Sunday, February 26, 2006

Peirce on Property Tax Reform

The Columbus Dispatch published an article today on Libertarian Gubernatorial Candidate Bill Peirce entitled “Grounds for Change”. The article discusses Peirce’s support for reforming the property tax system.

Granted, I’ve only recently began studying the “Land Tax”, as originally theorized Henry George. But from what I’ve learned, there are some pretty encouraging implications in such a system, especially when it comes to urban “blight”.

Many proponents of eminent domain cite the need for cities to seize property from private owners in order to facilitate and stimulate “economic growth”. Often, one might find large areas of run-down, dilapidated buildings, unkempt slums, and other unsightly properties. As the argument goes, allowing government the power to take property in order to clean things up is the only way to combat such things.

But by reforming property taxes to exclude the value of buildings, taxing only the land value would alter the incentives that are built in to the system.

An end to tax policy that rewards owners of dilapidated and vacant properties with low tax bills and penalizes those who invest in their properties with higher tax bills.

Since buildings become less important to total value, property owners don’t pay higher taxes when they add a Florida room or build a 12-story office instead of a two-story.

Owners of vacant lots or dilapidated buildings see their taxes rise to the level of similar-size properties nearby. The tax increase motivates slumlords to invest enough to pay the higher bill or sell out.

The fundamental question of any taxation system revolves around what sorts of activity will be rewarded, and what will be punished. For example, the income tax punishes work and savings; sales taxes punish consumption; and the current property taxes discourage investment, and reward negligent property owners.

It seems to me, reforming property taxes to tax only the value of the land would result in greater incentives to invest in and upgrade one’s property. It may even help reduce urban sprawl. In the end, there would less need for a munipalities to assert eminent domain, as the free market would be taking care of itself.

In any event, this is an idea worth looking into.


Blogger tohan said...

Sounds good but how do you think we can pull that off? We are not able to have the Supreme Court observe the 5th Amendament... To change the way property is taxed it looks to me like an almost impossible undertaking...

11:49 AM  
Anonymous Libertarian Jason said...

Well, no one said it was easy...and as things stand now, there's not much political pressure for such reform. The point here is to begin the process of "thinking outside the box". If we realize that many of the problems we now face are direct results of our tax system, then it makes sense that certain reforms will help alleviate them.

12:56 PM  
Blogger doinkicarus said...

The basis, under George's land tax, as I understand, would absolutely force the government to observe the fifth amendment's "takings" clause.

Correct me if I'm wrong, but it goes something like this:

A taxpayer decides how much property tax he is willing to pay, and values his property accordingly. If, at a later date, the government wants to acquire his property, they need only pay the self-assessed value of the land.

The fact that the government can easily take undervalued land will reduce the opportunists who seek to undervalue it in order to avoid taxes. That people won't want to pay prohibitively high taxes keeps their expectations about their land's value in check.

Consequently, if the Gov decides to purchase your land, there can be no squabble about "just compensation," as the property owner would be aware that his self-assessment would be the equivalent of "just compensation," if the Gov ever wanted to acquire his parcel. One's self-assessed property value would be prima facie "just compensation"

9:32 PM  
Anonymous Libertarian Jason said...

Doink -

Thanks for the clarification... But I have a couple of questions.

Other people may value the property for a different use than what its being currently used for, so I don't see how that would be a check on ED. For example:

You own a house on a strip of land. Lets say for arguments sake you value the land at 20k, and the house at 80k. If I were to buy the property from you, I would have to pay you for the value of the land and your house... 100k.

If I got the local government to take your property, they would only pay you for the land value...20k... They could then sell it to me for around that price, and I would still get a huge discount....right?

The only apparent answer to me would be that the State, having to observe the takings clause, would also have to compensate for the buildings on the land, thus bringing us back to full circle.

My understanding is that the Georgist land value tax excludes any and all buildings on top on the land.

As I said in my post...I'm still fresh to these ideas, so I don't profess you know all the subtleties of how this works, but it does seem odd to me that any government would allow a property owner to "self assess" their property... What's to stop every one from assessing their property at zero?

7:40 AM  
Anonymous ken said...

Eminent domain is really out of control. It has a solid purpose -- if the government is building a highway, it *has* to seize property to do it. There's really no other option. The blight argument I think really only works when there is truly blight -- like if a property owner is operating a crackhouse or the building is overtly run-down. All to often, developers are in league with city councils and use eminent domain as a way of nudging homeowners off their property to construct something like a mall. Any urban designer can tell you that commercial property is far more likely to blight than residential property, but don't tell that to developers.

1:32 AM  
Blogger doinkicarus said...

the problem is solved with a clear, objective, definition of "public use."

It certainly doesn't stand to reason that "tax base" is a legitimate public use. But wtf do I know really?

4:15 PM  
Anonymous Libertarian Jason said...

I think really only works when there is truly blight -- like if a property owner is operating a crackhouse or the building is overtly run-down.

The problem, at least here in Ohio, is that there is no objective, let alone rational definition of the word "blight".

But the point still remains... Even if there are "blighted" areas...the incentives of the tax code would tend to reduce the need for ED.

8:30 AM  

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