The Futility of Not Tapping Land Value
Those fools in California thought they could limit government and slash property taxes by merely passing a law. In 1978, the voters of California approved Proposition 13, which cut the real property tax to one percent of market value when bought, and rising by only two percent per year until sold. The measure did initially cut the property tax, but the constitutional amendment failed to constrain the growth of government, and it made the burden of taxes even worse.
by Fred E. Foldvary, Senior Editor
California now has high taxes on income and sales. The income tax rate is 9.3 percent starting with income of only $42,000 for single or separately filing married persons. The sales tax is over eight percent in many counties. Proposition 13 also centralized government in California, shifting much of the public finance from the counties to the state. But the proposition also failed to stop the tapping of real estate for local government financing.
Real estate is an inherently suitable base from which to finance local public goods. Tax income too high in one small location, and it will stop or move away or go underground. Tax sales in one place and folks will buy elsewhere. But land cannot hide, flee, or shrink when tapped for civic revenue. Buildings attached to land can move eventually by being built elsewhere or by not being rebuilt or improved, but they are at first stuck in place for a long time, and so the taxed owner has to pay.
The authors of Proposition 13 thought they were clever by forbidding new “ad valorem” taxes on real estate, i.e. taxes based on property value. They fooled the voters, but not clever politicians and civic entrepreneurs. As the population grows, new streets, schools, and water pipes have to be built, and somebody has to pay. If we don’t let free enterprise do it, government will find a way.
And so in California, the public has become inflicted with a large variety of complex taxes, assessments, and so-called “fees” that are really taxes. How do Californians tap land values for public revenue? Let us count the ways:
1) Parcel taxes. To comply with Proposition 13, taxes are not on the value but on the area of plots of land or on the area of the improvements, based on the square meters or square footage of the property.
2) Developer taxes. Rather than tax the property in new developments, local governments tax the developers to finance the new streets, pipes, and schools. These taxes are labeled “impact fees,” but they are not voluntary user fees. They are disguised taxes on real estate.
3) Tax increment financing. Local government creates a redevelopment agency which issues debt, which pays for improvements. These increase land values, and the “tax increment” or higher property tax finances the debt.
4) “Fees” that are really excise taxes. Services such as garbage collection which were once paid for from real estate taxes are now charged as “fees,” but these are compulsory, so are really taxes.
5) Assessments. With the cut in the real property tax, government says to the people, sorry, we can’t finance street lighting or parks or flood control any more. So voters approve the creation of a special assessment or improvement district, with assessments on property that are really taxes, but not called that.
6) City partnerships. Local government teams up with private developers and provides favorable zoning or infrastructure in exchange for a share of the profits.
7) Certificates of Participation. In this clever way to incur debt without voter approval, government creates a nonprofit organization which then issues lease-revenue bonds. The bond owners get not interest but shares of the revenues from leased-out government property.
8) Mello-Roos debt. California legislated this special debt to finance infrastructure or services in an undeveloped “community facilities district” if approved by the voters or land owners. The owners are responsible for the payment of the debt. It is in effect a real property tax.
9) Real estate transfer taxes. This is a tax on the sale of real estate, levied by local government, and based on the property value.
10) Residential association assessments. Many new developments create a homeowners’ association that owns and finances local works such as streets, parks, and recreation. These property-based payments save local governments from having to provide and finance these goods.
This complex mix of property-based government revenue gets around the restrictions of Proposition 13, but few taxpayers can understand how they are being charged and what the charges pay for. It would have been much simpler and less costly to exempt buildings and other improvements from the property tax and simply levy a charge based on the current market value of land.
Even with all these taxes, however named, landowners receive big implicit subsidies from governmental civic works, as most of government financing still falls on the high state income and sales taxes. Civic works pump up land values as the charges on property owners only pays for part of these services. The high price of California real estate testifies to this effect.
Californians could spare themselves these excess burdens by repealing Proposition 13 and replacing it with a constitutional law that replaces all taxes with truly voluntary user fees as well as levies on pollution and the tapping of land value for civic goods. The futile attempt to limit land-based financing has resulted only in complications, higher administrative costs, and greater excess burdens from taxation.
-- Fred Foldvary
Copyright 2007 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
Early Reactions in 1978 to Prop 13
Encourage Urban Land Speculators to Participate or Leave
Mason Gaffney's Classic -- Property Tax: Biases and Reforms
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