Spencer Heath Archive

Item 1829

Letter to Adam Shantz III, Chairman, National Committee on Local and State Taxation, National Association of Real Estate Boards, July 20, 1934, as self-published in mimeograph in Heath, Politics Versus Proprietorship, 1936, and subsequently revised by Heath August 27, 1939, to be submitted to Emerson Goble, Editor, National Real Estate Journal, Chicago_, for possible publication. (Title supplied)

 

Original is missing.

Dear Sir:

     The writer of this letter has recently completed a seven-years study of real estate with special reference to those factors in the general economy that seem chiefly responsible for the great decline in profitable occupancies and in new improvements and therefore in the marketability of unimproved sites and locations. A definite understanding of these adverse influences has prompted the formulation of a positive policy to be recommended for the consideration of all organized real estate interests. I am submitting this in the form of the enclosed article for your examination as to its value for your publication.

                            Very truly yours,

____________________________

 

TAXATION AND LAND VALUES:

A FRESH ANALYSIS

 

Spencer Heath

     Summary

Taxes on buildings and real estate improvements make them more costly and less profitable to use or to own. They therefore reduce and may even destroy the demand for improvements, and with it, the demand for the land to which they are affixed; and also for the land on which new improvements would be made, if the demand for them had remained unimpaired.

     Taxes on land value, however, do not make improvements more costly nor less profitable to use or to own. They do not reduce the demand for improvements nor for the land on which improvements are made. They do not increase production costs, and therefore do not impair the revenue out of which all income to real estate must arise. On the contrary, land value taxes when properly applied to needed community services and not wasted or misused, are a chief factor to attract population, enlarge its productivity, and therefore increase and maintain the value of both improved and unimproved land.

____________________

 

     All the incomes to consumers, all that upon which men and families subsist, comes from the administration of property — of capital properties — so that consumers’ goods are brought forth and the capital properties remain unconsumed. Capital cannot be administered except by those who own it, for none but its owner has a high interest in preserving it. Without owner-administration, capital is consumed and destroyed.

 

     To all owners of property (other than what they consume), the problem is: Who shall deliver us out of the hand of the politician — that is, from mounting taxation on all forms of present property and from monstrous public debts tax-mortgaging future properties? It is apparent to all that there must be some limitations and resistance to these onslaughts against property if the very needful production and flow of consumers’ goods is not to be destroyed. It is the public as well as the private duty of the owners of real property, the primary and basic values of any civilization, to unite on some rational and effective policy in this necessary resistance.

 

     When it comes to tax limitations on real estate, two courses should be clearly distinguished. On the one hand, we may seek the greater reduction or limitation of taxes on sites and locations and the income from them, or, on the other hand, we may seek to limit or abolish the taxes that penalize improvements on land — that tax away the value and the use of the one kind of property without which the sites and locations cannot have any actual service or income value.

     As an owner of both industrial and suburban properties, almost entirely unimproved, I should, on first thought, greatly prefer to limit taxation on sites and locations and leave the principal or entire burden on those who own chiefly the improvements on land.

     However, it is but a short step to realize that the more burdens there are on improvements the less desirable they become, and the less they will be extended and maintained; and until there is a tendency to maintain and extend building and improvements, it is useless for me to look for any increase in the value or the marketability of my unimproved land.

     To escape this, my mind turns to objects and kinds of taxation apart from real estate — sales taxes, or license or occupation taxes, or process taxes, or income taxes and mortuary confiscations — and I feel that among these may be found a kind of revenue that will not cut down the use and improvement and hence the value of land.

     But I find that every one of these taxes is an impediment to the turnover and to the keeping up of investments in business — that it /each/ impairs profits and thereby restricts exchanges; disemploys capital and labor from the use of buildings and improvements in the processing and handling of commodities; /and/ cuts off the demand for basic materials, and these /which then/ accumulate as surpluses in agriculture and the other extractive industries.

     In none of these effects can I see any tendency to encourage building and improvement, or any increased demand for my own land for such purposes. On the contrary, I feel that as an owner of unimproved land I must distinctly suffer from my own exemption, if it places such obstacles in the path of the productive industry, from which alone I can hope for any betterment in the demand for my now stagnant holdings.

     Moreover, every tax or restriction on active business or on income that might otherwise be invested restricts or reduces the working capital that can be employed and the number of producer units that can be engaged or continued in any industry. This introduces a tendency in the direction of monopoly, which tendency has even now become almost completely realized in a number of lines.

     The evil of this is that monopoly, by attempting to raise prices, cuts down both the demand for its goods and their supply. But before this occurs those units which have survived in the monopoly seldom fail to over-capitalize themselves upon the expectancy of a continuation of the monopoly prices which they temporarily enjoy. It is enough merely to suggest the evils that follow in this train: how, with falling demand, production at last falls short of maintaining this capital structure, its market support must decline, and its scarcity values collapse.

     It is enough to note that nowhere in all the results that follow upon the burdening of active production is there any factor to make possible a revival of the demand for land, or a renewal of demand for buildings and their accessories or other improvements upon land. From all the foregoing you can see /it can be seen/ that in my position as owner of unimproved real estate, I cannot be enamored of the results to me from the exemption of land without exempting the use of land, however alluring its immediate appeal.

Exempting improvements

     Turn now to a contrary exemption, partial or complete, of those elements in real estate values which arise from business activity, and are created by and also FOR the production of wealth — in other words, improvements.

     There are two things to note about improvements: (1) Their materials and supplies originate in the using of land and the products of its use, all constituting a primary demand for land. (2) It is only by the making and using of improvements on land that any considerable production or income can be brought forward out of which business can buy or rent land or finance its purchase and make further improvements.

The real estate market

     From this it is clear that nothing can be more vital to real estate generally than that improvements should be maintained and extended, and that business should use these improvements with such freedom from restraint on production and exchange that there will be not only a demand for existing improvements, but also profits to warrant and invite investment in real estate for productive purposes. This is to say that what we most need is a market for real estate; but it also, I believe, points out the only way this market can come. Such a market, it is clear, simply cannot develop upon the policy of increasing taxes or otherwise discouraging the use and making of improvements.

     What has happened to the real estate market? Capital is abundant; much of it idle and “eating its head off” in depreciation and repairs. Even “liquid” capital is working, much of it, for less than two per cent, and much is hidden away and depleting itself to pay for its own security against the hazards of performing its normal functions through the use of land. And what are these hazards? Capital must be assured of permission to produce and to yield; but of only one thing is it now assured: taxes!

     Then why should we not consider some exemptions from taxation of the capital that is invested in real estate improvement? It is plain that such exemption must tend to draw capital into use, and in use of capital lies the demand for land. As an owner of land, I must welcome whatever exemptions tend to attract capital to use what I own.

     Now, doubtless some will ask how I can profit, as an owner of unimproved land, if the burden lifted from improvements must fall on me? I admit I would be in some­what better shape if I had become an owner of improvements shortly before the exemption took place, and thus had the benefit of the quick demand for their use which the exemption would introduce — without having suffered the long decline while improvements were out of demand.

Exempting land

     But I have my recompense in this: while the burden remains on the improvements, they (as well as the land) decline in demand and in price, and they also physically decay. The damage is not at an end with the payment of the tax; it has only begun. The amount “out of pocket” may be but a bagatelle to the amount “out of value” from loss of market and from physical decline. But if the burden be transferred to the land, it cannot exceed the amount of the out-of-pocket tax, for then the demand for the land becomes not less, but more. The putting of improvements to use (or to more profitable use by their exemption) requires also the use of the land — the land on which they stand, and other land. In fact all land rises in demand as do the improvements, and because of the same exemption.

     Moreover, although the loss and damage to the value of the improvements was greater than the amount of the tax laid on them, the very reverse, as we have seen, may be true as to the land when the burden is transferred to it.

     And there is still further recompense: If the increased tax be usefully employed for the better maintenance of the community through its public services for which there is a real need, such as streets, with their improvements and equipment, instead of being worse than wasted on costly “enforcement” agencies and departments, set up to harass and limit the productive activities of the community, and to make jobs for corrupt or, at best, parasitic politicians, if the taxes be at all properly employed, there comes back to the landowner at least a part of what he has been taxed, and if they are profitably employed, there comes back to him in increased rental, or higher capital values, all that he has paid and substantial profits besides.

     From reflecting on these matters, I am strongly persuaded  (1) that real estate owners have everything to gain and nothing to lose through a better adjustment of whatever tax burden they bear; (2) that this adjustment should take the direction of obtaining the largest possible measure of tax limitation, or exemption, for improvements; and (3) that such part of any improvement-exemption as must still be carried by real estate should be transferred to the income to land and in proportion to its income value.

     This does not mean that the total real estate load may not be reduced, or its increase prevented. In any case, there is a threefold advantage in the transfer: (a) the taking of the improvements from between the jaws of tax-eaters; (b) the emancipation of the land value from the suppression of demand from it; (c) the building up of the land value by the restriction of its tax contributions to constructive public purposes.

A constructive policy for real estate

     In this connection, I think it would be well worth the attention of the organized real estate authorities generally to consider the development of a constructive business policy regarding taxation as making payment for public services in such manner as to place no final burden upon themselves as taxpayers, but, on the contrary, to afford them opportunity to make profits on voluntary payments in lieu of taxes (as public costs) through the enhancements that exemption of improvements would bring to their properties. It is clear that in populous and productive communities the public services, badly and wastefully as they are now performed, are a chief requisite of all the value that is in the land.

     From this thought it is only a step to realize what profound effect it would have upon the income and selling value of land, if these services should be even so well conducted as a first class mercantile or industrial establishment. With this in view, it would be a fruitful function of organized real estate interests to concern themselves not alone with the right placing of the tax burden, but to use their proper influence and intelligence upon the authorities, so that the resulting public services would bring back in value to real estate owners at least a large part of all taxes paid on account of land value or income.

     I believe it is entirely within bounds to predict that application of this technique would guide us to the achievement of a high order of public administration, in which it would prove an opportunity and a privilege belonging to those who privately manage real estate to become investors in public enterprises and co-administrators with salaried public servants and experts for profitably carrying on community functions and services.

     The practice of making profitable public investment, in lieu of tax payments under compulsion, should make the ownership of land especially attractive to persons who, having eminent gifts for public administration would find it desirable to devote their activities and resources to the development and support of land values by prudent and fruitful creation and maintenance of public services. Activities of this kind would logically be coordinated and carried on by the organizations representative of the real estate interests in a local and national way.

     Meanwhile, and until the relation between taxes and land value (and the technique of creating land value) is more clearly discerned, I believe it is of the utmost importance to every real estate interest to obtain the highest exemption for improvements, and leave the remaining burden, so far as possible, upon the land alone. I think the inauguration of this policy by real estate interests depends only upon their realizing the baleful effects that improvement taxes have upon both land and improvements, and the highly profitable results to land value itself that can be obtained through judicious use and application of tax funds voluntarily to public needs and services.

    In support of these conclusions, I would point out that in the history of this country,/the United States/ and of others similar /countries/ to our own, a long-continued increase in the tax burden has always been followed by a collapse of real estate values, and where there have been exemptions of improvements — as in Canada, Australia, New Zealand, and Pittsburgh — this has led invariably to marked increase in land value, and this increase has been maintained, at least relative to other values, throughout the depressions that destructive taxation and restrictions have so repeatedly brought on. Even temporary exemptions of improvements have proved effective to stimulate building and general real estate activity.