North Dakota Real Estate — Up!
|August 6, 2012||Posted by Fred Foldvary under Editorials|
The most neglected theorem in economics is the increase in land rent caused by the presence of territorial public goods. This phenomenon does not even have a name. Let us remedy this lacuna by calling the rise in rent due to public goods, “public goods rentalization.”
There is a name for the value of an asset due to a stream of income: capitalization. The higher rent becomes capitalized into higher land value, and also, the expectation of higher future rent is capitalized. “Capital” in this context is generalized to any asset value, since more narrowly, “capital” refers either to produced capital goods, or else to financial capital such as bonds and money.
In theory, productive public goods increase land rent because the supply of land is fixed. There can also be a rise in wages from more public goods, but that would be temporary. If labor becomes more productive in a location, that attracts labor from areas where wages are lower for the same skills. The increase in the labor supply will drive wages back down to normal. But the total supply of land in some region cannot expand, so the increase in rent sticks.
Just as territorial benefits raise land values, costs to landowners reduce the rent they keep, and so capitalize land value down. If the public goods are paid for by public revenue from land rent or site values, then the rise in land values would be limited. If governmental public goods are paid by labor and enterprise, then the rentalization and capitalization are implicit subsidies to landowners, at the expense of taxed labor and enterprise.
Economists have found evidence of the generation of higher land values from greater public goods. We now have an excellent case study: North Dakota.
Real estate prices have been rising sharply in North Dakota, especially in the western section of the state. A typical house that cost $80,000 in 2002 has quadrupled to $320,000. This land-value rise is due to greater oil and gas production, especially in the Bakken Formation. Advances in technology, such as horizontal drilling, have enabled oil extractors to make North Dakota the second-highest oil producer in the USA, after number-one producer Texas.
The greater oil production requires labor, which so far fetches a high wage, averaging $90,000 in the oil and natural gas industries, more than double the previous state average. The greater population is served by public goods such as schooling, infrastructure, and security. These public works and civic services become rentalized, as much of the cost is imposed on taxes on labor, goods, and enterprise.
North Dakota also benefits from higher prices for grains, but that benefit is concentrated on the landowners. Agricultural land values for 2012 increased 29% over 2011 values, although some of the land-value increase during the past decade is due to lower interest rates. A higher tax rate on the land rent would reduce the capitalization effect of changing mortgage interest rates.
The growing population itself increases the demand to use land, and is also rentalized. Indeed, growth has been so rapid, that the supply of housing lags behind, and some new workers sleep in “crew camps.”
This increase in land values is a windfall gain to those who owned the land. As Adam Smith put it, the landowners reap where they did not sow.
North Dakota taxes income, goods, real estate, and the extraction of oil and gas. The corporate income tax rate is 5.15 percent, and the highest tax rate on personal income is 3.99 percent. The “Oil Gross Production Tax” rate is five percent (with no tax on Indian reservations). The counties determine and collect the real property tax. North Dakota imposes a sales tax on the gross receipts of retailers of five percent for most goods and hotel rentals.
There was a ballot proposal in June 2012 to terminate property taxes in the state, but the voters wisely turned it down. The better alternative is to follow Alaska and Texas in abolishing the state’s income taxes. The property tax helps to decentralize state power, in contrast to income and sales taxes that shift power to the state level.
The property taxes in North Dakota are around two percent of the value. To avoid subsidizing land speculation, make the state’s growth more sustainable, and let all the residents of the state benefit from its growth, the state should stop taxing income, goods, and buildings, and shift its public revenue source to land value and natural-resource extraction. Land values would no longer rise, and the construction of housing would be less costly. Buildings and other improvements located on agricultural sites are already exempt from property taxation, so the state could apply the same logic to other land.
At any rate, the rapidly advancing land values in North Dakota are a good case study in rentalization and land-value capitalization. Economists should also study the effect of land speculation in North Dakota, which makes land values rise even further, reducing the benefits of growth to households and businesses. If North Dakota does not enact a tax shift, rising land values will become a curse rather than a blessing.
Copyright 2012 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.
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