Local Government Tax and Land Use Policies in the United States: Understanding the Links

By Helen F. Ladd; Lincoln Institute of Land Policy | Go to book overview
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This result may seem counterintuitive, since the parcels with high improvements gain the most from the lower tax rate on improvements. However, these same properties lose even more from the higher land tax because of their high land value. Applying this basic intuition to mixed land uses suggests that with a shift to a graded tax, many commercial and industrial properties would face higher taxes, while single-family homes would generally benefit from lower tax bills.

In sum, the distributional effects of a shift away from property taxation in favour of land-value taxation are more complex than first appears. Moreover and this point is the important one the distributional and land use effects of such a shift depend heavily on whether the tax restructuring is done in a single city or in all cities. The positive effects on economic development touted by proponents of land-value taxation emerge more strongly when the restructuring applies to a small part of the metropolitan area rather than the whole area, and reflect the reduction in the property tax not the increase in the tax on land value.

The asumption of a fixed number of people rules out the possibility that the tax affects the number of children that people choose to have or the likelihood that people will commit suicide. In an intertemporal model even a head tax might not be neutral, as households change their tax burdens by changing the number of household members.
See Oates and Schwab, Chapter 6 in this volume, and Oates and Schwab ( 1997) for a fuller explanation of this argument.
Based on personal communication from Nicolaus Tideman, 23 June 1995.
Arnott and Lewis ( 1979) and Arnott ( 1996) extend the investigation of neutrality by looking at systems of property taxes. In the earlier paper, they showed that a property tax on land value prior to development causes development to occur earlier and at a lower density, while a tax on total property value after development delays development but does not alter its density. In his 1996 article, Arnott extends the analysis to demonstrate the possibility of constructing a system of property taxes that would be neutral with respect both to the intensity and timing of development of a specific parcel. Under the assumption that redevelopment rent is zero, a neutral property tax system would require a zero tax rate on pre-development land value, a positive tax rate on post-development site value, and a subsidy on the post-development structure value.
This discussion draws heavily on Wildasin ( 1986) and Mieszkowski and Zodrow ( 1989).
Implicit in this logic is the requirement that, given marginal cost pricing, the value of output just equals the value of the inputs, which according to Euler's theorem requires that production be characterized by constant returns to scale. This condition is met, but only at the optimal level of population. The planner's task is to select a population that will minimize the average costs of providing a given level of utility to the population. Given a U-shaped average cost curve, the minimum point will be characterized by constant returns to scale and hence the requirement is met. (I thank Richard Arnott for this point of clarification.) For additional clarification and intuition, see Mieszkowski and Zodrow ( 1989, p. 1135). Note in addition that the Henry George conclusion about the efficiency of land taxes is a first best result and applies only if there are no other distortions in the economy.


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