Public Land Leasing and Land Value Taxation

1
Public Land Leasing andLand Value Taxation

• Steven C. Bourassa, Ph.D.
• KHC Real Estate Research Professor and Director
• School of Urban and Public Affairs, University of
  Louisville,
• Louisville, Kentucky, USA
• and
• CEREBEM, Bordeaux Ecole de Management, Bordeaux,
  France
• Peking UniversityLincoln Institute Center for
• Urban Development and Land Policy

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Introduction (1)

• Focus on two Lincoln Institute book projects
• Steven C. Bourassa and Yu-Hung Hong, editors,
  Leasing Public Land Policy Debates and
  International Experiences (2003)
• Motivation Are there lessons from established
  systems for transitional economies?
• Focus on urban, rather than rural, applications
• Richard Dye and Richard England, editors, Land
  Value Taxation and Economic Development
  (forthcoming 2009)
• Motivation If such a great idea, why is it not
  used more widely?
• Focus Theory, empirical evidence, and
  international experience

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Introduction (2)

• Both public land leasing and land value taxation
  ideas discussed by Henry George
• Land value the result of government investment
  and collective actions so should benefit the
  community
• Public land leasing and land value taxation are
  two ways of accomplishing the same objective

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Introduction (3)

• Indeed, in some cases it may be difficult to make
  a practical distinction between land rents and
  land taxes
• For example, in Canberra, this confusion helped
  to lead to abolition of land rents and the
  leasing system there is now based solely on
  premiums
• Same problems arise with respect to accurate and
  timely assessment of land value or rent
• This latter problem has helped to cause the
  abolition of land value taxation in places such
  as Pittsburgh

5
International Experiences withPublic Land Leasing

• Established systems include
• Canberra, Australia
• The Netherlands
• Sweden
• Finland
• Hong Kong
• Singapore
• Book also looks at some newer experiments

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Definition of Public Land Leasing

• Runs the full range from something approximating
  freehold ownership (premium leasehold in
  perpetuity) to state allocation of land
  (short-term leases for specific uses)
• In some cases, is a more secure form of tenure
  than freehold
• Also, lessees may effectively acquire an equity
  interest in the land
• Operates within a wide range of institutional
  contexts
• Benefits of market allocation can be achieved
• Not a solution to all land management problems

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Public Policy Objectives

• Raising revenue
• Providing affordable housing and government
  facilities
• Regulating land use
• Facilitating urban redevelopment
• Promoting industrial development
• Conveying public land into private use

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Raising Revenues

• Generally not effective at capturing full land
  values or rents
• Government as landlord must be at least somewhat
  responsive to public
• Depends on accurate land values and a system for
  competitively determining values
• If based on assessed values, premiums or rents
  tend to be below-market
• General failure to collect full betterment or
  renewal fees, especially in a premium-based system

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Providing Affordable Housing and Government
Facilities

• Of the various policy objectives, this seems
  relatively achievable
• But likely in conflict with other objectives,
  particularly revenue raising
• Ideal of transparency in cost of subsidies
  suggests need for an independent lease management
  agency

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Regulating Land Use

• Probably not a good idea
• Establish of land use rights in lease agreement
  may make it difficult to change them when
  necessary
• Conflicts of interest may make it difficult to
  achieve both land use and land management
  objectives
• Probably another good reason for establishing an
  independent agency for managing public land that
  is separate from planning and other government
  functions

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Facilitating Urban Redevelopment

• This is what most profit-oriented landlords would
  do
• But probably not effective when government is the
  landlord and lessees have long-term leases and
  probably some equity interest in the land

12
Promoting Industrial Development

• No obvious advantage over freehold
• Security of the property right clearly a more
  important issue here than the form of land tenure

13
Conveying Public Land intoPrivate Use

• Transitional role may allow for interim uses
• Probably better than selling at what could be
  excessively low prices before markets and
  institutions to support them are well-developed

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Institutional Needs for Public Land Leasing

• Some needs are specific to transitional
  economies
• System of title registration
• Mortgage and bankruptcy laws
• Developed cadastral system
• Mature judicial system for responding to
  conflicts
• Effective controls on corruption
• Other needs also apply to advanced economies
• Well developed land appraisal and management
  capabilities
• Independent agency for management of land leases
  with clear objectives and transparent reporting

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Background on Land Value Taxation(1)

• Definition Land value taxation is taxation of
  land at higher rates than improvements for
  general revenue purposes
• Real property taxes are typically applied to both
  land and improvements
• This part of presentation draws mainly on three
  chapters covering the U.S. and international
  experience (by Riël Franszen) and the politics of
  enactment
• Motivation If LVT is such as good idea, then why
  isnt it used more widely?

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Background on Land Value Taxation (2)

• Proposed by Henry George as a single tax
• Subsequently advocated as a means for encouraging
  economic development
• Taxes on buildings discourage development taxes
  on land do not
• Experience
• U.S. mainly in Hawaii and municipalities in
  Pennsylvania
• Elsewhere mainly but not exclusively in British
  Commonwealth countries such as Australia,
  Jamaica, New Zealand, and South Africa

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International experience (1)

• Africa
• Kenya
• Namibia
• South Africa
• Swaziland
• Zimbabwe
• Asia
• Japan
• South Korea
• Taiwan
• Thailand

• Australasia and South Pacific
• Australia
• Fiji
• New Zealand
• Papua New Guinea
• Solomon Islands
• Vanuatu
• Caribbean and Latin America
• Bahamas
• Barbados
• Belize
• Grenada
• Jamaica
• Mexico

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International experience (2)

• North America
• Canada
• United States
• Europe
• Denmark
• Estonia
• France

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U.S. experience ongoing LVTs

• Pennsylvania municipality Start year Tax rate
  ratio
• Aliquippa 1988 7.07
• Aliquippa School District 1993
  6.32
• Allentown 1997
  4.70
• Altoona 2002 15.81
• Clairton 1989 12.61
• Clairton School District 2006 2.42
• DuBois 1991 29.67
• Duquesne 1985 1.66
• Ebensburg 2000 3.67
• Harrisburg 1975 6.00
• Lock Haven 1991 5.70
• McKeesport 1980 3.87
• New Castle 1982 3.54
• Scranton 1913 4.60
• Titusville 1990 3.11
• Washington 1985 23.61

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U.S. experience failed LVTs

• Jurisdiction Duration
• Hawaii
• Statewide 1965-mid-1970s
• Pennsylvania
• Coatesville 1991-2006
• Connellsville 1992-2003
• Hazleton 1991-1992
• Oil City 1989-2003
• Pittsburgh 1913-2001
• Steelton 2000-2008
• Uniontown 1992-1992
• New York
• Amsterdam 1995-1996

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Example (1) Pittsburgh

• Initially adopted as 21 graded tax (city only)
  in 1913 to encourage development of large land
  holdings
• Poster child in U.S.
• But combined with substandard assessment
  practices
• Political fallout from mishandled reassessment
  led to abolition in 2001
• Land value taxation a scapegoat for inadequate
  assessment
• Now expanding the use of tax abatements to
  encourage development

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Example (2) Hawaii

• Adopted statewide to encourage tourism related
  development in the mid-1960s
• Dense, unattractive development in Waikiki was
  seen to be destroying character of the area
• Was abolished by mid-1970s
• Soon afterwards, property taxation devolved to
  counties and Honolulu, for example, instituted
  higher taxes on improvements than on land for
  some classes of property
• Arguably, land value taxation was the scapegoat
  here for inadequate land use planning and control

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Example (3) Harrisburg

• Major flood in 1972 capped off decades of
  economic decline
• Harrisburg categorized as one of the most
  distressed cities in the U.S. in early 1980s
• Comprehensive economic development program,
  including land value taxation, has resulted in
• Increases in building permits and construction
  activity
• Increase in taxable value of real estate
• Increase in employment
• Decrease in building vacancies
• Success story (?)

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Issues

• Taxation of unrealized capital gains
• Land value assessment and rate setting
• Too much development
• Winners and losers
• Lack of understanding

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Taxation of unrealized gains (1)

• Has been a particular issue in the U.S. and in
  places with rapid growth in property values
• California, Massachusetts, Florida, in U.S.
• New South Wales, in Australia
• Characteristics of property taxation in the U.S.
• Expensive local public services
• Property taxes an important source of local
  revenue (about 25)
• Average about 1 of value for owner-occupied
  houses
• Repeated property tax revolts
• Great Depression
• 1970s house price boom
• 2000s house price boom
• Legislative responses
• Homestead and other exemptions
• Proposition 13 and other caps

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Taxation of unrealized gains (2)

• LVT aggravates this problem because most gains
  are increases in land value
• Buildings do not increase in value unless
  construction costs increase at a faster rate than
  buildings depreciate
• For example, to achieve the level of house price
  inflation experienced in the U.S. in the early
  2000s (6 as of early 2000 rising to over 12 in
  early 2005), land value inflation would have to
  average about 30 annually
• This assumes that land was initially 20 of total
  property value
• Also assumes that buildings appreciated at 1
  annually
• Thus volatility in property taxes is exaggerated

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Taxation of unrealized gains (3)
Hypothetical example of 200,000 house with
40,000 land value and 160,000 building value in
year 1 and uniform 10 mill (1) tax rate
113
77
40
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Land value assessment

• In built-up areas land value is more difficult to
  assess than total property value
• Inaccurate allocation of value between land and
  improvements defeats purpose of LVT
• In many communities, reassessment is infrequent
• Pittsburgh and Clairton, PA
• Amsterdam, NY
• Rate setting processes can be overly politicized
  and rather clumsy
• Pittsburgh

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Too much development

• Not the most common problem
• The one example is Hawaii, where Waikiki came to
  be perceived as overdeveloped during the late
  1960s and early 1970s
• Subsequently, property taxation in Hawaii was
  devolved from the state to counties, and in some
  cases buildings were taxed at higher rates than
  land
• Need to make certain that land use and
  environmental controls are effective
• Assessment according to highest and best use
  should reflect land use controls

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Winners and losers

• Georgist argument that land rents should benefit
  the community rather than individual property
  owners
• Vertical and horizontal equity issues
• Problem of disconnect between total property
  value and tax bill
• Assessment issues may invite challenges
• Lack of connection between household income and
  tax bill
• These were major issues in Pittsburgh, for example

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Misunderstanding LVT

• The disconnection between total property value
  and tax bill makes tax system harder to
  understand
• Assessment problems contribute to the confusion
• Issue has been raised in U.S. and other countries
• In U.S., for example, in Pittsburgh and
  Philadelphia
• Elsewhere, in New Zealand and South Africa

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Conclusions on Land Value Taxation

• To be politically successful, land value taxation
  should be accompanied by
• A sophisticated assessment system
• Frequent reassessments
• A nimble rate-setting process
• Effective land use planning
• Ongoing public education
• Unfortunately, LVT has too often been the
  scapegoat for assessment problems and other
  issues

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General Conclusions

• Neither public land leasing nor land value
  taxation offer perfect means for achieving public
  policy objectives
• Similar to most, if not all, policy tools
• Both involve some of the same technical
  challenges
• Both require a high level of technical and
  administrative sophistication