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Public Land Leasing and Land Value Taxation

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Title: Public Land Leasing and Land Value Taxation


1
Public Land Leasing and Land Value Taxation
  • Steven C. Bourassa, Ph.D.
  • KHC Real Estate Research Professor and Director
  • School of Urban and Public Affairs, University of
    Louisville,
  • Louisville, Kentucky, USA
  • and
  • CEREBEM, Bordeaux Ecole de Management, Bordeaux,
    France
  • Peking UniversityLincoln Institute Center for
  • Urban Development and Land Policy

2
Introduction (1)
  • Focus on two Lincoln Institute book projects
  • Steven C. Bourassa and Yu-Hung Hong, editors,
    Leasing Public Land Policy Debates and
    International Experiences (2003)
  • Motivation Are there lessons from established
    systems for transitional economies?
  • Focus on urban, rather than rural, applications
  • Richard Dye and Richard England, editors, Land
    Value Taxation and Economic Development
    (forthcoming 2009)
  • Motivation If such a great idea, why is it not
    used more widely?
  • Focus Theory, empirical evidence, and
    international experience

3
Introduction (2)
  • Both public land leasing and land value taxation
    ideas discussed by Henry George
  • Land value the result of government investment
    and collective actions so should benefit the
    community
  • Public land leasing and land value taxation are
    two ways of accomplishing the same objective

4
Introduction (3)
  • Indeed, in some cases it may be difficult to make
    a practical distinction between land rents and
    land taxes
  • For example, in Canberra, this confusion helped
    to lead to abolition of land rents and the
    leasing system there is now based solely on
    premiums
  • Same problems arise with respect to accurate and
    timely assessment of land value or rent
  • This latter problem has helped to cause the
    abolition of land value taxation in places such
    as Pittsburgh

5
International Experiences with Public Land Leasing
  • Established systems include
  • Canberra, Australia
  • The Netherlands
  • Sweden
  • Finland
  • Hong Kong
  • Singapore
  • Book also looks at some newer experiments

6
Definition of Public Land Leasing
  • Runs the full range from something approximating
    freehold ownership (premium leasehold in
    perpetuity) to state allocation of land
    (short-term leases for specific uses)
  • In some cases, is a more secure form of tenure
    than freehold
  • Also, lessees may effectively acquire an equity
    interest in the land
  • Operates within a wide range of institutional
    contexts
  • Benefits of market allocation can be achieved
  • Not a solution to all land management problems

7
Public Policy Objectives
  • Raising revenue
  • Providing affordable housing and government
    facilities
  • Regulating land use
  • Facilitating urban redevelopment
  • Promoting industrial development
  • Conveying public land into private use

8
Raising Revenues
  • Generally not effective at capturing full land
    values or rents
  • Government as landlord must be at least somewhat
    responsive to public
  • Depends on accurate land values and a system for
    competitively determining values
  • If based on assessed values, premiums or rents
    tend to be below-market
  • General failure to collect full betterment or
    renewal fees, especially in a premium-based system

9
Providing Affordable Housing and Government
Facilities
  • Of the various policy objectives, this seems
    relatively achievable
  • But likely in conflict with other objectives,
    particularly revenue raising
  • Ideal of transparency in cost of subsidies
    suggests need for an independent lease management
    agency

10
Regulating Land Use
  • Probably not a good idea
  • Establish of land use rights in lease agreement
    may make it difficult to change them when
    necessary
  • Conflicts of interest may make it difficult to
    achieve both land use and land management
    objectives
  • Probably another good reason for establishing an
    independent agency for managing public land that
    is separate from planning and other government
    functions

11
Facilitating Urban Redevelopment
  • This is what most profit-oriented landlords would
    do
  • But probably not effective when government is the
    landlord and lessees have long-term leases and
    probably some equity interest in the land

12
Promoting Industrial Development
  • No obvious advantage over freehold
  • Security of the property right clearly a more
    important issue here than the form of land tenure

13
Conveying Public Land into Private Use
  • Transitional role may allow for interim uses
  • Probably better than selling at what could be
    excessively low prices before markets and
    institutions to support them are well-developed

14
Institutional Needs for Public Land Leasing
  • Some needs are specific to transitional
    economies
  • System of title registration
  • Mortgage and bankruptcy laws
  • Developed cadastral system
  • Mature judicial system for responding to
    conflicts
  • Effective controls on corruption
  • Other needs also apply to advanced economies
  • Well developed land appraisal and management
    capabilities
  • Independent agency for management of land leases
    with clear objectives and transparent reporting

15
Background on Land Value Taxation(1)
  • Definition Land value taxation is taxation of
    land at higher rates than improvements for
    general revenue purposes
  • Real property taxes are typically applied to both
    land and improvements
  • This part of presentation draws mainly on three
    chapters covering the U.S. and international
    experience (by Riël Franszen) and the politics of
    enactment
  • Motivation If LVT is such as good idea, then why
    isnt it used more widely?

16
Background on Land Value Taxation (2)
  • Proposed by Henry George as a single tax
  • Subsequently advocated as a means for encouraging
    economic development
  • Taxes on buildings discourage development taxes
    on land do not
  • Experience
  • U.S. mainly in Hawaii and municipalities in
    Pennsylvania
  • Elsewhere mainly but not exclusively in British
    Commonwealth countries such as Australia,
    Jamaica, New Zealand, and South Africa

17
International experience (1)
  • Africa
  • Kenya
  • Namibia
  • South Africa
  • Swaziland
  • Zimbabwe
  • Asia
  • Japan
  • South Korea
  • Taiwan
  • Thailand
  • Australasia and South Pacific
  • Australia
  • Fiji
  • New Zealand
  • Papua New Guinea
  • Solomon Islands
  • Vanuatu
  • Caribbean and Latin America
  • Bahamas
  • Barbados
  • Belize
  • Grenada
  • Jamaica
  • Mexico

18
International experience (2)
  • North America
  • Canada
  • United States
  • Europe
  • Denmark
  • Estonia
  • France

19
U.S. experience ongoing LVTs
  • Pennsylvania municipality Start year Tax rate
    ratio
  • Aliquippa 1988 7.07
  • Aliquippa School District 1993
    6.32
  • Allentown 1997
    4.70
  • Altoona 2002 15.81
  • Clairton 1989 12.61
  • Clairton School District 2006 2.42
  • DuBois 1991 29.67
  • Duquesne 1985 1.66
  • Ebensburg 2000 3.67
  • Harrisburg 1975 6.00
  • Lock Haven 1991 5.70
  • McKeesport 1980 3.87
  • New Castle 1982 3.54
  • Scranton 1913 4.60
  • Titusville 1990 3.11
  • Washington 1985 23.61

20
U.S. experience failed LVTs
  • Jurisdiction Duration
  • Hawaii
  • Statewide 1965-mid-1970s
  • Pennsylvania
  • Coatesville 1991-2006
  • Connellsville 1992-2003
  • Hazleton 1991-1992
  • Oil City 1989-2003
  • Pittsburgh 1913-2001
  • Steelton 2000-2008
  • Uniontown 1992-1992
  • New York
  • Amsterdam 1995-1996

21
Example (1) Pittsburgh
  • Initially adopted as 21 graded tax (city only)
    in 1913 to encourage development of large land
    holdings
  • Poster child in U.S.
  • But combined with substandard assessment
    practices
  • Political fallout from mishandled reassessment
    led to abolition in 2001
  • Land value taxation a scapegoat for inadequate
    assessment
  • Now expanding the use of tax abatements to
    encourage development

22
Example (2) Hawaii
  • Adopted statewide to encourage tourism related
    development in the mid-1960s
  • Dense, unattractive development in Waikiki was
    seen to be destroying character of the area
  • Was abolished by mid-1970s
  • Soon afterwards, property taxation devolved to
    counties and Honolulu, for example, instituted
    higher taxes on improvements than on land for
    some classes of property
  • Arguably, land value taxation was the scapegoat
    here for inadequate land use planning and control

23
Example (3) Harrisburg
  • Major flood in 1972 capped off decades of
    economic decline
  • Harrisburg categorized as one of the most
    distressed cities in the U.S. in early 1980s
  • Comprehensive economic development program,
    including land value taxation, has resulted in
  • Increases in building permits and construction
    activity
  • Increase in taxable value of real estate
  • Increase in employment
  • Decrease in building vacancies
  • Success story (?)

24
Issues
  • Taxation of unrealized capital gains
  • Land value assessment and rate setting
  • Too much development
  • Winners and losers
  • Lack of understanding

25
Taxation of unrealized gains (1)
  • Has been a particular issue in the U.S. and in
    places with rapid growth in property values
  • California, Massachusetts, Florida, in U.S.
  • New South Wales, in Australia
  • Characteristics of property taxation in the U.S.
  • Expensive local public services
  • Property taxes an important source of local
    revenue (about 25)
  • Average about 1 of value for owner-occupied
    houses
  • Repeated property tax revolts
  • Great Depression
  • 1970s house price boom
  • 2000s house price boom
  • Legislative responses
  • Homestead and other exemptions
  • Proposition 13 and other caps

26
Taxation of unrealized gains (2)
  • LVT aggravates this problem because most gains
    are increases in land value
  • Buildings do not increase in value unless
    construction costs increase at a faster rate than
    buildings depreciate
  • For example, to achieve the level of house price
    inflation experienced in the U.S. in the early
    2000s (6 as of early 2000 rising to over 12 in
    early 2005), land value inflation would have to
    average about 30 annually
  • This assumes that land was initially 20 of total
    property value
  • Also assumes that buildings appreciated at 1
    annually
  • Thus volatility in property taxes is exaggerated

27
Taxation of unrealized gains (3)
Hypothetical example of 200,000 house with
40,000 land value and 160,000 building value in
year 1 and uniform 10 mill (1) tax rate
113
77
40
28
Land value assessment
  • In built-up areas land value is more difficult to
    assess than total property value
  • Inaccurate allocation of value between land and
    improvements defeats purpose of LVT
  • In many communities, reassessment is infrequent
  • Pittsburgh and Clairton, PA
  • Amsterdam, NY
  • Rate setting processes can be overly politicized
    and rather clumsy
  • Pittsburgh

29
Too much development
  • Not the most common problem
  • The one example is Hawaii, where Waikiki came to
    be perceived as overdeveloped during the late
    1960s and early 1970s
  • Subsequently, property taxation in Hawaii was
    devolved from the state to counties, and in some
    cases buildings were taxed at higher rates than
    land
  • Need to make certain that land use and
    environmental controls are effective
  • Assessment according to highest and best use
    should reflect land use controls

30
Winners and losers
  • Georgist argument that land rents should benefit
    the community rather than individual property
    owners
  • Vertical and horizontal equity issues
  • Problem of disconnect between total property
    value and tax bill
  • Assessment issues may invite challenges
  • Lack of connection between household income and
    tax bill
  • These were major issues in Pittsburgh, for example

31
Misunderstanding LVT
  • The disconnection between total property value
    and tax bill makes tax system harder to
    understand
  • Assessment problems contribute to the confusion
  • Issue has been raised in U.S. and other countries
  • In U.S., for example, in Pittsburgh and
    Philadelphia
  • Elsewhere, in New Zealand and South Africa

32
Conclusions on Land Value Taxation
  • To be politically successful, land value taxation
    should be accompanied by
  • A sophisticated assessment system
  • Frequent reassessments
  • A nimble rate-setting process
  • Effective land use planning
  • Ongoing public education
  • Unfortunately, LVT has too often been the
    scapegoat for assessment problems and other
    issues

33
General Conclusions
  • Neither public land leasing nor land value
    taxation offer perfect means for achieving public
    policy objectives
  • Similar to most, if not all, policy tools
  • Both involve some of the same technical
    challenges
  • Both require a high level of technical and
    administrative sophistication
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