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

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.


NOTES
1.
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.
2.
See Oates and Schwab, Chapter 6 in this volume, and Oates and Schwab ( 1997) for a fuller explanation of this argument.
3.
Based on personal communication from Nicolaus Tideman, 23 June 1995.
4.
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.
5.
This discussion draws heavily on Wildasin ( 1986) and Mieszkowski and Zodrow ( 1989).
6.
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.

-38-

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

Table of contents

  • Title Page iii
  • Contents v
  • Figures vii
  • Tables viii
  • List of Contributors x
  • Acknowledgements xiii
  • Lincoln Institute of Land Policy xiv
  • 1. Introduction 1
  • Notes 21
  • References 21
  • Part I - Interactions Between Tax and Land Policies 23
  • 2. Theoretical Controversies: Land and Property Taxation 25
  • Notes 38
  • References 39
  • Notes 48
  • References 48
  • References 53
  • 3. Land Use Regulation as a Fiscal Tool 55
  • Notes 72
  • References 72
  • Notes 80
  • References 81
  • 4. Effects of Taxes on Economic Activity 82
  • Notes 99
  • References 99
  • Notes 107
  • Notes 115
  • 5. Tax Policies to Promote Economic Development 116
  • Notes 128
  • References 129
  • Part II - Tax Policy as a Land Use Tool 131
  • 6. the Pittsburgh Experience with Land- Value Taxation 133
  • Notes 141
  • References 142
  • 7. Property Tax Treatment of Farmland: Does Tax Relief Delay Land Development? 144
  • Notes 157
  • References 159
  • 8. Incentives, Firm Location Decisions and Regional Economic Performance 168
  • Notes 180
  • References 180
  • 9. Tax Increment Financing as a Tool of Redevelopment 182
  • Notes 196
  • References 197
  • Part III - Fiscal and Distributional Impacts 199
  • 10. Fiscal Impacts of Business Development in the Chicago Suburbs 201
  • Notes 212
  • References 214
  • Appendix 215
  • 11. Who Pays Development Fees? 218
  • Notes 231
  • References 233
  • 12. Regional Tax Base Sharing: the Twin Cities Experience 234
  • Notes 251
  • References 253
  • Index 255
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