They Ain't Making More of It: By George, a Tax Plan That Funds the Schools and Saves the Farm
By Wylie Neal Harris
The Touchstone
January 2005
Online at: http://www.rtis.com/touchstone/jan2005/p34.html
What does a cash-strapped state education system have in common with a rapidly disappearing agricultural land base? A potential solution articulated by a forgotten 19th century economic prophet.
With money to pay for Texas public schools in ever-shorter supply, a plethora of contending plans to fund Lone Star education has recently emerged [1] [2]. Of these, Governor Perry's best exemplifies the venerated tradition of wrongheaded Texas executive governance. His proposed lowering of the cap on property value increases would not only make the state's tax system more regressive, but would also fail to generate any new revenue to pay for education [3]. Even Perry's critics, though, have literally abandoned progressivism, with arguments based on which plan is construed as "least regressive." Through those lenses, a state income tax looks like the best option [4]. But income taxes, like the present state sales tax, have also been roundly criticized as disincentives to private economic enterprise, penalizing public goods rather than "public bads."
The state's current property-tax regime is also one of the culprits responsible for Texas' plague of sprawling suburban development. With land values highest in the cities, developers look to the rural periphery for the cheapest real estate, guiding the tide of homeowners out from urban centers. This pattern, though by no means endemic to Texas, put the state first in the nation for the amount of farm and ranch land lost to development between 1992-1997. Conservation easements have been successful at protecting pockets of wildlife habitat from sprawl; last year, the private acreage under such protection exceeded that contained within the state park system [5]. But that's still only a third the rate of agricultural land development. Conservation easements targeted at agricultural lands have been slower to catch on in the state -- far too slow to stanch the hemorrhage of asphalt and concrete onto two acres of Texas farmland each minute [6]. Meanwhile, back in the cities, lots are left vacant because their site value appreciates more rapidly than the potential profit from developing them. With the bulk of property tax value derived from improvements, every lot left vacant -- and every household opting for a home in the suburbs instead -- means a smaller tax base for the city. For all their "smart-growth" spin, the strategies thus far attempted as the public-policy analogue of chemotherapy for this cancer of sprawl -- zoning, urban growth boundaries, and the like -- are sharply criticized for their similarly poisonous effects on free-market economic development.
The situation seems a certifiable catch-22. The state education system's funding base isn't providing enough revenue to run the schools, yet the taxes on it are so purportedly onerous as to foster overwhelming cries for relief -- while sending elsewhere the very development that could increase that base. What if there were a vast pool of public wealth that could be tapped to fund the state's education system, without penalizing private economic activity? Better yet, what if public appropriation of that wealth could simultaneously reverse the incentive to sprawl, filling in cities' empty spaces while sparing the countryside for agriculture and wildlife? What if, on top of all that, this means of revenue generation were not only "less regressive," but actually progressive in a positive sense? It sounds too good to be true, but according to modern-day advocates of a 19th century economic idea, the basis for such a system is literally under our feet.
A look under the hood of that idea requires rewinding the history of economic thought to the point where production was commonly conceived as the product of three factors -- land, labor, and capital. (Modern, or "neoclassical," economics considers only labor and capital, with land being subsumed into the latter.) Of the three factors, land is unique in a couple of ways. First, it's the only one that is not created by human activity. As such, while labor and capital thus belong to the individuals who produce them, land is the common property of the community. Further, as Will Rogers noted in his oft-quoted piece of investment advice, land is the only factor of production whose supply is both finite and fixed. But since not everyone can have access to land of equal value (or perhaps to any land at all), the portion of wealth generated solely by individual access to land -- called "rent" -- should properly be returned to the community as a whole.
In today's economic parlance, "tax the rent" sounds like yet another regressive formula for public finance, placing the burden of taxation the backs of apartment-dwellers. That perception, however unavoidable, is an artifact of semantic evolution. Classical economists defined "rent" as the economic return on land, while "interest" (whose meaning has similarly metamorphosed) was the economic return on capital, and "wages," (in a less altered sense) were the economic return on labor. Still, to avoid the negative perception, modern-day advocates of rent appropriation refer to the scheme as "land value taxation (LVT)," "site value taxation," or "geonomics." Henry George, its leading proponent during the era of classical economics, called it the "single tax," alluding to the fact that the stream of public revenue it generated would be large enough to obviate the need for any other tax.
That observation leads directly from the theoretical economic aspect of land value taxation to its pragmatic one: the public education system, along with other public institutions, is starving in the midst of plenty. But how much, exactly? Rent -- in the classical economic sense -- has been estimated at 40% of the national income [7]. If the full value of that ground rent were publicly appropriated, total public revenues would come out around $16 trillion -- a sum large enough to cover the federal budget with no deficit, pay off the national debt, and still have plenty -- as in, trillions -- left over [8] [9] [10]. In fact, conservative commentators have faulted land value taxation precisely because it generates such large public revenues, thus increasing the size of government. One solution is simply to return a dividend to individual citizens, as Alaska does with the royalties from its mineral resources (which, like land, are a common resource whose value should thus be commonly shared).
What's good for the national goose is also worth a state-level gander, which is where land value taxation intersects with Texas' school-finance boondoggle. The state's property tax rolls were worth just over $1 trillion in 2002 [11]. The current school-district property tax generates revenues of $16 billion from that base, with single- and multi-family residential properties footing roughly half the bill [12]. In a certain sense, the current property tax system already appropriates ground rent. But it appropriates only a tiny fraction of it, and lumps in a tax on private capital (improvements) as well. "Pure" land value taxation would drop the rate on improvements to nil, while appropriating the full rent of land. As noted in the national example, that full appropriation would generate revenues well in excess of current government outlays. The rate could be reduced to, say, 50% - about the rate at which Denmark taxes land value -- or even lower. Likewise, improvement values could still be taxed, albeit at a lower rate than those of land, as in the two-tiered property tax systems already in place in many US municipalities [13]. Such mixed approaches could still easily answer public funding needs, though any tax on improvements, or anything very far short of full appropriation of land values, compromises the progressive ethical basis of land value taxation.
Absent hard numbers on the amount of taxable value represented by improvements, as opposed to land itself, it's difficult to say what rates of taxation on each would work best to fund Texas education. The proportion varies widely from one appraisal district to another -- and it's in the appraisal district offices that the necessary numbers are to be found. In any event, the important arguments in favor of the idea lie less in its details than in its broader outline. First, since property taxes are collected at a local level, raising, rather than capping them, avoids the cap plan's increased reliance on the state to fund education [4]. Second, the burden of taxation would be more equitably distributed, shifting off urban homeowners (since they would pay no tax on the improvements that constitute the bulk of their property value), off rural landowners (since the agricultural exemption would remain in place), and onto wealthy individuals or companies with large and/or high-value landholdings. Land value taxation penalizes economic inactivity, charging steep fees for the speculative holding of large chunks of high value land out of productive use.
It is through this penalty land value taxation, in addition to providing a larger and more progressive revenue stream to fund education, that sprawling development can be redirected away from wildlife habitat and farmland and back toward urban centers. The key, again, is in the distinction, unrecognized in the current property tax system, between the private value of improvements and the public value of land. One engine driving sprawl is that overall assessed value of a given house is lower when the house is sited on a rural acreage parcel with relatively lower market value than an urban lot. While cutting taxes on improvements and raising those on land would not alter this relationship, it would create several other dynamics encouraging more compact and urban-centered patterns of development. First, raising the tax rate on land would encourage smaller lot sizes, so each additional unit of growth uses less land than before. Second, the current combination of improvement taxes and low land taxes create a strong incentive to speculation on urban properties. City lots, once purchased, can be kept vacant much more cheaply than they can be developed, while their increasing value promises a rewardingly high rate of return to the speculator. Dropping the improvement tax, while raising the rate on land itself, reverses this incentive. As the effects of this incentive toward urban development take effect, cities' currently dwindling cores will begin to grow once more, providing a tax base that grows more quickly than the geographic extent of its infrastructural needs.
When Henry George's work Progress and Poverty was published in 1879, it became the most widely circulated book after the Bible. Though forgotten today, it is still the most widely distributed of any economics text [14]. Since its publication, land value taxation has made enemies at both ends of the political spectrum. The economic right confuses its socialization of land values with an erosion of private land ownership rights. Meanwhile, the left reflexively reacts against any reduction in existing public revenue flows, however regressive or perversely incentivized. Land value taxation represents a middle path, funding public works through appropriation of common, rather than private value. It's an instantiation of the positive vision of capitalism expressed by anti-globalization activist David Korten: "I'm not against private property. In fact, it's such a good thing that I think everyone should have some." That's an idea that the Texas Legislature could literally take to the bank -- and to the forests and the fields -- when it starts trying to figure out how to fund the state's education this session.
[1]. Bishop, B. 2004. The school finance formula. Austin American Statesman Lasso. http://www.statesman.com/metrostate/content/custom/blogs/lasso/archives/2004/09/27/the_school_finance_formula.html
[2]. Bishop, B. 2004. Craddick on education and taxes. Austin American Statesman Lasso. http://www.statesman.com/metrostate/content/custom/blogs/lasso/archives/2004/10/29/craddick_on_education_and_taxes.html
[3]. Center for Public Policy Priorities. 2004. Governor's latest proposal includes dangerous cap on local taxes, no new revenue source for education. Policy Paper No. 210. http://www.cppp.org/products/policypages/191-210/html/PP210.html
[4]. Center for Public Policy Priorities. 2004. The Best Way to Pay for Public Education.
[5]. Land trusts set aside record acreage for conservation. Dallas Morning News, 31 December 2003. http://www.dallasnews.com/sharedcontent/dallas/tsw/stories/010104dntexgreens.9ce59.html
[6]. American Farmland Trust. Farming on the Edge. 2002, http://farmland.org/farmingontheedge/index.htm
[7]. Hudson, M. 2004. Has Georgism Been Hijacked by Special Interests? Groundswell 17(1).
[8]. US Bureau of Economic Analysis. 2004. Interactive Access to National Income and Product Accounts Tables. http://www.bea.doc.gov/bea/dn/nipaweb/index.asp
[9]. Office of Management and Budget. 2004. Budget of the United States Government, Fiscal Year 2005. Table S-1. Budget Totals. http://www.whitehouse.gov/omb/budget/fy2005/tables.html
[10]. National Debt Clock. http://brillig.com/debt_clock
[11]. Texas State Comptroller of Accounts. 2003. 2003 Final Property Value Study, School District Summery Worksheet. http://www.window.state.tx.us/taxinfo/proptax/pvs03fbook/pvs03f_3.html
[12]. Texas State Comptroller of Accounts. 2003. 2003 Final Property Value Study, School District Summery Worksheet. http://www.window.state.tx.us/taxinfo/proptax/pvs03fbook/pvs03f_3.html
[13]. Henry George Institute. 2004. Land Value Taxation Around the World. http://www.henrygeorge.org/rem0.htm
[14]. Katzenberger, A.J. 2002. A Synopsis of Henry George's Progress and Poverty. http://www.progress.org/cg/pandp1.htm