LAND VALUE TAX SHIFT ANALYSIS BURLINGTON, VT March 4, 2004 Report by:

1. LAND VALUE TAX SHIFT ANALYSIS BURLINGTON, VT March 4, 2004 Report by: Gary Flomenhoft, Research Associate Gund Institute Burlington, VT Analysis by: Bill Batt Central Research Group Albany, NY

2. “There is nothing more difficult to carry out, more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For those who would institute change have enemies in all those who profit by the old order, and they have only lukewarm defenders in all those who would profit by the new order.” ---Nicolo Machiavelli, 1490

3. ECONOMIC BACKGROUND

4. Polanyi-Great Transformation • “Fictitious commodities” • Sold in markets for the first time • LAND: Commons or feudal to markets • LABOR: Humans sold on labor market • MONEY: means of exchange to commodity C-C C-M-C M-C-M* M-M* (95%)

5. CLASSICAL ECONOMICS ~1650-1890 • FACTORS OF PRODUCTION: • LAND=R (natural resources) • LABOR=L • CAPITAL=K Initially: Labor transforms land (raw materials) into capital Then: Labor and capital applied to land makes more capital

6. CLASSICAL ECONOMICS • RETURNS TO FACTORS: • LAND (R) = RENT • LABOR (L) = WAGES • CAPITAL (K) = INTEREST

7. CLASSICAL ECONOMICS • HISTORICAL FIGURES • CAPITAL (K) = Adam Smith • LABOR (L) = Karl Marx • LAND (R) = Henry George

8. CLASSICAL ECONOMICS Land (Ingredients) + = Labor (Chef ) + Bread Capital (oven) Capital (Mixing bowl)

9. NEO-CLASSICAL ECONOMICS 1890- No Ingredients, only labor and capital P = f(L,K)= ALa. BKb (Cobb-Douglas multiplication) Labor (Chef ) = x Bread? X Capital (oven) Capital (Mixing bowl)

10. NEO-CLASSICAL ECONOMICS INFINITE SUBSTITUTABILITY: 2P = f(L,K)= 2ALa. 2BKb More Chefs x = More Bread? or Bigger Mixing bowl

11. TAX ON BUILDINGS - production cost P S1 CS p1 PS D q1 Q

12. TAX ON BUILDINGS - production cost S2 P S1 CS p2 Deadweight loss p1 PS tax tax D q2 q1 Q

13. TAX ON LAND - no production cost S “Buy land, they ain’t making any more.” -Will Rogers P P* tax? P1 tax tax D Q* Q1 Q

14. LAND SPECULATION Q: Why is speculation bad? A: • Drives up price of land • Creates Sprawl • Produces nothing • Withholds land from market • Creates slums • “Flipping” VT anti-speculation tax: only applies to >25 acre industrial and forest land PROP 13: corporations avoid through selling shares

15. LAND SPECULATION Q: What good or service does a land speculator provide to the market? A: Nothing. “The land speculator profits in direct proportion to the damage done to society” -Winston Churchill

16. LAND SPECULATION Q: How does speculation create sprawl? A: By withholding land from the market, and holding for gain, price is driven up, and people have to move further out from center city to find available affordable land. (30% vacant land-Brookings) “The most comfortable, but also the most unproductive way for a capitalist to increase his fortune, is to put all monies in sites and await that point in time when a society, hungering for land, has to pay his price.” ---Andrew Carnegie

17. LAND SPECULATION Q: What is the formula for return on speculation? A: ROI = Annual return - holding cost Return = annual land inflation + annual income Holding cost = property tax(land + improvements) + bank interest on loan + maintenance

18. MAXIMIZE RETURN Annual Return = annual land inflation + annual income = 16.4% + ?

19. MINIMIZE EXPENSES • Holding cost = • property tax (land + improvements) + bank interest on loan + maintenance • = land tax + improvement tax + int + maint • (1.7% x land) + (1.7% x blds) + int (5%?) + maint. • Incentives: • Minimize land assessment • Minimize building improvements = slums • Low interest rate • Minimize maintenance=slums 2004

20. Return on speculation

21. What makes housing expensive?

22. 70% homeowners are passive speculators: zero sum game Land value PAINE: RECYCLE LAND RENT?

23. RENT COSTS “Whether it is the man or the earth I own, the bird or its food, it is essentially the same thing. ---Arthur Schopenhauer

24. RENT COSTS

25. VT FAMILY INCOME FROM: HOUSING&WAGES IN VERMONT VT HOUSING COUNCIL

26. RENT COSTS - CLT Community Land Trust (CLT) creates perpetually affordable land by taking land off the market. Created by Swann and Borsodi - Georgists CLT “Land is not the only monopoly, but it’s the mother of all monopolies.” ---Winston Churchill

27. Land costs According to Georgist theory taxing land at its full “Rental value” would reduce the price to zero. This would create “leasehold” vs. “freehold ownership Tax essentially becomes a lease payment for land.

28. Leashold Examples Hong Kong - 99 yr leases Canberra, Australia - municipal leasehold (backtracking)

29. 3 Ways to control land prices Community land trust Municipal leasehold Tax land at rental value

30. What makes land valuable? Publicly created Population demand natural features public improvements public services: fire, police, schools, waste private investment in the area business activity limited supply zoning growth restrictions (Santa Cruz) growth boundaries Not due to private effort

31. What makes land valuable? Publicly created “Takings”- private compensation when government action reduces property value “Givings”- public compensation when government action increases property value

32. “Value Recapture” of public investments Wright Act 1889: Tulare, CA Irrigation District Financed by tax on land value. Trees, vines, structures, etc. on the land were exempt CA Central Valley Irrigation Districts San Juacquin Valley Agriculture 80% produce in US

33. “Value Recapture” of public investments Crossrail – the London rail project now under consideration to fund by land tax. Studies say public transit could pay for itself through capture of increase in land values around transit stops.

34. What makes buildings valuable-Privately created Work Investment Materials Architecture Etc. Value created through private effort

35. LAND TAX IS PART OF GREEN TAX SHIFT “Pay for what you take, not for what you make” Tax “bads” not “goods” “Tax waste not work”

36. NW Green Tax shift includes LVT WORK INCOME SALES SOURCES SITES SINKS

37. SUMMARY OF INCENTIVES

38. HISTORICAL BACKGROUND

39. CLASSICAL ECONOMISTS ON LAND • Physiocrats • Quesnay; agricultural basis of economy: L’impot unique = land tax • David Ricardo- • Law of Rent=Difference in production (return) over the worst land=Rent • Unearned increment=unearned profit from land inflation

40. CLASSICAL ECONOMISTS ON LAND Adam Smith: “Ground rents are a species of revenue which the owner, in many cases, enjoys without any care of attention of his own. Ground rents are therefore, perhaps a species of revenue which can best bear to have a peculiar tax imposed upon them.” John Stuart Mill: “Landlords grow richer in their sleep without working, risking, or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.”

41. CLASSICAL ECONOMISTS ON LAND Thomas Paine, Agrarian Justice 1797 “Men did not make the earth...it is the value of the improvements only, and not the earth itself, that is individual property...Every proprietor owes to the community a ground rent for the land which he holds.;...from this ground rent...I...propose to create a national fund, out of which there shall be paid to every person...a sum.” Alaska Oil Dividend

42. RENT DIVIDENDS-BASIC INCOME Alaska Oil Dividend

43. HISTORY OF LAND VALUE TAX Henry George:Progress and Poverty 1879. “To abolish all taxation save that upon land values” “The taking by the community, for the use of the community, of that value which is the creation of the community.” “Poverty deepens as wealth increases, and wages are forced down while productive power grows, because land, which is the source of all wealth and the field of all labor, is monopolized.” The “single tax”. Forerunner to modern day Green tax shift: “tax bads, not goods.” Basis of modern assessments.

44. HISTORY OF LAND VALUE TAX • NY Mayoral election of 1886: • Abraham Hewitt (D)-stolen by Tammany hall • Theodore Roosevelt (R)-3rd • Henry George (Labor)-won • Attacks from left and right: • “Capitalists last ditch.” ---Karl Marx • “If George wins landowners should go out on their vacant land and hang themselves.” --- “Boss” Croker NY Mayoral election of 1897: George died 4 days before.

45. SINGLE TAX ADVOCATES TOLSTOY SUN YAT SEN HELEN KELLER ALBERT EINSTEIN CHANG KAI SHEK TEDDY ROOSEVELT MARK TWAIN

46. Modern Economists Right: “Land tax is the least bad tax” ---Milton Friedman Left: “Usurious rent is the cause of worldwide poverty” ---Joseph Stiglitz Green: “Taxation of value added by labor and capital is certainly legitimate. But it is both more legitimate and less necessary after we have, as much as possible, captured natural resource rents for public revenue.” ---Herman Daly

47. HISTORICAL APPLICATIONS Denmark: 1790’s, 1950’s, 1960’s California: 1890’s irrigation districts Australia: 1930’s-present, Sydney, Canberra-leashold New Zealand: 1930’s-present 80% site only South Africa: Jo-berg Hong Kong: leasehold Singapore: rent collection Taiwan: 1940’s-land to the tiller NY city 1920’s: 10 yr. abatement of improvements Pennsylvania: 1913-present

48. MODERN APPLICATIONS Australia, New Zealand Pennsylvania, date adopted Aliquippa Schools '93 Aliquippa '88 Clairton '89 Coatesville '91 Connellsville '92 DuBois '91 Duquesne '85 Harrisburg '75 Lock Haven '91 McKeesport '80 New Castle '82 Oil City '89 Pittsburgh '13+ Scranton '13+ Titusville '90 Washington '85

49. MODERN APPLICATIONS City Ratio Pittsburgh Scranton Harrisburg McKeesport New Castle Washington Duquesne Aliquippa Clairton Oil City Titusville 5.61 to 1 3.90 to 1 4.00 to 1 4.00 to 1 1.75 to 1 4.35 to 1 5.61 to 1 16.20 to 1 4.76 to 1 1.23 to 1 8.68 to 1

50. MODERN APPLICATIONS Philadelphia City Controller-Saidel Tax Reform Commission Board of Realtors 10,000 Friends of Pennsylvania