Tax Expert Urges Reforms
Property Tax Reform Priorities
Property Tax Reform Priorities
Priority #3. De-Balkanize Tax Enclaves
A. Rich and Poor
There are rich jurisdictions and poor. Professor Tideman's paper in this conference alludes to this matter in passing. Let us support his point with some numbers.
In California, you might think that farm counties like Tulare have a lot more taxable value pc than cities, but au contraire. Tulare County reports assessed values per capita of $38,100; the whole State averages $60,000 pc. Suburban Marin County weighs in with $95,400; urban Los Angeles County has $59,000;0range County has $74,000.
You might also think that Tulare, being rural, has a lot higher fraction of land value in its mix, but again, not so. The Land Share of Real Estate Value (LSREV) in Tulare County is 28 percent, compared to a statewide mean of 40 percent, and 47 percent in Orange County. (This datum, and others of like kind, refute the conventional belief that farm counties are heavy on land in the mix. On this last point, I must respectfully take issue with my good old friend Gene Wunderlich, whose paper at this conference suggests that farm counties have higher land fractions. I wonder if he has perhaps conflated building values with pure land values? My data, from California State Board of Equalization, show lower land fractions in real estate in the purely rural counties of the San Joaquin Valley.) Grazing and mining counties like Inyo have high values of LSREV, but they are a small share of the farm economy. (lnyo County, lightly peopled but heavily cattled, has $136,000 per capita, with very few human capita (and its cattle are exempt from the California property tax). Major farm counties with intensive farms, like those of San Joaquin Valley, have low values of LSREV.
Within counties, disparities among cities and school districts are much greater. In Tulare County, one pathetic little povertyville, the City of Parlier, has just $10,000 of assessed value per capita. Here are some assessed values per capita from different California cities in the County of Los Angeles: Lynwood, $21,500; Beverly Hills, $294,000 (14 times Lynwood); City of Industry, $5,533,000 (257 times Lynwood).
This is why some critics call the property tax "regressive." It has given some plausibility to the otherwise bizarre claim that switching to a sales tax is less regressive than sticking with the property tax. Within each city a property tax is progressive, but when your data meld cities like poor little Parlier and Lynwood with Beverly Hills, you sometimes find poor people paying more of their income in property taxes than rich people, and getting less for it. Switching just the local property tax to land ex buildings will do little or nothing to correct such disparities, and therefore make little progress toward overall social justice, and the wide support that will evoke. There is, in fact, a natural cap on local property tax rates imposed by local particularism: the City Council of Beverly Hills will not raise taxes in Beverly Hills for the benefit of voters in Parlier.
To avoid such regressivity we must work out some formula for power equalization. The most straightforward formula is simply a statewide land tax. On this I must again applaud Dick Noyes in NH - not for what he says, but what he does. What he says is that the genius of NH is its local control of revenues; what he does is initiate bills for a statewide land tax.
There are many other tax enclaves and exemptions by which much property stays off the tax rolls. I have a long list, with about 35 items. Here I'II just focus on two: timber and oil.
B. Timber and Timberland
Standing timber is generally now exempt from property taxes, by law or custom. Land remains on the property tax rolls. This sounds like a Georgist idea; advocate Ellis Williams, a forest economist, has made the point. It is, however, just partial and discriminatory Georgism. The present system works as though you exempted half the buildings in a city from a tax and raised the rate on the others. Timber is exempt, but as soon as it is cut, milled, and hammered into buildings, it goes on the property tax rolls. The bias is apparent between capital in different forms.
Standing timber still yields some revenue when it is cut. The idea has been to substitute a "yield-tax" for the property tax. In practice, though, yield tax rates are much too low to be revenue-neutral. In California, for example, the yield tax rate is 2.9 percent. It is levied just once during the tree's life cycle of 60-100 years, at the end. Two and nine-tenths percent levied just once at the end of each 60 years, is obviously less than one percent levied every year, starting from year one. Values are low in the sapling years, but well above zero, and in the last few years before harvest, the stumpage is worth nearly as much as its harvest value. I have calculated that a yield tax of 25 percent or so (varying with the interest rate and the tree-life) is needed to have the same present value as a one percent property tax.
Here is the revenue result in one major California timbe county, Mendocino. Its major property value is timber, but the County government and its subdivisions hardly get dried beans from the yield tax on it: $3.9 million in 1993, compared to $45 million from all property. This is not because they are cutting timber slowly; actually they are depleting the inventory. Neither is it because other values are high. This County has no large cities. Most of its people live outside the cities, and its annual timber harvest is twice as high as the sum of all its other "agricultural" gross output (including fishing). The net cash flow from timber harvests is much more than twice as high as the net cash flow from other property, because stumpage value is added mainly by property (land and trees), while other farm products like grapes, fruits, and milk are more labor-using.
How about land under the timber? It is separately valued, and kept on the property tax rolls. However, it yields revenue of only $1.2 million: one-third of what the yield tax renders.
Why so little? They could raise the valuation of timber land to compensate for exempting the trees. In addition, "timberland" in some areas is sold for vacation homes and resorts. Assessors once began using those sales to justify higher valuations. They also observed smaller timberland owners paying higher unit prices than giant corporate owners, and up-valued parts of their vast spreads accordingly.
Timber owners had other ideas, however. Major owners like SP (520,000 acres of timber in California) took alarm and went to Sacramento for relief. They got their lands put in a "Timber Preserve Zone" (TPZ) wherein land is assessed only on its putative value for raising timber, regardless of market value, regardless of alternative uses, and regardless of nontimber income from land growing timber. These "compatible" (untaxed) uses include grazing, resorts, vacation homes, campsites, fishing, hunting, watershed protection, tourism, rifle ranges, rights-of-way, mining, log storage, landings, roads, logging camps, etc. There is also hemp for the drug trade: possibly the state's most valuable farm crop, but unrecorded.
TPZ is hardly known outside the timber counties, but it covers vastly more than the better-known "Williamson Act" which provides for preferential low assessment of farmland. In Mendocino County, TPZ land of medium grade ("Site III") is now tax assessed at $136/acre. This is about ten percent of its value for growing timber (disregarding compatible uses), and a lesser fraction of its value for higher-valued "incompatible" uses like retirement homes that require formal "conversion" (obtainable on demand) out of TPZ. This is how they keep the tax payments on TPZ land down to only $1.2 million.
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End of Part Five. Part Six will appear on Thursday, April 9.
This paper was originally presented at a property tax reform conference at the Jerome Levy Institute at Bard College, New York, November 3, 1995.