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Lone Star State Tax Reform

Keep the Lone Star State Great!

Remember the Alamo? How about: remember what happened to California after the passage of proposition 13, which effectively destroyed property tax and the California housing market, and some may argue even California itself. There is a direct correlation between reliance on property tax and housing affordability. Within 18 months of Prop 13's passage, foreign ownership of California land DOUBLED, and they have been the target of land speculation ever since. 4 of the 6 most affordable cities are in Texas. 23 of the 25 most unaffordable cities are in California (credit to Dan Sullivan).

There is a proposal in the Texas Legislature to effectively gut the property tax system in Texas in favor of a sales tax system, very similar to what California did, with some of the sales tax proposals being ~12% and others at 19-20%. See HB285 in the 2017 special session. See Dan Sullivan's additional commentary for what can happen under sales tax schemes. What follows is an attempt to suggest a better path AND address the rightful concerns of the tax payers.

Let me first emphasize: I truly believe the soldiers in this agenda of fixing property tax in Texas, and the People of Texas affected by rising property Taxes TRULY mean well and have legitimate complaints! I have discussed this topic with many, and found their heart is in the right place and they are RIGHTFULLY upset by the annexation practices of cities as well as local officials' inability to reduce spending in many cases. Also, I don't necessarily believe the local officials are acting in bad faith either, in discussions with them, they often, but not always seem to have requirements dictated to them by the State - such as having elections, that have high costs not perceived by nice folks like you and me.

But --- Whatever are we to do? We have to do something! How about simply removing or reducing the taxes on productivity where we can- gradually if necessary, and let the loss in taxes on productivity (houses, sales, etc.) be made up through a wider tax base. Turning the deserts of Texas into gardens of prosperity! If we can't do it all at once, at least give some communities the opportunity to try under their own right of self-determination. Self-determination is one of the key elements of the Texas identity, IMO.

A Ph.D. Economist from the Texas Public Policy Foundation testified on HB285 which aims to upend the property tax in favor of a sales tax. It would be helpful to consider these comments on his testimony: 

"What the proposal ignores is that the property tax is both one of the worst taxes and one of the best. The worst part is the tax on improvements--houses, commercial structures, factories,barns, orchards. Taxing improvements discourages their creation and penalizes good maintenance. The best part is the tax on the land or location value of each parcel. It lets the property owners pay for the privilege of the special benefits their sites enjoys, not through any efforts or contributions on their part, but due to the community-provided amenities such as roads, schools, police protection and so forth. Failure to collect this land tax promotes land speculation which undermines the economic health of communities and distorts the free market of the development industry.  What's needed therefore is not elimination of the property tax but rather a major reduction (or elimination) of the portion of the tax that falls on man-made improvements. Many examples of where this has been done reveal that it results in less urban sprawl, fewer slums, revived downtowns and more affordable housing." 

"Property tax keeps housing prices stable and affordable. Consider that the two fastest-growing states during the last half of the 20th Century were Texas and California. Yet real estate prices rose slowly and steadily in Texas, but in California, after they restricted property taxes with Prop 13, real estate prices rapidly rose and fell, making it and Nevada the leading states for mortgage foreclosures. (Nevada also has very low real estate taxes due to revenue from minerals and from gambling.) Before Prop 13, California's "affordability index" was only 10% higher than the national index. Today it is well over 3 times as high. 23 of the 25 least affordable cities in the country are in California. Meanwhile, for of the six *most* affordable cities are in Texas (Abilene, Wichita Falls, Corpus Christi and San Antonio). Lest anyone think this affordability difference is due to climate, let me point out that dusty nasty Bakersfield, with nothing but vinyards and oil derricks, is less affordable than Austin, the garden city of Texas. Sales tax, on the other hand, is the most economically destructive tax one could choose. It helps established monopolies by falling particularly hard on new startup businesses, whose profits are often far less than the sales tax would take away. The *only* bad feature of property tax is that elderly residents pay it. This can be offset by giving each municipality the power to give a per capita grant to people over 65. The rebate could be up to the amount paid in property taxes on homes with elderly people in them." -- Dan Sullivan, Director of Saving Communities

Some will want to quote economists and chant "Taxation is Theft", but it is helpful to remember that many economists and famous folks have offered opinions on this topic from time to time, saying that the land value tax was the least bad tax. The list includes Smith and Friedman, and David Nolan, a founder of the Libertarian party, who seemed to believe that LVT was the least bad tax. Others from a wide range of political spectrum have opined on the land issue.

What follows is my meager explanation and work-in-progress so please give it its due despite any grammar or flow problems.

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Background

What follows is additional background and points for a proposed solution for solving deadlock in the Texas political process and achieving the fundamental aims of both the Left and Right. Some of it rests on moral arguments, but there are also economists and various "credible people" from a wide range of life. Warning - in what follows, there will be some hasty generalizations. This page is the sister page for a broader initiative to bring land reform to the United States. See Harmonious Tax Reform

Consider and entertain: in American politics, the so-called Left seems to focus on everyone getting their "fair share", whereas those on the Right seem concerned about excessive taxes and entitlements. Neither side is really happy, but perhaps both are not wrong, but not entirely right either and would need to be willing to entertain the other side's concerns, for even a moment, in the hopes of resolution. Not possible? Well, consider that Kennedy and the leader of the USSR at the time, Khrushchev, managed to avoid global thermonuclear war. Try to keep an open mind in what follows, please.

Imagine that all of us just woke up here one day - no history, no governments, no houses. We'd all pick a nice spot to live and settle down. Life would be great until we started to run out of room and some were eventually forced to live on the North and South poles. Perhaps there is a way around such polarization? Consider, hypothetically, that if it were possible to claim ownership to the Sun and deny access to others? What if one could even sell access to the Sun light? Wouldn't that be sort of ... ridiculous? Of course. We could make a similar argument for the Ocean or perhaps the moon.

These examples are easy to see and everyone, Left and Right, can agree.


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Do we treat land, a natural resource, differently, because we can divide it or claim it with force? Let's divide it:

Consider -none has an inherent / natural right to your labor or mine, any more than one could claim right to your grades in school.

Yet, our model of everyone picking a nice place to settle down breaks down as soon as someone starts claiming more than he needs or there are no more good spots for the new people being born.

Some will counter that not all labor is the same (e.g., the ditch digger works harder than the comedian perhaps) as justification to tax some people's labor more than others, but we can all agree that to survive in this world certain basics are needed: air, sunlight, water, shelter, food, etc. In our present system, we help the new people by laying claim to the labor of some folks via income, sales, taxes on the improvements on the land. These are all taxes on productivity - like putting an anchor on a boat. The money from taxes is used to make schools to give these new folks skills to buy their own place one day. Basically, the way our system is designed, new folks feed themselves, by being forced to to rely on the labors (taxes) of others. Depending on where born the result can be relatively painless or someone can be born into a ghetto environment. Is there any reason why a ghetto environment should exist in the first place? Can't we do better AND not take from the labor of others while doing so?

Consider and entertain: Isn't the loss of jobs to foreign nations what gets Trump's supporters excited? Likewise, isn't the same thing in a different form, promises of more education, presumably to get better jobs, what motivates the Sanders' supporters? Can you see how it is sorta the same thing? Sorta?

What?

In light of the increasing calls for fair shares and guaranteed income from the Left and calls to reduce Taxes and entitlements from the Right, with none really getting anywhere, is it time to revisit a rather ancient concepts concerning property put forth by the great philosopher, Locke, himself and to revisit the ideas of founding fathers such as Thomas Jefferson or Thomas Paine on the matter. Regarding the fairness issue, consider and entertain: the station of the tribes living in South America who may have yet had human contact. Is it UNFAIR to them, that people in our neck of the woods may have an XBOX and they do not? Perhaps there are underlying reasons for the differences between different sections of humanity in the same way that there are underlying differences between male and female? And there may be a way to deal with this issue, at least in side of some States or counties, by revisiting our notions of what constitutes property. Fortunately, there is something built into our system in most States that could, in theory, allow for removal of the earlier mentioned taxes on productivity, in favor of compensating people for the loss of access to the land. Most states already support a property tax on the unimproved land itself. There is still plenty of room for corruption in such a system, but the closer to the people it is, the better, in my opinion, so as to limit the role of corruption.

Support

Land Value Tax Quotations

Why?

The idea behind the land value tax is to provide a fair opportunity for those entering this world. Note: I did not say result! Fairness for what people have labored to create. No one has right to your labor, yet no one has right to that which he did not create! See another article here for a deeper explanation.

How?

From a practical perspective, many states already have an existing property tax system as does Texas. One proposal is simple - identify a county or even smaller subdivision, perhaps even a privately held tract, to run as a pilot program to test for feasibility of a land value tax system. Do it right! Don't try to sabotage it and then point to it as an example of failure! In the chosen microcosm, allow for exemption from most property tax or gradually reduce the taxation on structures and improvements to nil, and gradually raise the taxation, or rather, allow for economic rent to be extracted from the land- basically provide some compensation to members of the chosen entity to either distribute the funds or make improvements for the community as a whole. It sounds sort of strange, right? See here: for an example.

For a more detailed discussion see this video series. Many taxation systems may employ an exemption system and the land value tax could and has incorporated exemptions on the basis of homesteading or agricultural usage - this may mitigate the negatives of this system, at least from a perception standpoint.

Examples of Success?

On a national level: Denmark, Singapore, Hong Kong, Taiwan, laid the foundation of the land value tax in their system and appears to have reaped the rewards; however, they eventually turned towards income taxes and the like. Why? It is my understanding that after using this system, eventually taxes drop lower and lower, which results in the system itself being dropped by the taxing authorities. See here for commentary and discussion.

Here is a sample quote: 

"Apologists for state planning and state partnership with big business point enthusiastically to Pacific Rim Asia but overlook the fact that all these success stories began on a firm footing of land reform. The city-state Singapore, founded on Georgist tax principles, reached a tax rate on land of 16%. Hong Kong existed only on crown land, funding 4/5 of their budget with 2/5 of site Rent (Yu-Hung Hong, Landlines, 1999 March, Lincoln Inst., Cambridge, MA). The city uses land rent, not subsidy, to fund their new metro and in its suburbs grows much of its own food. Hong Kong enjoys low taxes, low prices, high investment, and often the highest per capita salaries. The city is often voted the world’s best city for business and the freest for residents. "

Some towns in America have had success with one town, Fairhope, Alabama noting a key part of our current issues: 

"There was fierce opposition to the idea of taxing 100% of the rental value of land on the part of railroads, mining companies, land developers, and others, and the single tax was never implemented. In the 1880's when the single theory was being promoted, the responsibilities of government were such that the revenues from a single tax on land could probably have paid all government obligations of the time. As years went by, however, the role of government has changed to the point where a single tax on land could not generate the revenues required to fund the expanded government activities."

In the foregoing, note the role of spending: "role of government has changed to the point where a single tax on land could not generate"

More discussion follows here: [1]

Economic Rational

A rental fee (that's what your property tax is currently anyway, so you have nothing to lose) on land owed to the local community (that's up to you and your community to figure out), results in unused land being put into production, rather than held in speculation. This increases the available "supply" (land patents for sale) for awhile, which in turn drives down the cost of land, which in turn drives down the taxes for individual land owners who have put their land to productive use, for awhile. Then the authorities, depending on how jaded you view them, will realize that the no longer have rich land owners greasing their pockets or fat government retirement packages to fund, and will say, we gotta raise taxes to match our spending, and abandon or weaken the system!

Then they go back to taxing labor (sales, wages, capital gains, inventions, etc.), presumably to encourage more efficient labor, in the same way that putting a monkey on someone's back makes them more efficient. That's what usually happens. Then someone will say the land tax doesn't work and try to discredit it.

But, if allowed to proceed further, land values start to level out, and with more land being in productive use, this results in economic prosperity, this attracts labor, etc. etc. IMO, this is what happened in post war Japan, where the famed general implemented land reform. The land holders will typically oppose such a system, because it reduces their ability to make money through their holdings, and usually the land holders have control over the political process in one way or another. Please don't take land holders literally. All it means is that in order to produce, access to the natural resources is generally the basic input to the economy.

Challenges

All systems have their challenges, here are a couple for the LVT or similar proposals I have encountered, though there are plenty of rebuttals. LVT has its own set of issues if is implemented by a State/Country. See the Strengths and Weaknesses of Various Ideologies.

  • Some segments of the population may spend their inheritance on frivolous living
  • It may not deal well with derivative financial instruments
  • There may need to be homestead or other exemptions, similar to how 'unimproved' food is exempted in many sales tax systems.
  • Consider: [2]
  • Consider: possible setup challenges
  • May impact elderly more, consider adding a rebate upon reaching a certain age.


Local Conditions

Local conditions may alter the value proposition or what makes sense. When I visited Iceland I learned that they have very cheap energy there. It has something to do with the island being on top of one big volcano. In Texas, the state constitution expressly prohibits ad-valorum taxes at the State level, but this amendment is misleading as it has freed up numerous political subdivisions to use ad-valorum taxes on improvements. A sample of communities, hypothetical and real, with differing tax structures is provided in what follows:


The Game Plan / Next Steps

  • Currently, the state legislature is seeking to more tightly regulate the various municipalities that have not found it possible to reduce the tax burden on citizens. The State is stepping in with various token gestures; however, the real goal is to find communities where the LVT may make sense.
  • Join the Facebook group if you would like to support efforts to implement at a municipality, county, or local level. State level interaction may be needed for allowing municipalities to govern themselves in this area.
  • Generally, educate chamber of commerce members.
  • Participate in forum discussions to educate the general public.
  • Identify and recruit politicians to sell the idea in a pilot for an independent county, city, or school district. Personally, I don't think that large amounts of people will ever accept such notions, but I do believe they might allow it for some communities.

Before rushing off to battle, please remember that everyone is fighting a battle of some kind. Work hard, but be nice.

Additional Reading

Debate with yourself - did Japan's economic miracle originate from land reform, or was it merely stymied by lack of access to credit as a result of land reform? Was empirical data used? Comparisons before and after?

  • Consider a quote from this study backed by at least some empirical data and analysis:

"Empirical studies of the impact of land reform are rare since reliable estimation requires data from the pre- and postreform periods. In India there are numerous case studies of land reform (reviewed below), but few attempts to look at the overall picture. Discussion of the theoretical impact of land reform has been dominated by the frequently found inverse farm size-productivity relationship, whence small farmers are supposed to achieve higher yields (see Binswanger et al. [1995]). This suggests that finding means of evening the distribution of landholding should lead to productivity gains in addition to redistributive benefits. However, land reforms in India are rarely of a form that could directly exploit this possibility. Moreover, careful analyses, such as Banerjee and Ghatak [1997] show that the theoretical effects on productivity are inherently ambiguous when assessing the impact of tenancy reforms that allow tenants greater security. Our main finding is that there is a robust link between land reform and poverty reduction. Closer scrutiny reveals that, in an Indian context, this is due primarily to land reforms that change the terms of land contracts rather than actually redistributing land. Consistent with the antipoverty impact, we find that land reform has raised agricultural wages. The impact of land reform on growth also depends upon the type of land reform. Overall, there is some evidence that the gain in poverty reduction did come at the expense of lower income per capita. We show that all of these results are consistent with a simple model of agricultural contracting." Source: Land Reform, Poverty Reduction, and Growth: Evidence from India 
Author(s): Timothy Besley and Robin Burgess
Source: The Quarterly Journal of Economics, Vol. 115, No. 2 (May, 2000), pp. 389-430 Published by: Oxford University Press
 Stable URL: https://www.jstor.org/stable/2586998

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