PROPERTY TAXATION FOR MORE THAN JUST GOVERNMENT REVENUES

Theodore PanayotouCyprus International Institute of Management

CONVENTIONAL PROPERTY TAXATION Aims to collect revenues for the local and

national governments It is applied to the value of the immovable

property (land and structures combined) The same rate is applied to land and buildings Improvements to the property are taxed at the

same rate Land use does not make a difference in the tax

rate Environmental or social externalities are not

considered in property taxation

CONVENTIONAL PROPERTY TAXATION Is a bland instrument Treats all property the same as if its nature and

use do not matter It is not neutral: it adversely affects investment

and economic activity It serves no developmental objectives It discourages improvements It serves no environmental or social objectives It treats all land developments as if they are

equally desirable and beneficial

WHAT IS NEUTRAL TAXATION It is a tax that does not cause individuals or

firms to shift their economic choices, i.e. work, consumption, savings, and investment

Income tax is a tax on work (encourages more leisure)

Corporate taxes are in part taxes on investment Commodity taxes are taxes on the

consumption of the tax goods A tax on all goods and leisure are neutral Property taxes are not neutral (they discourage

development)

LAND VALUE TAXES

Land value taxes (or site-value taxes) are imposed only on land values, not the value of property on the land

They tax rent and are therefore a neutral alternative to property taxes

PROPERTY TAXES VS. LAND VALUE TAXES

Property taxes are not neutral Land value taxes are! WHY? Because the land owner cannot alter the location or

the use of the land to lower his/her land taxes; LVT tax the natural resource rent not the value created by human effort and investment

Since property taxes tax not only the value of land but also that of structures and buildings, (and hence human effort) the property owner can lower his/her property taxes by delaying and/or reducing his/her investments in property development and improvement

MINIMIZING TAX DISTORTIONS In an ideal world there will be only neutral taxes; all

distortionary taxes (e.g. on labor, and on capital) would be replaced by neutral taxes such as land value taxes and taxes on all goods and services including leisure (with tax rates inversely related to their demand elasticities).

The world we live in is not an ideal one and therefore some distortions will be caused by the tax system but policy makers should make every effort to minimize these distortions i.e. chose the type, the base and the rate of taxes as to make the tax system as neutral as possible

With the current tax system for every additional euro of taxes collected 40 cents are lost in discouraged economic activity (reduced work &investment).

CORRECTING THE MARKET

A second reason why we may not want a completely neutral taxation is that the market is not perfect: we may actually want to alter private economic choices in favor of superior social outcomes

The market fails in a number of ways in maximizing the common good (social wellbeing) most notably in the protection of the environment and the efficient use of natural resources

Market failures in the form of environmental and social externalities, public goods, and un-priced resources justify the use of the taxation to correct the market by taxing more heavily activities with negative externalities (social impacts) and more lightly (or even subsidizing) activities with positive externalities.

DIFFERENTIAL PROPERTY VALUE TAXATION In a less than ideal world where 100% neutral taxation is

neither possible (insufficient revenues) nor desirable (due to market failures) differential property value taxation (DPVT) is the preferred choice:

1. DPVT taxes property values that arise from ownership of land at higher rates than values that arise from investments in structures and buildings and property improvements in general; this would minimize the overall excess burden of taxation on economic activity

2. DPVT taxes at lower rates property values that arise from land development and improvements that create positive externalities for the economy, the society and the environment and higher rates those that create negative externalities.

ADVANTAGES OF DIFFERENTIAL PROPERTY VALUE TAX

It minimizes the excess burden of taxation and distortion of private economic activity

It internalizes (and thereby minimizes) negative externalities

It internalizes (and thereby maximizes) positive externalities

It encourages infill development and discourages urban sprawl and energy-wasteful patterns of development

ADVANTAGES OF DIFFERENTIAL PROPERTY VALUE TAX

The differential property value tax (or “site-value tax” or “land value tax”, terms that signify that land bares the lion’s share of the property tax):

captures the “unearned income” from land and natural resources for needed government revenue, part of which is directed to public investments “green” infrastructure

lowers taxes on sustainable and environmentally sensitive design and production.

ADVANTAGES OF DIFFERENTIAL PROPERTY VALUE TAX (cont’d)

It encourages more efficient use of public transportation and infrastructure

It discourages land speculation and the development of property bubbles

Redirects funds from un-productive speculative investments in land to productive investments in sustainable land development and the green economy

FORMULA OF DIFERENTIAL PROPERTY VALUE TAX (DVPT)

DPVT=a (value of land) +b (value of developments e.g. buildings) +c (value of negative externalities) -d (value of positive externalities) where c>a>b and d=cIn an ideal world In the real worlda=annual land rent a=% of land value (a>>b)b=0 b=% of value of buildings etcc=100% c=% of external cost (damages)d=100% d=% of external benefits (c>d)

DPVT=RESOURCE TAX+ECOTAX

The site-value tax (a) is a resource tax which in combination with a low or zero tax (b) on development and ecotaxes (c and d) on externalities would contribute to economically efficient, socially equitable, and environmentally sustainable development.

THE SITE-VALUE TAX HAS RECEIVE SUPPORT FROM Adam Smith Ricardo Henry George Milton Friedman Paul Samuelson Robert Solow James Tobin Franco Modigliani William Nordhaus

SITE-VALUE OF LAND IN THE UK IN 1990

Residential: £66.4 billion Commercial: £19.0 billion Public services: £10.2 billion Industry: £9.3 billion Farm, woodland and forest: £2.4 billion (Source: David Richards, “The Land Value in Britain,2985-1990”,

Economic and Social Science Research Association)

THE SITE-VALUE TAX HAS BEEN IMPLEMENTED IN OVER COUNTRIES INCLUDING: France Denmark Finland Latvia Japan New Zealand US (Pennsylvania, California,Hawaii, Virginia,

Connecticut) Australia (state of Victoria) Taiwan South Africa Estonia

EXAMPLE

Land Tax Improvements Tax Total Tax

(Land value=€100,000) (improvements=300,000)Traditional Property Tax 1000 3000

4000(1% of both)

Pure Land Value Tax 4000 0

4000(4% on land only)

Two-rate Property Tax 2500 1500

4000(2.5% on land,0.5% on improvements.)

POSITIVE EXTERNALITIES IN LAND DEVELOPMENT

Intelligent buildings Energy saving/energy generating Water saving/water capturing Green walls Local architecture Preserving natural environment Environmentally and culturally sensitive

design

NEGATIVE EXTERNALITIES

Energy–wasteful design (e.g.above average per sq. m. of space)

Environmentally insensitive design Inefficient water use Excessive waste generation/pollution Congestion Landscape scarring

Leadership in Energy and Environmental Design (LEED) LEED is a third-party certification program

and the nationally accepted benchmark for the design, construction and operation of high-performance green buildings

The ratings are issued by the United States Green Building Council (USGBC).

LEED buildings are assessed by a number of criteria to determine how environmentally sustainable they are. Awards are presented at various levels of recognition, based on open criteria

LEED (cont’d)

LEED gives building owners and operators the tools they need to have an immediate and measurable impact on their buildings’ performance.

LEED promotes a whole-building approach to sustainability by recognizing performance in five key areas of human and environmental health

LEAD’s key areas of human and environmental health

Sustainable site development Water use efficiency Energy efficiency Material selection Indoor environmental quality

Levels of Certification

LEAD Certified (score 40-49) LEED Silver (score 50-59) LEED Gold (score 60-79) LEED Platinum (score 80)

The LEED for New Construction Rating

The LEED for New Construction Rating System is designed to guide and distinguish high-performance commercial and institutional projects, including office buildings, high-rise residential buildings, government buildings, recreational facilities, manufacturing plants and laboratories.

The LEED for Existing Buildings Rating

The LEED for Existing Buildings Rating System helps building owners and operators measure operations, improvements and maintenance on a consistent scale, with the goal of maximizing operational efficiency while minimizing environmental impacts. 

LEED Initiatives

LEED initiatives including legislation, executive orders, resolutions, ordinances, policies, and initiatives are found in 45 states, 138 cities, 36 counties, and 28 towns, 34 state governments , 14 federal agencies or departments and 41 institutions of higher education across the United States.

LEED BUILDINGS

Within the United States there are more than 15,000 LEED buildings and the number is rapidly rising

Government owned or occupied LEED buildings make up 30% of all LEED projects.

The federal government has 200 certified projects and another 3296 pursuing certification. 

State governments have 353 certified projects and 1983 pursuing certification. 

Local governments have 520 certified projects and 3117 pursuing certification

The UK Code for Sustainable Homes (introduced in 2007)The Code (www.communities.gov.uk) measures the

sustainability of a home against nine design categories: Energy and CO2 Emissions Water Materials Surface Water Run-off Waste Pollution Heath and well-being Management Ecology

The implementation of the Code The implementation of the UK Code for

Sustainable Homes is managed by BRE BRE is an independent and impartial,

research-based consultancy, testing and training organization, offering expertise in every aspect of the built environment and associated industries to create better, safer and more sustainable products, buildings, communities and businesses.

Implementing the Differential Property Value TaxationDPVT= a X (value of land) +(b - ei) X (value of structures/buildings)Where: a>b a: land tax rate; b: buildings tax ratei= 0,1,2,3,4, 5, … LEED rating, “sustainable

homes” rating or other rating adoptede5 >e4 >e3 >e2 >e1>e : building tax rate deduction

due reduced environmental impacts/increased social benefits (incentives for improvement); the higher the rating the higher the deduction; e0=0 (i.e. uncertified). It is the owner’s responsibility to seek and obtain certification

Easing Implementation of DPVT

Apply lower tax rates to small land owners (or below certain total land value)

Phase-in of differential tax rates over several years to attenuate impacts on large land holders

Include a tax credit provision in communities with land-rich but income-poor citizens to mitigate impact of land-value taxation

Introduce measures to ensure best practices by local assessment officials and frequent reassessment (now easier with computerized systems, GPS and satellite imagery)

Adjustments needed

Green spaces within urban areas should be assessed at their current use or exempted if they meet certain environmental specifications

Green areas outside the urban fringes should be treated likewise (to ensure preservation of the countryside); the lower or zero tax could be thought of as payment for environmental services rendered

The increased financial pressure on owners of vacant lots and derelict properties within urban areas to develop them would lessen the pressures to expand the urban fringe and restrain the urban sprawl

ADVANTAGES OF DIFFERENTIAL PROPERTY VALUE TAX

Shifting part of the tax burden from buildings to land would

discourage land speculation, urban sprawl, and poor site use

encourage land development and better land use within urban areas

increase the viability of public transport help preserve the countryside from

haphazard development

ADVANTAGES OF DIFFERENTIAL PROPERTY VALUE TAX (cont’d)

Providing a tax advantage to socially environmentally, and culturally sensitive design, construction and use would result in a gradual transformation of urban, regional and tourism development into one that provides:

higher quality of life for residents a more attractive destination for tourists a more attractive location for foreign

investments