Wednesday, July 19, 2006

This is a piece that I'm submitting to Echo, a local magazine. It's a primer on land tax and why it's a Very Good Thing. Thanks to my parents, my girlfriend, Echo's editor, my coworkers, and Mike Pasquale for the support and help.

The Da Vinci Tax Code
Lyle Solla-Yates

The book and recent film The Da Vinci Code spirals around the lost Western tradition of the sacred feminine, a concept that challenges many of the assumptions and practices of our culture. This article is about another lost Western tradition, the secret of conforming our way of life to the landscape, rather than the other way around. This concept is philosophically parallel to the sacred feminine. It is the secret of respecting the other side of the issue, seeing the land instead of the buildings. The secret has to do with how land is used, and how taxes shape its use and misuse.
Not so long ago in human history, there were no taxes. In the Middle Ages, feudal lords would require a task (tasque in middle French, the derivative of our word “tax”) to be done by their subjects in exchange for the use of the lord's land. But the land itself was not taxed, and peasants and merchants were free to use it as best they could.
There are many pictures of towns, villages, and landscapes from this period. A few things stand out. First, the absolute soul-stirring beauty of these towns and landscapes. There are places like this in Virginia, but fewer and fewer. Second, the way that buildings are clustered together, to better conserve heat and protect vital agricultural land, and simultaneously create urban squares and plazas that are full of activity and life, ripe with commerce and culture. Buckminster Fuller called this synergy. In a healthy landscape, the elements of the landscape - home, business, farm, forest – are greater than the sum of its parts. This is design for long-term sustainability. And it's delightful, completely satisfying.
But the secret has been lost, and modern buildings and roads are a plague on the landscape, and a curse on the cities. The real estate market has become warped and twisted by a taxation scheme designed to promote suburban sprawl and dying central cities. In some areas experiencing major growth, the central cities are reinvested in, raising housing costs and pricing out many residents. Under this system, growth creates more problems than it solves. The real estate market is sick, and there is a cure. Markets properly cared for give us what we want in the most efficient way possible. It's what they do. But when buildings are taxed, it sends the market a message: “Stop building in valuable areas, it isn't worth it. Buy up valuable land and sit on it: it's bound to go up and be a good investment. If you want to build, build out where land is cheap and the taxes are low. Wipe out the farmers and get rich. If you really want to build in the city, build skyscrapers: anything smaller won't be worth it.” This is not the message that most citizens want to send the market. And this isn't the message that many real estate developers and investors want to hear. But they follow it, and we see it across most of America and the world.
Not everywhere though, because some places don't tax buildings, or tax them less. Those places tax land higher, because as Will Rogers said, “They ain't making any more of the stuff.” When communities tax land high, they tell the market “Don't waste land, use it as well as you can. If you can't use it, sell it to someone who can.” And then you get an outpouring of creativity and ingenuity to create wonderful things to be enjoyed by everyone. This means better, less expensive housing for everyone, better places of work, shorter distances to travel, better places to shop. This means more jobs, a better economy, less pollution, healthier people who can walk and ride instead of drive, and a countryside where small farmers prosper instead of real estate speculators. It's a win-win-win.
When communities make the transition (usually phased in over ten years), three quarters of residents pay less taxes. This is because most people live on land that's being used well, so they benefit. However, places that aren't being used well, such as prime downtown real estate paved for parking, or prime agricultural land growing grass, become a tax liability. Those empty downtown lots become buildings that contribute to the health of the city, and that rural land lying fallow becomes active farms that contribute to the food security and aesthetics of the region.
Several communities across America and the world have demonstrated the success of the land tax. You may have heard of the startling recovery Pittsburgh, Pennsylvania made after the core of the city, its steel mills, closed down. The secret? They'd taxed land higher than buildings since 1913. The economic transition was challenging, but efficiently handled. Plenty of other rust belt towns, such as Flint and Detroit in Michigan, are still staggering from the changes.
Harrisburg, the capital of Pennsylvania, pursued the same strategy after it was declared the second most distressed city in the nation in 1981. Since 1982, when they began taxing land three times higher than buildings, Harrisburg made an astonishing economic recovery, attracting $1.2 billion in new investment while reducing the tax burden on 90% of property owners. Newburgh, New York, on the other hand, the only city listed as more distressed than Harrisburg in 1981, didn't fare so well. After years of attempted reforms and economic development schemes, it remains one of the poorest cities in America, another distressed city which tragically did not pursue the land tax. Neither did Lynchburg, Richmond, or Martinsville, or any of Virginia's first cities, to great loss.
The land tax can come to Virginia. Taxing land at a higher rate than buildings is legal in Roanoke city and Fairfax city. The state legislature can authorize it elsewhere, if the political will exists. Thriving urban centers, the return of family farms, and a beautiful, healthy landscape preserved for the future can happen here. That's the secret.


Blair said...

I agree that land is more valuable than the buildings. But it doesn't explain how development occurred in the first half of the nation's history and blames business closings for decay of cities and parking lots replacing buildings. In most cities where lots have replaced buildings, the government seized, tore down, then put the "hot" lots up for sale. Of course investors are reluctant to buy stolen property and other investors fear govt theft of their land investments. In last year's eminent domain reform in Pa., the biggest transgressors (Pittsburgh, Philadelphia) were exempted for 7 more years from the prohibition of substituting eminent domain for due process (blight expansion policy). The way to revitalize cities is to restore rule of law and reassure business that earning less profit and paying less tax than the previous year will not result in seizure of their investment. Taxing properties at unequal rates will have undesired unintended consequences.

Lyle Solla-Yates said...

Blair, thank you for your comment. I appreciate your ongoing work to raise consciousness about eminent domain and the history of Vinegar Hill.
I haven't found much material yet that delves into the economics behind our early development in America. What I've been able to piece together is that the relatively low price of land coupled with the extremely low cost of early government (no paved roads, no major infrastructure, a bare bones school system, no parks, low tech security, etcetera) essentially eliminated property tax as a significant factor in development decisions. Areas that taxed property taxed them so low that it didn't affect locational decisions. Whereas now, businesses and residents constantly consider taxes in deciding where they want to be. Often, major employers will demand major tax concessions to locate in specific communities. Government has gotten a lot more expensive, and so has land.
Many culprits have been fingered for urban decay: a bad economy, drugs, cars, racism, crime, immigration, the death of family farming, "greedy" developers, and so on. My take on it is that those are all the results of the warping effect of building taxes. Income taxes and sales taxes have similar warping effects in their respective markets, but I'm less interested in that area.
You're definitely correct that a large portion of empty lots throughout America got that way through eminent domain. In many cases, however, they got that way because real estate holders realized that they had better cash flow with an increasingly valuable empty lot than they did with an old building in need of repair. Buildings catch fire sometimes, a little insurance fraud. Or get torn down for parking. Or buildings would just sit empty and depreciate, giving tax breaks. In the 80s, those buildings became crack houses in many cities.
So, my read is that in many cases, eminent domain was abused, but the rationale for it was to correct ( mainly unsuccessfully) for the distortions created by taxing buildings.
I agree that the threat of eminent domain may have a potential chilling effect on real estate investment. I haven't seen any research on it, but it makes sense to me.
As for buying up stolen property, I think the real issue is that that stolen property was more valuable as low tax, high profit land than high tax, low profit buildings. If you look into the business model of McDonalds and other drive through joints, their chief source of revenue isn't sales. It's real estate appreciation. They cover as much land with as little building as they profitably can and still pretend to be in sales, with the relevant income tax benefits. It's brilliant.
I'm not familiar with the PA eminent domain reform. If you could post a link with some material on that, I'd be interested in learning more. My feeling about eminent domain in general is that it's cutting off the city's nose to spite its ugly face. I agree with your premise that businesses need to feel secure in their investments. However, I would take it a step further and say that tax policy should actively encourage business investment by taking tax off of productive activity and putting it onto a resource with a fixed supply.
I am sure that there will be some negative consequences from returning to a more healthy marketplace. I haven't been able to find any yet, except for some concern that people won't be able to put as much of their money into unimproved land anymore, but then they'll just put it into a more productive financial vehicle like stocks, bonds, buildings, and so on. From what I've been able to find, it looks like the economic opportunity created by a tax shift to land creates much more potential wealth than it destroys, but I haven't found any hard numbers on it. 50% higher average economic activity in the region, that sort of thing. I'll see what I can dig up.
Thank you again for your comment, I hope you'll excuse my long reply. It's difficult to be brief with these issues.