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Article Excerpt
In a recent article in this journal, England and Zhao (2005) examine the redistribution of the tax levy that would result in Dover, New Hampshire, if the real property tax were changed from the existing uniform tax on land and improvements to one taxing only land. They report that single-family residential properties in Dover bear a larger percentage of the total property tax under the land value tax than under the existing uniform tax, and that the tax changes within this class of property are regressive. This paper presents evidence from the city of Roanoke, Virginia, showing distributional consequences of changing to a land-only tax that are very different from the England-Zhao findings for Dover.
We replicate for Roanoke the England-Zhao analysis to relate changes in property tax liabilities for individual properties to assessed values, which they argue are good proxies for permanent income. In addition, we relate, for the first time, increases and decreases in property tax liabilities to current income at the census tract level, and consider the within-class distributional consequences of moving to a land-only tax against this income measure.
Reallocating tax burdens associated with such tax reform in Roanoke favors residential properties in general and low-income residents in particular. This finding holds under both our approaches, and it is in stark contrast to the England and Zhao findings for Dover. In part, the different findings may result from the different characters of the two cities. Roanoke has characteristics of older central cities and Dover is more like a bedroom community to Boston. As a result, there are substantial differences in the intensity of land use; for example, in Dover, improvements account for less than twice as much value as land per residential parcel, while in Roanoke improvements account for six times as much as land.
The findings for Roanoke and Dover suggest that the distributional implications of changing to a land value tax (or a split-rate variant that still taxes improvements, but at a lower rate than land) depend critically upon intensity of development and property tax base composition. As the character of the community considering such a change varies--rural and urban, central cities, urban counties, suburban and exurban communities, etc.--the analysis needs to be expanded. Future research should examine the distributional consequences of differential taxation of land and improvements in a variety of additional local areas. Extending analysis of such property tax changes to consider current incomes of residents can provide useful additional insights. We have made a first effort, using census tracts as the unit of analysis; future research should try to link income and property data at the level of the individual parcel and household to explore the distributional consequences of differential taxation of land and improvements.
INTRODUCTION
In a recent article in this journal, England and Zhao (2005) examine the redistribution of the tax levy that would result in Dover, New Hampshire, if the real property tax were changed from the existing uniform tax on land and improvements to one taxing land more heavily. Property taxes that tax both land and improvements but at different rates are a form of land value taxation; they are variously known as two-tier, split-rate, or graded property taxes. Typically, the land rate is the higher of the two; in the limiting case discussed here, improvements are zero-rated and the tax is a pure land (or site) value tax. Although land is taxed more heavily than improvements in some countries, in the United States split-rate taxes are found in fewer than 20 Pennsylvania municipalities and one Hawaii county (Bell, Bowman, and German, forthcoming).
England and Zhao report that single-family residential properties in Dover bear a larger percentage of the total property tax under the split-rate approach than under the existing uniform tax, and that the tax changes within this class of property are regressive. They suggest, "A general reason for the limited adoption of two-rate property taxation is that tax reforms always redistribute income and net worth among taxpayers. Those who stand to lose from tax reform can be counted upon to oppose adoption even if implementation of the reform proposals would improve efficiency of resource allocation and increase society's real income" (2005, p. 248).
This paper presents evidence from the city of Roanoke, Virginia, showing distributional consequences of changing to a land-only tax that are very different from the England-Zhao findings for Dover, New Hampshire.
First, however, we provide a brief review of some advantages claimed for a tax that falls more heavily on land, including the efficiency advantage alluded to in the England-Zhao quote, above. Next, we summarize the England-Zhao research approach and their findings for Dover as well as our findings from this approach for Roanoke. This is followed by our extended analysis, linking Roanoke property records and tax changes to census tract data on income and other selected variables, which adds an important new dimension to the analysis. Finally, we present some concluding comments.
TAXING LAND MORE HEAVILY THAN IMPROVEMENTS: ADVANTAGES
There is remarkable agreement among economists and public finance professionals with the principles of sound tax policy articulated in 1988 by the National Conference of State Legislatures (NCSL). Two of the most important of these principles refer to the effects of individual taxes on economic efficiency and equity. (1)
For efficiency, taxes should have as little unintended effect on market decisions as possible. In the arena of local taxes on real property, such efficiency concerns typically argue for a tax on land values, rather than both land and improvements to land. Because the supply of land is essentially fixed (perfectly inelastic), higher taxes on land would not affect the behavior of landowners, thereby avoiding the efficiency losses (excess burdens) associated with most other forms of taxation. A land value tax is said to be neutral with regard to land use decisions. (2)
The equity principle says that a tax should be fair, both horizontally and vertically. Horizontal equity requires that a tax treat similarly situated taxpayers the same. Vertical equity notions generally suggest that tax burdens should reflect, at least to some extent, differences in ability to pay. Beyond these general principles, it is difficult to gain consensus on precisely what equity entails. The vertical equity concept is more problematic than horizontal equity because appropriate vertical distribution of tax burden is inherently a matter of judgment. A common judgment, however, is that vertical equity requires a progressive form of taxation--i.e., tax payments that increase more than in proportion to income as income rises.
A property tax based solely on land values is often thought to be more equitable than one taxing land and improvements at the same rate for two reasons. First, because land ownership tends to be concentrated in high-income families and individuals, a tax on land values is thought to be more progressive than a tax on land and improvements (Bahl, 2002; Case, 1998). (3) Second, increases in land values often represent "unearned increments" resulting from the actions of society in general, whereas individual owners are responsible for decisions to add and/or maintain improvements to their respective properties. In taxing land more heavily, a portion of socially created value is reclaimed for collective use in the public sector. Netzer...
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