Real Estate Economics 156 Foldvary

The taxation of real estate

Adam Smith’s canons of taxation.

1. equitable. 2. certain: one should be able to predict what one has to pay.

3. the excess burden, including the collection cost, should be minimized.

Two rationales for taxation: benefit, and ability to pay.

Income and sales taxes are based on ability to pay.

Sales taxes are regressive because the poor spend a greater percentage on taxable goods.

Dependence on sales taxes makes cities favor retail rather than manufacturing and offices.

Taxes on land reflect benefits.

Taxes on buildings do not reflect benefits other than for fire protection.

Explicit rent provides an ability to pay.

Implicit rent can usually be configured to ability to pay.

The British colonies in America had real estate taxes.

The Articles of Confederation authorized the confederate government to collect taxes from the states in proportion to their land value.

The U.S. Constitution specifies that direct taxes be proportional to state population.

Real estate taxes are direct.

The federal government levied direct taxes several times until 1861.

There was then a Civil War income tax.

In the US today, real estate taxes are collected by counties.

But the government of California takes some of it.

Proposition 13 limits the real estate tax to 1 percent of value,

and limits increases to 2% so long as the property is not transferred.

There is a small homeowner’s exemption ($7000).

Over time, long-time owners pay much less than new owners.

Commercial land turns over less, so gets taxed less.

California constitutional law requires the total real estate value to be taxed.

In Pennsylvania, a city can split its property tax rates, different for land and improvements.

P. 293: real estate is visible and immobile.

Land does not hide, flee, or shrink when taxed.

Buildings are, however, mobile in the long run, and some improvements can be hidden.

People do not evade property taxes because the penalty is the loss of the property.

Real estate taxes are suited to local taxation.

Income taxes require a large area to avoid flight.

P. 293: property taxes are shifted to tenants and business clients.

– only true for the buildings.

Real estate taxes seem regressive since very rich people put their extra money to use other than real estate. But the rich own stocks and bonds that are based on real estate, so taxing land is progressive, since the rich own more stocks than the poor. Also, strict assessment based on market value would tax rich properties more.

Nonprofit organizations, including churches, are usually exempt from real estate taxes.

That is a subsidy.

Tax credits:

Boston Financial Qualified Housing Tax Credits

Boston Capital Tax Credit Fund

Henry George. Progress and Poverty.

Rent is a surplus that can be taxed with no bad economic effect. The single tax.

A tax shift from labor and capital to land rent will also equalize income and reduce poverty.

It is equitable because public goods are capitalized into higher land value.

Private communities use the Georgist method because it is efficient.