Bayou Business Review, 7/13/98 p. 31
When is tax limitation not tax limitation? When its the homestead exemption from property taxes.
Of course, some people oppose our homestead exemption because they think that the homestead exemption limits the local property tax base and limits local spending.
With our homestead exemption, most people who would vote no in an election to increase property taxes now shrug their shoulders and ask "Why not? Businesses and people with fancy houses will pay the tax. It doesn’t affect my bank account." The problem is such reasoning is faulty because businesses end up raising their prices, passing on the tax to their customers. The tax gets disguised. Voters are not in a position to weigh the benefits of local spending against the cost of higher taxes. With the taxes disguised, voters tend to vote for more local public spending than they would have if they felt the full cost of the spending.
There is a tax reform that could limit the burden on homeowners while at the same time provide a reasonable tax base. What I am suggesting here is that all homes and other buildings and business assets be exempt from taxation, taxing only the value of land. Instead of a homestead (house, outbuildings and land) exemption, I am suggesting a home exemption.
In the nineteenth century Henry George, a journalist, pamphleteer and social critic, suggested that we rely on a tax on land and cut taxes on production and exchange, such as income taxes and sales taxes. Mostly, George was interested in helping the poor. Unlike Karl Marx, who saw inequality in ownership of capital as the reason for income inequality, George saw the inequality in land ownership as the reason for large differences between rich and poor.
While taxing land value may decrease the differences between rich and poor, there are other reasons to propose such a tax reform.
First, public funds, when spent on things that people value, increase land values. Most of us would rather live in an area with excellent public schools because it saves us from the added expense of private education. We would rather have good streets than those filled with potholes. We would rather live in an area where we have effective, professional police protection. Good public services increase the value of our land, and land value represents what people have to pay to live in an area where such good public services are provided. Taxing land merely makes people pay for what they get and gives local officials an incentive to provide better public services.
Second, taxing only land encourages economic growth. When we tax fine houses, people build fewer fine houses. Local taxes on business assets discourage people from investing in those assets in that community. Taxing sales discourages retail activity in that community. Taxing income also discourages people from engaging in productive activities that generate income. However, taxing land does very little to discourage the production of land. More than any other good or asset, land is relatively fixed in amount (living in coastal Louisiana, I realize that land can be built up and it can be destroyed).
Finally, taxing land puts takes away the distorted view of the choice most voters face in a tax election. The benefits of public spending are laid out to voters by spending proponents. Since taxes on land cannot be passed forward to buyers or customers because the of the limited supply of land, land taxes are paid completely by the land owner. Since local spending increases land values and local taxes reduce land values, the land owner is in the perfect position to make the choice, to weigh the full costs and benefits of various local spending proposals.
As with any proposal to change the status quo, a status quo we have all gotten use to, I do not expect immediate adoption. But Henry George’s idea of taxing land, not buildings and assets, is worth thinking about.