The Nobel-winning economist William Vickrey said
that the property tax is actually two different taxes
(Vickrey 1991). That is because buildings are capital,
not land, in the economic sense – even if, in
most legal codes, there is no distinction between land
and improvements made to it which are all lumped
together as ‘landed property’ or real
estate. Buildings and other improvements to land all
depreciate over time unless further capital is
expended. Eventually the market value of such
improvements may become negative, owing to the
costs that would need to be incurred by someone wishing
to redevelop the site for an alternative use. But that
does not necessarily take away the rental value of the
site.
Much urban blight is caused by these so-called
‘brown field’ vacant and under-used sites.
However they are often in valuable locations, with good
transport connections. It may be that owners are
speculating that land prices will rise and enable them
to sell at greater profit in the future than now, or it
may be that there is genuinely no market for sites in a
particular location unless the cost of remediation is
subsidised as a form of public investment. Such
investment, according to Vickrey and other followers of
Henry George, can be entirely funded from LVT. In a
lecture given in 1991, first published last year,
Vickrey claimed:
“Cities have the capacity to be fully
self-financing without dependence on either federal
assistance or on general taxes that are unrelated to
benefits received.”
The proviso, according to Vickrey, is to replace the
tax on buildings with a tax on land value alone –
LVT:-
“The property tax combines one of the best and
one of the worst taxes we have. The portion that
falls on sites or land values is the only major tax
that is reasonably free of distortionary effects and
is not intolerably regressive”.
Taxing buildings and work done to improve them
discourages such work. Un-taxing them and taxing land
more highly, irrespective of its actual state of
development but based upon its
highest and best
immediate potential use, will encourage owners to
maintain their sites and buildings in such a way as to
maximise their income.
A remote site or one with
conservation or other restrictions will have a low site
value, hence attract low taxes, whereas a high value
city centre derelict site will very soon be
redeveloped. The extra property tax revenue from
extending the tax base to sites that are currently
under-taxed (because the tax is based primarily on
building/rental value not site/owner value), ensures
public infrastructure projects can be funded without
resource to general taxes or excessive borrowing on the
financial markets. ...
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