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Last October the Lincoln Institute sponsored the fourth annual symposium for recipients of David C. Lincoln Fellowships in Land Value Taxation (LVT). This fellowship program was established to provide funding for in-depth research by scholars and practitioners working on various aspects of the tax and to present a forum for continued learning and sharing among the fellows and Institute faculty.
The fellowship topics include theoretical or basic research as well as research on practical aspects of the administration and implementation of LVT in the U.S. and around the world. This focus on practicality is appropriate since these fellowships are named for David C. Lincoln, the chairman of the Lincoln Foundation and founding chairman of the Lincoln Institute, who has continually challenged the Institute and the fellows to answer such questions as, how can we get LVT put in place and how can we demonstrate the impact?
This year’s symposium presentations reflect the diversity of the work supported by the program. Richard England reported on his efforts to measure the feasibility of getting a two-rate tax adopted in New Hampshire (see page 8 of this newsletter). He developed a model to estimate the number of taxpayers who would gain or lose with various forms of the two-rate tax. His research suggests that to gain support from taxpayers a new two-rate tax needs to be coupled with some kind of tax credit.
David Brunori conducted a national survey of state legislators who sit on finance or tax committees to determine their familiarity with land value or two-rate tax schemes. To his surprise most were familiar with the two-rate tax and believed that a movement to use it would stimulate economic development. Given that favorable view toward LVT, he was hard pressed to explain why so few policy initiatives have moved in this direction.
Other fellows focused on LVT experiences outside the U.S. Frances Plimmer and Greg McGill reported on their updating of the classic case study of property values in the town of Whitstable in the United Kingdom. Riel Franzsen and William McCluskey reported on their cataloging of all of the LVT efforts in 37 of the 54 member states of the British Commonwealth. Yu-Hung Hong described the existing tax structure on property in the People’s Republic of China and suggested alternative schemes for introducing an expanded LVT system as part of the taxation reform presently being considered there.
On a more empirical track, Suzi Kerr reported on efforts to measure the revenue requirements of growing and declining communities in New Zealand, and Courtney Haff reported on econometric efforts to estimate land value in New York City. All of these papers will be available on the Lincoln Institute’s website when they have been completed.
The list of fellows and their research topics for 2003–2004 is shown on pages 16-17 of this newsletter. Again, the diversity of topics reflects the Institute’s continued support for investigations into viable experiments with the LVT and examples of how to measure the impact. I look forward to the results of this work and the discussion at the next symposium.
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The content of the Institute’s work program has evolved significantly over the past two years, and its annual activities have increased by about half since 2004. Reflecting this evolution and growth, the Institute’s programs and staffing are also changing.
The former Department of Planning and Development has been replaced by two new departments. The Department of Planning and Urban Form, headed by Armando Carbonell, addresses planning and its relation to the form of the built environment with a focus on three themes: spatial externalities and multijurisdictional governance issues; the interplay of public and private interests in the use of land; and land policy, land conservation, and the environment. The Department of Economic and Community Development, headed by Rosalind Greenstein, connects planning to development and fiscal issues with a focus on four themes: the city, land, and the university; neighborhood planning and development; fiscal dimensions of planning; and urban economics and revitalization.
The Department of Valuation and Taxation, headed by Joan Youngman, continues its focus on land taxation, property taxation, and the valuation process within an expanded program. The main activities of the Department of International Studies continue to be its programs in Latin America and in China focusing on land and tax policy issues. Other international activities include work in Eastern Europe on administration of market value based property taxation, in South Africa on property taxation and land markets, and in Taiwan on infrastructure development and planning.
This year the Institute established a new position, Manager of Public Affairs, and Anthony Flint took up this work in late July. He will be responsible for disseminating information about the Institute’s products, findings, and activities, particularly with the media and through the Internet. He will develop the Institute’s Web site as an outreach tool, writing regular columns, making the site more interactive, and strengthening its capacity as a key Internet portal for those interested in land policy.
Anthony covered transportation, planning and development, architecture, and urban design as a reporter for the Boston Globe from 1989 to 2005. For the past year, he was Smart Growth Education Director at the Massachusetts Office of Commonwealth Development. While a visiting scholar at the Harvard Graduate School of Design (GSD), he wrote the book This Land: The Battle over Sprawl and the Future of America (Johns Hopkins University Press, 2006) on the forces influencing urban growth in the United States. Anthony became familiar with the Institute as a Loeb Fellow at the GSD in 2000 and has since contributed to the Institute’s annual journalists program and authored an Institute working paper on density. A graduate of Middlebury College and Columbia University’s Graduate School of Journalism, Anthony will continue to do research and writing.
The Institute also has been adapting its training programs to take advantage of the capabilities of the Internet. Several of the Institute’s basic courses have been made available for distance education and Internet-based instruction. These typically involve videotaped presentations that can be downloaded from the Internet or a CD. Examples include the introductory courses on conservation easements, mediation of land use disputes, and planning fundamentals. This shift has freed up resources for new classroom courses, such as one based on the book The Humane Metropolis, published this fall by University of Massachusetts Press in association with the Institute.
The Latin American Program has developed several Internet-based courses offered live with real-time instructor feedback on the students’ work. These courses on urban land policy and property taxation topics are presented in Spanish and Portuguese to participants in Latin America.
Finally, the Institute will soon launch a program of evaluations of land policy programs in the United States. One of the first of these will assess the performance of smart growth policies that have been applied to different degrees in many states. This work is part of a new Institute initiative to improve our knowledge of what works and why in land policy.
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Daniel McMillen has a joint appointment in the Department of Economics and the Institute of Government and Public Affairs at the University of Illinois. He is also a visiting fellow in the Department of Valuation and Taxation at the Lincoln Institute of Land Policy. Before moving to Urbana-Champaign, he was a member of the economics departments at the University of Illinois at Chicago, University of Oregon, Santa Clara University, and Tulane University. McMillen received his Ph.D. in economics from Northwestern University in 1987.
Since 2005, McMillen has worked on a number of Lincoln Institute projects, including two David C. Lincoln Fellowships with Rachel Weber, a member of the Urban Planning and Policy Department at the University of Illinois at Chicago. He has also collaborated with Richard F. Dye of the University of Illinois on a series of Lincoln-sponsored projects on land valuation and assessment limitation measures.
McMillen has been co-editor of Regional Science and Urban Economics since 2007. He also serves on the editorial boards of other leading journals in urban economics, real estate, and regional science, and as a consultant for the Federal Reserve Bank of Chicago. He directed the Center for Urban Real Estate at the University of Illinois at Chicago from 1999 to 2005, and has served on the board of the American Real Estate and Urban Economics Association.
Land Lines: How did you become associated with the Lincoln Institute of Land Policy?
Daniel McMillen: I first came to the Lincoln Institute in 1989 for a conference on “Growth Management and Land Use Controls.” It was an honor to be invited there as a relatively new assistant professor and to have the chance to meet many leading urban and public finance economists. I returned for another conference in 1996. I was impressed by the quality of the research being conducted by and for the Lincoln Institute on land use, land and property taxation, and the regulation of land markets. When I had a sabbatical in 2005–2006, the Lincoln Institute seemed like an ideal place to work. I spent much of that year in Cambridge, and have been involved regularly ever since.
Land Lines: What was the first project you conducted for the Lincoln Institute?
Daniel McMillen: I began working with Richard F. Dye on a study of teardowns and land values in the Chicago metropolitan area. A teardown is a property that is purchased solely to replace the existing structure with a new one. Teardowns have been remarkably controversial because they drastically alter the character of long-established neighborhoods. In 2006 the National Trust for Historic Preservation declared Chicago to be the “epicenter” of teardown activity, so the city offered an ideal setting for such a study.
We collected data on sales and demolition permits for homes in Chicago and several suburbs. An assessment file including the structural characteristics of each home allowed us to test a key prediction of theoretical models of demolitions—that is, when a home is purchased as a teardown, it is valued only for the land on which it rests. Our results supported this theory by showing that structural characteristics did not influence the sale prices of teardown properties.
This study has important practical implications because it suggests that teardowns can be used to estimate land values in areas where many homes are being demolished and replaced by new structures. One of the impediments to a land tax is the difficulty of estimating land values in built-up areas where there are few sales of vacant land. Teardowns may help make land taxation feasible in large urban areas that are undergoing redevelopment.
Land Lines: What other research topics have you investigated?
Dan McMillen: I have worked on a series of projects with Rachel Weber analyzing property assessments in Chicago. In a paper published in the National Tax Journal, titled Thin Markets and Property Tax Inequities: A Multinomial Logit Approach, we developed a new approach for determining whether property assessments are regressive in the sense that assessment ratios tend to be lower for higher-priced properties. We use a statistical (logit) model to estimate the probability that a property will have an assessment ratio in the upper or lower end of the distribution rather than in the middle. Although we do find evidence of regressivity, we also find that assessments tend to be much more accurate in neighborhoods with a large number of sales. Thin markets—areas with few sales—have a much higher probability of both unusually high and unusually low assessment ratios.
In subsequent work to be published in the Public Finance Review, titled Ask and Ye Shall Receive? Predicting the Successful Appeal of Property Tax Assessments, we develop an empirical model of the appeals process for property assessments. We find that thin markets have many more appeals and a higher proportion of successful appeals than areas with many sales. Taxpayers who appeal their assessments tend to live in moderate-income neighborhoods in newer, larger homes with assessments that increased significantly since the previous reassessment year. In contrast, successful applicants tend to live in smaller, older homes and in neighborhoods that have experienced relatively slower rates of property appreciation.
Land Lines: What conferences have you organized for the Lincoln Institute?
Daniel McMillen: For several years, I have helped organize the conference “Recent Advances in Urban Economics and Public Finance,” at which many of the leading researchers in urban economics and public finance present new work. The conference provides the opportunity for authors to summarize their papers and receive useful feedback from an enthusiastic, knowledgeable audience.
The conference includes both established and emerging scholars. It was very important to me to meet recognized scholars when I was an assistant professor at the University of Oregon, and I want to return the favor by using these conferences to help junior scholars meet more established researchers.
This year Daphne Kenyon, another Lincoln Institute visiting fellow, and I formalized this mentoring goal by introducing a junior scholars program that matched young assistant professors with the editors of key urban economics and public finance journals, including Regional Science and Urban Economics, Public Finance Review, the Journal of Regional Science, Real Estate Economics, and the National Tax Journal. After a session with the full panel of editors, each junior scholar met individually with one of the editors, who provided comments on a working paper the scholar had prepared. The junior scholars came from a variety of universities and organizations, including the University of Michigan, the University of Southern California, the University of Oklahoma, Georgia State University, the University of Georgia, Winthrop University, Washington University, and the Federal Reserve Board.
Land Lines: How has your association with the Lincoln Institute influenced your research?
Daniel McMillen: I have published many papers that deal directly with issues of land use, land and property taxation, and land policies. My association with the Lincoln Institute has encouraged me to think more about the policy implications of my research and to expand its potential audience beyond academic economists.
For example, I wrote a paper on the costs and benefits of teardowns for Land Lines (July 2006) as a direct result of a presentation for the Lincoln Lecture Series. A surprising number of people in the audience were convinced that teardowns should be heavily regulated because they could never generate any benefits. However, teardowns may also offer new tax revenues, an improved housing stock, and perhaps even reduced urban sprawl. Economists become so used to thinking in terms of costs and benefits that they tend to take it for granted that others use the same framework to analyze issues. Although I think a strong case can be made for regulating teardowns, this kind of experience helps me realize how vital an economist’s perspective can be in shaping policies that lead to good outcomes.
The Lincoln Institute has also encouraged me to think about the implications of my research for assessment practices. When I presented my work on teardowns in an Institute-sponsored session at the International Association of Assessing Officers (IAAO) conference in 2005, the participants were very interested in using teardowns to improve land assessments. They wanted to know what data would be required and what statistical procedures to use. This conference and subsequent contact with IAAO members provided inspiration and background for my work on assessment regressivity and assessment appeals.
My Lincoln Institute affiliation has also led to contacts with legislators and other policy makers. Richard Dye, David Merriman, and I produced a study for the Illinois Department of Revenue that analyzed the effects of Cook County’s cap on the growth rate of residential property assessments. This work motivated a 2007 conference on assessment limits held at the Institute where academics, local government officials, and state legislators heard presentations about the experience with assessment limits in Colorado, Idaho, Illinois, and Minnesota.
One lesson from the conference was that assessment limits have important distributional effects that transfer taxes from fast-growing areas to those with low rates of appreciation, or from residences to commercial or industrial properties. This conclusion surprised many people who thought that assessment limits simply lowered property taxes for everyone. To share this work with a broader audience, Richard Dye and I wrote a Land Lines article (July 2007), titled Surprise! An Unintended Consequence of Assessment Limitations, in which we presented the algebra and explanations behind such policies.
Land Lines: What are your current projects for the Lincoln Institute?
Daniel McMillen: I am returning to my work on teardowns. I am working with Arthur O’Sullivan, professor of economics at Lewis & Clark College, to develop the implications of an options model of teardown investments. The basic implication is that the sales price of a property can be decomposed into the value of the land and the value of the structure, with the weights to each component depending on the probability that the structure will be demolished. Whereas land accounts for the entire value of a property when the structure will be demolished immediately, structural characteristics have more influence on the sales price when the owner is likely to live in the home for some time. We are now testing these implications using updated data on property sales in the Chicago area.
I am also extending my work on assessment practices by developing new statistical procedures to analyze the distribution of assessment ratios. My preliminary results suggest that the variance of assessment ratios is much higher at very low sales prices and that assessments tend to be more accurate for relatively high-priced properties. I am working to develop a set of computer programs that will make the analysis of assessment ratio distributions readily accessible to assessors and other practitioners.
We plan to continue our junior scholars program as a companion to the Urban Economics and Public Finance conference. These conferences play an important role in mentoring young scholars and in helping to introduce the Lincoln Institute to academic researchers, which my own experience shows can be a formative intellectual experience.
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In most countries, government property is not liable for property taxes; indeed, the whole idea may be seen as a circular shifting of money (Bird and Slack 2004; Youngman and Malme 1994). The United Kingdom has taken a very different perspective recently. Regarding it as important that both government and local government occupiers are aware of the true cost of holding property, the UK insists on a system of notional rents and ensures liability for local property taxes.
From the enactment of the Poor Relief Act in 1601, the generally accepted starting date for the taxing of local property in the UK, until 2000 when changes were enacted, property occupied by the government or Crown was not subject to property tax or “rates.” However, the Crown did accept that it was appropriate to make some contribution to meet the costs of local services and paid ex gratia contributions in lieu of rates (CILORs). This process suffered from a number of problems: the contributions were voluntary; Crown property did not appear in the valuation lists; and the basis upon which the contributions were made lacked the rigor and transparency of valuation that applied to all other property.
The Local Government and Rating Act was introduced in 1997 for England, Scotland, and Wales (with an amendment in 1998 for Northern Ireland) to effectively place all Crown property on the same footing as all other taxable property, liable to be assessed for rates. These provisions came into effect from April 1, 2000. As a result, such iconic buildings as the Palace of Westminster and the Tower of London are now being valued in the same way as all other property for the first time.
Valuing Commercial Property
Valuation officers of the Valuation Office Agency (VOA), a part of Her Majesty’s Revenue and Customs (HMRC), are responsible for compiling and maintaining commercial (nondomestic) property rating lists for England and Wales. The local assessors are responsible in Scotland, and the Land and Property Services have responsibility for Northern Ireland. Broadly speaking, the rateable value of a nondomestic property is based on the annual rent that it could have been let for on the open market at a standard date (the antecedent valuation date). For England and Wales, the antecedent date of the 2000 lists was April 1, 1998; for the 2005 lists it was April 1, 2003; and for the 2010 lists, which came into effect on April 1, 2010, it was April 1, 2008.
Table 1 shows the number of taxable properties in England and Wales and their total rateable (taxable) value. Comparisons with capital value-based property taxes are a little difficult because it is necessary to know the relevant yields to make the comparison, but even so it is clear the level of taxation is unusually high for a property tax. The tax level for England and Wales is approximately 45 percent, but this is on rental, not capital, values.
The UK government sets a separate uniform tax rate (poundage) for England known as the nondomestic rating multiplier. For Scotland and Wales, it is set by their respective assemblies, and for Northern Ireland each district council sets its own rate. This determines the sum payable on every pound sterling of rateable value to arrive at the full rates bill. Local authorities remain responsible for calculating the bills and collecting nondomestic rates payable on properties within the authority’s area. They do not, however, retain the rates they collect but pay them into a national pool (one each for England and Wales). The money in the pool is then redistributed to local authorities with special arrangements for the City of London.
Background on the Crown Exemption
Prior to the 2000 rating lists, certain properties occupied by the Crown, e.g., central government offices and Ministry of Defence establishments, were exempt from rating and did not appear in any rating list. The Crown did, however, make an ex gratia CILOR based on a notional rateable value.
The Crown was neither expressly mentioned in the Poor Relief Act of 1601, the original rating act sometimes referred to as The Statute of Elizabeth, nor in the General Rate Act 1967 that replaced it. As it was a principle of UK law that the Crown was not bound by an act of Parliament unless specifically mentioned, there was no liability for rates. Further, no rates could be imposed with respect to property occupied by its servants whose occupation amounted to occupation by the Crown. This position was upheld by Jones v. Mersey Docks 11 HL Cas. 443 (1865).
However, as far back as 1860, the government accepted the principle of the Crown paying something by way of ex gratia CILORs with respect to property occupied for public purposes. This practice was made uniform in 1874. The Treasury of the UK, by formal Minute, adopted the principle that property occupied for the public service should contribute to the local rates equally with the other property in the parishes in which it was situated, having regard to its character in each case. The Treasury Minute established the Rating of Government Property Department (RGPD) to undertake the assessment of all government property with the intention of adopting in each case as far as possible the same principles as were applicable to the valuation of private property. Nineteenth-century case law established that the exemption applied only to property occupied by the Crown itself or its servants, but not to other property occupied for public purposes. Generally, therefore, the exemption applied to property occupied for the purposes of the central government and the Royal palaces and parks, and to other property occupied by servants of the Crown (for example, occupation by government ministers or by military personnel of Royal Naval, army, and Royal Air Force bases).
In 1896, a further Treasury Minute reaffirmed the principle of equal contribution and made certain concessions in order to carry it fully into effect. The concessions included periodical revaluation, punctual payment, and a contribution with respect to the Houses of Parliament.
The following were the main characteristics of the CILOR in the last few years of its existence:
The CILOR arrangements differed from standard rating procedures in the following main respects:
Rationale for Removal of the Crown Exemption
The government debated the removal of the Crown exemption as far back as World War II. The Central Valuation Committee, in a letter of January 21, 1947, to the Minister of Health, while in effect suggesting such a removal also stated that it had long been its view that the then-arrangements for the rating of property occupied by the Crown were in many respects unfair and unsatisfactory to local authorities, who at the time set their own rate levels. In the 1950s, the English local authority associations expressed their dissatisfaction with the Crown exemption and went so far as to say that the manner of assessing CILORs was completely arbitrary and frequently worked to the detriment of local authorities. They estimated the rateable value of Crown property in England and Wales in 1952 to be around £14 million out of a total rateable value of about £341 million, which would equate to £2.2 billion based on levels of value at the 2010 revaluation.
In the mid-1990s the government considered several drivers for change:
The Local Government and Rating Act 1997 made provision to end the Crown exemption from nondomestic rates in England, Wales, and Scotland, effective April 1, 2000. Rating authorities would collect rates on Crown properties directly from the departments concerned, rather than from the CPU. These authorities also would be able to proceed with enforcement proceedings against the Crown, as they would with other ratepayers. Although this would happen in only the rarest of cases, rating authorities would in principle be able to take steps against a government department to obtain a liability order for unpaid rates if the need arose.
It has been suggested by the rating profession in the UK that, since rating is a tax, valuing and taxing properties occupied by public bodies is a waste of public resources. Properties that might fall in this category include those occupied by the Ministry of Defence, National Health Service, and local authorities. Superficially, valuing and taxing these properties may appear unjustified. The difficulty is that many activities traditionally carried out by central or local governments are now also performed in the private sector. Leisure centers are just one example. Exempting local authority properties from rates when they compete directly with the private sector could be argued to be unfair as it would give the public sector a fiscal advantage.
While the public sector occupies other buildings whose current use clearly does not compete with private business, it is difficult to justify exempting some publicly occupied properties and including others. The original justification for rating buildings occupied by public sector bodies (including the removal of Crown exemption in 2000) was to establish a level playing field, ensure that the costs of occupation were fully recognized, and make transparent the contribution of public sector bodies to the cost of providing local services.
The Valuation of Iconic Buildings
The removal of the Crown exemption precipitated the need to value a wide variety of unusual properties. Rating in the UK is an occupier’s not an owner’s tax and is based on broad actual use rather than highest and best use. Very old buildings often have to be valued, though many of them have been modernized and used for diverse purposes, such as offices, commercial mixed uses, or, at least in part, tourist attractions.
The traditional comparison valuation approach could be made with similarly used properties to enable determination of an indicative rental value for some structures, but for others the task was much more difficult. For example, Somerset House on the River Thames is a purpose-built office block, but it is the world’s first purpose-built government office block, dating back to 1776, and it has been used in commercial filmmaking, and so is difficult to compare to other buildings.
Valuing unusual properties is not confined to Crown properties or those for which the rental comparison method cannot be used because there are no relevant comparisons. In such cases, the use of the Receipts and Expenditure (R&E) or income method may be a more reliable guide to assessing the market rental value of a property. This method is appropriate if the property to be valued is commercial in nature or has a degree of monopoly, and an occupier would be motivated primarily by the prospect of profit in its use of the property and, indeed, makes a profit (Bond and Brown 2006).
If neither the comparison nor R&E methods can be used, then the Contractors Basis or cost method is applied where the property is provided primarily for public purposes and is not occupied for commercial profit, or where the property concerned is commercial but it is not a profit center with its own accounts. In both cases the occupier (or owner) would be prepared to incur the cost of a replacement property to carry on the use of the property.
In addition to the problem of valuation is the UK complexity of having a separate tax on domestic property. In England, Scotland, and Wales this is the Council Tax, but in Northern Ireland the system is one of Domestic Rates. If any part of a property is used for domestic purposes, as defined in the legislation, then that use is assessed for the domestic tax. Thus, Buckingham Palace and Windsor Castle, both royal palaces, have a rating assessment on the non-domestic, commercial element and a council tax on the domestic sections of the buildings.
Palace of Westminster
The Palace of Westminster, also known as the Houses of Parliament, is a royal palace and the meeting place of the two chambers of the Parliament of the United Kingdom—the House of Lords and the House of Commons. The Palace is the center of political life, and Westminster has become a metonym for the UK Parliament and the Westminster system of government for which it is named. The Elizabeth Tower, often referred to by the name of its main bell, Big Ben, is an iconic landmark of London. The Gothic Revival architecture by Sir Charles Barry dates from only 1840, but the remarkable Westminster Hall with its hammer beam roof dates from 1097.
The Palace of Westminster has been part of a World Heritage Site since 1987. The Palace had a rateable value of £14,700,000 in the local 2010 rating list (£5,500,000 in the 2000 rating list). If the standard tax rate of 45.8 percent is applied, then the tax liability ignoring any reliefs would be around £6,730,000 per year. The assessment actually combines four buildings: the Palace, Portcullis House, 1 Derby Gate, and the Norman Shaw buildings. All parts are valued on the comparative method with respect to offices, with allowances for layout and size if appropriate. In the case of the Palace the two chambers are valued at 65 percent of the main rate per square meter. There is a further end allowance to reflect the overall amount of floor space in the property.
Buckingham Palace
Buckingham Palace is the official London residence and principal workplace of HM Queen Elizabeth II, both with respect to her position as British monarch and head of state of many countries around the world, and as head of the Commonwealth. Located in the City of Westminster, the palace is a setting for state occasions and royal hospitality. Originally known as Buckingham House, the building that forms the core of today’s palace was a large townhouse built for the Duke of Buckingham in 1705. Buckingham Palace became the official royal palace of the British monarch on the accession of Queen Victoria in 1837.
Buckingham Palace is used in part as one of the monarch’s residences but consists mainly of offices. Recently limited commercial use has been introduced, as part of the building is open to visitors. The commercial portion has a rateable value of £1,300,000 in the local 2010 rating list. It is valued using two methods. First, the R&E or income method is used to reflect the commercial component (approximately 400,000 people visited during 2011). The property is open for 63 days per year with limited opening hours, so the relevant receipts are annualized, and 5 percent is added to reflect the fact that longer opening hours would generate more ticket sales. The trading accounts as published show that the rateable value equated to 6.3 percent of Fair Maintainable Receipts. Second, the Contractors or cost method is used for the Queen’s Gallery. The residential component of the palace has 775 rooms, including 52 Royal and guest bedrooms, 188 staff bedrooms, 19 state rooms, and 78 bathrooms. In 2011–2012 it had a council tax bill of £1,369.
Tower of London
Her Majesty’s Royal Palace and Fortress, commonly known as the Tower of London, is a historic castle on the north bank of the River Thames in central London. It dates to the Norman Conquest of England in 1066, and the White Tower, which gives the entire castle its name, was built by William the Conqueror in 1078. The Tower has served variously as an armory, a treasury, a prison, a menagerie, the home of the Royal Mint, and a public records office. Now it is home to the Crown Jewels and is one of the country’s most popular tourist attractions, having some 2.55 million visitors in 2011.
It is protected as a UNESCO World Heritage Site (and by some very high walls and elaborate alarm systems). It is valued by the R&E method, due to its particular value as a tourist attraction, and the rateable value equates to approximately 4.7 percent of fair maintainable receipts. For the local 2010 rating list the property had a rateable value of £1,790,000 (for the 2000 rating list the value was £1,180,000).
Stonehenge
Stonehenge is a prehistoric stone circle on Salisbury Plain comprising a megalithic rock monument of 150 enormous stones set in a circular pattern dating back to 3000 BC. While there are larger stone circles in the world, including one nearby at Avebury, Stonehenge is unique because the Sarsen stones are surmounted by lintels connecting to one another and once formed a complete, connected ring. Stonehenge was built over a period of 1,500 years. It is a World Heritage Site attracting some one million visitors per year. Given the commercial operation of the property, it has been valued using the R&E method at a rateable value of £700,000.
Summary
Crown-owned and occupied property is currently valued in accordance with normal valuation methods and principles. The removal of the Crown exemption has resulted in the “correct” valuation of unique and often iconic historic buildings. The valuation methods applied have to reflect the use of the buildings and, where rental evidence is limited, the cost-based approach may be required. This latter approach brings with it significant difficulties when applied to buildings that are several hundred years old. In such circumstances valuers have to be creative, artistic, and scientific in their valuations.
About the Authors
William McCluskey is a researcher in the Built Environment Research Institute, University of Ulster, Northern Ireland, UK.
David Tretton FRICS FIRRV is a visiting professor in the School of the Built Environment, University of Ulster, Northern Ireland, UK. He was formerly Head of Profession and Director of Rating at the Valuation Office Agency, London, and is currently the technical editor of the RICS Valuation–Professional Standards (Red Book).
The authors thank Patrick Bond, BSc FRICS Dip. Rating IRRV (Hons), head of Commercial, Leisure and Civics National Specialists Unit, Valuation Office Agency, London.
References
Bird, R. M., and E. Slack. 2004. International handbook of land and property taxation. Northampton, MA: Edward Elgar Publishing.
Bond, P., and P. Brown. 2006. Rating valuation: Principles and practice. London: Estates Gazette.
Citizens Charter White Paper. 1991. Citizens Charter Open Government, Cm 2290, HMSO, London.
Youngman, J. M., and J. H. Malme. 1994. An international survey of taxes on land and buildings. Boston, MA: Kluwer Law and Taxation Publishers.
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Strengthening Municipal Fiscal Health in China
Since 2013, Zhi Liu has been a senior research fellow and director of the China Program at the Lincoln Institute of Land Policy, and director of the Peking University–Lincoln Institute Center for Urban Development and Land Policy (PLC). Prior, Zhi was lead infrastructure specialist at the World Bank, where he worked for 18 years, with operational experiences in a number of developing countries.
Zhi received a B.S. in economic geography from Dr. Sun Yat-Sen University (China), a M.S. in city and regional planning from Nanjing University (China), and a Ph.D. in urban planning from Harvard University.
LAND LINES: The Lincoln Institute recently initiated a global research agenda on municipal fiscal health. This effort arises from the recognition that a number of cities in the United States and in many other countries including China suffer financial hardship. What is the nature of municipal fiscal distress in China?
ZHI LIU: It’s very different from the financial troubles faced by cities in the United States. The two countries are at very different stages of urbanization. While the U.S. is highly urbanized, with more than 80 percent of citizens living in urban areas, according to the 2010 census, China is only halfway through the urbanization process. Today, 750 million Chinese citizens live in cities, accounting for 55 percent of the total population. By 2050, the urban population is expected to reach 1.1 billion, or 75 percent of the total population. Over the last two decades, with the exception of a few mining cities, almost all municipalities have seen rapid population growth and spatial expansion, generating a significant demand for public investment in urban infrastructure.
In China, the main sources of funding for urban infrastructure investment are revenues from land concessions and local borrowing from commercial banks, often using land as collateral. Urban land is owned by the state, and rural land is collectively owned by villages. The Land Administration Law stipulates that only the state has the power to convert rural land into urban use. This sets the stage for the municipal governments to take rural land for urban development through the land concession process. As it goes, municipal governments expropriate rural land, service it with infrastructure, and sell the land use rights to real estate developers. The compensation to farmers for the farmland taken is low, based on the land’s agricultural production value instead of market value for urban use. When the demand for real estate development is high, the land concession fees are bid high, and the municipal governments stand to collect a huge amount of revenues. For the last 10 years, revenues from land concessions have accounted for more than one-third of total local fiscal revenues.
Moreover, municipal governments further expand their financing capacity by using land assets as collateral to secure commercial loans from commercial banks. Before a recent amendment, the Chinese Budget Law did not permit local governments to borrow. However, most municipal governments bypassed the law by creating their own local financing vehicles—known as urban development investment corporations (UDICs)—that borrowed commercial loans or issued corporate bonds for the governments. The size of outstanding local debts has grown rapidly over the last few years, reaching at least one-third of the GDP now.
The land-based financing mechanism has helped municipal governments in China raise a significant amount of funds for capital investment. However, the success has also created incentive for municipal governments to rely on land concessions and UDICs too heavily. Today, China’s economy is growing more slowly than before, and the mechanism is running out of steam in many localities where conversion of rural land for urban use exceeds the real demand. Some cities have borrowed much more than they can repay, leaving them heavily indebted.
Many empirical studies, including some funded by the Lincoln Institute, find that China’s land-based financing mechanism is one of the main causes of other urban issues that we face today. Skyrocketing housing prices, growing local debts, excessive land-taking, growing tension between the farmers and municipal governments over land-taking, and widening gaps of income and wealth distribution between urban and rural populations are among the major issues.
LL: The international mass media has been reporting on these issues. How will China address them?
ZL: There is a high level of consensus on the root causes of the problems. In November 2013, the central government announced a set of reforms, and a few are directly related to urbanization policy and municipal finance. For example, the scope of land expropriation will be narrowed to the confine of public purposes, and villages are allowed to develop their land for urban use under the premise that it conforms to planning. The reforms also call for acceleration of property tax legislation; reform of hukou, the household residential registration system, to help farmers become urban residents; and government efforts to make basic urban public services available to all permanent residents in cities, including all rural-to-urban migrants.
LL: What are the implications of hukou reform on municipal finance?
ZL: The government is phasing out China’s longstanding hukou system, and the implications for municipal finance will be significant. Hukou was designed to identify a citizen as a resident of a certain locality, but for several decades the government used the system to control rural-to-urban migration. A rural hukou holder could not become an urban hukou holder without the government’s approval. Without urban hukou, a rural migrant worker is not eligible for public services provided by the urban governments.
Since the economic reform, the expanding urban economy has absorbed a large number of rural-to-urban migrant workers. Earlier, I mentioned China’s urbanization rate of 55 percent and urban population of 750 million. These numbers include the 232 million rural migrants who stay in cities for more than half a year. If they were excluded from the calculation, the level of urbanization would be just 38 percent. Due to their rural hukou status, however, migrant workers don’t have access to many services enjoyed by urban hukou holders, despite the fact that many have labored and lived in cities for years. Municipal governments determine the extent of many urban public services—such as public schools and affordable housing—according to the number of urban hukou holders inside the municipal jurisdiction. Phasing out hukou would significantly increase the fiscal burden to the municipal governments for public service provision. Some scholars in China estimate that the cost of providing full urban public services to each rural migrant would be at least RMB 100,000 (roughly $16,000 U.S.). The total outlays for all current rural migrants would be at least RMB 23 trillion (about $3.8 trillion U.S.).
LL: China is introducing the residential property tax. What is the status of that initiative?
ZL: The government is drafting the first national property tax law as part of the ongoing reform of public finance. China is one of only a handful of countries without a local property tax. The current taxation system relies heavily upon taxes on businesses and transactions, and very little upon taxes on household income and wealth. In a more urbanized China with a wealthier population who own residential properties, the property tax would be a more viable source of municipal revenues. Today, 89 percent of urban households own one or more residential units, and the value of those properties has much to do with urban public services. Property tax will allow cities to tax urban residential properties whose value would benefit from the improved public services made possible by property tax revenues. It should also fill part of the fiscal gap left by the expected reduction of revenues from land concessions. However, property tax will not be a major source of municipal revenues any time soon. It may take one or two more years for the National People’s Congress to pass the new law. It would also take perhaps two to three years for cities to establish the property database and assessment and administration system.
LL: It must be tough for cities to deal with declining revenues from land concessions without an immediate alternative—especially as they are coping with growing local debt, which has been widely reported. How will Chinese cities get out of this situation?
ZL: The situation is indeed tough. China’s economy is slowing down. The real estate sector is no longer as hot as it was in the last 10 years, resulting in lower demand for land and thus lower revenues from land concessions for municipal governments. Cities are now facing a fiscal gap. One possible way to fill the gap would be local government borrowing. However, as I mentioned earlier, many cities are indebted and have little capacity to borrow further. In fact, most cities in China do not have adequate capacity for debt management. The newly amended budget law permits provincial-level governments to issue bonds within the limit set by the State Council, but also closes the door on other forms of local government borrowing. Currently, the central government actively promotes infrastructure financing through public-private partnerships (PPP). While this is a good move, it won’t be sufficient to fill the infrastructure financing gap, as PPP is suitable mainly for infrastructure projects with a strong revenue flow. There are many other urban infrastructure projects that generate little or no revenues. In the long term, I believe that China should actively establish a municipal government bond market to channel funds from institutional investors to municipal infrastructure investment and enable local governments to access commercial loans based on creditworthiness. To do so, municipal governments need to develop institutional capacity on several fronts, such as local debt management, capital improvement planning, multiyear financial planning, and municipal infrastructure asset management.
LL: Is PLC’s work relevant to the current reform?
ZL: The PLC was jointly established by the Lincoln Institute and Peking University in 2007. By the time I arrived, in 2013, the center had developed its reputation as one of China’s premier research and training institutions on urban development and land policy issues. The center supports a number of activities, including research, training, academic exchange, policy dialogue, research fellowship, demonstration projects, and publication. We focus on five core themes—property taxation and municipal finance, land policy, urban housing, urban development and planning, and urban environment and conservation. Over the last few years, our research projects have touched upon land-based finance, local debts, housing prices, infrastructure capital investment and finance, and other topics relevant to municipal fiscal health. We have also provided training to Chinese government agencies on the international experiences of property tax assessment and administration. I would say that our work is highly relevant to the current reform.
Implementation of the new comprehensive policy reforms is generating considerable demand for international knowledge and policy advice in the China Program’s focus areas, especially property taxation and municipal finance. We plan to initiate a pilot demonstration project with one or two selected cities in China, to support the institutional capacity required for the development of long-term municipal fiscal health. Our team has started a study to develop a set of indicators to measure municipal fiscal health for Chinese cities. It is the right time for us to initiate this agenda in China.
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It is with great sadness that we announce that Arlo Woolery passed away on February 28, 2002, at his home in Sun City West, Arizona.
Arlo brought zest, courtesy and unfailing curiosity to all of his endeavors over 82 years. Even before graduation from Luther College in Decorah, Iowa, in 1943, he turned his gift for public speaking to early success as a radio broadcaster. He provided play-by-play radio descriptions of baseball games, complete with sound effects for hits and cheering crowds, guided only by wire service score reports. Later he held several executive positions in radio and television, dealing both with broadcasting, equipment manufacturing and the first development of cable television networks.
He became an expert on public utility regulation and valuation, earning the Certified Assessment Evaluator (CAE) designation from the International Association of Assessing Officers and serving as chairman of its education committee. He was an expert witness in numerous utility valuation cases and taught in the annual Wichita State University program on railroad and utility valuation for many years. The Supreme Court of Utah reflected the respect with which he was regarded when it described him as a “well-educated, long experienced and highly qualified appraiser.” From 1967 to 1976 he served as director of the Property Tax Program for the state of Arizona, dealing with issues of valuation and tax administration and taking the lead in the development of computer-assisted mass appraisal.
Arlo was the first executive director of the Lincoln Institute of Land Policy, from 1974 to 1986, and upon retirement was named the Archibald M. Woodruff Fellow. He led the Institute’s move to Cambridge and its establishment as a center for education on land use and land-related tax issues. He organized and participated in numerous international symposiums on property taxation, land policy and computer-assisted valuation. He assisted in the development of the International Center for Land Policy Studies and Training (formerly the Land Reform Training Institute) in Taiwan and served on its Board of Directors from 1975 to 2000. He also wrote and edited many books, including The Art of Valuation (1978); Introduction to Computer Assisted Valuation (1985); Property Tax Principles and Practice (1989); and Valuation of Railroad and Utility Property (1992).
“Arlo’s legacy to the Lincoln Institute is its solid academic underpinnings,” notes Kathryn J. Lincoln, Chairman of the Board. “Even after his official retirement, Arlo remained involved with the Lincoln Foundation, and his continuing leadership and teaching at the International Center for Land Policy Studies and Training were instrumental in the development of that Lincoln program. We shall miss his wisdom and guidance.”
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The introduction of property taxation in transitional economies offers a unique perspective from which to study fiscal and governmental decentralization, land privatization and market development. These reforms all involve fundamental changes from the centrally controlled and planned societies of the communist period. The Lincoln Institute has a particular interest in the experiences of countries that are adopting property taxation and is underwriting a series of case studies in consultation with research associates in Armenia, the Czech Republic, Estonia, Poland, Russia and the Slovak Republic.
These studies demonstrate similarities in the challenges and problems faced by countries in transition and the extraordinary changes that have taken place in less than a decade since the fall of communism. At the same time, each country has followed a somewhat different path, adopting strategies that reflect its unique set of past traditions and current circumstances.
Decentralization and Privatization
Among the challenges facing these countries after nearly 50 years of communist rule are the decentralization of fiscal and political control and the reduction of the role of government in favor of private-sector ownership and activity. Privatization of land ownership has been a particularly sensitive issue. Taxes on real property have been introduced as part of a strategy to provide a revenue source to local governments, to encourage privatization of government-owned real estate assets, and to improve land utilization. Although in most cases the central governments continue to play a dominant role, a degree of local fiscal authority and autonomy has been introduced. Poland and Estonia have assigned these taxes to local self-governments, with authority to determine tax rates within limits established by their national parliaments.
In the other countries, national law sets the rate of taxation, but some local control is achieved by adjusting the coefficients applied to area measures that establish the tax base. The revenues raised from land and building taxes are still a relatively modest source of local revenue, and generally benefit rural communities more than urban areas. Although property taxes raise a minor portion of these countries’ total taxes at present, central governments envision a larger role for them in improving inter-governmental finance systems.
Privatization of state assets and ownership rights to real property is an essential yet complicated process that is still underway in each of the countries studied. In Estonia, for example, the desire to restitute land to pre-Soviet-period owners or their heirs initially complicated the determination of property rights. The adoption of a land tax in 1993, within two years of independence, was an essential element of Estonia’s land reform program, which also included privatization and market development. Limiting the tax base to land alone was intended to encourage its productive use, stimulating owners of restitution rights “to develop the property or sell it.”
In the former Soviet satellites, considerable private ownership remained under communism, but the formal cadastral systems were not maintained and the recording of property rights is still far from complete. During the Soviet period, land was treated separately from buildings, and this practice has continued in some countries, making real estate units more difficult to assemble for investment purposes. Property (buildings and structures) is treated separately from land for taxation purposes in Armenia, the Czech and Slovak Republics, and Russia.
While housing and business privatization has progressed to a degree in all countries, the release of land to private ownership and especially to ownership by foreigners has been a contentious issue. In Russia, although the Constitution and Civil Code provide for private property, the government and the Duma have failed to agree on a Land Code to provide a legal basis for land ownership. Most countries have placed some restrictions on foreign ownership, but permit long-term leases. Land taxation offers a potentially broad and expanding revenue base as privatization continues.
Market-based Reforms
In the absence of secure property rights and developed property markets, most countries have taken an incremental approach to incorporating market-based elements into their property tax bases. With the exception of Estonia, the countries in this study levy taxes on the basis of land or building area, adjusted by coefficients related to location, population, usage or other factors not derived directly from market indicators. As a logical step in their transitional reforms, Armenia and the Czech Republic are each exploring the addition of ad valorem elements to their area-based property tax, and Poland is considering proposals to shift to a market-based system. Plans for an ad valorem tax in the Slovak Republic await further fiscal, governmental and market reforms.
Estonia’s strong ideological commitment to a market economy led its Parliament to take the bold step in 1992 to base its land tax on market value. The first valuation assigned price zones to each assessment area, with the expectation that the methodology could be refined as understanding of real estate markets improved and as the markets matured. The collection of land tax information has strengthened real estate market activity and has been a catalyst for the development of land records, sales registries and cadastral maps. A revaluation in 1996 incorporated the expanded market databases.
Recent efforts to develop a pilot project for market value-based real property taxation in two Russian cities illustrate both the potential and the frustration of tax reform in the current Russian fiscal climate. The program began with funding from USAID in 1995, and federal legislation authorized the “experiment” in 1997. Before the current fiscal crises, the city of Novgorod anticipated implementation of the new tax in 1999 to replace the three existing non-value-based taxes on land, property of individuals and assets of enterprises. Whether the local officials will consider it possible to risk implementation under current conditions is now unclear.
Other Challenges
The reorganization of administrative functions and the cost of integrating and collecting property tax information are other challenges to the development of modern market-based property tax systems. Each country is struggling with structural reforms of Soviet-based administration and are seeking to improve inter-agency cooperation and efficiency in planning for property tax reforms.
The case studies illustrate the complex transitions that are underway in each of these countries. At the same time, the studies point out the important role that property taxation can play in providing a stable source of independent revenue to local governments, developing democratic and accountable public institutions, and maintaining a public claim on property entering the private market.
The potential benefits of market value-based taxation in stimulating real estate markets and promoting urban revitalization and efficient land use are just beginning to be recognized. The financial hardships still experienced by many people in these countries may keep property taxes at very modest levels for some time, making the design of a broad-based system with limited exemptions particularly important to the viability of property taxation in these new economies.
Note:
1. “Unlikely Icon,” Economist (February 28, 1998): 78.
Jane H. Malme is a fellow of the Lincoln Institute specializing in the development and implementation of property taxation in diverse international contexts.
She is coordinating the preparation of case studies with colleagues for the following transition countries:
Armenia: Richard R. Almy, consultant, Almy, Gloudemans, Jacobs & Denne, Chicago, Illinois, with Varduhi Abrahamian, International City/County Management Association, Yerevan, Armenia
Czech Republic: Gary Cornia and Phillip Bryson, Romney Institute of Public Management, Marriott School of Management, Brigham Young University, Provo, Utah, with Dr. Alena Rohlícková, Ministry of Finance, Czech Republic
Estonia: Jane H. Malme with Tambet Tiits, director, AS Kinnisvaraekspert, Tallinn, Estonia
Poland: Jane H. Malme with W. Jan Brzeski, president, Cracow Real Estate Institute, Cracow, Poland
Russia: Jane H. Malme with Dr. Natalia Kalinina, Center for Real Estate Analysis, Moscow, Russia
Slovak Republic: Gary Cornia and Phillip Bryson with Ing. Sona Capová, Univerzita Mateja Bela, Banská Bystrica, and Milos Koncek, Ministry of Finance, Slovak Republic
Sources: These figures are based on official country data sources and were provided by the research associates. No data was available from Russia.
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It is undeniable that land use change in the United States has been occurring at a rapid rate. Between 1982 and 1997 alone, developed land increased nationwide by 25 million acres, or 34 percent. Population growth certainly helped to fuel this increase in settled land area, as the U.S. resident population grew by 15.6 percent during the same period. From these two trends, it follows that the average population density of developed areas has declined during the late twentieth century: the average number of residents per developed acre fell by 13.6 percent nationwide. This declining density of settled areas is one indicator that “sprawl” has been unfolding across the U.S.
Concerns about Sprawl
Rapid conversion of forests, farms and wetlands to residential, commercial and industrial uses has provoked growing concern among elected officials and voters in many states. In 1999, the National Governors’ Association adopted a statement of principles on better land use that called for preservation of open space and encouragement of growth in already developed portions of the landscape.
The deepening concern for containing sprawl and promoting denser development has been expressed repeatedly at the state and local levels of government. The recent report of the Connecticut Blue Ribbon Commission on Property Taxation and Smart Growth, for example, has explicitly linked “loss of farms, forest and open space . . . [to] decline of and flight from urban areas, along with economic and racial segregation” (State of Connecticut 2003). In New Hampshire during the spring of 2003, a dozen small towns in that politically conservative state authorized million-dollar bond issues to finance conservation of rural lands threatened by metropolitan growth radiating from Boston.
Urban economists have often noted that we should expect the areas of metropolitan regions to expand along with growth of population and income per capita, but this readiness of land markets to accommodate a larger and more affluent population is not the entire story. Jan K. Brueckner and Hyun-A Kim, for example, have pointed out that the territorial expansion of metropolitan regions during recent decades has probably been excessive from a social efficiency point of view. One reason is the failure of developers to account for the loss of amenity values as development consumes open spaces. (Ecological economists would describe this loss as depreciation of natural capital.) Another reason is the failure of local governments to charge developers for the full cost of public infrastructure investments necessitated by metropolitan expansion. Other contributing factors are mortgage interest subsidies under the federal income tax and a failure to price congestion externalities on the roadways linking the metropolitan center to its fringe communities.
There may be other reasons for believing that metropolitan regions have expanded excessively in the U.S. since World War II. First, federal and state grant formulas sometimes reward towns and cities for adopting low-density zoning rules. An example is state reimbursement of pupil busing costs, a subsidy that encourages local school boards to ignore the land use implications of their school siting decisions. Second, several rounds of federal tax cuts since the 1980s have increased the disposable incomes of already affluent households and fueled a status competition favoring construction of ever larger homes on ever larger residential lots.
Tax Policy Tools for Smart Growth
Whatever the exact set of reasons for metropolitan sprawl, state and local policy makers have been scrambling to find policy tools with which to promote compact development. More than a generation ago, nearly all states adopted use-value assessment of rural lands in an effort to protect agricultural lands and other kinds of open space from development. When a rural parcel is enrolled in a use-value assessment program, it is treated for purposes of property taxation as though it were going to remain undeveloped in perpetuity. This legal fiction conveys a substantial tax benefit to rural landowners on the metropolitan fringe because their parcels have far greater market value than assessed value. Under the law, property assessors are required to ignore the development potential of undeveloped parcels enrolled in use-value assessment programs.
Theoretical research by Robert D. Mohr and this author (2003) has found that use-value property assessment, if properly designed, can postpone land use change and thereby provide a window of opportunity for local governments and conservation groups to buy development rights before rural lands are lost to metropolitan growth. However, in 15 states (including Arizona, Florida and New Mexico), the private decision to develop a rural parcel that has enjoyed use-value assessment results in no financial penalty at all to the owner. Hence, the tax incentive to postpone development is very weak. Only in those states (such as Connecticut and Rhode Island) that impose stiff development penalties if a parcel has been enrolled in the use-value assessment program for less than a decade is there a fairly strong incentive to postpone development despite escalating urban land rents. Perhaps it is time for state governments to review their use-value assessment programs to see if they actually postpone development of rural lands. If not, reform of use-value assessment statutes is in order.
Another way to promote compact metropolitan development would be to permit city governments to adopt split-rate property taxation. Under this type of property tax reform, a city can lower the tax rate on buildings and other capital improvements and still maintain the level of municipal services by raising the tax rate on land values. The Commonwealth of Pennsylvania has had this form of property taxation since 1913. Pittsburgh and Scranton have been the pioneers in tax reform, but by 1995, some 15 cities in the Keystone State had adopted two-rate property taxation. Although the evidence is circumstantial, Wallace Oates and Robert Schwab (1997) have tentatively concluded that lowering the tax rate on building values relative to land values helped to spur downtown commercial construction in Pittsburgh during the 1980s, despite the sharp decline of the city’s steel industry.
A Case Study of New Hampshire
As the fastest-growing state in the Northeast, New Hampshire is witnessing the rapid transformation of its traditional landscape of forests, farms and villages. Between 1982 and 1997, the developed area in the state increased by 210,000 acres, a 55 percent increase, although the population increased only about 26 percent (England 2002). To date, policy makers have paid little attention to the impact of the state’s high property taxes on these trends.
Using a regional econometric model to perform tax reform simulations, I have explored a revenue-neutral shift toward land value taxation in the state. In one study, the statewide property tax (which raised $460 million in 1999) is hypothetically replaced by a pure land value tax yielding an equal amount of state tax revenue. This policy simulation suggests that gross state product, employment and residential construction in the Granite State all would receive a boost from this type of tax reform. The boost to the state’s economic development would be long lasting, not transitory. However, because net migration into the state would receive a strong stimulus, this statewide approach to property tax reform would not serve to deter sprawl (England 2003b).
In a companion study, I simulated a shift to two-rate property taxation in New Hampshire’s largest city, Manchester, and in the economically depressed mill town of Berlin (England 2003a). In both cities, local employment, output and construction would receive a persistent boost following reform of the property tax. This stimulus to urban economic activity also would help to restrain the migration of households and businesses to surrounding rural areas.
If we want to slow down the development of rural lands, then we need to promote employment opportunities and healthy neighborhoods in already settled urban areas. A shift to two-rate property taxation by city governments could help to spark urban revitalization and thereby protect undeveloped lands on the metropolitan fringe. However, even though a shift to two-rate property taxation would promote investment and reinvestment in urban areas, this type of tax reform is likely to confront skepticism and even political opposition. Because industrial and commercial properties frequently have a higher ratio of building value to land value than do residential properties, raising the tax rate on land values in order to pay for a rate cut on capital improvements could have a regressive impact on the distribution of property tax payments. The owners of office buildings and electric power plants, for example, might enjoy lower tax bills while many homeowners might find increased tax bills after implementation of split-rate taxation.
My present research as a David C. Lincoln Fellow aims to see whether this potentially regressive impact of shifting to two-rate property taxation can be avoided, thereby undercutting potential voter opposition. Figure 1 demonstrates that the combination of a generous credit with two tax rates could make a “typical” homeowner a supporter of property tax reform.
Analysis of property tax data for three New Hampshire cities suggests that the introduction of split-rate taxation would indeed be acceptable to many homeowners if it were accompanied by a uniform tax credit on each annual tax bill. One of these communities is Dover, a small but growing city with abundant undeveloped land. In 2002, the total property tax rate was 1.89 percent of market value. Applied equally to land and building values totaling $2.03 billion, this single rate raised $26 million for municipal services and local public schools, with additional revenues raised for county and state purposes.
If the City of Dover had cut the tax rate on buildings by $2 per thousand dollars of assessed valuation and offered a (maximum) credit of $1,000 on each tax bill, then it would have needed to raise the tax rate on assessed land values by roughly $18 per thousand in order to maintain the level of municipal and local school spending during 2002. That particular tax reform would have lowered the annual property tax payment of most owners of single-family homes and residential condos in the city, especially those with relatively modest values. Because of the credit, even owners of inexpensive residential lots would have gained from the tax reform. Many owners of apartment complexes, large commercial properties and extensive tracts of vacant land, however, would have paid more local taxes after the shift to two-rate taxation and a uniform credit applied to each tax bill.
Conclusion
More than a century ago, Henry George advocated taxation of land value in the name of social equity. Contemporary economists have more often advocated land value taxation as an efficiency-enhancing policy favoring economic development. My own research suggests that taxing land values more heavily than building and improvement values could foster urban revitalization and help to protect undeveloped land at the same time. However, unless the design of property tax reform takes distributional impacts explicitly into account, George’s concern for social equity is unlikely to be served.
Richard W. England is professor of economics and natural resources and director of the Center for Business and Economic Research at the University of New Hampshire. He has held a David C. Lincoln Fellowship in Land Value Taxation for three years and will be a visiting fellow at the Institute during 2004.
References
Brueckner, Jan K. and Hyun-A Kim. 2003. Urban Sprawl and the Property Tax. International Tax and Public Finance 10: 5–23.
England, Richard W. 2002. Perspective: A New England Approach to Preserving Open Space. Regional Review, Federal Reserve Bank of Boston 12(1): 2–5.
———.2003a. Land Value Taxation and Local Economic Development: Results of a Simulation Study. State Tax Notes, 22 April: 323–327.
———.2003b. State and Local Impacts of a Revenue-Neutral Shift from a Uniform Property to a Land Value Tax: Results of a Simulation Study. Land Economics, February: 38–43.
England, Richard W. and Robert D. Mohr. 2003. Land Development and Current Use Assessment: A Theoretical Note. Agricultural and Resource Economics Review, April: 46–52.
Oates, Wallace E. and Robert M. Schwab. 1997. The Impact of Urban Land Taxation: The Pittsburgh Experience. National Tax Journal 50(1): 1–21.
State of Connecticut. 2003. Report of Blue Ribbon Commission on Property Tax Burdens and Smart Growth Incentives.
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The community land trust (CLT) is one mechanism that addresses the need for affordable housing, and it also can be considered an institutional mechanism for capturing socially produced land value.
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Nonprofit organizations operated for charitable purposes in the United States are exempt from most taxes, including investment income, sales, and property taxes. They benefit from the tax deductions that donors receive for charitable contributions, and some nonprofits also benefit from financing raised through tax-exempt bonds. Data allows informed estimates of the size of these tax benefits for most types of charities. However, comprehensive data on religious organizations and governments, both of which are also largely exempt from taxes, are difficult to obtain.
A review of these tax benefits provides a useful perspective on efforts by state and local governments to collect PILOTs (payments in lieu of taxes), which generally focus on nonprofits other than religious organizations (see page 23).
Tax benefits for nonprofits, such as educational institutions, health and human service organizations, foundations, and the arts, were worth about $140 billion in FY2009. About half ($72 billion) was from forgone taxes on investment income, about a third ($46 billion) was the tax benefit for charitable contributions, and about a tenth ($15 billion) was from property tax exemptions. Sales tax exemptions ($3 billion) and benefits from tax-exempt bonds ($5 billion) round out the total.
In 2009, nonprofit property tax exemptions (excluding those for religious organizations) were slightly less than 4 percent of the $400 billion total. Of course, the property tax exemption share varies widely across communities.
The distribution of five types of tax benefits are shown in figure 1 for six categories of nonreligious charitable nonprofits. They are listed in the order of their overall tax benefit, with educational institutions receiving the most benefits and arts organizations the least. The exemption for the tax on investment income has the same ranking as the overall tax benefit, but rankings of the other tax benefits vary widely.
The property tax exemption accrues to those sectors that use property and buildings most extensively, with health having the highest benefit followed by education. Foundations, which figure significantly in income and charitable contribution tax benefits, receive only modest property tax benefits. Sales tax exemptions, the smallest tax benefit in the aggregate, accrue mainly to the health sector.
This summary of the distribution of property taxes by charitable sector makes it clear why local governments have focused their efforts to collect property tax PILOTs on hospitals and universities—that’s where the property tax money is—but most tax benefits for nonprofits come from other sources.
Sources: Totals from An Overview of the Nonprofit and Charitable Sector. 2009. Congressional Research Service (http://www.fas.org/sgp/crs/misc/R40919.pdf). Sector allocations based on data from National Center for Charitable Statistics (http://nccs.urban.org) and J. Cordes, M. Gantz, and T. Pollak. 2002. What is the property-tax exemption worth? In Property-tax exemption for charities, ed. E. Brody. Urban Institute Press.
