos casos, terminan cambiando de opinión o, al menos, identificando nuevos argumentos para su uso posterior en los debates con sus oponentes en la vida real. Al finalizar el juego del tribunal de tierras, el grupo que actúa como jurado vota dos veces en secreto: primero sobre al desempeño del equipo cuyos miembros actuaban como defensores; segundo, sobre los argumentos conceptuales. Cuando un equipo recibe más votos que la posición que defendían, queda claro que se necesita investigar el tema con mayor profundidad. Lo que más me gusta es que el juego no impone una posición a los participantes, sino que eleva el nivel de debate.

Land Lines: ¿Cuáles son los principales tipos de resistencia que existen en torno a los conceptos e ideas relacionadas con las políticas de suelo?

Carlos Morales: El concepto que con mayor frecuencia suscita resistencia tal vez sea la forma en que los impuestos y las normas se capitalizan en el precio del suelo. La resistencia puede provenir de un punto de vista ideológico (tanto la izquierda como la derecha tienen sus argumentos), del interés personal (los propietarios no aceptan fácilmente sacrificar sus ganancias) o de la ignorancia acerca de la forma en que funciona el concepto de capitalización. Como educador, es mi función tratar el tema de este último desafío.

Aunque a los profesionales se les explique la teoría, permanecen escépticos si su experiencia contradice la teoría. El malentendido puede surgir del hecho de referirse a un impuesto sobre un bien de consumo que no es tan escaso como el suelo, aunque también puede derivarse de la experiencia que tengan con los mercados inmobiliarios en sí. Esto ocurre cuando se presentan de forma conjunta dos políticas con efectos opuestos, como por ejemplo el aumento de las densidades y el aumento de los impuestos. El efecto combinado de estas medidas dificulta la comprensión del impacto que tiene cada una de ellas. Un juego de simulación puede ayudar a aislar cada impacto. Los profesionales deben experimentar con cada medida para poder entender mejor ambas políticas. He notado que a veces asienten con escepticismo cuando uno dicta la teoría, pero que luego sonríen con cara de “eureka” cuando logran comprenderla después de participar en un juego.

Land Lines: ¿Cómo supera usted la resistencia hacia temas tales como la recuperación de plusvalías?

Carlos Morales: Toda tarifa relacionada con el aumento de las densidades es una forma de recuperar la plusvalía del suelo, así como también una fuente de financiamiento de infraestructura, tal como lo está llevando a cabo la ciudad de São Paulo al cobrar por derechos de construcción adicionales. El debate sobre la forma en que esta política tiene un impacto sobre los precios de mercado es controvertido. Los propietarios no están de acuerdo, ya que esta política reduce sus expectativas de precios; por otro lado, los desarrolladores están a favor, ya que esta política reduce los precios del suelo y los pagos que se realizan a la ciudad vuelven en forma de obras públicas. Una situación similar se dio en Bogotá, cuando se creó un impuesto sobre la plusvalía del suelo.

Ambos casos resultan referencias útiles cuando se quiere explicar la recuperación de plusvalías del suelo en los países en vías de desarrollo, aunque es necesario documentar y divulgar más casos de ciudades, y algunos profesionales quieren ejemplos de países desarrollados. Esto no es fácil, ya que la recuperación de plusvalías del suelo es un término de moda en los círculos de América Latina, no así en la mayoría de los países desarrollados. Y esto no quiere decir que el concepto de recuperación de plusvalías no se utilice en los Estados Unidos u otros lugares, sino que se asume como parte del funcionamiento del mercado inmobiliario. Por lo tanto, los profesores tienen la función de resaltar esta cuestión y dar lugar a la posibilidad de compartir experiencias entre los profesionales provenientes tanto de países desarrollados como en vías de desarrollo.

Land Lines: ¿Qué podría comentarnos acerca de las dificultades que existen al tratar de transmitir conceptos sobre tributación a los planificadores?

Carlos Morales: Los planificadores aprenden acerca de los impuestos sobre la propiedad si estos son lo suficientemente altos como para tener un impacto sobre las decisiones que toman los propietarios, los desarrolladores y los usuarios del suelo, tal como ocurre en los Estados Unidos. En los países en vías de desarrollo, estos impuestos son, por lo general, tan bajos que no tienen un impacto sobre las decisiones del mercado, por lo que los planificadores no se interesan en ellos. Cuando participamos en juegos que ilustran el funcionamiento de los mercados de suelo a los arquitectos (quienes, con frecuencia, también son planificadores) y estos se dan cuenta de que la ciudad no está yendo hacia donde ellos esperan, su reacción más frecuente es la de sugerir más impuestos y mercados inmobiliarios más eficientes. Casi nunca proponen un plan de uso del suelo tradicional.

Land Lines: En su opinión, ¿cuáles son los conceptos o ideas fundamentales que podrían marcar la diferencia en el debate internacional sobre los mercados inmobiliarios urbanos?

Carlos Morales: Resaltar el hecho de que la recuperación de plusvalías del suelo es una fuente importante de financiamiento de infraestructura y prevención de asentamientos informales puede generar la participación de más partes interesadas en un debate serio. Las ideas relacionadas con la seguridad de la tenencia, el registro de inmuebles y los títulos de propiedad a fin de aumentar el acceso a préstamos han estado dominando las políticas, aunque los resultados no han sido tan positivos como se esperaba. Los asentamientos informales siguen desarrollándose y la prestación de servicios continúa bastante atrasada.

Aquellas políticas que tienen que ver con la tributación del suelo y las obligaciones —no solamente con los derechos de propiedad— tienen mayores posibilidades de mejorar el funcionamiento de los mercados inmobiliarios urbanos. UN-Habitat y el Banco Mundial adoptaron las primeras nociones de seguridad de la tenencia como una solución, pero ahora están comenzando a mostrar interés en los instrumentos de desarrollo urbano basados en el suelo. Las políticas de recuperación de plusvalías del suelo tendrán un efecto mañana, aunque su costo político se produce hoy, ya que entregar títulos de propiedad es barato y atractivo para los políticos de corto plazo. Este es el desafío que debemos enfrentar en el debate internacional con el fin de asegurar una reforma del mercado inmobiliario más efectiva y a largo plazo.

A major argument in support of land-value taxation is that it creates no incentives for altering behavior in order to avoid the tax. By contrast, a conventional property tax, levied on buildings, can deter landowners from erecting otherwise desirable structures on their land. For example, homeowners may decide against finishing a basement or adding a second bath because it would increase tax liability. Thus, a conventional property tax can lead to excessively low capital-land ratios and “excess burden”—a cost to taxpayers over and above the actual monetary payments they make to the tax authorities. This article reports on a recent study of excess burden resulting from an early British antecedent of the modern property tax—the 17th-century window tax.

The Case of the Window Tax

In 1696, King William III of England, in dire need of additional revenues, introduced a dwelling unit tax determined by the number of windows in an abode. The tax was designed as a property tax, as described by this discussion in the House of Commons in 1850: “The window tax, when first laid on, was not intended as a window tax, but as a property tax, as a house was considered a safe criterion of the value of a man’s property, and the windows were only assumed as the index of the value of houses” (HCD 9 April 1850).

In its initial form, the tax consisted of a flat rate of 2 shillings upon each house and an additional charge of 4 shillings on houses with between 10 and 20 windows, or 8 shillings on houses with more than 20 windows. The rate structure was amended over the life of the tax; in some cases, rates were raised dramatically. In response, owners of dwellings attempted to reduce their tax bills by boarding up windows or by constructing houses with very few of them. In some dwellings, entire floors were windowless, leading to very serious and adverse health effects. In one instance, lack of ventilation led to the death of 52 people in the surrounding town, as reported by a local physician who called on a house inhabited by poor families:

“In order to reduce the window tax, every window that even poverty could dispense with was built up, and all sources of ventilation were thus removed. The smell in the house was overpowering and offensive to an unbearable extent. There is no evidence that the fever was imported into this house, but it was propagated from it to other parts of town, and 52 of the inhabitants were killed.” (Guthrie 1867)

The people protested and filed numerous petitions to Parliament. But, despite its pernicious effects, the tax lasted more than 150 years before it was finally repealed in 1851.

The window tax represented a substantial sum for most families. In London, it ranged from about 30 percent of rents on “smaller houses on Baker Street” to as much as 40 to 50 percent on other streets, according to a House of Commons debate in 1850 (HCD 9 April 1850). The tax was particularly burdensome on poor families living in tenements, where assessors taxed the residents collectively. Thus, if a building contained 2 apartments, each with 6 windows, the building was taxed at a rate based on 12 windows. By contrast, on very large houses of the wealthy, the tax typically did not exceed 5 percent of the rental value.

The tax schedule underwent several significant changes before it was finally repealed. In 1784, Prime Minister William Pitt raised tax rates to compensate for lower taxes on tea. Then in 1797, Pitt’s Triple Assessment Act tripled the rates to help pay for the Napoleonic Wars. The day following this new act, citizens blocked up thousands of windows and wrote in chalk on the covered spaces, “Lighten our darkness we beseech thee, O Pitt!” (HCD 24 Feb. 1848).

England and Scotland were both subject to the window tax, but Ireland was exempted because of its impoverished state. One member of Parliament quipped, “In advocating the extension of the window tax to Ireland, the Honorable Gentleman seemed to forget that an English window and an Irish window were very different things. In England, the window was intended to let the light in; but in Ireland the use of a window was to let the smoke out” (HCD 5 May 1819).

The window tax, incidentally, was viewed as an improvement over its antecedent, the hearth tax. In 1662, Charles II (following the Restoration) imposed a tax of 2 shillings on every fire hearth and stove in England and Wales. The tax generated great resentment largely because of the intrusive character of the assessment process. The “chimney-men,” as the assessors and tax collectors were called, had to enter the house in order to count the number of hearths and stoves. The window tax, by contrast, did not require access to the interior of a dwelling; the “window peepers” could count the apertures from the outside and avoid invading the privacy of the home.

The window tax, however, created some administrative problems of its own—most notably the definition of a window for purposes of taxation. The law was vague, and it was often unclear what constituted a window for tax purposes. In 1848, for example, Professor Scholefield of Cambridge paid tax on a hole in the wall of his coal cellar (HCD 24 Feb. 1848). In the same year, Mr. Gregory Gragoe of Westminster paid tax for a trapdoor to his cellar (HCD 24 Feb. 1848). As late as 1850, taxpayers urged the Chancellor of the Exchequer to clarify the definition of a window.

Notches and Their Effects on Behavior

Throughout its history, the window tax consisted of a set of “notches.” A notch in a tax schedule exists if a small change in behavior—such as the addition of a window—leads to a large change in tax liability.

Notches are rare (Slemrod 2010) and not to be confused with kinks, which are far more common even today. A kink in a tax schedule exists if a small change in behavior leads to a large change in the marginal tax rate but just a small change in tax liability. The income tax in the United States, for example, has several kinks. Married couples with taxable income from $17,850 to $72,500 are in the 15 percent marginal tax bracket; couples with taxable income from $72,500 to $146,400 are in the 25 percent marginal tax bracket. If a couple with income of $72,500 were to earn an extra dollar, its marginal tax rate would jump to 25 percent, but its tax liability would increase by just $.25.

Microfilm records of local tax data in the U.K. from 1747 to 1830 allow for a more systematic examination of the impact of the window tax and notches. This article draws on a data set from 1747 to 1757, with information on 493 dwellings from Ludlow, a market town in Shropshire, near the border of Wales. Over this period, the window tax schedule included 3 notches. A homeowner in this period paid:

• no tax if the house had fewer than 10 windows;
• 6 pence per window if the house had 10 to 14 windows;
• 9 pence per window if the house had 15 to 19 windows;
• 1 shilling per window if the house had 20 or more windows.

Homeowners who purchased a 10th window thus paid a 6 pence tax on the 10th window as well as on each of their 9 other windows, which previously had been untaxed. Thus the total tax on the 10th window was 60 pence, which was equal to 5 shillings. If the window tax distorted decisions and thus led to excess burden, then one would expect to find many homes with 9, 14, or 19 windows but very few with 10, 15, or 20. A test of this argument is discussed below.

Through the first half of the 18th century, the administration of the tax had been troublesome, as homeowners frequently camouflaged or boarded up windows until the tax collector was gone, or took advantage of loopholes or ambiguities in the tax code. As a result, tax collections were much lower than expected. In 1747, however, Parliament revised the tax by raising rates and introducing measures to improve its administration. Most notably, it prohibited the practice of blocking up and subsequently reopening windows in order to evade assessment; violators had to pay a penalty of 20 shillings (1 pound) for every window they reopened without notifying the tax surveyor (Glantz 2008).

The 1747 act reduced tax evasion significantly, so the data for the following 10 years should provide reasonable estimates of the actual number of windows. If the window tax distorted behavior, one would expect to find spikes in the number of dwellings at the notches, with 9, 14, or 19 windows. And this is precisely what the data demonstrate. Figure 1 is a histogram showing the number of windows for homes in the sample. The pattern is clear; there are sharp increases in the number of homes with 9, 14, or 20 windows:

• 18.4 percent of the homes have 9 windows, 3.9 percent 8 windows, and 4.6 percent 10 windows.
• 16.6 percent have 14 windows, 6.0 percent 13 windows, and 1.8 percent 15 windows.
• 7.1 percent have 19 windows, 3.4 percent 18 windows, and 0.7 percent 20 windows.

Standard statistical tests reject the hypothesis that there are equal numbers of houses with 8, 9, or 10 windows; with 13, 14, or 15 windows; or with 18, 19, or 20 windows. It is manifestly clear that people responded to the window tax by locating at one of the notches so as to minimize their tax liability.

Data on a sample of 170 houses for the period 1761 to 1765 shed light on the response to Parliamentary revisions to the tax in 1761. In addition to rate increases, the 1761 revisions expanded coverage of the tax to include houses with 8 or 9 windows. Under the earlier rate structures, houses with fewer than 10 windows paid no window tax. For this second sample, figure 2 shows a large spike at 7 windows: 28.2 percent of the houses have 7 windows, but only 5.2 percent have 6 windows, and just 2.9 percent have 8 windows. Once again, it’s easy to reject the hypothesis that there were an equal number of houses with 6, 7, or 8 windows.

In summary, the evidence from our two samples makes it quite clear that there was a widespread tendency to alter behavior in order to reduce tax payments. People chose the number of windows not to satisfy their own preferences, but to avoid paying higher levels of taxes. The window tax, in short, generated a real “excess burden.”

How Large Was the Excess Burden from the Window Tax?

As discussed, the window tax was substantial and induced widespread tax-avoiding behavior. Based on some standard techniques of economic analysis, our simulation model generates an estimate of what people would have been willing to pay for their preferred number of windows. The model captures each consumer’s demand for windows with and without the tax, the taxes paid, and the loss of welfare from adjusting the number of windows in response to the tax.

In the sample from 1747 to 1757, the estimated welfare losses were very large for households at one of the notches. For them, the welfare loss (i.e., excess burden) is 62 percent of the taxes they paid. That is to say, for every dollar collected under our simulated version of the window tax, the tax imposed an additional burden or cost of 62 cents on these households. The excess burden, not surprisingly, is particularly large for households that chose 9 windows. One criterion economists use to evaluate a tax is excess burden relative to taxes paid. By this standard, a good tax is one that collects significant revenue buts leads to very small changes in decisions. Consumers who purchased 9 windows are thus the worst possible case. Those consumers paid no tax; so, for them, the entire burden of the tax is excess burden.

For our entire sample of 1,000 simulated households, the excess burden as a fraction of taxes paid is about 14 percent. Thus for each tax dollar raised by the window tax, our simulation suggests an additional cost of 14 cents to taxpayers as a result of their distorted choices.

Some Concluding Remarks

The window tax represents a very clear, transparent case of excess burden—a tax that placed heavy costs on taxpayers in addition to their tax liabilities resulting from tax-avoiding adjustments in behavior. But, as mentioned early on, modern property taxes also create an excess burden, although the consequences are less dramatic than in the case of the window tax.

In designing a tax system, it is important to consider this issue. The ideal, in principle, is a neutral tax that raises the desired revenues but doesn’t distort taxpayer behavior so as to create additional burdens. Such a tax is a pure land-value tax levied on the site value of the land—that is, its value with no improvements. Thus, the assessed value of the land (and hence the tax liability of the owner) is completely independent of any decisions made by the owner of the land parcel. Unlike the window tax, which provides a compelling example of the additional costs that arise when property tax liabilities depend on the behavior of the property owner, a land-value tax creates no incentives for tax-avoiding behavior.

About the Authors

Wallace E. Oates is Distinguished University Professor of Economics, Emeritus, University of Maryland, and University Fellow at Resources for the Future.

Robert M. Schwab is a professor of economics at the University of Maryland.

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The single greatest challenge to any type of land value taxation system is accurate valuation of land on a large scale. In urban areas where nearly all real estate sales data represent transfers of land with improvements, it is difficult to divide prices between land and building components. Although many jurisdictions require a separate listing of land and building values on their tax rolls, these allocations will not affect the final tax bill if the tax rate is the same on both.

Any special tax on land value alone would increase the need to assign more accurate land values to parcels that have been improved over many years. As a result, skepticism as to the feasibility of this process has proven a major stumbling block to serious consideration of two-rate property taxes and other forms of special land taxation. Many observers have concluded that the practical problems of land assessment prevent the realization of the many theoretical benefits it offers.

New advances in computerized approaches to property assessment have important implications for this debate. While land valuation presents special problems in the analysis of sales data for improved parcels, it also can benefit from location analysis and land value mapping techniques. Buildings can and will vary unpredictably in both type or value from lot to lot, but land values for adjoining or nearby parcels should have a more constant relationship to one another. More than 20 years ago, Oliver Oldman of Harvard Law School, considered the implications of this situation for an appeals process under a land value tax, recognizing that a successful challenge to one parcel’s valuation would have implications for many other assessments as well. He wrote, “The key to developing an accurate land-value assessment roll is the process of land-value mapping.” Now the technology is available to achieve this goal.

In a recent seminar at the Lincoln Institute, representatives of the Auditor’s Office in Lucas County, Ohio, which includes the city of Toledo, joined a group of economists, appraisers, lawyers and local officials to examine current methods of land valuation. Lucas County has one of the most sophisticated appraisal systems in the country, with almost 20 years of experience in using computerized methods of spatial data analysis for property taxation. The seminar provided a valuable opportunity to discuss the county’s innovative approaches to the integration of geographic information systems and computer-assisted land valuation to estimate the effect of location on real estate market value.

Traditional Methods of Land Valuation

There are several standard methods of deriving a value for unimproved land, all extremely problematic as the basis for jurisdiction-wide assessment.

Comparable Sales: The most straightforward method is an analysis of sales of comparable unimproved land, adjusting the prices to account for any differences in size, location, and features. Similarly, the capitalization of rental income for comparable vacant land can serve as a basis for estimating its sale price. However, these methods are difficult to apply in densely populated urban areas where sales or rentals of unimproved land are rare. The pool of sales data can be expanded if sales of improved land are followed soon after by demolition of the buildings. In that case, the unimproved land value can be estimated as the purchase price minus the costs of the demolition. Although such sales provide an important check for estimated values produced by other approaches, they do not exist in sufficient numbers over a varied enough geographic range to serve as the sole basis for assessment.

Income Analysis: The land residual method begins with an estimate of the income yielded by the developed property. The building value is then calculated, and from that the income attributable to the building is derived. Capitalizing the remaining income then provides a value for the land. However, even a cursory description of this method suggests the difficulties of its application. In particular, the existence of depreciation, or any deviation from highest and best use that would distort the income available to the unimproved land, can leave the independent value of the improvements extremely uncertain.

Cost Analysis: Similar problems confront a division of value according to the depreciated reproduction cost of the improvements. This method assumes that structures can be worth no more than their cost of construction, and assigns all remaining value in the improved parcel to the land itself. Physical, economic or functional depreciation greatly complicates the attempt to calculate building value, however, so this method requires fairly new construction whose price can be confidently estimated as a measure of value. The financial effect of various forms of obsolescence can only be measured accurately through examination of sales data, which will almost never be available for the building alone.

Cost of Development: A full-scale market appraisal of potential development alternatives provides another basis for estimating the sale price of unimproved land. This is the approach taken by developers considering new uses for land, land trusts seeking to acquire and preserve undeveloped open space, and taxpayers claiming deductions for charitable contributions of development rights. However, it is most suitable for valuing undeveloped land to be used for residential subdivisions. Even in these situations, it requires extensive study of the potential market for such properties, local restrictions on development, and the physical attributes of the land that would affect its building capacity, such as soil and drainage characteristics. This type of exhaustive individual appraisal is appropriate for purchasers or developers of individual parcels, but is not feasible for annual assessments for all parcels in a taxing jurisdiction.

Other valuation methods, such as derivation of typical ratios of site value to total improved property value, are even less useful in the case of densely developed urban property, where buildings of all sizes, ages and utility may be found in close proximity on fairly similar parcels of land.

New Approaches: CAMA and GIS

The greatest change in assessment practice over the past three decades has involved the use of computers and mathematical formulas to establish a relationship between property characteristics and sale prices, thereby permitting an estimate of the market value of other properties not subject to a recent sale. This approach is known as computer-assisted mass appraisal (CAMA). Site characteristics such as size and location are important elements of these mathematical models, raising the possibility of estimating the effect of location on parcel value.

At the same time, the development of computerized geographic information systems (GIS) has permitted assessors to develop location-based property records or cadastres, and to coordinate sales data with location. More sophisticated and less expensive GIS technology now offers the potential for full integration with CAMA for spatial analysis. Initial attempts to quantify location effects faced difficulties not only in defining and maintaining “economic neighborhoods” or zones, i.e., contiguous areas of relatively homogeneous land values, but also in understanding the dynamics of the interactive, elusive locational factor. Some efforts developed different mathematical models for each geographic region or “cluster” of properties with similar characteristics. However, these approaches could not capture the many complex, interrelated and significant micro-variations within any given neighborhood, and could not reduce the determination of location value to an objective process.

Lucas County pioneered a new approach to location value-the use of GIS tools to develop a response surface that represents the effect of location on land value. The response surface is a fitted three-dimensional surface that represents a percentage adjustment to land and/or land and improvements based on a parcel’s geocoded location. Included in the analysis are geographic coordinates and distances from important features, such as other recent sales, institutions, amenities or other “value influence centers.” This analysis results in a three-dimensional representation, with the height of the surface (z) at any specific x-y coordinate indicating the approximated location value of that parcel. This variable is then evaluated with others, such as land and building size, quality, condition and depreciation, to produce a total estimated value for the parcel.

In the Lucas County example, the response surface differs from a mathematical equation in that it is developed through a spatial analysis process available in GIS to estimate the effects of location on value and refine those estimates after comparing them with sales and appraisal data. This approach still relies on an element of appraisal and economic judgment in determining neighborhood boundaries for location effects, but it can be tested and refined by observing the effect of different neighborhood “breaklines” on the resulting three-dimensional value surface.

To be used successfully in mass appraisal, these sophisticated approaches must yield results that are reasonable, understandable and available to typical taxpayers. Lucas County has pioneered this aspect of the assessment process, as well. All real estate records, values and maps are available on a CD with GIS viewing software, priced at its production cost of $10, and online free at all public libraries in the county. Taxpayers can view property records or create customized maps showing the location of multiple parcels and the relationships among their taxable values.

Future Directions

Participants in the Lincoln Institute seminar found great promise in the Lucas County approach to location value, and identified many points for further development and investigation. All agreed that recent decades have seen a literal revolution in assessment practice, with great potential for increasing the feasibility of large-scale land valuation. Among the most important theoretical questions were the “functional form” of this spatial analysis, including the type of effect on value observed with changes in location and distance variables; the identification of omitted variables (those for which data is not available or which have been overlooked in the past); and the relationship between marginal value estimates and the total parcel value needed for assessment. Similarly, the effect of substandard buildings and less than “highest and best use” on values requires further exploration.

Development of these new approaches must be matched by educational efforts to explain their operation to taxpayers, local officials, and the lawyers and judges who will consider their consistency with legal standards for assessment practice. Through its innovative efforts in both of these areas, Lucas County has made an important contribution to the theory and practice of land valuation.

Jerome C. German is the chief assessor for Lucas County, Ohio. Dennis Robinson is vice president of programs and operations at the Lincoln Institute. Joan Youngman is senior fellow and director of the Institute’s Program on Taxation of Land and Buildings.

References

International Association of Assessing Officers. Property Appraisal and Assessment Administration (1990).

Oliver Oldman and Mary Miles Teachout. “Valuation and Appeals Under a Separate Tax on Land.” 15 Assessor’s Journal 43-57 (March 1980).

Richard D. Ward, James R. Weaver, and Jerome C. German. “Improving CAMA Models Using Geographic Information Systems/Response Surface Analysis Location Factors.” 6 Assessment Journal 30-38 (January/February 1999).

Lucas County website: www.co.lucas.oh.us