Gaffney (1968): Land as an Element of Housing Costs

Overview

"Policies and Practices Affecting Urban Land Costs as an Element of Housing Costs" is Mason Gaffney's contribution to Land as an Element of Housing Costs: The Effects of Public Policies and Practices / The Effects of Housing Demand (IDA Study S-324, Institute for Defense Analyses, Program Analysis Division, October 1968; also circulated as HUD document H-931) — a two-paper volume commissioned for the Department of Housing and Urban Development, with Gaffney's essay (~37 pages) paired with a separate paper by Richard F. Muth on housing demand.[1] Only Gaffney's paper is covered here; Muth's is a distinct, separately authored work not reviewed for this page. Gaffney was Professor of Economics at the University of California, Riverside at the time.

The essay has three parts: (B) a formal treatment of land cost, the property tax, and capitalization, addressed to the theoretical mechanics of why raising land taxes can lower acquisition costs specifically for lower-income buyers; (B.2) a catalogue of assessment and administrative practices that undercut that mechanism in the field; and (C) an exhaustive taxonomy of Federal income tax provisions that reward holding land off the market — the essay's most original and detailed contribution.

The Capitalization Argument, and Why It Specifically Helps Low-Income Buyers

Using a worked numerical example (a $2,500-improvement parcel earning $250/yr versus an identical, better-located parcel earning $1,250/yr in total rent), Gaffney derives the standard capitalization result — that a rise in the land tax lowers the land's selling price while leaving its true annual carrying cost unchanged — roughly contemporaneously with Oates's 1969 JPE capitalization study (Gaffney's paper is dated October 1968). He then adds an argument not on the wiki's existing capitalization pages: because lower interest rates and lower tax rates have symmetrically opposite distributive effects, substituting a land tax for the implicit "interest cost" of holding land specifically benefits buyers who face higher borrowing costs. In his words: raising the land tax "substitutes an impartial tax cost for an interest charge that bears more heavily on lower-income groups. Land taxation lowers... the capital that must be raised by private parties to achieve land ownership. If low-income individuals encounter higher costs of raising capital than do high-income individuals... property taxes which lower land acquisition costs will operate to the relative advantage of those in the lower income groups."[1] The mirror argument — that simply cutting property taxes does not lower housing costs — anticipates the wiki's existing "capture ≠ cheap" caveat on benefits/lvt-improves-housing-affordability almost exactly: "Students who propose property tax reduction as a means of permitting lower cost housing should not be surprised if in fact no cost reduction occurs. Rather, under certain conditions such property tax reduction may only increase the net worth of land owners."[1] Gaffney directs this specifically against Dick Netzer's contemporaneous claim (in Netzer's 1968 Joint Economic Committee report) that property taxes are a regressive "consumption tax" on housing that should be cut — arguing this treats the property tax as uniform when its land component behaves entirely differently from its building component. (B-claim; Gaffney's own theoretical derivation, illustrated numerically and with then-current national-accounts tax-burden data, not an independent empirical test of housing-market outcomes.)

Assessment Practices That Undercut the Mechanism

Gaffney catalogues specific administrative failures that keep real-world property tax systems from delivering the capitalization benefit above — material with direct bearing on why LVT proposals require careful implementation, not just legislative intent:

• Systematic underassessment of land relative to buildings, documented from a Milwaukee study of ~1,500 demolitions: assessors attributed "over half the assessed value" to buildings on the eve of demolition, when the purchase was economically land alone — biasing IRS depreciation allocations and understating land's true tax share nationwide.
• Tax exemption of land under institutions (churches, cemeteries, schools, foundations) — "indefinitely expansible" as privileged organizations accumulate land, withholding it from home-seekers who must outbid a tax-free competitor.
• "Missized lot" assessment — large lots taxed less per square foot than small ones (biasing toward large-lot sprawl at the fringe), while below-optimal lots in older neighborhoods are taxed even lower, "strengthening the hand of holdouts" against apartment-site assembly and producing what Gaffney calls "apartment sprinkle" — "more extreme than 'urban sprawl' at the urban fringe" in its own way.
• Low-density ("snob") zoning as a fiscal-exclusion device, deliberately used by suburbs both to keep out low-income families with school-age children (a fiscal-liability calculation) and to hold down assessed values during a multi-year wait for eventual rezoning and capital gains.
• Delinquency-with-redemption laws letting speculators hold land tax delinquent during a downturn, redeeming cheaply if it appreciates — "heads they win, tails the county loses."

(C-claim; Gaffney's own catalogue of institutional and administrative practices, illustrated with the author's own Milwaukee data and period sources, not a systematic cross-jurisdiction study.)

The Federal Income Tax Catalogue

The essay's longest and most original section (Part C, roughly a third of the paper) is a systematic taxonomy of Federal income-tax provisions that reward holding land off the market — a mechanism for high land prices distinct from anything currently on benefits/lvt-improves-housing-affordability, which discusses zoning and supply constraints but not income-tax structure. Gaffney groups the loopholes into three classes:

1. Covert write-off of nondepreciable land. Land is legally non-depreciable, but a buyer of an old building can allocate most of the purchase price to the (depreciable) building using the local assessor's land/building split — which, per the assessment bias above, systematically understates land value — letting land value be written off against ordinary income again and again each time the property resells, "no matter how many times it was done before."
2. Exemptions. Imputed income from owner-occupied land (untaxed, unlike other assets' service flows) fortifies large-lot holdout at the fringe; unrealized capital gains go untaxed until sale, rewarding indefinite holding; gains are fully forgiven at death; charitable bequests of appreciated land are deductible at full appraised value while the appreciation itself stays untaxed — Gaffney notes cemetery associations and land-rich churches are "large land speculators" that benefit disproportionately from this combination.
3. Deferral mechanisms. A worked table shows the after-tax rate of return on land speculation rising with the holding period under the capital-gains "realization doctrine" (from an effective ~4% after-tax return on a one-year flip to ~7.2% on a fifty-year hold, at an assumed 8% pre-tax appreciation rate) — the numerical demonstration of the "locked-in effect." Section 1031 like-kind exchange lets suburban land speculators barter appreciated land tax-free indefinitely; installment sales let sellers convert taxable interest income into capital-gains-rate income; and condemnation awards can be rolled tax-free into replacement property.

Gaffney's summary judgment: "the Federal income tax operates in such a way as to encourage land holdout and so increase urban land prices," and "there is probably scope for legitimate reduction of housing costs, without subsidy, via review and revision of the income tax features discussed" — while explicitly declining to propose a specific reform package, on the grounds that "nothing short of a sweeping reform of the entire system may suffice." (C-claim; Gaffney's own catalogue and worked illustrations from 1960s tax law, not independently tested against housing-price outcomes; the specific provisions cited — 1968 capital-gains rates, Section 1031, the realization doctrine — have since been repeatedly amended, so the examples are dated even where the underlying "realization doctrine rewards holding" mechanism persists in current US tax law.)

Standing and Limits

• Genre and audience. A government-commissioned policy study (IDA/HUD), not a peer-reviewed journal article — closer in register to Gaffney's later planning-audience pieces than to his academic essays, with extensive footnoted period data (1956 and 1966 national-accounts property-tax burdens, 1967 FHA lot-price data) but no econometric testing of its own claims against housing outcomes.
• Dated tax law. The Federal income-tax provisions catalogued (capital gains rates, Section 1031, the specific mechanics of installment sales and simple-interest imputation) reflect 1968 law and have been substantially amended since (e.g., 1986 and later tax reforms); the general mechanism — that non-depreciable, non-taxed-until-realized land is a uniquely tax-favored holding vehicle — is the durable claim, not the specific numbers in Table 4.
• Provenance. Native, pdftotext -layout-extractable text (no OCR needed). Local mirror: sources/gaffney/text/E22-LandasanElementofHousingCosts.CV.txt. Only Gaffney's paper (pp. 1–37 of the bound volume) was reviewed; Richard F. Muth's companion paper on housing demand, bound in the same PDF, was not read for this page.

Bears On

• Benefit: Land value taxation can improve housing affordability — adds (a) an early, pre-Oates statement of why land-tax capitalization specifically advantages credit-constrained lower-income buyers (the interest-cost-substitution argument), directly reinforcing the page's "lower land prices" capitalization section, and (b) the Federal income-tax holdout catalogue as a distinct high-land-price mechanism the page does not currently document. Cited as historical context and mechanism detail — not wired as additional empirical evidence for the page's affordability claims, per the convention already applied to Gaffney's own theoretical arguments on benefits/lvt-reduces-sprawl.

See Also

• Land value taxation can improve housing affordability
• Oates (1969): the founding capitalization study — the near-contemporaneous academic capitalization result Gaffney's Part B derives independently
• Tax Capitalization
• Speculative Vacancy
• Gaffney (1969): Land Planning and the Property Tax — a companion piece from the same period on assessment practice and planning leverage
• Mason Gaffney — author page

Sources

1. Mason Gaffney, "Policies and Practices Affecting Urban Land Costs as an Element of Housing Costs," in Land as an Element of Housing Costs: The Effects of Public Policies and Practices / The Effects of Housing Demand (Two Papers by Mason Gaffney and Richard F. Muth), IDA Study S-324 (Arlington, VA: Institute for Defense Analyses, Program Analysis Division, October 1968; also circulated as HUD H-931) — used for the entire page (pp. 1–37 of the bound volume; Muth's companion paper not reviewed). Native, pdftotext-extractable text (no OCR needed). Free PDF (masongaffney.org); local mirror at sources/gaffney/text/E22-LandasanElementofHousingCosts.CV.txt.