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Land value taxation : some effects on land speculation and the burden of municipal taxation Stewart, Douglas Allan 1974

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LAND VALUE TAXATIONt SOME EFFECTS ON LAND SPECULATION AND THE BURDEN OF MUNICIPAL TAXATION by DOUGLAS ALLAN STEWART A.B., Cornell University 1972 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS i n the Department of Community and Regional Planning We accept t h i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA May 197^ In presenting t h i s thesis i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y available f o r reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the Head of my Department or by h i s representatives. It i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. Department The University of B r i t i s h Columbia Vancouver 8, Canada i i ABSTRACT Throughout economic history, since the time of the Physiocrats, the idea of taxing land has been discussed, re-ceiving both enthusiastic approval and vehement condemnation. While i t has been held up as everything from a cure f o r unem-ployment and i n f l a t i o n to "a guarantor of perpetual i n d u s t r i a l and i n t e r n a t i o n a l peace," the property of the tax with which t h i s thesis i s concerned i s i t s propensity to i n t e n s i f y the use of land. Recently, t h i s property has resulted i n the tax's reception of a considerable amount of attention from p o l i t i -cians, planners and c i t i z e n s who f e e l that a substantial portion of the high cost of land (and thus housing) and the sprawl-type development i n the Vancouver area i s the r e s u l t of the withholding of land from the market by land specula-tors. The effect of increasing the tax on land i s to i n -crease the costs, thus reducing the p r o f i t a b i l i t y of holding land i n the expectation of s e l l i n g at a p r o f i t i n the future, so causing more land to be developed and ultimately, r e s u l t i n g i n an increase i n the supply and a reduction i n the price of housing. I t i s the purpose of t h i s thesis to examine the p o t e n t i a l of a p o l i c y of increasing the tax on land to a l e v e l necessary to accomplish t h i s goal i n the Vancouver area. The development of a simple land valuation model from the roots of c l a s s i c a l rent theory permitted a i i i demonstration (in theory) of the holding cost and capital-ization effects of the tax. However, the realization that the effects of taxing land in a theoretical world may differ considerably from the results of taxing land in "the real world", made necessary the model's extension to take into account the characteristics of and the forces acting upon the three main participants in the land conversion process; the consumer of housing, the residential developer and the pre-development landowner. By making explicit the difference in the landowner's and developer's valuation of land, i t was possible to con-struct a framework, which when provided with values for two variables, the rate of land value appreciation and the capi-talization interest rate of the speculator, is able to deter-mine the rate at which land must be taxed to force i t into production. An important factor to be kept in mind when changing the base of the property tax (land and improvements to land alone) or raising the rate of taxation on one part of the base i s the shift i n the burden of taxation among different properties or different types of properties that may occur as a result of the differences in the distribution of assessment between land and improvements among different properties. It was found that substantial shifts in the burden of taxation resulted from a shift to land value taxation and that the total burden increased drastically iv when land was taxed at a rate necessary to remove the pro-f i t a b i l i t y of land speculation. If the costs of this shift in burden are sufficient to block the implementation of this policy, i t i s necessary to look for alternative means of accomplishing the stated goals. The selection of alternative policies w i l l depend on the assumed cause of the problems (shortage of housing and sprawl). If speculative activity i s s t i l l seen to be the cause of housing shortages and urban sprawl, other policy devices with less costly side effects may be adapted to reduce the quantity of speculation. If land speculation is not the major obstacle to sufficient quantities of housing and orderly urban development, alternative public policies that influence other market factors or participants must be adapted. V TABLE OF CONTENTS Page ABSTRACT i i LIST OF TABLES LIST OF FIGURES . Chapter I INTRODUCTION 1 1.1 Shortage of Housing. 1 1.2 Urban Sprawl . . 3 1.3 Land Speculation 7 1.31 Effects of Land Speculation 8 1.32 E l a s t i c i t y of the Supply of Land 9 1.33 Monopoly Interest 9 1.4 The Land Value Tax 10 1.5 Thesis Overview 12 II LAND VALUE TAXATION. . 17 2.1 History of Land Value Taxation . 17 2.2 Advantages of the Land Value Tax 18 2.21 Unearned Increment. . . . . 18 2.22 Intensification of Land Use 19 2.3 Disadvantages of the Land Value Tax 21 2.31 Intensity of Land Use . . . 21 (a) Congestion. . . . . . . 21 (b) Premature Development . 22 2.32 Equity 22 2.33 Administration. . . . . . . 23 2.4 Summary - Land Value Tax . . . . 23 2.5 Land Value 24 2.51 Economic Rent 25 (a) Ricardian Rent. . . . . 26 (b) Locational Rent . . . . 28 (c) Summary - Economic Rent 29 2.52 Urban Land Rents 30 2.53 Capitalization of Rent into Land Value 31 2.5^ General Land Valuation Model 31 v i Chapter Page 2.6 Mechanics of the Tax on Land Values 33 2.61 Incidence of the Property Tax 3^ 2.62 Incidence of the Tax on Land . . . . . . . . . 35 2.63 Incidence of the Tax on Buildings 35 2.64 Incidence of the Tax on Housing 37 2.65 Summary of the Incidence of the Property Tax. . . . . 37 2.7 Economic Effects of the Tax on Land Values . . . . . . . . 38 2.71 Holding Cost Effect . . . . 38 2.72 Capitalization Effect . . . 39 2.73 Fixed Cost and Unburdening Effects 41 2.74 Summary - Economic Effects of the Land Value Tax . . 42 III THE LAND CONVERSION PROCESS 3.1 Introduction 48 3.2 Demand for Residential Land. . . 51 3.21 Derived Demand 51 3.22 Determinants of Demand. . . 52 3.23 Demand for Housing. . . . . 55 3.24 Demand for Components of Housing. 57 3.25 Summary of Demand for Residential Land. . . . . 58 3.3 Supply of Residential Land . . . 58 3.31 Speculative Motive for Owning Land . . . . . . . 59 3.32 Capitalization Interest Rate 60 (a) Income Time Preference. 60 (b) Opportunity Costs . . . 61 (c) Risk 62 3.33 Cost of Holding Land. . . . 62 3.34 Estimation of Land Value Appreciation 63 3.35 Summary - Supply of Residential Land. . . . . 65 v i i Chapter Page 3.4 The Developer 65 3.41 Indirect Effects on Developer Decisions . . . 66 (a) Housing Production Function . 68 (D) Locational Effects. . . 70 3.42 Direct Influences on Developer Decisions . . . 71 (a) Financial Factors . . . 73 (i) Cost of Capital... 73 ( i i ) Availability of Capital 7^  3.43 Risk of Development . . . . 75 3.44 Summary - The Developer . . 78 3.5 Summary - Land Conversion Process 78 IV THE LAND VALUE TAX RE-EXAMINED 82 4.1 Introduction . . . . . 82 4.2 Pure Development Model 84 4.3 Pure Speculative Model 84 4.4 Effects on Sprawl - Re-Examined. 87 4.5 Effects of the Housing Shortage -Re-Examined 88 4.6 Tax Rate Necessary to Lower the Price of Land. 91 4.61 Speculator Income Tax Rates 92 4.7 Equity Constraint. . . . . . . . 95 4.8 Summary 96 V THE EFFECTS ON THE DISTRIBUTION OF THE BURDEN OF MUNICIPAL TAXATION OF TAXING LAND AT THE RATE NECESSARY TO REMOVE THE SPECULATIVE VALUE OF LAND. . . . . . . 98 5.1 Introduction 98 5.2 Tax Rate Needed to Remove the Speculative Value 99 5.21 Rate of Land Value Appre-ciation in the City of Vancouver . . . . . . . . 99 (a) Methodology 99 (b) Selection of the Appropriate Rate. . of Land Value Appreciation. . . . . 104 v i i i Chapter Page 5.22 Speculator's Discount Rate 105 5.23 Rate of Taxation Needed to Reduce the Speculative Value of Land to the Development Value . . . . 106 (a) Present Rate of Taxation 10? (b) Shift to Land Value Taxation 10? 5.3 Shift in the Burden of Taxation With a Shift to Land Value Taxation 108 5.31 The Effect of the Shift on the Average Single Family Home. . . . . . . . . . . I l l 5.4 Shifts in Tax Burden When Land is Taxed at a Rate Necessary to Reduce Speculative Land Value to Development Land Value. . . 113 5.41 Effect on the Average Single Family Home. . . . 115 5.5 Summary - Shifts in the Burden of Municipal Taxation. . . . . 115 5.6 Limitations of the Analysis. . . 116 VI FINAL EVALUATION OF THE LAND VALUE TAX . . 120 6.1 Introduction 120 6.2 Unearned Increment 121 6.3 Housing Shortage 125 6.31 Effect of the Tax 125 6.32 Causes of the Shortage. . . 126 6.33 Policy Alternatives . . . . 128 6.4 Urban Sprawl . . . . . 129 6.41 Causes of Sprawl. . . . . . 130 (a) Dead Lands 130 (b) Public Policy 131 (c) Independent Decision-makers. . 132 6.42 Policy Alternatives . . . . 133 6.5 Land Value Taxation and Speculation. . . . . . . . . . 134 6.51 Tax on Vacant Land. . . . . 135 6.6 Conclusions and Directions for Further Research . . . . . 135 BIBLIOGRAPHY 139 ix LIST OF TABLES Table Page I Effective Property Tax Rate for Various Marginal Income Tax Rates 93 II Land Value Tax Rates Needed to Stabilize Land Prices Under Various Rates of Land Value Appreciation, Speculator Discount Rates, and Speculator Income Tax Rates, , . 9^ III Land Value Appreciation Rates for Selected Areas in the City of Vancouver -1967-1973 102 IV Land Value Appreciation Rates for Selected Areas in the Greater Vancouver Regional District - 1967-1973 103 V Improvement Value/Land Value Ratios and Total Value/Land Value Ratios for Land-Use Property Classes in the City of Vancouver 109 VI The Shift in Property Tax Burdens in the City of Vancouver, Following a Shift in the Base of Taxation from Land and Improvements to Land Alone . . . . 112 VII The Shift in Property Tax Burdens in the City of Vancouver Following a Shift from the Present Tax Base and M i l l Rate to a Land Value Tax Base and a M i l l Rate Sufficient to Reduce the Speculative Value of Land to the Development Value of Land 114 X LIST OF FIGURES Figure Page 2-1 Ricardian Rent 2? 2-2 Location Rent 27 ACKNOWLEDGEMENT I would like to thank my thesis advisors, Dr. Michael Goldberg and Professor Brahm Wiesman, for their thought-provoking comments, guiding criticisms and heartening encouragement, without which I could never have completed this study. I would like to take this opportunity to express my appreciation to Professor Wiesman, not only for assisting me at every step of the thesis-writing process, but for playing a large part in making my two years at the School of Planning, two of the most f r u i t f u l years of my l i f e . 1 CHAPTER I INTRODUCTION Two issues that have received a great deal of discussion in the past and continue to cause concern in the present are (1) the shortage of housing and (2) the "sprawled pattern of land use", which often occur in urban areas ex-periencing rapid growth. Vancouver has not escaped this experience. 1.1 The Shortage of Housing Anyone currently residing in the Vancouver area cannot help but be aware of the shortage of accommodation. Soaring rents and dwindling vacancy rates are evidence of the housing industry's i n a b i l i t y to meet the demands of a large influx of migrants. One explanation that has been offered for the paucity and high price of housing i s that there is a shortage of land for residential development in Vancouver. It is easy to understand why some people might come to thatcconclusion in view of the small percentage of the total land area upon which i t i s possible to build houses. However, not a l l those concerned with the housing problem agree. In the Report of the Residential Living Policy Committee to the Greater Vancouver Regional Distr i c t , i t 2 i s stated that One of the great fallacies i s that the Region has run out of available land for housing. Nothing could be further from the truth. There i s a shortage of serviced land. 1 The report says that there i s an estimated 30,000 to 60,000 acres of undeveloped land designated for urban residential use. These projections exclude a l l areas desig-nated for other uses, e.g. industrial, commercial, parkland, greenbelt, u t i l i t i e s and railways etc. 2 It goes on to says Using the lower figure (30,000) acres, and assuming a density of only six dwelling units per acre, there i s sufficient, (largely unserviced) desig-nated land to meet the single family dwelling needs of the Region for 30 years, plus projected apart-ment land needs for 3° years with land to spare,3 A more recent study done by the G.V.R.D., indi-cates that there i s about 57,000 acres of already designated urban areas, which would be sufficient to accommodate (at existing densities) a l l expected growth for the next 18 years. No matter which of these estimates represents the true a v a i l a b i l i t y of land for residential use, i t appears that the question i s not one of availability, but of putting the existing resource to use. Why, then, isn't this land being built upon? One reason might be that rapid increases in land prices that have accompanied the accelerating growth of the area have encour-aged landowners to hold on to land in anticipation of even larger price increases in the future. 3 1.2 Urban Sprawl While there has been l i t t l e argument over the fact that there i s a housing shortage that needs to be corrected, the issue of what form of urban development i s desirable has sparked considerable debate i n modern urban society. In the interest of keeping an open mind, the next section w i l l d i s -cuss b r i e f l y , some of the arguments that have been used to condemn and to support sprawl-type development. While no conclusions w i l l be reached here, i t i s hoped that t h i s d i s -cussion w i l l show the range of opinion that has been voiced on t h i s subject. Before beginning the discussion, i t i s necessary to esta b l i s h just what i s meant by sprawl. The word sprawl has been used to describe a variety of larid-use patterns. While a l l represent patterns of development that feature an o v e r - a l l density, that i s less than that found i n mature compact segments of the c i t y , the differences between these land use patterns that bear the l a b e l sprawl are important i n the formation of p o l i c y to deal with sprawl. Harvey and Clark-' suggest that there are b a s i c a l l y three patterns of urban development that have f a l l e n , at one time or another, under the c l a s s i f i c a t i o n of urban sprawl. These are, "low density continuous sprawl" which " i s merely the gluttonous use of land i n opposition to a value judgement about a higher density which would have been more appropriate", "ribbon development" composed of narrow bands of (frequently quite intensive) development, usually along transportation corridors and "leap-frog sprawl" which i s the settlement of discontinuous, although possibly compact patches of urban land-use. I t w i l l be seen i n future discussions that the "sprawl" with which t h i s paper concerns i t s e l f i s the t h i r d type of sprawl, i n which the house builder i s forced to leap over land which he cannot use f o r one reason or another. This i s the same type of sprawl that has evoked strong c r i t i c i s m from popular and academic writers. Clawson l i s t s some of the most frequently heard c r i t i c i s m s . ^ 1. A sprawled or discontinuous development i s more costly and less e f f i c i e n t than a more compact one, each of the same density, within s e t t l e d areas. Many costs depend on maximum distance or maximum area. I f these were reduced, costs would be lower per capita or per family served. 2. Sprawl i s unaesthetic and unattractive. 3. Sprawl i s wasteful of land, since intervening lands are t y p i c a l l y not used f o r any purpose. k. Land speculation i s unproductive, absorbing c a p i t a l , manpower and entrepreneurial s k i l l s without commensurate public gain. I t destroys or impairs economic calculations that i d e a l l y lead to maximum general welfare. Since the opponents of sprawl have probably been more numerous and perhaps more vocal than the supporters, an elaboration on Clawson's points w i l l not be made here. Instead, the less frequently heard opposing arguments w i l l be presented. I t i s d i f f i c u l t to argue with the f i r s t point, that servicing costs are not greater i n sprawled areas than i n compact areas. However, the servicing costs are not the 5 only costs associated with a particular pattern of urban-ization. An evaluation of the second argument against sprawl lis t e d by Clawson, that i t i s unaesthetic or unattractive is d i f f i c u l t due to the subjective nature of a decision con-cerning what i s or i s not attractive. If the concern i s for the commuter who must pass these open areas of land on his daily t r i p to the core, there i s reason to suspect the oppo-site, that the commuter does not find these open spaces offensive, but rather more attractive than a continuous vista of houses, factories and shops. The argument that sprawl i s a wasteful pattern of land-use i s based on the observation that vacant land amid built-up areas i s rarely seen to have any economic activity going on upon i t . One reason given to explain why the former use of the land, usually farming, i s not continued is that the planning horizon has been shortened by uncer-tainty. The reason that farmers do not invest in capital improvements that would yield long-run returns, i s that such investments could delay the sale of the land by the time i t takes to liquidate the capital investment in the land. Thus the farmer or speculator, because of uncertainty feels that the chances of a profitable deal are enhanced by the absence of encumbering investments on the land. Taken from a public viewpoint, i f the society desires to have a supply of land that is available for quick conversion to 6 urban use i t i s probably necessary to forego the income that could be gained from the land while i t i s in "storage". Another argument made for the value of storing 8 vacant land for future use i s made by Lessinger: The gradual f i l l i n g - i n of communities—provides f l e x i b i l i t y in urban development. A quick f i l l i n g in-compaction, as exemplified in the year 2000 plan (National Capital Region, U.S.A.)— loads the community with the fashions of today, the obsolescences of tomorrow. It reduces the amount and interspersal of uncommitted space; vacant or containing removable (relatively old structures). This chokes off the pos s i b i l i t i e s for adaptive reconstruction, essential in our world of furious but unforeseeable change and produces long-run inefficiencies, unwarranted blight and segregation of the poor. A city which incorporates channels and increases scatteration encourages efficient adaptation to change. It also offers a supply of housing in which residential mixing of poor and middle class i s feasible and large scale segregation is not feasible. The two main arguments for sprawl that emerge from this statement ares 1. the property of sprawl to enable successful, efficient adaptation to change, 2. the encouragement of "social mix" in housing. If these two goals are desirable and are indeed encouraged by discontinuous urban growth, i t would appear that sprawl, at least on these two counts, confers social benefits rather than costs. It seems that the most important argument for the sprawl-type development i s the f l e x i b i l i t y i t provides for future development. The opponents of sprawl argue that a 7 high price i s paid f o r t h i s f l e x i b i l i t y because of the high infrastructure costs incurred i n the servicing of t h i s type of urban development and the production l o s t on the land while i t i s i n storage. I t i s u n l i k e l y that the opponents of sprawl would argue that f l e x i b i l i t y f o r adaptation i s an undesirable q u a l i t y . What they would question, however, i s the e f f i c i e n c y of the present practive of allowing the de-cisions of i n d i v i d u a l landowners to determine the quantity and location of land held i n "storage" to provide the f l e x i -b i l i t y needed to accommodate future urban growth. These c r i t i c s see r e a l costs i n allowing "speculators" to deter-mine which land w i l l be developed, when. As the shortage of housing and the sprawl of c i t i e s have related to the effects of land speculation, i t w i l l be useful to discuss i t s nature and ef f e c t s . 1.3 Land Speculation Speculation i n land i s much the same as speculation i n any other commodity. The basic means of making a p r o f i t i s to buy the commodity i n a market where the price i s low and s e l l i n a market where the price i s high. Differences i n the price of a commodity from one market to another usually occur i f the markets are separated by space or time. In order f o r the speculator to make a p r o f i t , the price d i f f e r e n t i a l between the two markets must be large enough to cover the costs of transporting the good either through space or time and to leave a residual f o r p r o f i t . Thus, the 8 p r o f i t a b i l i t y of speculation depends on the price differential and the transportation costs (for spatially separated markets) or holding costs (for temporally separated markets). 9 Speculation w i l l occur when the price differential minus the holding or transportation costs provides a return greater than or equal to the return available to the specula-tor in other investments. If the price differential i s too low or the costs of transportation or holding are too high, the speculator w i l l earn a return lower than the return available in other investments and so, i f economically rational, w i l l not speculate in land. 1.31 Effects of Land Speculation Hamilton summarizes the effects of the speculator! By buying commodities in one pariod for release in a future period, speculators cause (1) a withdrawal of present supply, (2) a temporary increase in present price, (3) an increase in amount stored, (4) an increase in future supply, and (5) a reduction in future price—the end result being a relative stabilization of price and consumption over time. 1 0 Thus, despite the speculators poor reputation he performs the valuable role of moving the economy toward pareto optimality by helping to equate differences in u t i l i t i e s or prices for a commodity between markets (separated by either space or time). If speculators are performing a service to society, why have they been so maligned? In addition to land speculation's association with the two evils discussed earlier in this chapter, Hamilton 9 finds a substantial amount of the criticism stems from the widespread assumption that the urban land market lacks competitiveness. This, he says results from two assumptions* 1. the assumption of a fixed supply of land and a disregard for the influence of demand in the determination of market prices. 2. the tendency to confuse speculators with those landowners who may have some degree of monopoly control over portions of supply.H 1.32 E l a s t i c i t y of the Supply of Land Hamilton says that, while s t r i c t l y speaking, the supply of land i s relatively fixed, (land rarely being created or destroyed) the amount of land available for deve-lopment at any point in time i s elastic and does respond to increases in demand with an increase in the quantity supplied. If demand were not elastic, the only response, to an increase in the demand for land would be an increase in the price of land. Such i s obviously not the case, particularly with land on the urban fringe.J- 2 Hamilton goes on to state that in situations where the supply of land i s divided among a large number of owners, this e l a s t i c i t y "produces conditions of supply that are con-siderably more competitive than many would expect". 1^ 1.33 Monopoly Interest The second condition necessary for a competitive land market is the absence of any landowner with monopoly power. Only through the competition among numerous small 10 landowners w i l l prices reflect the true preferences of society. While Hamilton, in his study of the British Columbia land market found no evidence of the presence of monopolistic Ik interests, there is evidence to suggest that, in other Canadian c i t i e s , large percentages of the total quantity of land available for urbanization i s in the hands of relatively few landowners,1^ The existence of monopolistic interests in the land market means that, to a certain extent, land is supplied at the time, place and location determined by these landowners• Further arguments are raised against land specula-tion on the basis of the morality of permitting the specula-tor to profit at public expense.1^ While both the questions of monopolistic interests in the land market and the equity of the income distribution fostered by present institutional arrangements, are important questions to be answered, they w i l l not be discussed further here. 1,4 The Land Value Tax Thus far, this study has shown how the shortage of housing and sprawl-type development have been linked to land speculation. Politicians, planners and citizens concerned with the two problems, have f e l t the solution to both to l i e in the reduction of speculative activity in the land market. The brief discussion of land speculation.showed the speculator 11 to be a businessman who, like most others, is concerned with the p r o f i t a b i l i t y of his enterprise. One of the costs of a l l business ventures, i s the cost of taxation. "House and Home" says: Ours i s a tax-activated, tax accelerated, tax dominated economy. Every business decision must be checked and rechecked against i t s tax consequences.!7 The G.V.R.D. report also looks to taxation as a means of guiding private investment decisions toward social goals. There should be a fundamental change in the method of apportioning real property taxes . . . . A gradual reduction of the taxes from improvements to the land would have an effect on vacant unde-veloped land.l° The prospect of using land-value taxation to help push vacant urban land on to the market i s further developed in a paper done for the G.V.R.D. by Hans Blumenfeld. Speaking of a tax on site values, Blumenfeld says. This would strongly deter speculators from buying land and put increased pressure on them to s e l l , resulting in an increased supply of land at lower prices, for building. It would eliminate, or at least very much weaken the pressure for "leap-frogging" or scatteration. Finally i t would greatly reduce both the cost and d i f f i c u l t i e s for public land assembly.19 Gaffney, in two remarks in two separate articles, suggests that property taxes have strong influences on urban land-use and may cause unwanted effects i f their mechanisms are not property understood. 12 Real estate taxes cannot absolutely compel some land uses nor absolutely forbid others, as can zoning or building codesi but they provide powerful economic incentives which are operative constantly over long periods of time and in the long run may be as effective as absolute prohi-bitions or mandates.20 . . . others have supported land underassessment to relieve the pressure to develop suburban land— without, I believe, adequately considering that unused land l i e s among used parcels and disrupts symbiotic interactions which are the heart of public land planning and the essence of urban civilization.2 1 While no attempt w i l l be made to evaluate the effects of the property tax on "the essence of urban c i v i l -ization" as i t exists through the "symbiotic interactions" of parcels of land, i t i s the purpose of this thesis to evaluate the effectiveness of a land value tax in amelior-ating the two problems, (housing shortage and sprawl) through the reduction of speculation in the urban land market. 1.5 Thesis Overview Having stated the problems with which this thesis seeks to deal, (the determination of the effectiveness of a land value tax in increasing the supply of housing and re-ducing urban sprawl by reducing speculative activity in the land market), the remainder of the thesis w i l l be concerned with establishing the relationship between land value taxa-tion and the level of speculative activity i n the land market and the relationship between the incidence of land 13 speculation and the incidence of the two problems (the housing shortage and urban sprawl). Since the suggestion of the use of a land value tax to accomplish these and other objectives has been made at various times in the past, the f i r s t part of Chapter II w i l l be devoted to a review of the theory of taxing land values as put forward by economists and non-economists throughout history. In the second part of Chapter II, the effects of the tax (in theory) on the landowner, w i l l be examined. The motivation for the third chapter i s the realization that the land conversion process or housing production process (whichever way i t i s viewed) i s a com-plex process, whose outcome (amount and location of housing produced) i s determined by the decisions of many p a r t i c i -pants with differing characteristics. Once this i s realized, the land value tax becomes one of many policy devices that may be used to modify the outcome of the land conversion process. With this in mind, a simple three participant land conversion model consisting of the predevelopment landowner, the residential developer and the consumer of housing i s presented and used to show the effects of a number of par-ticipant characteristics and contextual factors on p a r t i c i -pant decisions and thus on the quantity and location of housing produced. In Chapter IV, the theoretical effects of the tax wi l l be re-examined in light of the new knowledge of the "real world" gained in Chapter III, So far, throughout the discussion of the effects of the tax, the concern has been focused on the primary effects of the tax on the speculator. The tax also w i l l be shown to have secondary effects which vary in magnitude with the rate at which land is taxed. In order to measure the magnitudes of some of these secondary effects (shifts in the burden of taxation among uses), a simple model w i l l be developed to show the magnitudes of the tax rate necessary to influence speculator decisions. The purpose of Chapter V is (1) to use the model to determine the rate of land value taxation which i s neces-sary to accomplish the goals set out for i t , and (2) to de-termine the effects on the distribution of tax burden among land uses of raising the tax rate to the necessary level. The purpose of Chapter VI i s to make a f i n a l evalu-ation of the effectiveness of the tax in reducing sprawl and the housing shortage in light of the information gained on (1) the relationship of the tax to land speculation (the level of the tax needed to reduce land speculation), (2) the importance of land speculation to the larger problems of the shortage of housing and the sprawl of c i t i e s , and (3) the secondary effects of shifting tax burdens that result from the use of land value taxation to accomplish the specified goals. 15 Chapter I - Notes and References •""G.V.R.D., Report of the Residential Living Policy  Committee, Vancouver, 1973» P» 9. 2Ibid., p. 9. 3Ibid.. p. 9. Thompson, Berwick and Pratt, I n f i l l , a policy study done for the Greater Vancouver Regional Di s t r i c t , December 1973» p. 2. -*R.O. Harvey and W.A.V. Clark, "The Nature and Economics of Urban Sprawl," Land Economics, Vol. LXI, February 1965t p. 2. •"•Marion Clawson, "Urban Spawl and Speculation in Suburban Land," Land Economics, May 1962, -p. 108. 7Ibid.. p. 107. o Jack Lessinger, "The Case for Scatteration. Some Reflec-tions on the National Capital Region Plan for the Year 2000," Journal of the American Institute of Planners, XXXVIII, No. 3. August 1962, p. 59. 9R.U. Ratcliff and S.W, Hamilton, Suburban Land Development, Union of British Columbia Municipalities, April 1972, p. 5» 1 0 I b i d . , p. 5. •""•""Ibid., p. 8. 1 2 I b i d . . p. 8. 1 3 I b i d . . p. 8. 14 Ibid., p. x i i . •""^ James Lorimer, A Citizen's Guide to City P o l i t i c s , Toronto, James Lewis and Samuel, Toronto. 1972, pp. 21-26. 1 G^.W.R. Bryant, "Land Speculation! Its Effects and Con-t r o l , " Plan. Vol. 5. No. 3,- 1965. pp. 109-121. 17 '"Land, A Special Issue," House and Home. (XVII, August 1968), pp. 98-164. 18G.V.R.D., op. c i t . , p. 49. 16 ^Hans Blumenfeld, Land Control and Land Prices, Greater Vancouver Regional Dist r i c t , June 1973» P- 11 • 20 Mason Gaffney, 'Tax Reform to Release Land," in Marion Clawson, Modernizing Urban Land Policy, (Baltimorei Resources for the Future, John Hopkins Press, 1973). Mason Gaffney, "Land Planning and the Property Tax," Journal of the American Institute of Planners, May 1969, 17 CHAPTER II LAND VALUE TAXATION 2.1 History of Land Value Taxation Throughout economic history, since the time of the French Physiocrats, the idea of taxing land values or the rent from land has received considerable discussion. The range of opinion on the matter has been quite large. There have been those who have openly advocated the taxing of land values to achieve various socially desirable goals. Henry George (1879), Brown (1932), Rawson (1961) and Gaffney (1972). There was a group of classical economists who, interested in efficiency, were in favour of taxing land rent: Smith (1776), M i l l (1872), Say (1830), Senior (1928), and Ricardo (1911). Another group qualified their support of the tax in one way or another: Anderson (1914), Simon (1959), Fisher (195*0. Seligman (1913), the Hickes (1955), Heilbrun (1966), Jensen (1939) and Haig (1915, 1917). And another group was opposed to the idea of taxing land values for various reasons that w i l l be made clear later: Carman (1907), Edgeworth (1906), Darwin.(1907), King (1921, 1924), Knight (1933). Ely (1922, 1930), Davenport (1917), Barlowe (1954), and Rateliff ( 1950) . 1 18 2.2 Advantages of the Land Value Tax Among the advantages claimed for the exclusive taxation of the rent of land in l i e u of a l l other taxes include, "the elimination of unemployment, the prevention of inflation," as well as i t s powers as a "guarantor of perpetual 2 industrial and international peace." Leaving these miracles aside, i t can be said that the advantages of the tax are twoi (1) the recovery of the unearned increment and (2) the intensification of land-use. 2.21 Unearned Increment One of the most prominent advocates of the tax on site value was Henry George, who, l i v i n g in California during the late nineteenth century saw the effect of a large influx of population, rapid economic growth and surging land prices to be the concentration of wealth in the hands of the land-owners who were reaping extraordinary profits by simply buying land and waiting. If they waited long enough, development, in the form of roads, sewers, and schools would eventually engulf their land thus raising i t s value as the value of these services became capitalized into the price of the land. To George, the sight of parasitic landowners be-coming rich by the work of others was intolerable. His remedy for this inequity was to tax the value of the land so as to return the land speculator's "unearned increment"^ to i t s rightful owneri the public. 19 The tax on land values f a l l s on those who receive from society a peculiar and valuable benefit and upon them in proportion to the benefit they receive. It i s taking by the community for the use of the community, of the value that i s the creation of the community.'* Browning puts i t simply: A tax on the value of land w i l l restore to the community, some of the increase i n value due to community improvements.5 Support for George's proposition has continued into the present. According to Rawsoni . . . since land values are primarily a social value which rises where people cluster together for exchange and social intercourse, i t is par-t i c u l a r l y suitable for taxation, since taxation i t s e l f i s a social phenomenon, the need for which arises out of the same clustering of population." Since the purpose of this thesis i s to evaluate the efficiency of the land value tax in solving the problems of the housing shortage and urban sprawl and not i t s a b i l i t y to promote an equitable distribution of resources, the paper w i l l now turn to the second property of the tax, which re-lates more directly to the theme of this thesis, the tax's a b i l i t y to intensify land use. 2.22 Intensification of Land Use Much has been written about the difference in land-use, generated by the taxing of a building as opposed to the land upon which i t i s situated. Gaffney says: Tax capital and you drive i t away- tax land and you drive i t into use. 7 20 Rawson outlines the basic theory behind this relationship between land taxation and land use. As far as a property tax rests upon the site value of a property, i t rests upon the potential earning power of the site, in direct proportion to i t , and without consideration of whether the owner develops his property well or poorly. Because the tax takes a portion of the land's annual value, whether or not the land i s used, i t discourages, however mildly the speculation and "withholding" with which planners and developers are constantly faced. 8 This type of speculation, the holding of land out of i t s "highest and best use" manifests i t s e l f in two ways, which have been identified by the advocates of site-value taxation; the deterioration of buildings in the central city and discontinuous suburban growth (sprawl). It is argued that a property tax based on building values rather than on land values, both discourages investment, in housing and allows landowners to keep land off the market in anticipa-tion of the windfall gains resulting from increased land values caused by urban growth. These i l l s can be avoided by converting the tax on buildings and land, to a tax based solely on land. Rawson saysi The tax on land, through i t s tendency to lower land prices, lowers the real cost of housing. By providing a stimulant to the efficient use of land, i t encourages rebuilding in central areas and i t checks the practice of holding land in vacant or ill-used states.9 As well, the benefits of land-value taxation have been pre-sented as a boon to urban planners. 1 0 21 Despite the enthusiasm on the part of the advo-cates of the tax there has been no lack of criticism. Some of the major criticisms of the tax on land values w i l l be discussed below. 2.3 Disadvantages of the Land Value Tax The criticisms of the tax f a l l into three basic categories! (1) disputation of the desirability of the intensity of land use fostered by the tax, (2) claims that the tax i s inequitable, and (3) claims that the tax i s administratively infeasible. 2,31 Intensity of Land Use The arguments against the tax on this basis are similar to those arguments presented earlier in the discussion of sprawl. These writers have emphasized the increased costs of intensive land use and the restriction of options for the future by premature development, (a) Congestion. The costs of congestion can be seen in the increased travel time that"occurs as popu-lations become more and more dense (causing more and more t r a f f i c on streets that are limited in size). C r i t i c s concerned with the congesting propensities of the tax also point to the psycho-logical costs of reduced open space and the biolo-gical and sociological ;consequences of crowded human l i v i n g . 22 Other c r i t i c s have f e l t that the tax may adversely influence the timing of development, (b) Premature Development.11 By forcing landowners to put land into use as quickly as possible, to maximize short-run returns, a more permanent, long-run, land-use pattern may be precluded. If, for example, the construction of a more efficient high-rise building i s prevented by the cost of removing a walk-up, whose construction was forced by the pressure of a site-value tax in a previous period, the result i s a long-run misallocation of resources. Others have pointed to the shifts in wealth that would occur with a switch to land-value taxation, that would make the tax inequitable. 2.32 Equity It has been argued that to impose a tax on land in a later period of development would be inequitable to those people who have recently purchased land. While there probably has occurred large increments in value, quite possibly un-earned increments, i t i s quite l i k e l y that the person pre-sently holding land has enjoyed the benefit of a very small portion of this unearned increment or perhaps none of i t at a l l . The imposition of a site-value tax could have the effect of relieving a present landowner of those resources which he had invested in land without regard for their 23 origin (perhaps earned in some more acceptable manner). S t i l l others have maintained that the tax i s administratively infeasible. 2.33 Admini strati on Since the major effects of the tax are supposed to occur as a result of taxing land values as opposed to any other values (improvements), i t i s c r i t i c a l for the tax, to tax the value of the land, exclusive of the value of any buildings resting upon i t . This means that the land must have a value independent of the value of a building on the site. Writers such as Ratcliff and Turvey do not believe that this is possible. In a s t r i c t sense, land has no value as such nor do buildings, have an independent value. Each has value and u t i l i t y only when usable for some human -activity and to make it^usable in the urban scene, land must have improvements, usually buildings and buildings must have land. It i s never possible, therefore, to speak of the pro-ductivity of land without saying for what purpose in what use and thereby implying improvements of a certain nature, . . . Thus i t i s i l l o g i c a l to isolate structural or locational factors which affect productivity only in relation to building or only in relation to land. 13, 14 2.4 Summary - The Land Value Tax Some of the most frequently occurring arguments for basing the real estate tax on the land value are: (1) It encourages building and rehabilitation. (2) It discourages land speculation. (3) It reduces urban sprawl. (4) It recovers the "unearned increment." (5) It reduces the cost of land.15 24 The most commonly heard arguments against the tax are: (1) It fosters undesirable urban congestion. (2) It forces premature development. (3) It i s inequitable. (4) It i s administratively infeasible. A careful examination of the l i s t of advantages li s t e d for the tax w i l l reveal that there i s one basic ad-vantage, from which the others flow. That i s the discourage-ment of land speculation. Since the discussion here, and in other sources often make references to the tax's effect on speculation through i t s effect on land values, i t i s useful, at this point, to diverge for a moment, and show how the value of land is determined. 2.5 Land Value Basically, the value of land i s the value of the economic rent that can be earned by the land. Since rent i s an income flow that occurs both in the present and in the future and since present incomes are worth more than the prospect of future incomes, the value of future rents must be equated to the value of present incomes, i f the investor is to make a decision about the allocation of present resources. This brief discussion suggests that there are two steps in the determination of the value of landj (1) the determination of the present and future returns (net bene-f i t s ) earnable on the land, and (2) the discounting of future returns to land in order to equate them to present values. 25 2.51 Economic Rent Before discussing the determinants of economic rent, i t i s necessary at this point to distinguish between the meaning of rent as i t is commonly used and economic rent. Rent as i t i s used to refer to a payment to a landlord by a tenant i s a payment for services provided by the landlord. Included in the price of this "contract rent" are payments to the landlord to enable him to cover the costs of operating the building and to earn a return on the capital he has in-vested. Economic rent, on the other hand, is the portion of contract rent paid that i s above the amount required to bring the good into production. Economic rent has been defined similarly by Barlowe as the surplus of income above the minimum supply price i t takes to bring a factor into produc-t i o n . ! 6 Gaffney provides another definition of rent that w i l l be more useful in later discussions of the value of land and i t s relation to the economic rent of land* Essentially rent i s the net product of land after deducting non-land costs. It includes imputed service flows as well as cash flows, of course, with the former assuming primary importance today because i t i s exempt from income t a x . l 7 When the competitive economy i s i n equilibrium, the price of an object i s the price of the inputs required for i t s production. Therefore, in equilibrium, there i s no 26 "net product." However, not only is the market not always in equilibrium but not a l l land i s of equal quality. A certain piece of land may have qualities which enable i t to produce more of a product from a given level of inputs than another piece of land. The difference in the level of production from a given level of inputs i s the rent 18 accruing to the more productive land. Rent earned by land i s a result of the differing characteristics of land. These characteristics can be pro-ducts of Nature or of Man. In classical economic rent theory, these two sources of rent may be found respectively, in Ricardo's theory of rent from f e r t i l i t y and in von Thunen's theory of rent, from locational advantage, (a) Ricardian Rent Ricardo said that in a newly settled country, with an abundance of rich f e r t i l e land, a very small proportion of which i s required to be cultivated for the support of the actual population^? only the most f e r t i l e land would go into production. (In Figure 2-1 this land i s represented by A.) At this point in time, there would be no economic rent associated with the use of the land, because the price of the good produced would equal the costs of production (including labour and a f a i r return to capital). However as population increases and the demand for food goes up, there would be an increase in the demand for food (and thus i t s price), that would warrant the bringing into production, lands that are not quite as f e r t i l e Figure 2-1 - Ricardian Rent 10 10 10 10 10 10 (\ B c . t e t FERTILE LEAST FEWILE GRADES OF LAND Figure 2-2 - Ideational Rent 28 as the f i r s t land (lands on whieh equal quantities of labour and capital as applied on thev..most f e r t i l e land would produce a smaller output than on the most f e r t i l e land). In Figure 2-1, equal amounts of labour capital are applied to a l l grades of land. The differences in sizes of the blocks represents the differences in the output of the different grades of land. It can be seen that when B i s brought into production, the value of the extra ten units produced on A with the same labour-capital input represents an economic surplus (rent) that accrues to A as a result of i t s superior f e r t i l i t y compared to B. As population increases more and C lands are brought into production, an economic rent of 10 w i l l accrue to B and 20 to A. When D lands are brought into production, an economic rent of 10 accrues to C, 20 to B and 30 to A. This example emphasizes the idea that economic rent i s the difference in income that can be earned by one piece of land as compared to another and not simply the difference between total returns and the costs of utiliza-* tion. (b) Location Rent In classical economic theory, a second determinant of rent, that of locational advantage, was developed by von Thunen. Because transportation technology was in a relatively primitive stage of development in von Thunen*s days, the costs of transportation were important cost factors of agri-cultural production. Obviously, goods produced on land 29 further from the market would cost more to bring to market than those produced closer to the market. Figure 2-2 illustrates the effects of location on economic rent. If i t i s assumed that a l l land i s of equal f e r t i l i t y , i t follows that equal amounts of labour-capital w i l l produce an equal output. Thus no f e r t i l i t y rent w i l l be earned by any land. However, with a market economy, a further cost of production i s the cost of bringing the pro-duce from the farm to the market. Because of the costs of transportation, land located nearest the market i s compara-tively more productive (less inputs per unit output) than lands located at a distance. Lands at the market earn a rent that i s equal to the costs of bringing products from the most distant farm that actually brings produce to the market. (c) Summary - Economic Rent The following are the principal characteristics of economic rents (.1) Rent i s the result of the use of different qualities of land in the production of a good. (2) The price of the good is equal to the costs of producing the good on the least produc-tive land in use. (3) The rent earned by a piece of land i s equal to the difference between the costs of pro-ducing the good on that piece of land and the price of the good as determined by the costs of producing i t on the least produc-tive land that actually produces the good. 30 (4) As population increases, the demand for goods produced on the land increases, thus (assuming constant short-run supply) forcing prices for the good up. These increased prices mean that i t i s profitable to produce the good on pre-viously uneconomical land. Rent on a l l land in production before this rise in demand, increases. 2.52 Urban Land Rents The determination of urban land rents, as put for-ward by Hurd, bears a close resemblance to the theory of agricultural location rents of von Thunen. As a city grows, more remote and hence inferior land must be u t i l i z e d and the difference in desirability between the two grades of land pro-duces economic rent in locations of the f i r s t grade, but not those in the second. As land of s t i l l more remote and inferior grade comes into use, ground rent i s forced s t i l l higher in land of the f i r s t grade, rises in land of the second grade but not i n land of the third grade and so on. Any u t i l i t y may compete for any location within the city and a l l land goes to the highest bidder. , . . Since value depends on economic rent and rent on location and location on convenience and convenience on nearness, we may eliminate the intermediate steps and say that value depends on nearness.21 Without getting into the argument of why a particu-22 lar site yields more u t i l i t y , i t w i l l suffice here, to note that a site producing more u t i l i t y than alternate sites w i l l earn an economic rent. This rent w i l l equal the excess u t i l i t y yielded by the site in question over the u t i l i t y of the marginal si t e . 31 2.53 Capitalization of Rent into Land Value From the preceding section, i t was learned that the fact that a site has the potential to earn a rent, means that i t s productive capacity i s larger than that of an alter-native site (the difference in productive capacity being equal to the rent). A producer looking for a site for his operation would pay a yearly premium to use the site up to the amount of the economic rent earned, yearly, by the site. If he were to purchase the site, he would, in effect be buying the right to receive a series of annual incomes. The present value of this right i s the sum of these annual re-turns (rent) discounted to the present by the buyer's dis-count rate. The formula for determing this value i s : P V ~ A l + A 2« + .... A n 2-1 ( 1 + r } ( 1+rj 2 ( l + r ) n Where: PV = Present value of site kn = Economic rent in period n r = Capitalization interest rate 2-^ 2k 2,5k General Land-Valuation Model As mentioned before, the effect of the land-value tax to intensify the use of land, acts mainly by influencing the value of land as determined by different participants in the land market. Since the land-value tax operates by affecting the valuation of land by individual participants, i t is necessary 32 to expand the land value model (above) in order to account for differences in participant characteristics. The f i r s t step i s to reformulate the A (rent) term of Equation 2-1. A, the rent accruing to the site is equal to the income earned by the site minus the costs of keeping the site in use. Thus. A = b-c Where A = economic rent 2-2 b = income earned on the land c = costs of keeping the land in production Equation 2-1 becomest PV = ( V C l ) , ( V C 2 ) , ( V cn> 2-3 (1+r) (1+r) 2 ( l + r ) n Which reduces under more convenient notation tot *3 b - c P V = £ H _ _ f t 2 . 4 t=l (l+ r ) x Where: PV = present value of the site b^ = income earned on site in period t Cj. = costs in period t r = capitalization interest rate (opportunity cost of capital) n = investment time horizon (time period of investment) From this general equation, i t can be seen that the value of land is determined by the benefits earned from the land minus the costs of earning those benefits (both real 33 c o s t s a s r e p r e s e n t e d b y t h e " c " t e r m o f t h e e q u a t i o n b u t i m p l i c i t o p p o r t u n i t y c o s t s , a s r e p r e s e n t e d b y t h e " r " t e r m o f t h e e q u a t i o n ) . 2.6 M e c h a n i c s o f t h e T a x o n L a n d V a l u e s D i s t i n g u i s h i n g b e t w e e n t h e i n c i d e n c e a n d e f f e c t s o f a t a x , S i l v e r m a n s a y s , I n d e a l i n g w i t h i n c i d e n c e we w i s h t o k n o w o n whom t h e m o n e y b u r d e n o f a t a x d i r e c t l y o r i n d i r e c t l y f a l l s : t o w h a t e x t e n t t h e i m p o s t " s t a y s p u t " a n d t o w h a t e x t e n t i t i s s h i f t e d . I s i t p o s s i b l e , f o r e x a m p l e , f o r a b u s i n e s s man t o p a s s h i s i n -come t a x t o h i s c u s t o m e r s i n t h e f o r m o f h i g h e r p r i c e s ? . . . . B u t e v e n m o r e i m p o r t a n t , f r o m t h e v i e w o f e c o n o m i c w e l f a r e , i s t h e q u e s t i o n o f u l t i m a t e e f f e c t s . B e s i d e s a s c e r t a i n i n g s o f a r a s p o s s i b l e , who b e a r s t h e m o n e y b u r d e n o f a t a x , we w a n t t o k n o w w h a t a r e t h e e c o n o m i c r e a c t i o n s t o w h i c h i t g i v e s r i s e . T h e a m o u n t may b e s o o p p r e s -s i v e o r t h e m a n n e r s o i l l - c o n c e i v e d , t h a t t h e t a x p a y e r i s d i s c o u r a g e d f r o m e x e r c i s i n g h i s p r o -d u c t i v e p o w e r s t o t h e f u l l , 2 5 A l t h o u g h , a s S i l v e r m a n p o i n t s o u t , i t i s t h e e f f e c t s o f t h e t a x w h i c h a r e m o s t i m p o r t a n t , i t c a n b e s e e n t h a t t h e d e t e r m i n a t i o n o f t h e i n c i d e n c e o f t h e l a n d - v a l u e t a x i s n e c e s s a r y f o r a n a s s e s s m e n t o f i t s e f f e c t s . W h i l e n o t a p p a r e n t f r o m t h e g e n e r a l l a n d v a l u e e q u a t i o n , i t w i l l b e c o m e a p p a r e n t i n l a t e r s e c t i o n s t h a t t h e e f f e c t o f t h e t a x w i l l d e p e n d , t o a l a r g e d e g r e e , o n t h e c h a r a c t e r i s t i c s o f t h e " l a n d v a l u e r . " A s t h e s e c h a r a c t e r -i s t i c s v a r y f r o m p a r t i c i p a n t t o p a r t i c i p a n t , i n t h e l a n d m a r k e t , i t i s n e c e s s a r y , i n o r d e r t o d e t e r m i n e t h e e f f e c t s o f t h e t a x , t o e s t a b l i s h u p o n w h i c h p a r t i c i p a n t t h e t a x i s i n c i d e n t . 3 4 Secondly, as a move to a property tax, based solely on land values would mean the elimination of a tax on building values, i t i s also important in considering the incidence of the land-value tax, to consider the shift in incidence that occurs as a result of removing the tax on buildings. 2,61 Incidence of the Property Tax Perhaps Simon summed up the problem faced here best when he said, It i s a curious fact that, although there has been common agreement among two generations of economists as to the fundamentals of tax i n c i -dence theory, no consensus has been reached with 2< respect to the incidence of a tax on real property. Of the l i s t of determinants of the incidence of a tax given by Seligman in his "Doctrine of Incidence," the consideration of the following seems to hold the most promise for determining the incidence of the property t a x : 2 7 (1) Is the tax on the margin or on a surplus? (2) Is the market for the product monopolistic or competitive? (3) Is the demand for the product elastic or inelastic? (4) Is the supply of the product elastic or inelastic? (5) Is there complete mobility of capital? The classical economists divided the tax on pro-perty into two parts; the tax on land and the tax on buildings. Thus the real property tax was subject to two different laws: "the law of a tax on rent (land value) and the law of a tax 28 on capital (building value)," 2.62 Incidence of the Tax on Land Ricardo gives the classical view of the incidence of a tax on land as he sayss A tax on rent would affect rent onlys i t would f a l l wholly on landlords and could not be shifted because i t would leave unaltered, the difference between produce obtained from the least productive land in cultivation and that from every other quality. 2^ Simply, the argument i s that a tax on land rent w i l l probably be regarded by the landlord as an added expense to be passed on to the tenant. The way he does this is by raising the contract rent of the property. However he w i l l be unsuccessful in his attempt because land at the margin (land D in Figure 2-1) i s not earning rent and therefore, is not subject to the tax. The tenant, i f confronted with an increase in rent, would move to the marginal location where he could continue to pay his former contract rent. For this reason, i t i s argued that the tax comes directly from the landlord's pocket.^ 0 2.63 Incidence of the Tax on Buildings The tax on buildings i s regarded by the classical economists to be a tax on capital. Smith (1776), M i l l (1872), Ricardo (1911). The argument may be expressed in the following manner. Builders who make an investment in ma-terial s , labour and interest charges to construct a building and make further expenditures for maintenance, insurance and repairs to keep the building i n operation, expect a certain 36 return. If they do not receive the return they want they simply w i l l not invest in the construction of new buildings but w i l l put their money into some other investment yielding a higher return. The effect of a tax on building values, which i s a tax on the capitalized net returns earnable by the building, has the effect of reducing these returns. The owner of the building w i l l try to pass this cost onto the users of the building by increasing the contract rent. If this increase i s not paid, investment in buildings w i l l diminish, and assuming that demand for buildings does not drop, prices for buildings w i l l be bid up as supply becomes insufficient to meet demand. The new price w i l l be large enough to provide the builder with the return he wants with enough l e f t over to cover the amount of the tax. One of the principle arguments against the idea of using site-value taxation has been the feeling by some economists that a return to a property consisting of land and buildings cannot be divided between that arising from the land and that arising from the building. Edgeworth (1897* 1906), Turvey (1957). Ratcliff (1950, 1964). Edgeworth f e l t that the s p l i t could not be made, and stated that under conditions of inelastic demand, the burden of the tax on site-values would be borne, not by the landlord, but by the occupier of the b u i l d i n g . 3 1 Turvey, holding that the value of site and building cannot be determined in isolation of each other and basing his analysis on the interest in property concludes-3? . . . the substitution in part or in whole of a site-value rate for the present rate would re-distribute the burden between properties, but not between owners of different interests in each property. The same people would be liable to pay rates in either case.32 2.64 Shifting of the Tax on Housing Research into the characteristics of housing mar-kets has found that the classical theory of building tax shifting does not always hold true. It has been suggested that the taxing of the housing industry may cause a shift of investment funds to untaxed sectors. 3-^ The ultimate incidence of the tax i s thought to depend on the (1) period considered, short or long rung, (2) opportunities open to the landlord, (3) the tax rate, and (4) the rate of housing substitution in nearby areas (Barlev, 1973). Further analyses of the incidence of the tax on building values by Richman-^ and Thorndike^ have shown that the incidence of the property tax varies under differing conditions of the ela s t i c i t y of the demand for buildings. 2.65 Summary of the Incidence of the Tax There has been considerable argument over the i n c i -dence of the real estate tax. It i s generally f e l t that be-cause the supply of land i s fixed that the incidence of the tax on land f a l l s on the landowner. Edgeworth has argued, however, that under conditions of inelastic demand, the tax on land would be shifted to the occupier of the land. 38 It has been thought that the burden of the tax on buildings i s shifted to the occupier of the building. It has been argued however, that, at least in the short run, since supply of buildings i s inelastic and the demand i s elastic, that the tax on buildings i s borne by the owner of the building. 2.7 The Economic Effects of the Tax on Land Values Becker 3 7 identifies four effects of converting the present real estate tax on the value of building and land to a tax based solely on the value of land, on the intensity of land-use. He says the following effects of such a change would tend to promote more intensive land-uset (1) the holding cost effect, (2) the capitalization effect, (3) the fixed cost effect, and (4) the unburdening effect. It i s the purpose of this section, to b r i e f l y sketch the nature of these effects as presented by Becker. In subsequent sections, the effects of varying the assumptions upon which this theory i s based, w i l l be discussed. 2.71 Holding Cost Effect Prom the general land value equation, i t can be seen that the value of land varies as the difference in values of n the net returns to land vary. As <^  (b^ - c.j.) increases, so t=l does land value. Thus as the costs, "c" of owning land go up or the benefits, Mb w of owning land go down, the present value of the land goes down. It can be seen that the costs become more important to the landowner as the benefits of the use of land decrease. The landowner, who suffers most from an increase in the costs of holding land i s the holder of vacant land (no present returns). The holder of vacant land i s speculating that the rise in value over the holding period w i l l more than compensate for the costs of holding the land through the period. Since he i s earning no tan-gible return from the land during the holding period against which an increase in holding costs may be offset, he w i l l be particularly sensitive to an increase in holding costs. One of the costs of holding land i s the property tax. It has been argued that the present system of property taxation (based on the value of land and improvements) favours those property owners who have least in the way of improvements. It i s argued that the rise in property tax rates on land that would be necessary to raise the same level of revenues from land values (when shifted from a base of property and land values) would increase the holding costs of vacant or underutilized land, thus reducing the speculator's incentive to hold the land, encouraging him to either develop the land or to s e l l the land to someone who w i l l develop the land. 2,?2 Capitalization Effect The effect of these increased holding costs on the value of land i s known as the capitalization effect. The yearly reduction in net returns to land that i s caused by 4-0 an increased tax on land, reduced the present value of the land. From the general land valuation equation, i t was shown how n P V = V ct t=l (l+r) u An increase in the land value tax may be represented by n b +- (c ++x +) t=l P V = " t : : " t ' A t ' (1+r) Where x. = increase in land value tax in period t. Thus the net returns, in each period, have decreased by the value of the increased tax. The mechanics of the capitalization effect on land values i s given by Colin C l a r k . 3 8 Let r = interest rate x = the tax rate on the selling value of the land V = the selling value of the land Then E = F = F = V = V = f u l l economic rent (including discounted value of expectations of future rises in rent) the f u l l selling value of the land E i (E - xV) i E (x+r) E = V (x+r) V F ( r+ x) J Thus site-value taxation w i l l lower the selling price of the land in the ratio r (r+x) 2.73 Fixed Cost and Unburdening Effects The third consequence, for the intensity of land-use of the conversion of the real estate tax on land and buildings to a tax on land values alone has been labelled by Becker as the "fixed cost e f f e c t . " 3 9 It i s argued that the level of investment in buildings i s affected by the tax on improvements of the present real estate tax. If the builder i s to maximize profits, he must add units of building (e.g. more floors) u n t i l the marginal revenue earnable by those units equals the marginal cost of their construction. The effect of a tax on buildings i s to increase the marginal costs of adding an extra unit (since the tax i s tied to the value of the building which presumably rises with an in-crease in the number of units), thus making submarginal, a unit that before the tax was marginal. In this way, i t i s argued that the tax would reduce the amount of building. The advantage of the site-value tax is that i t i s a fixed amount, dependant on the use of the site (highest and best). Since the portion of the marginal cost of each additional unit to the building is not increased by the tax on site-value (in fact, average tax per unit goes down with each additional unit) the tax does not restrict the size of buildings. The "unburdening effect" i s closely related to the fixed cost effect. By removing the burden of the property tax from the building and placing i t on the value of the land, there w i l l be a reduction of the tax l i a b i l i t y of 42 owners of properties with high improvement/land ratios and an increased l i a b i l i t y for those owners of properties with low improvement/land ratios. If the tax burden for two properties, similarly situated, one with a high value building, the other with a low-value building (or in the extreme case, no building at a l l ) , are equal, i t i s argued that there w i l l be no disincentive to maintaining the high-value building in good condition or to increase the value of buildings on the low building value site. The construction of higher quality and more spacious buildings w i l l be encouraged because they w i l l incur no more tax costs than, i f buildings were shabby and cramped. Owners w i l l remodel their buildings more freely, knowing that the f r u i t of their efforts w i l l not be rewarded with an additional tax burden.^0 2.74 Summary - The Economic Effects of the Land Tax The four effects of a substitution of a tax based solely on land for a tax based on land and improvements as defined by Becker are (1) the capitalization effect, (2) the holding cost effect, (3) the fixed cost effect, and (4) the unburdening effect. While the effects of untaxing buildings, contained in the fixed cost and unburdening effects, represent an important part of the argument for changing the base of the property tax from the value of land and improvements to the value of the land only, the effects that concern this study are the effects that most directly influence the land specu-lator (the holding cost effect and the capitalization effect). 4 3 It w i l l be remembered from Chapter I, that the housing shortage and urban sprawl are thought to be caused by the withholding of land by speculators. It was shown how the holding cost effects makes speculation in land less profitable by increasing i t s cost. The less profitable i t is to speculate in land values, the smaller the quantity of land that w i l l be withheld from the housing developer and presumably, the less serious w i l l be the housing shortage. With the reduction of the p r o f i t a b i l i t y of specu-lation, there i s less likelihood that developers w i l l have to "leap" over land that i s being held by developers, thus lessening the likelihood of urban sprawl. So, i t seems that by reducing the p r o f i t a b i l i t y of speculation, the land value tax has the ab i l i t y to reduce the problems of a housing shortage and urban sprawl. Chapter II - Notes and References xFor a more complete l i s t of the work done and the views taken, see Mason Gaffney, "The Sources, Nature, and Func-tions of Urban Land Rent," American Journal of Economics and Sociology, July 1972, pp. 241-257. p Dick Netzer, Economics of the Property Tax, Washington, Brookings Institute, 1966, pp. 197-198. 3Alfred Marshall, Principles of Economics, New York, Macmillan and Co., 1961, pp. 433-434. Marshall distinguishes between the "inherent" or original value of land, "which arises from i t s position, i t s extension, i t s yearly income of sunlight and heat and rain and air" and the "public value" which results from the actions of men. "For instance barren heath land may suddenly acquire a value from the growth of an industrial population near i t , though i t s owners have l e f t i t untouched as i t was made by nature." "A tax on the public value of land does not greatly diminish the inducements to cultivate the land highly nor to erect farm buildings on i t . Such a tax therefore does not greatly diminish the supply of agricultural produce offered on the market, nor raise the price of produce: and i t is not shifted away from the owners of the land." ^Henry George, Progress and Poverty, (18?9)» New York, Robert Schalkenbach Foundation, 1970, p. 139. ^Clyde E, Browning, "Land Value Taxation: Promises and Problems," Journal of the American Institute of Planners, November 1963, p. 307. ^Mary Rawson, Property Taxation and Urban Development: Effects of the Property Tax on City Growth and Change, Research Monograph #4, Urban Land Institute, Washington, 1961, p. 10. 7 'Mason Gaffney, "Land Planning and the Property Tax," Journal of the American Institute of Planners, May 1969, pp. 178-183. o Rawson, (1961), op. c i t . , p. 11. o ^Ibid., p. 11. 1 0Gaffney (op. c i t . 1969), l i s t s a series of benefits that he feels flow to the planning process from the use of the site-value tax. (1) Gives planners a positive tool for influencing land-use (as opposed to present negative tools, zoning, building codes). 45 11 quenc (2) Gives public investment leverage over private investment. (3) Gives planners leverage over tax assessors. (4) Enables synchronized expansion to provide for open space. (5) Shortens the period between site renewals. (6) Frees planners from the constraint of "French Equity." (?) Leads to a demand for a greater variety of community f a c i l i t i e s , because i t gives people better access. P h i l l i p Cornick, Premature Subdivision and i t s Conse-ices, Columbia University, New York, 1938* 12 The Urban Institute, Property Taxation, Housing and Urban  Growth, A Symposium, Washington, D.C., 1970, p. 15. 1 3Richard Ratcliff, "A Restatement of Appraisal Theory," Appraisal Journal, 32, April 1964, p. 262. 14 For the opposing view, see Ernest M. and Robert M. Fischer, Urban Real Estate, New York, Holt, 195*4-, pp. 5^-57. Netzer considers both arguments and concludes that "To deny that there i s a distinguishable site value for a specific improved site, independent of the nature of the actual im-provements on i t i s to deny that there is any such thing as location rents—that i s differential returns available from the use of one urban site rather than another in an environ-ment in which every site i s unique in some respect. Indi-vidual entrepreneurial decisions surely do not deny this." Netzer, op. c i t . . p. 199. ^Browning, op. c i t . , p. 35. """^R. Barlow, Land Resource Economics. Englewood C l i f f s , N.J., 1958, p. 150. 1 7Gaffney, op. c i t . . 1972, pp. 242-243. Note that rent i s defined as the differential and not as the difference between the total return and the cost of u t i l -ization in the following: "Each site tends to be put to the use whereby i t w i l l yield the maximum total return over the costs involved in u t i l i z i n g i t . These costs include among other things, such returns, in the form of profits as are necessary to attract business a b i l i t y . The differential remaining which is due to the superiority of the p r o f i t -making opportunities afforded by one site as compared to another is rent, and i s put into the hands of the landlords by the competition of the entrepreneurs for the best oppor-tunities." Edward Chamberlin, The Theory of Monopolistic  Competition, Cambridge, Harvard University Press, 1933» P» 203, 46 1 9C. Newman, The Development of Economic Thought, New York, Prentice Hall, 1952, p. 71. 20 Barlowe, op. c i t . , pp. 153-157. 21 Richard M. Hurd, Principles of City Land Values, New York, The Record and Guide, 1903. pp. 77-78. 22 For a discussion of the determinants of urban land values, see Paul F. Wendt, "Theory of Urban Land Values," Land Eco-nomies, Vol. 33. August 1957. pp. 228-240 and Ratcliff*s reply, "Commentary on Wendt*s Theory of Land Values," Land  Economics, November 1957. Vol. 33, pp. 360-362. Also see William Alonso, Location and Land Use, Cambridge, Harvard University Press, 1964 and Herman G. Berkman's comments, "The Game Theory of Land Use Determination," Land Economics, February 1965. pp. 11-19. 2 3Barlowe, op. c i t . , p. 169. 24 The development of the General Land Valuation Model i s taken from an unpublished Master's Thesis done at the Uni-versity of North Carolina by John E. Smith, Toward a Theory  of Landowner Behaviour on the Urban Periphery, Chapel H i l l , 1967, P P . 33-47. : ; 2^H.A. Silverman, Taxation, Its Incidence and Effects, London, Macmillan and Company Ltd., 1931. P P * 3-4. 26 Herbert A. Simon, "The Incidence of a Tax on Urban Real Property," Quarterly Journal of Economics, Vol. LVII, No. 3, May 1943. 27 'Edwin R.A. Seligman, The Shifting and Incidence of Taxa-tion, New York, Columbia University Press, 1927. pp. 253-254, 2 8 I b i d . , p. 278. 29 7David Ricardo, "Principles of P o l i t i c a l Economics," Vol. 1, in Works and Correspondence of David Ricardo, P. Sraffa, ed., Cambridge, at the University Press, for the Royal Economic Society, 1951. p. 173* It seems that Ricardo foresaw the administrative problem of dividing the total return of a property, when land and property are owned by the same person, "A tax on rent as rent is constituted would discourage cultivation because i t would be a tax on the profits of the landlord." p. 173. "There can be l i t t l e doubt that i f a tax were l a i d on rent, landlords would soon find a way to discriminate between that which i s paid to them and for the use of the land and that which i s paid for the use of the building and the improvements which are made by the landlord's stock." p. 174. If a tax were l a i d on rent 4? and no means of separating the remuneration now paid by the tenant to the landlord under the name of rent were adapted* the tax as far as i t regarded the rent on building and other fixtures would never f a l l for any length of time on the land-lord but on the consumer, p. 175. 3°H.G. Brown, Economics of Taxation, New York, Henry Holt & Co., 1924, pp. 215-217. 3 1F,Y. Edgeworth, Papers Relating to P o l i t i c a l Economy, Vol. II, "The Pure Theory of Taxation," London, 1924, pp. 63-125. 3 2Ralph Turvey, The Economics of Real Property, London, George Allen and Unwin, 1957. p. 80. 3 3Benzion Barlev, "Location Effects of Intra Area Tax Differentials," Land Economics, February 19731 p. 86. 34 J Orr found that in the Boston area, the tax i s borne by landlords because the short-term supply i s inelastic and the demand i s elastic. Larry L. Orr, "The Incidence of Differen-t i a l Property Tax on Urban Housing," National Tax Journal. September 1968, pp. 253-262. --^ Raymond L. Richman, "The Incidence of Urban Real Estate Taxes Under Conditions of Static and Dynamic Equilibrium," Land Economics, May 1967, pp. 172-180. •^Samuel L. Thorndike Jr., "Some Theoretical Aspects of Building Value Tax Burdens on Landowners," Land Economics, February 1970, pp. 59-67. 3 7Arthur P. Becker, "Principles of Taxing," in Land and  Building Taxes." Madison, University of Wisconsin Press, 1969, p..25. -^Colin Clark, "Land Taxation: Lessons From International Experience," in Land Values, ed. by Peter Hall, London, Sweet & Maxwell Ltd., 1965. pp. 128-129. 3 9Becker, op. c i t . . p. 27. ^ I b i d . . p. 28. 48 CHAPTER III THE LAND CONVERSION PROCESS 3,1 Introduction To t h i s point i n t h i s study, i t has been shown how: (1) the shortage of housing and sprawl-type urban development has been att r i b u t e d by c e r t a i n segments of society, to the process of speculation i n the land market, (2) the l o g i c a l response of those holding t h i s b e l i e f i s to attempt a reduction of these two problems by reducing the incidence of land speculation, and (3) one of the more f r e -quently proposed methods of reducing speculation i n land i s to raise the tax on land. Two important l i m i t a t i o n s make t h i s approach to solving the problems of the housing shortage and urban sprawl inadequate, These are: (1) the f a i l u r e to evaluate t h i s p o l i c y device (land value tax) within the context of the la r g e r process of land conversion, and (2) the f a i l u r e to determine the nature of the second order e f f e c t s of the tax. I t i s the purpose of t h i s chapter to attempt to demonstrate the r e s t r i c t i o n s imposed by the f i r s t l i m i t a t i o n by i l l u s t r a t i n g the complexity of the land conversion process. k9 The land conversion process (or housing production process) i s a complicated process which i s the result of decisions made by a multitude of actors, including land-owners, real estate agents, home-builders, home-buyers, financial institutions, politicians, planners and other non-elected o f f i c i a l s . 1 The decisions made by each individual that affect the outcome of the entire process are a function of what o Kaiser and Weiss c a l l "decision agent characteristics" (factors inherent in the decision-maker himself—income, liq u i d i t y , attitudes toward risk etc.), and "contextual factors" (factors external to the decision-maker—public policy, interest rates). The attempt to influence the amount and location of housing produced, by increasing the tax on land i s an attempt to modify the entire process through the modification of one contextual factor influencing one parti-cipant i n the process. Clearly the success of such a policy is dependent upon the importance of (1) the influence of the tax on landowner decisions relative to the effect of changes in other contextual factors, and (2) the influence of the decisions of the landowner on the outcome of the larger process relative to the influence of other decision-makers. If there are other contextual factors, which when modified, or other participants, who when influenced have a more important effect on the outcome of the process, i t becomes necessary when evaluating the tax's a b i l i t y to affect the 50 outcome of the process, to compare the benefits and costs of i t s use with the benefits and costs of other p o l i c i e s . Rather than attempt to evaluate the effects on the process of the decisions of the large number of participants l i s t e d , the study, following the work done at the University of North Carolina, w i l l t r y to understand the land conversion process by examining the behaviour of three key decision_ agents; the predevelopment landowner, the r e s i d e n t i a l deve-loper and the consumer of housing. Restating the problem simply, as society's d i s s a t i s -f a c t i o n with the quantity and location of housing produced, suggests that the p i v o t a l participant i n the process i s the r e s i d e n t i a l developer. I t i s he, who ultimately makes the decision as to how much and where, housing w i l l be produced. The motivating force behind a l l developer decisions w i l l be assumed to be the making of a p r o f i t . The more pro-f i t a b l e i t i s to develop land into housing, the more housing the developer w i l l produce. The more p r o f i t a b l e i t i s to develop s i t e A than s i t e B, the more l i k e l y the developer w i l l be to develop s i t e A. In t h i s discussion, i t w i l l be shown how the pro-f i t a b i l i t y of developing land i n general and the p r o f i t a b i l i t y of developing p a r t i c u l a r pieces of land i s influenced by (1) the effects of consumer demands for housing, (2) the effects of the supply of land offered by the landowners, and (3) the effects of contextual factors acting d i r e c t l y upon the deve-loper. 51 3.2 The Demand for Residential Land 3.21 Derived Demand One of the most important things to remember when discussing the demand for land is that i t is a "derived demand." Boulding offers the following explanation of this concept in reference to the demand for labour. In studying causes affecting the demand for labour, the f i r s t fact that springs to our no-tice i s that the demand for labour is usually a derived demand. That i s to say that people who buy labour do not generally buy i t for i t s own sake. They buy i t because, with i t s aid they can produce or acquire some further commodity for which there i s a demand and which therefore can be sold. There i s a demand for weavers be-cause of the demand for cloth; there i s a demand for automobile workers because there i s a demand for automobiles. Likewise, there is a demand for the services of land because of a demand for things which land w i l l grow . . .3 Since the product of residential land i s housing,, the demand for residential land is derived from the demand for housing. Thus demands for residential land w i l l vary with the demand for housing. But this is not the only influence on the demand for residential land. Since the demand for a home i s not simply the demand for a building, but i s also a demand for other home-related services; the space provided, the accessibility to other places and other amenities such as schools, parks, and municipal services, the demand for housing may also be regarded as a demand for a composite good. Since these services make variable demands on the land component of housing, shifts in preferences among 52 these housing services w i l l cause shifts in the demand for land in the composite good. For the purposes of this study, in order to be able to concentrate on the land component of the housing package, the services provided by housing w i l l be divided into those derived from the space provided by land and those derived from a l l other services. The two components of housing w i l l be labelled, respectively, land and shelter-accessibility. k. 3«22 Determinants of Demand Most clearly, the demand for land w i l l vary with the total amount of housing demanded. The more housing demanded, the more land demanded (other things held constant). In general, an increased demand for housing can result from an increase in the number of consumers demanding a constant amount of housing per consumer, a constant number of con-sumers demanding more housing per consumer, or an increased number of consumers each demanding more housing. Thus, a change in population or shifts in the demand curve for housing w i l l change the demand for housing and thus for residential land. The individual consumer of housing i s also a con-sumer of other goods. According to indifference curve ana-lysis,, the consumer w i l l maximize his satisfaction with the combination of housing and other goods at a point where the line of attainable combinations (budget line) i s just tan-gent to the consumer's indifference curve between housing and other goods. At this point, M R S 0 H = Ijj Where M R SOH = M a r § i n a l Rate of Substitution of housing and a l l other consumer goods Po = price of other goods P H = price of housing The consumer maximizes his u t i l i t y by consuming quantities of housing and other goods in proportions such that, _ MU "p 2 rH Po Where MU^  = marginal u t i l i t y of housing MUQ = marginal u t i l i t y of other goods P H = price of housing Po = price of other goods Any change in contextual factors, or consumer characteristics that alters this relationship, by changing the marginal u t i l i t y or price of either good to the con-sumer w i l l result in a change in the proportion of the con-sumer's budget that is allocated to housing. This change in demand (other things remaining equal) w i l l result in a change in the demand for residential land. Secondly, i t i s important to remember that housing i s a composite good consisting of two basic components (in this study) land, and shelter-accessibility. The consumer seeks a combination of these two composite goods, that maxi-mizes his u t i l i t y . In the same way that the consumer maxim-izes his satisfaction by consuming quantities of housing and other goods, so he maximizes his s a t i s f a c t i o n by consuming quantities of land s h e l t e r - a c c e s s i b i l i t y such that MUT MU L _ sa P L Psa Where MUL = marginal u t i l i t y of land MU = marginal u t i l i t y of s h e l t e r - a c c e s s i b i l i t y P L = pri c e of land Psa = price of s h e l t e r - a c c e s s i b i l i t y Any change i n contextual factors or consumer c h a r a c t e r i s t i c s which a l t e r s t h i s r e l a t i o n s h i p by changing the marginal u t i l i t y or pr i c e of eithe r component w i l l r e s u l t i n a change i n the proportion of the consumer's budget that i s allocated to each component of housing. This change i n the demand f o r housing components (other things remaining equal), w i l l re-su l t i n a change i n the demand f o r r e s i d e n t i a l land. The following points may be drawn out of the pre-ceding discussion: (1) The demand f o r land i s derived from the demand f o r housing. Changes i n the demand housing w i l l change the demand f o r land. (2) The demand f o r housing i s determined by the consumer's marginal u t i l i t y gained from housing and the pri c e f o r housing compared to the marginal u t i l i t y to the consumer of a l l other goods and the price of those goods. Changes i n the marginal u t i l i t y of consuming housing r e l a t i v e to the price of other goods, w i l l change the demand f o r housing and hence the demand for land. (3) The demand for housing i s composed of the consumer's demand for the services provided by the two components of housing, land and shelter-accessibility. Changes in the relative prices or marginal u t i l i t i e s to the con-sumer of these two components w i l l change the demand for land. The next section w i l l l i s t the changes in demand for land that occur as a result of changes in contextual factors and consumer characteristics that influence (1) the consumer's demand for housing, and (2) the consumer's demand for the components of housing. 3.23 The Demand for Housing (a) Number of Consumers St r i c t l y speaking, the increase in demand for housing through population increases can be seen to be a result of net migration and increases in the difference between birth and death rates. While some housing studies talk about net household formation and age composition, these w i l l be seen to be characteristics related to the u t i l i t y of housing,-' (b) U t i l i t y of Housing Any change in societal attitudes that results in consumers valuing housing more than they did previously, w i l l result in an increase in the demand for housing and land. 56 (i) Net Household Formation Changes in tastes or preferences for housing that result in the formation of new households or the maintenance of existing households w i l l cause an increase in the demand for housing and thus an increase in the demand for land. Such changes in tastes as demonstrated by the preferences of young people of moving out of the family home at an earlier age than did previous generations or the tendency of older people not to move back to their children's home has meant a net increase in the number of households demanding housing units and hence an increase i n the demand for land. ( i i ) Income If the demand for housing i s more income elastic than the demand for other goods, an increase in income w i l l result in a larger increase in the demand for housing than for other goods. An example of the increase in housing demanded resulting from an increase in income i s the in -creased rate of "undoubling" that occurs when incomes rise.' Similarly i f the u t i l i t y of housing rises more with each additional unit of housing consumed, an increase in credit availability, through a reduction of interest rates, a reduction of down payment/loan ratio or a lengthening of the term of the loan that makes a l l goods easier to obtain, w i l l mean an increase in the demand and consumption of housing as compared to other goods. 5? (c) Price of Housing If the price of housing changes relative to the price for other consumer goods, the consumer, to maintain a constant level of satisfaction, in the absence of a change in preferences, must change the level of consumption of housing. Special policies designed to make credit more available in the housing sector than in other f i n a l demand sectors, effectively lowers the price for housing relative to the price of other consumption goods. Thus to maintain his maximum level,of satisfaction, the consumer w i l l consume more housing and thus more land, 9 Policies of rent control or rent subsidy w i l l re-duce the price of housing compared to other consumption goods and encourage an increased demand for housing and land, 3.24 The Demand for The Components of Housing As stated before, the second effect on the demand for land occurs as a result of changes in the relative u t i l i t i e s and prices of land and shelter-accessibility in the composite good of housing. Any increase in the u t i l i t y gained by a consumer from the services provided by the land portion of the compo-site good of housing that i s not accompanied by a corresponding rise in the u t i l i t y gained from the other services of housing w i l l result in an increase in the consumer's demand for land. Important factors causing changes of this sort, are the age 58 composition of the population and l i f e - s t y l e preferences. 1 0 3.25 Summary - The Demand for Residential Land The f i r s t step in understanding the outcome of the land conversion process (quantity and location of housing produced) was to show the impact of consumer demands for land. It was demonstrated how the consumer's demand for land (both in quantity and location) was derived from his demand for housing (both the total amount demanded and components de-manded). In addition, some of the consumer's characteristics and some of the contextual factors influencing the quantity and composition of housing demanded were mentioned. In spite of the importance of the magnitude and nature of the demand for housing, in determining the outcome of the land conversion process, i t has been often under-estimated and in some cases completely overlooked by those seeking to alter the- outcome of the land conversion process through the use of a land value tax. 3.3 The Supply of Residential Land It i s necessary, when determining the p r o f i t a b i l i t y of developing housing in a particular amount or location to not only be aware of the demand for housing in that quantity or location but also of the costs of producing housing in that quantity or location. Since the price for one key input of the housing production process, land, i s determined by the value placed on land by the predevelopment landowner, an important part of 59 determining the p r o f i t a b i l i t y of developing particular quan-t i t i e s and locations of land, i s the understanding of the land valuation process of the predevelopment landowner. Part of the d i f f i c u l t y of this task l i e s in the scarcity of knowledge of his behaviour. Of a l l the groups involved in the process of suburban growth, least i s known about the land-owners, speculators and dealers, and considering how l i t t l e we know about some other groups, this i s a strong statement. Such evidence as does exist suggests that members of this group, in addition to buying land from farmers or others who used i t for production and selling i t to developers, may buy and s e l l land among them-selves. H 3.31 Speculative Motive for Owning Land In spite of the apparent diversity of this group, one thing that may be said with relative certainty i s that the majority of these landowners are aware of the increasing value of their land, caused by the expansion of adjacent urban areas. Thus the land valuation equation 2-4- may be adjusted to make explicit, increasing capital value. Equation 2-4 becomes: n . PV = < D t " c t . + K - , Where PV = present value of the land b^ = income earned on the land in period t = costs of production in period t r = capitalization interest rate K = expected sale price for land period n n = investment time horizon 60 It can "be seen from equation 3-1 that variations in the values for any of the variables among different land-owners w i l l result in variations in the value placed on the land by different landowners. Generally those influences which tend to (1) increase the net returns to the land during the holding period (either an increase in the income derived from the land or a decrease in the costs of produc-tion), (2) increase the price at which the landowner expects to s e l l the land in the future, or (3) decrease the capital-ization interest rate, w i l l increase the present value of the land to the landowner, thus increasing the price of the land to the developer and so decreasing the p r o f i t a b i l i t y of developing land. As this study is concerned with vacant land that is being held off the market in anticipation of profits from future land value appreciation, the most important variables are (1) the expected sale price at the end of the investment period, (2) the landowner's discount rate, and (3) the costs of holding the land through the investment period. 3•32 Capitalization Interest Rate The rate used to discount future returns to the present i s a function of the landowner's time preferences for income, his opportunity costs of capital, and his evalu-ation of the risk involved in the investment, (a) Income Time Preferences The more the landowner values present income as 61 opposed to future income, the higher w i l l be the rate by which he discounts the future incomes from the land. The higher the discount rate, the lower w i l l be the landowner's estimation of the present value of his land and the more probable i t i s that the bid price of a developer w i l l be s u f f i c i e n t to persuade him to s e l l his land, (b) Opportunity Costs In making e x p l i c i t the rate at which he wishes to discount future earnings the investor must take into account the rate of return that might be expected from alternative investment opportunities open to him. He should discount future earnings on the proposed project by at least the rate of return that i s available to him i n his best alternative investment. The costs of foregone investment opportunities vary from investor to investor as investor c h a r a c t e r i s t i c s such as income, l i q u i d i t y , income tax bracket, etc. vary among investors. A man with ample investment funds, perhaps faced with a high marginal tax rate and hence eager to secure c a p i t a l gains on which a lower rate i s paid ( i n Canada half the taxpayer's c a p i t a l gains are added to his taxable income and taxed at his normal rate) could afford to speculate on land at in t e r e s t rates perhaps no higher than 2%, A farmer, short of c a p i t a l and hence forced to r a t i o n his scarce c a p i t a l among various poten-t i a l l y p r o f i t a b l e farm enterprises or forced to borrow at 6% or more would necessarily use a much higher rate—perhaps 6, 8, or even 10$. A r e a l estate developer perhaps, short of c a p i t a l and eager to use his c a p i t a l i n enterprises where the turnover was rapid would be i n a p o s i t i o n s i m i l a r to that of the farmer,12 62 (c) Risk While attitudes toward r i s k may vary from investor to investor, most investors w i l l prefer an investment guaran-teeing a sure return to an investment i n which the p r o b a b i l i t y of the same return i s l e s s . In order to d i f f e r e n t i a t e between two investments with d i f f e r i n g p r o b a b i l i t i e s y i e l d i n g the same return, the investor may discount the more r i s k y oppor-tunity at a higher rate than the less r i s k y investment (thus reducing i t s value r e l a t i v e to the more ce r t a i n investment). The investor's attitude toward r i s k and thus the rate he uses to discount investment opportunities may vary among investors as the marginal u t i l i t y of money varies among investors, 3,33 Cost of Holding Land As t h i s study i s dealing with vacant land, the major cost i n holding i t through an investment period i s the cost of the property tax. An increase i n the property tax on land reduces the net return to land by the amount of the tax and thus reduces the present value of the land i n the eyes of the landowner. Variations i n the ef f e c t i v e rate of taxation on land occur as a re s u l t of variations i n investor income tax rates. In Canada, property taxes incurred i n the produc-t i o n of an income are deductible from that income. Property taxes on undeveloped land are deductible i f "the land i s held i n inventory of or used i n connection with a business 63 or held primarily for the purpose of producing income of the taxpayer for the year." 1 3 Taxes which are not deductible under these c r i t e r i a can be used to increase the cost base of land which would reduce the taxable capital gain resulting from the sale of the land by the cost of the tax. Thus the cost of property taxation is less for those investors taxed at high marginal income tax rates than for those taxed at low marginal income tax rates. 3.3^ Estimation of the Appreciation in Land Values The land valuation model presented to this point in the discussion has made the real estate investor appear to be an "economic man," continually weighing his oppor-tunities i n holding land against the opportunities that open to him upon selling the land. Since land i s a bulky invest-ment, in which the investor usually ties up substantial quantities of his money, there i s reason to expect that estimations of present value would be calculated religiously. Weiss had this to say of such estimations Land development is obviously, much more of an ad hoc process than we had previously supposed. The unsystematic manner in which developers approach the production of residential lots indicates that most of the decisions made at this stage in the development process are probably made on the basis of their own ex-perience and a general awareness of "what's going on" in the local development industry rather than on the basis of what new techniques and ideas are available,14 64 While Weiss and her associates were speaking spe-c i f i c a l l y of developers, there i s no reason to believe that landowners in the process would act any more "rationally," If such subjective estimates are li k e l y to yield less consistent answers to the question of the value of land than detailed f e a s i b i l i t y studies, there i s reason to suspect that values for land and thus prices for land w i l l tend to vary as landowner characteristics vary. Furthermore, an accurate estimation of the rate of land value appreciation involves an accurate forecasting of the demand for land. This in turn means that participants in the market must accurately forecast the demand for housing from the determinants of demand as presented at the beginning of this chapter. Such a task i s by no means an easy one particularly for those with l i t t l e or no experience in real estate investment problems. Even i f the demand for housing in a region can be accurately forecast by the landowner, other factors may i n -fluence the income potential of an individual location. While the pressure of demand may be uniform on land through-out a region, the infrastructure which make urban expansion possible w i l l display unevenness both spatially and tempor-a l l y . Since the costs of holding land (taxes and interest charges) continually eat away at expected profits, i t i s important for the land holder to know where and when public investment w i l l occur. 65 Thus accuracy in forecasting the rate and path of urban growth w i l l probably depend on (1) the information available to the investor, and (2) his a b i l i t y to use i t to estimate the correct value of the land. 3.35 Summary - Supply of Residential Land The point that this section has tried to make, is that the price which the developer pays for land i s deter-mined, to a large extent by the investment characteristics of the landowner. Landowner characteristics such as income, liquidity, opportunity costs, time preferences for income, expectations, attitudes toward risk, as well as holding costs (land tax) have an effect on the value which the land-owner places on the land. As these characteristics vary from landowner to landowner, so does the value placed on a given piece of land. Differences in landowner values for land and consumer values for land w i l l have an effect on the amount of housing that is produced. Differences among landowner valuations for comparable parcels of land w i l l affect the distribution of land developed. 3.4 The Developer In the f i r s t two sections of the chapter i t was shown how the demand for residential land is derived from the consumer* s demand for housing and how the landowner responds to prices offered for his land to determine the supply of residential land that i s offered at any one time. 66 Essentially the market for land i s an exchange of resources between the consumer who desires to trade some portion of his wealth for land and the landowner who wishes to ex-change part of his wealth in land for a more liquid asset. However, the land that i s to be exchanged, i s not in the form which the consumer desires. As mentioned above the consumer typically demands a "housing package" of which land i s only one component. Other components of the r e s i -dential package include shelter and urban services. This is where the developer comes in . He uses his s k i l l s of com-bining land with other components to produce a product which is demanded by the consumer. As mentioned at the outset of this chapter, the pivotal participant in this process of land conversion i s the developer. His decisions concerning the p r o f i t a b i l i t y of developing land i n general and the p r o f i t a b i l i t y of deve-loping particular tracts of land i s affected both indirectly by the influences of demand for and supply of land and directly by contextual factors acting upon him to modify his perception of the p r o f i t a b i l i t y of a proposed project. 3.41 Indirect Effects on Developer Decisions The developer i s typically a producer (in Vancouver) who i s neither a monopolist or monopsonist and has the amount of land that he develops determined to a large degree by the quantity of land demanded by the consumer and the amount of land supplied by the landowners. Because of this, any variations in the determinants of demand for the quantity or type of housing w i l l cause changes in the quantity of land demanded. Similarly, changes in the factors which influence the landowner's valuation of land, thus the asking price for land w i l l change the quantity of land supplied at any bid price. In general any factors which tend to i n -crease the positive difference between the consumer's bid price for land and the landowner's asking price for land w i l l increase the quantity of land that needs to be ex-changed in a move toward "pareto optimality" and hence w i l l increase the amount of production carried out by the developer The land developer's position as a middleman can be an advantage or a disadvantage to him. If market condi-tions and contextual factors combine to increase the positive difference between consumer valuations of land and landowner valuations of land, he gains an extra profit equal to the difference. If forces act to decrease this difference or to make i t negative, the developer becomes hard pressed to find land upon which to carry out his operations. Thus public policy which combines with market imperfections to increase the difference between landowner and housing consumer valuations of land (consumer has higher valuation) w i l l increase the p r o f i t a b i l i t y of land develop-ment and thereby increase the amount of land developed. In the same way, policies that decrease this difference w i l l be seen to decrease the amount of land that i s developed. 68 (a) The Housing Production Function In the f i r s t section of t h i s chapter i t was shown how the consumer forms his demand f o r the land and s h e l t e r / a c c e s s i b i l i t y components of housing. The relationship between the consumer's demand function and the developer's production function w i l l now be shown. Just as the consumer maximized his u t i l i t y i n the combination of land s h e l t e r / a c c e s s i b i l i t y by consuming quantities of each so as to equal t h e i r r a t i o s of marginal u t i l i t y to p r i c e , s i m i l a r l y , the developer maximizes h i s production per unit cost by equating the r a t i o s of each factor's marginal physical product to p r i c e . So i n the production of a r e s i d e n t i a l package, he combines factors of production i n the following manner: J M P P L = M P P S A  P L PSA Where MPP^ = marginal physical product of land MPPSA= marginal physical product of shelter-a c c e s s i b i l i t y P^ = price of land PSA = Pr-*-ce °^ s h e l t e r - a c c e s s i b i l i t y The producer w i l l adjust his.combination of factors i n the composite good i n response to changes i n the MPP or price of a facto r . I f the consumer's marginal u t i l i t y of land r i s e s i n r e l a t i o n to the other component of housing, the marginal physical, product of a unit of land i n the developer's 69 production has r i s e n . In an attempt to provide the product demanded "by the consumer and to equate the MPP/price r a t i o of the two components the developer increases the proportion of land i n the r e s i d e n t i a l package. Since the consumer's marginal u t i l i t y of land has r i s e n he w i l l be w i l l i n g to pay an increased price f o r the land. I f the landowner's supply price of the land remains the same as before, the developer earns a p r o f i t at the expense of the landowner i n addition to the normal return expected f o r his services. At the other end of the process, i f the influences on the landowner are such that he lowers h i s valuation of land and thus his asking price f o r land, the developer can off e r the same proportion of land i n his r e s i d e n t i a l package at a lower cost or increase the proportion of land at no additional cost. I f the consumer i s unable to recognize t h i s reduction i n costs, the developer i s able to earn an extra p r o f i t again. S i m i l a r l y , reductions i n the u t i l i t y gained by the consumer through the consumption of land or increases i n the landowner's asking price f o r land that combine with mar-ket imperfections to reduce the developer's p r o f i t w i l l decrease the amount of land developed. Thus i n the absence of an instantaneously adjusting market, fluctuations i n participant valuations of land can have either p o s i t i v e or negative effects on the p r o f i t a b i l i t y of the development of land and thus on the amount of land that i s developed. 70 I f the developer, i n r e a l i t y , operates i n a compe-t i t i v e market, the increased p r o f i t a b i l i t y that r e s u l t s from higher consumer valuations f o r land combined with lower landowner valuations of land would quickly disappear as developers undercut each other's prices i n an attempt to secure a larger share of the market. However, i f p o l i c i e s and market imperfections work i n the opposite d i r e c t i o n , that i s , to reduce the difference between consumer and landowner valuations of land, the adjustment made by developers w i l l be to reduce the amount of development, to search f o r other areas i n which to operate, or to p u l l out of the land development industry altogether. (b) Locational Effects Market imperfections not only influence the amount of land that i s developed but also influence the s p a t i a l d i s -t r i b u t i o n of the land that i s developed. The consumer's preferences between land and shelter-a c c e s s i b i l i t y dictate the price which he i s w i l l i n g to_pay for each component. The developer i n his selection of a location f o r his next development i s aware of the u t i l i t y gained by the consumer from the land component of the package and thus how much he should pay f o r that input. I f the landowner's price i s too high, the developer w i l l shop around u n t i l he finds a piece of land that w i l l s a t i s f y the con-sumer's needs and his own p r o f i t requirements. This appears to be one of the reasons f o r urban sprawl. Landowners 71 holding land adjacent to the urban area, whose price i s higher than that which the developer fe e l s the consumer i s w i l l i n g to pay, w i l l be passed over by the developer i n favour of cheaper land further from the c i t y . I f the land-owner overestimates the price he believes the consumer i s w i l l i n g to pay f o r a c c e s s i b i l i t y or i f he f a i l s to adjust his prices to decreases i n the price of a c c e s s i b i l i t y brought about by improvements i n transportation f a c i l i t i e s or changes i n urban structure, his land w i l l remain overpriced and unde-veloped and thus r e s u l t i n the "sprawl" or "scatteration" of c i t i e s of which so many authors have written. 3.42 Direct Influences on Developer Decisions Not only do the influences of demand fo r and supply of land have effects on developer decisions, but there exists a number of factors which act d i r e c t l y on the developer to modify his development decisions of quantity and l o c a t i o n . As with the i n d i r e c t influences on developer behaviour, d i r e c t influences w i l l be seen to affect the amount and location of development by a f f e c t i n g the p r o f i t -a b i l i t y of development. There are b a s i c a l l y two types of variables which d i r e c t l y influence the developers those associated with the financing of the development and those associated with the r i s k of the development. The importance of financing to the developer i s pointed out by Clawson, Maisel, and Goldberg. 72 Residential builders and developers i n the suburbs, l i k e redevelopers i n the central c i t y , have r e l i e d p r i m a r i l y on borrowed capital.1° A l l phases of the construction process tend to be equity poor. The great majority of firms i n the industry are compelled to stretch t h e i r c a p i t a l to the utmost. T y p i c a l l y , the leverage i n the industry i s large. In theory—lending contracts f o r construction oblige the builder to furnish equity to 20% of the fi n i s h e d value. In practice by careful timing and, judicious scheduling of work and b i l l s , contractors can cut t h e i r equity requirements by more than h a l f . . . . A builder who finances a l l h is own work has of necessity a very low c a p i t a l turn-over rate. Conversely, the higher his borrowing, the more work he can perform and the greater the p o t e n t i a l p r o f i t s . Most builders attempt to maximize turnover.17 Goldberg, ranking the importance of various financing arrange ments found that loan-to-value r a t i o i s by f a r the most important, re i n f o r c i n g the i n t u i t i v e stress on leverage. The rate of i n t e r e s t , i s next i n importance, while the remaining factors are e s s e n t i a l l y undifferentiable.1° While the developer's attitudes toward the r i s k of an investment may vary from developer to developer, some developers being more prepared to take the chance of lo s i n g heavily f o r the p o s s i b i l i t y of making a k i l l i n g , generally, other things being equal the investor w i l l prefer a sure thing to one that i s uncertain. Moreover i n l i g h t of the previous discussion i n which the developer was seen to be heavily dependent on obtaining c r e d i t f o r his operations, from f i n a n c i a l i n s t i t u t i o n s , given the conservative nature of these i n s t i t u t i o n s , i t appears that no matter what the entrepreneur's personal attitudes toward r i s k are, he w i l l "be forced to behave conservatively i f he i s to obtain funds from these f i n a n c i a l i n s t i t u t i o n s . Most lenders have been pri m a r i l y concerned with the " f i n a n c i a l soundness" of projects, but the factors they use i n measuring such f i n a n c i a l soundness are l i k e l y to be conservative. 19 Thus any factor that tends to improve the p r o b a b i l i t y of a successful venture w i l l be looked upon as a factor that i n -creases the y i e l d of the investment making development more pr o f i t a b l e and thereby increasing the amount of development occurring. (a) Financial Factors ( i ) Cost of Capital I f a r e a l estate investment i s evaluated i n terms of the cash flow that i t generates there are two basic sources to be considered! (1) the cash flow that occurs over the term of ownership, and (2) the net proceeds from 20 the l i q u i d a t i o n of the investment. For a t y p i c a l r e s i -d e n t i a l development i n which the developer s e l l s the l o t s or houses on completion of his work, the cash flow during the term of the investment w i l l be negative, leaving the entire value of the investment to be gained from the l i q u i d a t i o n of the investment at the end of the investment period. I f the y i e l d i s defined as the net return ( s e l l i n g price of the investment minus the cost of development) divided by the t o t a l costs of development, the higher the interest 74 rate the higher are the annual payments for the use of money borrowed, hence the lower the net return, the lower the yield per dollar invested, the less attractive the invest-ment in the development of land becomes and the less land development that occurs. ( i i ) Availability of C a p i t a l ^ In the typical real estate investment there are usually two investors, the equity investor and the mortgage lender. The equity investor (or property owner), character-i s t i c a l l y , when making a real estate investment goes to the money market to borrow as much money as he can at the best terms, supplying the balance of the capital required from his own pocket (equity funds). Since i t i s the rate of return to the investor's own funds about which he i s most concerned, the equity in-vestor tries to gain maximum advantage from the situation known as "leverage" or the ratio of borrowed funds to equity funds. The investor benefits from any difference in the rate of return on the project and the rate at which he borrows funds. It seems then that influences which tend to in-crease the availability or decreases the cost of financing w i l l be seen to increase the p r o f i t a b i l i t y of development and so increase the amount of development. Any influence that tends to decrease the availability of capital or i n -crease i t s cost w i l l be seen to decrease the p r o f i t a b i l i t y of 75 land development and therefore decrease the amount of deve-lopment occurring. 3.4-3 Risk of Development There are many factors acting on the developer to influence the p r o b a b i l i t y that he w i l l earn a return on the money invested that w i l l make a p a r t i c u l a r development 22 worthwhile. Kaiser and Weiss divide these effects into the effects on marketability and the effects on the costs of development. Influences, especially those of public agencies can s i g n i f i c a n t l y change the revenues anticipated from the proposed developments. Public investments i n transportation that increase the a c c e s s i b i l i t y of a proposed development w i l l increase i t s marketability. Changes i n the zoning of the development area or surrounding area can determine the appropriateness of a proposed development (thus i t s market-a b i l i t y ) . While Kaiser and Weiss maintain that effects on the marketability of p a r t i c u l a r development weigh more heavily i n the decision calculus of the developer (because the costs of development are usually more predictable than market conditions) they do not neglect the cost side of the equation. Despite the greater importance of estimated marketability effects of s i t e c h a r a c t e r i s t i c s i n our study area, the developer cannot afford to concentrate on marketability at any cost.23 To i l l u s t r a t e t h e i r point they o f f e r the example of Greensboro, which controlled developers most by a p o l i c y 76 which influenced development costs. Whether p o l i c i e s act upon the cost of development or the marketability of a development i s secondary ( i n t h i s discussion) to the recognition that these factors can have an effect on p r o f i t a b i l i t y of a given development. The less c e r t a i n a developer i s about the outcome of such fa c t o r s , the less c e r t a i n he w i l l be of the expected return of the deve-lopment. One way i n which an investor might deal with uncer-ta i n t y i s to charge himself a premium that serves to equate the value of a sure development with the value of an uncer-t a i n one. Generally, the larger the r i s k , the larger the premium he must charge. The larger the r i s k premium the smaller the expected return of the prospective development. The lower the expected return of a development, the less l i k e l y i t i s to occur. Thus any factor which tends to i n -crease the r i s k associated with the earning of a return from land development w i l l serve to decrease the p r o f i t a b i l i t y of land development occurring. Any factors which decrease the r i s k of earning a given p r o f i t from land development w i l l increase i t s p r o f i t a b i l i t y and so the amount of development occurring. The uncertainty associated with the p r o f i t a b i l i t y of land development r e s u l t i n g from the uncertainty of public p o l i c y w i l l act to decrease the amount of development over an entire region i f the uncertainty of public p o l i c y i s uniformly uncertain. However i n a m u l t i - j u r i s d i c t i o n a l region, uncertainty associated with any p a r t i c u l a r l o c a t i o n i s due to the uncertainty of the p o l i c y of the j u r i s d i c t i o n i n which that location l i e s . I f the uncertainty of public p o l i c y varies from j u r i s d i c t i o n to j u r i s d i c t i o n , i t i s probable that development w i l l occur i n j u r i s d i c t i o n s i n which the developers are most able to predict the return they can expect on t h e i r investment. In t h i s way uncertainty, when combined with p o l i -t i c a l fragmentation may act to not only influence the quan-t i t y of development but also the location of development. Evidence that developers are concerned with the certainty of these influences on t h e i r anticipated returns oh i s supplied by Goldberg. He found that developers were extremely sensitive to the influences of zoning and the access to municipal services. I t appears that developers were not w i l l i n g to purchase land on the chance that the zoning or servicing necessary for t h e i r development might occur. When asked of the importance of "proper zoning" i n the consideration of the decision to develop, 61.3% of the developers interviewed, responded that i t was "es s e n t i a l " while an additional 25.8% f e l t i t was "very important." When asked the same question of the importance of access to trunk sewers, 48.4% responded that i t was ess e n t i a l while 41,1% f e l t i t was very important. Thus over 87% of the respondents f e l t that zoning was ess e n t i a l or very important and close to 90% f e l t that access to sewers was ess e n t i a l or very important to the decision to develop. 78 3.44 Summary -. The Developer The purpose of this section was to show the out-come of the land conversion process as determined by the housing production quantity and locational decisions of the developer i s influenced by (1) the indirect effects of the demand for and supply of land for housing, and (2) by a number of "contextual" factors acting directly upon the developer to modify his perception of the p r o f i t a b i l i t y of the development of land general and of the p r o f i t a b i l i t y of developing particular parcels of land. It was shown how market imperfections that cause differences in consumer and landowner valuations for land affect the p r o f i t a b i l i t y of developing land. Finally, some of the contextual factors which were seen to directly influence the developer* s opinion of the pr o f i t a b i l i t y of development, included the cost and availa-b i l i t y of capital and public policy (e.g. zoning, servicing). 3.5 Summary - Land Conversion Process In view of the number of decision-makers and factors affecting decisions, which have an impact on the quantity and distribution of land developed for housing, i t i s d i f f i c u l t to understand why so much emphasis has been given to: one factor (tax on land) affecting one variable (holding costs of land) of one participant (the landowner) in the land conversion process. 79 An over-reliance on t h i s one factor means not only the neglect of other factors influencing other landowner decision variables, but more c r i t i c a l l y , the overlooking of the important influences of consumer demands, and factors acting d i r e c t l y on the developer to modify his decisions i n regard to the quantity and location of his operations. Only a f t e r the benefits and costs of a range of p o l i c i e s designed to (1) reduce demand f o r housing (e.g. r e s t r i c t population growth), (2) encourage development by increasing the p r o f i t a b i l i t y of development, (e.g. increasing the amount of serviced land) or (3) modify landowner behaviour (e.g. increasing information about urban land markets to landowners) are compared to the benefits and costs of using a land value tax to reach the desired goals, can a d e f i n i -t i v e answer be given to the question of which p o l i c y or com-bination of p o l i c i e s i s the most e f f i c i e n t means of reducing the problems of the housing shortage and urban; sprawl. Hopefully t h i s chapter, by describing some of the relationships i n the process has served to suggest some of the areas i n which p o l i c y may be implemented, should the primary effects of the land value tax be found to be i n -e f f e c t u a l or i t s secondary effects too burdensome, to make i t s use worthwhile. 80 Chapter I I I - Notes and References Marion Clawson, Suburban Land Conversion i n the United  States, (Baltimore, Resources f o r the Future Inc., John Hopkins Press, 1971), pp. 58-109. 2 For a review of research conducted under t h i s program see Edward J . Kaiser and Shirley Weiss, "Decision Agent Models of the Residential Development Process - A Review of Recent Research," T r a f f i c Quarterly (23) 1969, pp. 597-630. ^Kenneth E. Boulding, Economic Analysis, New York, Harper and Brothers, 1941, pp. 220-221. h, Richard H. Leftwich, The Price System and Resource A l l o -cation, New York, Holt Rinehart, Winston, 1965, p. 8 3 . ^Lawrence B. Smith, Urban Canada* Problems and Prospects, Research Monograph No. 2 - Housing i n Canada, OttawaJ Queen's P r i n t e r , 1971, p. 3 0 . 6 I b i d . , p. 3 0 . 7 I b i d . t p. 31. 8 I b i d . , p. 61. 9 I b i d . , p. 32. 1 0 I b i d . , p. 3 0 . 1 : LClawson, (1970), op. c i t . , p. 102. 12 Marion Clawson, "Urban Sprawl and Speculation i n Suburban Land," Land Economics, May 1962, pp. 95-111. 1 3Revenue Canada, Your Guide to the 1973 Income Tax Return, Ottawa, 1973, p. 1°. 14 Shirley Weiss, Raymond J. Burby, Newton W. Andrus, Lake  Oriented Residential Developer Decisions - A Focused View  of the Urban Growth Process, Center f o r Urban and Regional Studies, I n t t i t u t e f o r Research i n So c i a l Sciences, Univer-s i t y of North Carolina, November 196?, p. 13* ^ L e f t w i c h , 1965, op. c i t . , p. 125. l 6Clawson, 1970, op. c i t . , p. ?1. 17 'Sherman Maisel, Financing Real Estate - P r i n c i p l e s and  Practices, McGraw H i l l , pp. 315-316. 81 18 M.A. Goldberg, "Residential Developer Behaviourj Some Empirical Findings," Land Economics, February 1974, pp. 85-89. 1 9 Clawson, op. c i t . , 1970, p. 72. 20 J . E . Gibbons, "Impacts of Yield on Value," Appraisal  Journal, October 1970, p. 495. 2 1 R i c h a r d U. R a t c l i f f , Bernhard Schab, "Contemporary-Decision Theory and Real Estate Investment," The Appraisal  Journal, 1970, p. 167. 2 2 K a i s e r and Weiss, 1970, p. 34. 2 3 j Goldberg, op. c i t . , p. 86. ' i b i d . , p. 34. 24, 82 CHAPTER IV THE LAND VALUE TAX - RE-EXAMINED 4.1 Introduction In Chapter I, the problems with which this thesis i s concerned were presented. In Chapter II, the effects and mechanics of the effects of a land value tax on these problems were presented with the aid of a simple land valuation model. In Chapter III, the simple model was expanded to take into account the variables that affect the valuation of land in a situation closer to the one that exists in the real world. The purpose of Chapter IV, is to use the knowledge gained in Chapter III to re-evaluate the effects of the tax discussed in Chapter II on the problems stated in Chapter I. Before going on to discuss the relationships among speculation, land taxation and urban sprawl or the high costs of land i t w i l l be useful here to expand the land valuation model to make explicit the effect of the tax on the land speculator. In both problems (urban sprawl and the shortage of housing) speculation or the holding of land for a higher price, means that the residential developer is not able to acquire the input (land) for his production process at the price he needs to make the profit he requires to make an 83 investment i n the development of r e s i d e n t i a l land seem a t t r a c t i v e . His reaction to the speculator's demand f o r a higher price f o r land w i l l depend to a large degree on the demand e l a s t i c i t y f o r the f i n a l good. I f demand i s e l a s t i c , he w i l l be unable to pass a l l of the increased costs of land on to the consumer. This r e s u l t s i n a decrease i n the supply of houses offered by the developer. I f the demand f o r housing i s price i n e l a s t i c the developer w i l l be able to meet the landowner's price f o r land by simply r a i s i n g the price of the f i n a l product. In the t h i r d s i t u a t i o n , i f the consumer i s w i l l i n g to increase his transportation expenses i n l i e u of paying a higher price f o r a better l o c a t i o n , the reaction of the developer w i l l be to bypass the well-situated high-priced land i n favour of developing less well-situated lower priced land. Thus i f the speculator's asking price f o r the land i s more than the developer i s w i l l i n g to bi d , there are three possible supply responses by the developer that depend u l t i -mately on the demand ch a r a c t e r i s t i c s f o r housing and the components of housing} (1) supply less housing at the same pr i c e , (2) the same amount of housing at a higher p r i c e , or (3) change the loc a t i o n of the houses supplied (sprawl). Since i t i s the difference between the developer's bid price and the speculator's asking price that causes these adverse effects (less housing, higher priced housing, or sprawl), i t w i l l be useful to examine the means by which each evaluates land. 4.2 The Pure Development Model Since the evidence shows that developers do not t y p i c a l l y speculate i n land (Chapter I I I ) but value land so l e l y f o r i t s worth as a factor of production, i t i s possible to adjust the general land valuation equation: n v. PV = £ D t " c t + K t= l (1+r)* ( l + r ) n to r e f l e c t t h i s singlemindedness: P D V = £ V j t ^ t=l u+rr PDV = pure development value b^ = returns to development i n period t Cj. = the cost of development i n period t r = c a p i t a l i z a t i o n interest rate n = time period of investment 4.3 The Pure Speculative Model Just as i t i s possible to assume a single minded developer with no regard f o r the r i s e i n land values over the investment period, i t can be assumed that the speculator has no intention of developing the land and so invests only to capture the r i s e i n land values. To show t h i s motivation f o r holding land the general equation becomes: n PSV = K 4 c t 85 PSV = Pure Speculative Value K = expected b i d price i n year n f o r land c^ = costs of holding land i n year t The pure speculative model may be reformulated again, to make e x p l i c i t the components of the speculator's value f o r the land: n k - c PSV = PDV + ^ _ t ^ t 4 _ 3 t=l ( l + r ) * k^ . = increase i n land value i n year t This equation simply shows that the speculator bases his estimation of the future value of the land on the price which he has been offered i n the present and the net increase i n land values that occurs between the present and the time of the anticipated sale. I t can be seen, that as long as the increase i n land values i s greater than the costs of holding the land, the value of the land to the speculator w i l l be greater than the value of the land to the developer. As long as PSV i s greater than PDV, the developer responses l i s t e d above, may be expected to occur. However, should the rate of increase i n land values decrease or the costs of holding land r i s e such that* n i k t - c t = 0 ^ t=i i t can be seen that the present speculative value w i l l equal present development value and thus the developer w i l l not display the adverse reactions l i s t e d above (decreasing the supply of housing, increasing price or providing scattered discontinuous development). For the speculator to have a higher value f o r the land than the developer, the yearly rate of land value appre-c i a t i o n must be greater than the yearly costs of holding the land. I f the rate of appreciation i s equal to the holding costs, the value of the land i s equal to the development value. I f the rate of appreciation i s less than the rate of holding costs, the speculative value w i l l become less than the development value. PSV = [l+(m-h)] PDV 4-5 m = annual percentage increase i n land values h = annual holding costs as a fo of land value Since the two major holding costs to the speculator are (1) opportunity cost of c a p i t a l invested i n the land, and (2) the tax on the land, the equation may be reformulated to make e x p l i c i t these costs PSV = (l+[m-(r+x)]) PDV 4-6 m = annual rate of land value appreciation {%) r = speculator's c a p i t a l i z a t i o n i n t erest rate x = land value tax rate (% of market value) IF [m-(r+x)] 7 P then PSV y PDV IF [m-(r+x)] = 0 then PSV = PDV IF [m-(r+x)]< 0 then PSV < PDV 87 I f i t i s accepted that housing shortages and urban sprawl are the r e s u l t of higher speculative values f o r land, any p o l i c y that (1) decreases the rate of land value appre-c i a t i o n , (2) increases speculator opportunity costs, or (3) increases speculator tax costs w i l l meliorate the problems by decreasing the difference between the two values f o r land. Those proponents of an increased s i t e value tax see the solu-t i o n to l i e i n the implementation of the t h i r d a l t e r n a t i v e . I t i s now necessary to re-examine the effects of t h i s p o l i c y on the two problems, (1) shortage of housing and (2) the "suboptimal" d i s t r i b u t i o n of urban development (urban sprawl). 4-.4 Effects on Sprawl - Re-examined In previous discussions, i t was stated that one of the causes of sprawl i s the i n a b i l i t y of developers to pur-chase land adjacent to the urbanized area because of the difference i n the price that they are w i l l i n g to pay and the asking price of the speculator. I t was shown how the specu-l a t i v e value of land could be made to equal the development value by increasing the tax on the land held out of produc-t i o n . This would lower the speculator's asking price f o r the land to a price that the developer i s able to pay. Thus land nearest the c i t y , held out of production before the im-p o s i t i o n of the tax would be developed a f t e r the imposition of the tax. There i s one problem with t h i s reasoning, however. I t w i l l be remembered that the developer chose the more 88 distant land because of a d i f f e r e n t i a l i n the price of adjacent land and distant land. An increase i n the tax on land applied uniformly upon a l l land within the region would c e r t a i n l y lower the costs of adjacent land ( c e t e r i s paribus) but so would i t lower the cost of the distant land. Thus the d i f f e r e n t i a l i n price that was responsible f o r the sprawl i n the pre-tax period i s preserved to work i t s e v i l i n the a f t e r -tax period i f the tax i s applied to a l l land values at the same rate. In the absence of d i f f e r e n t i a l assessment or tax rates that would tax adjacent land more heavily than distant land, the tax would achieve i t s desired effect only i f the entire speculative value were taxed away. In areas of rapid growth, the increase i n the tax necessary to accomplish t h i s task might be high. I t w i l l be seen l a t e r that there are r e a l constraints to the amount which the tax may be raised. I f i t happens that the tax r a i s i n g runs hard into a con-s t r a i n t before i t reaches the l e v e l needed to remove the speculative value from land, i t w i l l be necessary to employ other methods to remove the "excess" price d i f f e r e n t i a l between land acjacent to the urbanized areas and that land further from the c i t y core. 4.5 Effects on the Housing Shortage - Re-examined As mentioned e a r l i e r , one reason given f o r the shortage of housing was the high cost of land (due to specu-l a t i v e . ^ a c t i v i t y i n the land market) to the developer. 89 It was shown in Chapter II how the imposition of land value tax lowers the price of land in the ratio of Thus increases in the rate at which land i s taxed w i l l reduce the cost of land. Reductions in the cost of land, under competitive market conditions, result in reductions in the price for housing and increases in the amount of housing produced. However there i s more to the simple reduction than the equation shows. Holland 1 illustrates some additional considerations in the following example . . . let the discount rate be 5 percent and let there be a piece of land that promises $1,000 a year (appreciation or net rent). The land w i l l s e l l for $20,000 and the annual interest cost w i l l be $1,000. Next impose a site value tax that comes to 20 percent of the annual yield. The land w i l l now s e l l for $16,000. The annual interest charge w i l l be $800 and the annual tax payment $200; together they w i l l be precisely equal to the annual interest cost before the tax. The running costs of development w i l l not have changed. . . . Thus the running cost of land for develop-ment purposes i s converted by the site value tax from an interest charge to a smaller interest outlay plus a tax payment which together are just equal to the interest charge in the absence of the tax. . . . And i f this i s the case capitalization of the tax and the consequent decline in the selling price of land do not encourage development. Thus from this example, i t can be seen that while the price for land has gone down, the total costs of develop-ment have remained constant. The only change has been a shift in the destination of the payment from the private 90 sector to the public sector as a result of the decrease in interest payments accompanied by a corresponding increase in tax payments. However even this example does not give the f u l l story of the effect of the land value tax on land values and development, since i t holds true only under the restrictive assumption of the existence of a world in which unlimited capital i s freely available at the same cost to a l l who desire i t . While the total costs of development are not reduced by the increase in the tax, the "capital cost" of the land has been reduced. The tax may be seen as a per-2 petual loan to the owner of the land. This "loan" i s of most value to those who have the most d i f f i c u l t time obtaining credit or have to pay the highest price for i t . It i s worth least to those investors with ample supplies of low cost capital. Thus land subject to this tax and thus subject to this loan would increase in value, more for the capital poor than for the capital rich. Typically i t i s the developer who has d i f f i c u l t y obtaining the capital he requires and who pays dearly for that which he can scrape up, while i t i s the speculator who is usually endowed with large quantities of capital for which the opportunity costs are low. Thus the effect of a tax on land i s to narrow the gap between the value placed on land by the speculator and the value placed on the land by the developer. The effect of this narrowing, i s to reduce 9 1 the incidence of problems discussed at the outset of t h i s chapter. In addition to the effect which the tax has on those " r a t i o n a l speculators" who respond i n a predictable manner to changes i n the present worth of t h e i r land, Gaffney argues that the tax awakens those landowners who have been s i t t i n g on land without paying much attention to i t s worth. The shock of a d r a s t i c a l l y increased tax provides the nudge, needed to encourage these landowners to evaluate the worth of t h e i r land and act i n a manner s i m i l a r to the r a t i o n a l speculator. In p r a c t i c e , they (land value taxes) even tend to accelerate renewal by arousing sleeping landowners, bypassing c r e d i t rationing, substituting a v i s i b l e e x p l i c i t cost for an i n v i s i b l e i m p l i c i t one, re-ducing the l i q u i d i t y of slow landowners, compelling a more r a t i o n a l attitude toward heirloom land and i n general needling landowners to do what t h e i r s e l f i n t e rest would seem to have dictated anyway.3 4.6 The Tax Rate Needed to Lower the Price of Land E a r l i e r , i t was demonstrated that speculative land value equalled the development land value when the rate of land value appreciation equalled land holding costs, which consist of the opportunity cost of the c a p i t a l invested i n the land and annual taxes on the land. In areas of high growth, an increase i n speculative values can be counter-balanced by either an increase i n the tax rate or c a p i t a l -i z a t i o n rate such thatt [m-(r+x)] = 0 4-7 92 I f the p o l i c y i s to s t a b i l i z e land prices at the development value by increasing the tax on land i t i s important to know (1) the annual rate of land value appre-c i a t i o n and (2) the c a p i t a l i z a t i o n rate of the speculator. I f f o r example the price of a piece of land has been i n -creasing at a rate of 20$ per year (and that pace of appre-c i a t i o n i s expected to continue) and the speculator has a c a p i t a l i z a t i o n rate of 8 $ , the value of the land needed to s t a b i l i z e prices can be found by substituting these values into the equation: m - (r+x) = 0 20 - (8+x) = 0 x = 12 Thus when the rate of value appreciation i s 20$ and the speculator's opportunity costs are 8 $ , the rate at which land must be taxed to reduce the speculative value of land to the development value i s 12$. 4 , 6 1 Speculator Income Tax Rate A twist to the formulation occurs when the income tax s i t u a t i o n of the speculator i s taken into account. Since property taxes on vacant land are often deductible from i n -come tax l i a b i l i t i e s , the existence of a progressive income tax makes the cost of the property tax dependent on the income of the speculator. For example, t h i s means that a 2% land value tax to a person i n the 50$ tax bracket i s equivalent to a Ifo tax to a person with no taxable income. The v a r i a t i o n in effect among taxpayers with differing marginal income tax rates i s shown below. Table I2* Effective Property Tax Rates for Various Income Marginal Tax Rates Marginal Income Holding Cost for a Land Value Tax Tax Rate - % 2 per cent 4 per cent 50 1 .00 2 . 0 0 33 1 .33 2.60 25 1 .50 3 . 0 0 0 2 . 0 0 4 . 0 0 To return to the previous example, i t can be seen that i f the taxpayer were in the 50% income tax bracket, a land value tax of double the twelve per cent would be neces-sary to reduce the value by the same amount. Thus an import-ant factor in determining the rate of land value taxation that w i l l reduce the speculative value to the development value i s the marginal income tax rate of the speculator. In Table II, the effects of the three variables acting to determine the rate at which a municipal government would have to tax land to remove the speculative value of land are summarized. It can be seen that increases in the rate of land value appreciation or speculator income tax rates, has the effect of raising the rate at which land must be taxed to remove the speculative value. The rise in the speculator's discount rate reduces the rate at which land must be taxed to reduce the speculative value to the develop-ment value. What i s particularly striking is the high rate 94 TABLE I I Land Value Tax Rate Needed to S t a b i l i z e Land Prices  Under Varying Rates of Land Value Appreciation, Speculator Discount Rates, and Speculator Income Tax Rates Rate of Annual Holding Speculator's E f f e c t i v e Income Nominal Appre- Costs to Discount Rate of Tax Land Value c i a t i o n S t a b i l i z e Prices Rate Land Value Tax Rate Tax Rate 10 10 2 8 0 8 10 10 5 5 0 5 10 10 8 2 0 2 10 10 2 8 25 10.6 10 10 5 5 25 6.6 10 10 8 2 25 2.6 10 10 2 8 50 16 10 10 5 5 50 10 10 10 8 2 50 4 20 20 2 12 0 12 20 20 5 15 0 15 20 20 8 12 0 12 20 20 2 18 25 24 20 20 5 15 25 20 20 20 8 12 25 16 20 20 2 18 50 36 20 20 5 15 50 30 20 20 8 12 50 24 30 30 2 28 0 28 30 30 5 25 0 25 30 30 ' 8 22 0 22 30 30 2 28 25 37.3 30 30 5 25 25 33.3 30 30 8 22 25 29.3 30 30 2 28 50 56 30 30 5 25 50 50 30 30 8 22 50 44 95 at which land must be taxed to reduce the speculative value to the development value. 4.7 The Equity Constraint The large increases i n the tax rate applied to land necessary to induce high income, low opportunity cost specu-l a t o r s to s e l l t h e i r land to developers involve substantial s h i f t s i n the burden of the property tax. A s h i f t from the present system of property taxation which taxes both buildings and land would increase tax burdens of those taxpayers owning property with r e l a t i v e l y low improvement/land r a t i o s . Speci-f i c a l l y , the s h i f t to land value taxation at a rate which would maintain the pre-tax l e v e l of revenue, would decrease the tax payable by those owning property with a t o t a l value/ land value r a t i o greater:than the average r a t i o f o r a l l pro-perties i n the taxing j u r i s d i c t i o n , increase the tax payable by those owning property with a t o t a l value/land value r a t i o lower than the average r a t i o and leave unchanged the tax payable by those owning property with a t o t a l value/land value r a t i o equal to the average r a t i o i n the taxing j u r i s -d i c t i o n . The s h i f t s i n property tax burdens that occur when the base of the property tax i s s h i f t e d from land and improve-ments to only land and that occur as land value taxes are increased to a l e v e l necessary to s t a b i l i z e land prices at t h e i r present l e v e l w i l l be the subject of investigation i n the next chapter. 4 . 8 Summary A re-examination of the effects of the land value tax i n reducing the problems of the housing shortage and urban sprawl revealed some of the si m p l i f y i n g assumptions made when the effects of the tax were f i r s t discussed. Once the importance of the d i f f e r e n t i a l i n land prices rather than absolute land prices to the incidence of urban sprawl, was made cl e a r , i t was possible to re-evaluate the tax's a b i l i t y to reduce sprawl by lowering land p r i c e s . I t was seen that a land tax would have to be applied d i f f e r -e n t i a l l y to remove the d i f f e r e n t i a l i n the p r o f i t a b i l i t y of developing one piece of land as opposed to another (and thus reduce sprawl)• In addition to i l l u m i n a t i n g some of the factors influencing the effectiveness of a p o l i c y to reduce the shortage of housing by increasing the rate of land value taxation, the chapter presented a simple model designed to show the rate at which a land value tax would have to be levied to reduce the speculative motive f o r holding land and so increase the p r o f i t a b i l i t y of producing housing (thus easing the housing shortage). F i n a l l y , a secondary effect associated with the increasing of the land value tax was introduced ( s h i f t i n g of the burden of t a x a t i on). 9? Chapter IV - Notes and References ""•Daniel M. Holland, "A Study of Land Taxation i n Jamaica," i n Arthur P, Becker, ed., Land and Building Taxess Their  Effect on Economic Development, University of Wisconsin Press, Madison, 1969,pp. 278-279. 2 I b i d . , pp. 2?8-280. 3Mason Gaffney, "Property Taxes and the Frequency of Urban Renewal," i n National Tax Association, 1964 Proceeding of the  Fifty-Seventh Annual Conference on Taxation, ed. Walter J . Kress (Harrisburg, Pa.), 1965, p. 280. ^A l l a n A. Schmid, Converting Land From Rural to Urban Uses, Resources f o r the Future, John Hopkins Press, Baltimore, I960, p. 43. 98 CHAPTER V THE EFFECTS ON THE DISTRIBUTION OF THE BURDEN OF MUNICIPAL TAXATION OF TAXING LAND AT THE RATE NECESSARY TO REMOVE THE SPECULATIVE VALUE OF LAND 5.1 Introduction In Chapter IV, the c u l p r i t responsible f o r the i l l s of urban sprawl arid the shortage of housing was assumed to be the land speculator. I t was shown how the high price f o r land demanded by the speculator, due to his expectations of future land value appreciation evokes three responses from the developer- (1) less housing produced, (2) higher priced housing, and (3) urban sprawl. Further, a simple speculative land value model was developed. In t h i s model the specula-t i v e value depended on three variables! (1) the rate of land value appreciation, (2) the speculator's discount rate, and (3) the rate of land value taxation. I t was shown that as long as the rate of land value appreciation i s greater than the combined opportunity and tax costs, the speculative value w i l l remain above the development value, preventing land from being developed. Thus by increasing the tax on land so that holding costs become equal- >to the rate of land value appreci-ation, the speculative value f o r land i s reduced to the development value of land and the adverse effects of land speculation are avoided. 99 The purposes of t h i s chapter are twofold. The f i r s t i s to estimate the magnitude of a land value tax that i s required to reduce the speculative value for land to the development value. To accomplish t h i s , i t w i l l be necessary, as equation 4-6 suggests, to determine the rate of land value appreciation and the speculator's discount rate. The second purpose of t h i s chapter i s to examine the s h i f t s i n tax burden which occur when a land value tax i s l e v i e d at a rate necessary to remove the speculative motive for holding land. The area of analysis f o r t h i s study i s the C i t y of Vancouver. 5.2 The Tax Rate Needed to Remove  The Speculative Value of Land 5.21 Rate of Land Value Appreciation  i n the C i t y of Vancouver The Vancouver area has undergone extremely rapid growth i n the past decade and especially rapid growth i n the past few years. This growth, lar g e l y due to heavy immigra-t i o n has placed onerous demands on the available land resource. This has resulted i n a rapid increase i n the price of a l l land but p a r t i c u l a r l y i n the price of serviced land. (a) Methodology In an attempt to establish the rate of land value appreciation, i t was f i r s t proposed to draw a sample from the 2150 vacant l o t s i n the City of Vancouver whose rate of appreciation would be representative of the rate occurring 100 throughout the C i t y i n a specified time period. The require-ments of t h i s methodology included (1) a substantial number of vacant l o t s that had changed hands at least once (pre-ferably more often) during the time period, (2) sales which were transacted between s e l l e r s who were adequately aware of demand prices and buyers who were adequately aware of b i d prices, and (3) sales that were made at "arms length." A search through the f i l e s of the Greater Vancouver Real Estate Board for t h i s sample was frustrated on a l l counts. Sales of vacant land were few i n number and multiple sales of the same parcel were even fewer. Large price changes over extremely short periods of time and the presence of sales from companies to individuals or vice versa of the same name led the researcher to suspect that the t h i r d con-d i t i o n necessary f o r a v a l i d sample would not be met either. When the i m p o s s i b i l i t y of obtaining an adequate sample from which to estimate the rate of land value appre-c i a t i o n became apparent, an alternative method was adapted. This method made use of the Greater Vancouver Real Estate Board's s t a t i s t i c a l records f o r vacant l o t pr i c e s . Each year The Board publishes the prices f o r l o t s i n selected areas of the City of Vancouver and the Greater Vancouver Regional D i s t r i c t . A lower and an upper price f o r l o t s i n each area are given f o r each year. An average price f o r l o t s f o r each year i n each area was obtained by taking the aver-age of the two representative prices l i s t e d f o r each year. 101 The average price was used so as to avoid the bias of using either the upper or lower end of the price range. Prices used i n the analysis, therefore are probably sub s t a n t i a l l y higher than the price that could be obtained for some l o t s and substa n t i a l l y lower than the price f o r which other l o t s could be sold. In view of the high rate of appreciation i n the l a s t year, the prices l i s t e d f o r 1973, on the whole w i l l probably seem substa n t i a l l y lower than experience might suggest. Average l o t prices were calculated from 1967 to 1973- The year 1967 was chosen because areas l i s t e d i n the records remained nearly the same from that period to the present. Thus problems of area r e d e f i n i t i o n were avoided. From the average l o t prices calculated, the yearly land value appreciation rate was calculated f o r each area of the c i t y l i s t e d . An average appreciation rate f o r each area was then obtained by taking the average of the yearly appreciation rates. An average appreciation rate f o r the Ci t y of Van-couver as a whole was obtained by taking the average of the average rates of appreciation f o r a l l areas of the c i t y which had sales l i s t e d i n a l l seven years. The r e s u l t s of t h i s analysis are presented i n Table I I I . The trend over the seven years was one of sub-s t a n t i a l appreciation i n the early parts of the period followed by a period of l i t t l e or no appreciation around 1970, followed i n turn by the present period, characterized by spectacular TABLE I I I Land Value Appreciation Rates f o r Selected Areas i n the City of Vancouver Area Typical Frontage 1967 1968 1969 1970 1971 1972 1973 Average Increase Point Grey Dunbar oo.-sO* $ Value J J -? fo Increase 11,000 14,750 3^.1 17,500 18.6 17,500 18,750 20,75° 0 7.1 10.7 30,000 44.6 3,166 17.5 Oakridge 58* 17,500 22,000 25.7 24,000 9.1 few or no sales Kerrisdale 33'-50« 11,000 14,750 34.1 17,500 18.6 17,500 18,750 22,000 0 7.1 1?.3 30,000 36.4 3,166 18.9 Shaughnessy 60*-70* 20,000 23,000 15.0 27,500 19.5 few or no sales South Vancouver & Cambie 33»_50' 11,750 14,500 23.4 16,750 15.5 16,750 17,250 18,500 0 3.0 7.2 28,750 55.^ 2,833 17.4 Fraserview - Old 33.-40* 9,250 11,000 18.9 13.500 22.7 few or no sales Fraserview - New 45*-50* 9,900 12,500 26.3 16,500 32.0 few or no sales Champlain Heights 42*-64* 14,250 15,750 10.5 28,750 82.5 K i l l a r n e y Joyce Road 33.-45* 7,500 8,750 16.6 11,500 3.4 12,250 12,250 14,750 6.5 0 20.4 23,750 61.0 2,708 22.6 Renfrew Heights 33'-50' 7,000 8,750 25.0 12,000 37.1 12,250 12,500 15,000 2.1 2.0 20.0 25,750 71.6 3.125 26.3 East Hastings 33. 7,000 8,75° 25.0 12,000 37.1 12,000 12,500 14,000 0 4.2 12.0 22,500 60.7 2,583 23.1 Grandview 33* 6,750 8,75° 29.6 12,000 37.2 12,000 12,500 14,000 0 4.2 12.0 22,500 60.7 2,5^1 23.9 TABLE IV Land Value Appreciation Rates for Selected Areas i n the G.V.R.D. Area Typical Frontage 1967 1968 1969 1970 1971 1972 1973 Average Increase Burnaby (North) 33'-66- I Land Value Increase 7,000 9,000 28,6 11,250 25.0 11,250 0 12,500 11.1 14,500 16.0 22,000 51.7 2,500 22.1 North Vancouver (Upper Lonsdale) 33'-66" 7,000 8,500 21.4 9,000 5.9 10,000 11.1 10,250 2.5 14,750 43.9 22,500 52.5 2,583 22.9 West Vancouver (Cypress Park) 60" 9.000 12,000 33.3 14,250 I8.7 ,15,250 7.1 17,000 11.4 20,000 17.6 28,000 40 .0 3,166 21.3 Coquitlam 6o ,-66« 4,500 5.750 27.8 7,000 21.7 8,050 15.0 9,000 11.8 10,750 19.4 17,000 58.1 2.083 25.6 Richmond 66* 5,500 6,500 18.2 7,250 11.5 8,500 17.2 9,250 8.8 11,500 24.3 17,500 52.1 2,000 22.0 Surrey (North) 60»-66* 3,800 4,500 18.4 6,000 33.3 6,000 0 7.500 25.0 10,500 40.0 15.250 45.2 1,908 26.9 Delta (North) 66"-75' 3,750 6,250 13.3 6,250 47.0 6,250 0 8,000 28.0 9,750 21.9 15.500 58.9 1.958 28.1 o V - 0 1 Oil-leaps i n land values of from 36.4$ i n Kerrisdale to 82.5$ i n Champlain Heights. Average yearly rates of appreciation over the seven year period ranged from 17.5$ i n the Point Grey-Dunbar area to 23.9$ i n the Grandview area. The aver-age for the City over the period was 21.4$ per year. A s i m i l a r trend of high appreciation, low or zero appreciation followed by rapidly accelerating rates of land value appreciation was found when the same analysis was made of areas throughout the Greater Vancouver Regional D i s t r i c t . Since these areas have, on the whole experienced higher growth rates than the Ci t y of Vancouver, i t i s not sur-p r i s i n g that land value appreciation rates have also been higher, ranging from 21.3$ per year i n West Vancouver to 28.1$ per year i n Delta (north). The average yearly i n -crease over the seven year period (24.1$ per year) turned out to be s l i g h t l y higher than the average increase f o r the Ci t y of Vancouver. (b) The Selection of an Appropriate  Rate of Land Value Appreciation The selection of a single rate of land value appreciation i s extremely d i f f i c u l t and i s made more d i f f i -c u l t by the rapid r i s e i n prices i n the l a s t year. Are these price increases representative of true economic con-di t i o n s and so indicate the probable rate of future appreci-ation? Or are they the result, of overly i n f l a t e d expecta-tions s i m i l a r to the ones that occurred before the sudden drop i n rates of land value appreciation that occurred i n 105 1970? The Real Estate Board seems to f e e l that these price increases w i l l continue into the f u t u r e . 1 I f the Board i s correct i n i t s assumption, the appropriate rate of appreci-ation to use i n the c a l c u l a t i o n might be 50$ per year or more. However since the outcome of the complete analysis w i l l be jeopardized more by an overestimated rate than by an under-estimated rate i t was a r b i t r a r i l y decided to select a rate of appreciation close to the average rate found to have occurred over the past seven years. That rate i s 23$ per year. 5.22 The Speculator's Discount Rate The s e l e c t i o n of a discount rate that could be considered representative of the cost of c a p i t a l to a large heterogeneous group of landowners known c o l l e c t i v e l y as specu-l a t o r s i s an even more d i f f i c u l t task than the determination of an appropriate rate of land value appreciation. As pointed out i n Chapter I I I , the cost of c a p i t a l varies from investor to investor as a function of each's income, l i q u i d i t y , and income time preference, and alternative investment oppor-t u n i t i e s . T y p i c a l l y the l i t e r a t u r e has regarded the speculator as an investor with low opportunity costs due to the high rate at which his income i s taxed. Clawson i n 1962, speaks of speculators with discount rates as low as 2$. In a study done for the G.V.R.D. by Thompson, Berwick and Pratt (an urban planning consulting firm) a model developed to investigate the p o s s i b i l i t y of putting vacant land into use, assumed c a p i t a l to be available to developers at rates of 8% to 9ir%. I f i t i s true that developers are t y p i c a l l y c a p i t a l scarce and pay more fo r c a p i t a l than speculators, i t would seem that a speculator discount rate less than that of the developer would not be inappropriate. However since the argument suffers from an underestimation of the discount rate more than from an overestimation, a conservative rate of 10% was chosen as the speculator c a p i t a l i z a t i o n i n t erest rate. 5.23 Rate of Taxation Needed to Reduce the  Speculative Value of Land to the  Development Value Having established values for the annual rate of land value appreciation and the speculator's c a p i t a l i z a t i o n i n t e rest rate, i t i s now possible to determine the rate at which land must be taxed to decrease the present specula-t i v e value to the present development value. I t w i l l be remembered that t h i s occurs when the annual rate of land value appreciation i s equal to the annual costs of holding the land. This occurs when m - (r+x) = 0 Thus when m = 23% and r = 10% the rate at which land must be taxed to reduce the speculative value of land to the development value i s 13%. However, from an e a r l i e r discussion i t w i l l be r e c a l l e d that the marginal income tax rate of the speculator has an important influence on the e f f e c t i v e cost of any nominal rate of taxation. I f the speculator i s assumed to be i n a 50$ marginal income tax rate bracket, the nominal rate of the land value tax w i l l have to be 26$, or double, to have the same ef f e c t . (a) Present Rate of Taxation At the present time i n the C i t y of Vancouver, there are two assessment r o l l s , the general r o l l , against which a 15.6 m i l l tax rate i s applied to y i e l d the general purpose revenue and the school and hospital r o l l against which a m i l l rate of 30.8 i s applied to y i e l d school revenues and against which a .8 m i l l rate i s applied to y i e l d h o s p i t a l revenues. The t o t a l taxes paid by owners of vacant land within the c i t y i s $1,608,062. The t o t a l rate at which vacant land i s being taxes may be obtained by di v i d i n g t h i s amount by the assessed value (equal to market value f o r general purpose tax) of the vacant land. The annual tax rate by t h i s c a l c u l a t i o n represents ,0285 of the market value of the land or 2.85$ of the value of the land. There-fore to remove the speculative value of the land the tax rate would have to be raised by over 400$ to af f e c t a specu-l a t o r who does not pay any income taxes and by over 900$ to affec t a speculator whose income i s taxed at a marginal rate of 50$. (b) The S h i f t to Land Value Taxation A f i r s t step i n r a i s i n g the tax on land i s to change the base of taxation from land and improvements to land alone. Losing the revenues obtainable from taxing 108 improvements means that the tax rate on the remaining land assessment must be increased, i f the p r e - s h i f t l e v e l of revenue i s to be maintained. The m i l l rate which would y i e l d revenues from land equal to the revenues now obtained by taxing land and improvements may be found by d i v i d i n g the t o t a l tax revenues ($104,050,128) by the t o t a l land assess-ment ($1,843,747,021) (from the general purpose r o l l ) . The new m i l l rate of 56.4 i s equivalent to 5.64% of the market value of the land. I t can be seen that merely s h i f t i n g the base of the r e a l estate tax to land i s not enough to remove the speculative value of land. The tax rate s t i l l must be sub s t a n t i a l l y increased (from 5.64% to 13.00% or 26.00%, depending on the income tax assumption). 5.3 The S h i f t i n the Burden of Taxation  With a S h i f t to Land Value Taxation In Chapter IV, i t was shown that properties with low improvement to land r a t i o s or t o t a l value/land value r a t i o s lower than the average t o t a l value/land value r a t i o f o r a l l properties i n the taxing j u r i s d i c t i o n would bear increased tax b i l l s i f revenues formerly earned by a tax on improvements and land were to be earned from a tax s o l e l y on the value of land. These relationships are summarized f o r the C i t y of Vancouver i n Table V.-* I f land and improvements were taxed at t h e i r f u l l value, the average t o t a l value/land value r a t i o i s 2.17/1. This means that a l l those classes of land-use with t o t a l value/land value r a t i o s of l e s s than 2.17 w i l l experience TABLE V Improvement/Land Value Ratios and Total Value/Land Value Ratios for Land-Use Property Glasses i n the City of Vancouver Property Class Land Assessment Improvement Assessment Total Assessment Improvements as % of Land Value Total Value/ Land Value Ratio Vacant 56,290,388 — 56,290,388 — 1/1 Residential Single Family Duplex & Equiv. Conversions Combined with Commercial Miscellaneous 967,604,029 54,256,867 50,430,478 21,109,960 2,188,350 706,368,421 49,075,267 38,661,967 46,369.920 81,245 1,673,972,450 103,332,134 89,092,445 67,479,880 2,269,603 73.00 90.45 76.66 219.66 3.71 1.73/1 1.90/1 1.76/1 3.18/1 1.03/1 Residential Total 1,095.589,692 840,556,820 1,936,146,512 76.72 1.76/1 Apartments Total 159,587,742 423.778,945 583,366,687 265.55 3.65/1 Business Commercial 382,211,773 605,966,827 988,178,600 158.54 2.58/1 I n d u s t r i a l 150,067,426 291,755.726 441,823,152 194.42 2.94/1 Business Total 532,279,199 897.722,553 1,430,001,752 168.66 2.68/1 Total Taxable 1,843,747,021 2,162,058,318 4,005,805,339 117.26 2.17/1 110 increased tax burdens with a s h i f t to the land value tax. A l l r e s i d e n t i a l classes of land-use excepting the category "combined with commercial" would be expected t o p a y more taxes i f the base of taxation were shi f t e d from land and improvements to land alone. Those land-uses whose t o t a l value/land value r a t i o s are above 2.1? (commercial, indus-t r i a l and apartments) would be expected to pay less tax a f t e r the s h i f t to land value taxation. Taking the m i l l rate, 56.4, which y i e l d s revenues equal to the t o t a l tax revenues f o r the c i t y (including general purpose, school and h o s p i t a l , and excluding l o c a l improvements and water rates) when applied to the t o t a l assessed land value (general purposes) and applying i t to the land assessment values of each i n d i v i d u a l property class (thus giving the tax payable by each class under the land value tax) and comparing t h i s value to the amount of taxes payable by each property class under the e x i s t i n g system, an idea i s gained of the s h i f t s i n burden that occur when a tax, previously raised from land and improve-ments i s raised s o l e l y from land values. As was expected (from the c a l c u l a t i o n of the r a t i o s ) those properties with t o t a l value/land value r a t i o s lower than the average r a t i o faced increased tax b i l l s a f t e r the s h i f t . As expected, vacant land with the lowest t o t a l value/land value r a t i o , suffered most from the s h i f t to land value taxation. I l l Perhaps the most significant finding (while obvious from the data presented in Table V) i s the refutation of a generally held belief that a shift from a tax on land and improvements to a tax on land alone w i l l shift the burden of property taxation from residential land uses to commercial and industrial land uses.^ In the City of Vancouver, at least, the shift i s largely in the opposite direction. While apartments and dwellings "combined with commercial" would pay less tax under the shift, a l l other forms of r e s i -dential dwellings would pay:more. Perhaps most significant is the 27.6% increase in taxes which would be paid by the largest group of property taxpayers, the single family home owners (41.1% of a l l property taxes paid in the City of Van-couver in 1973 were paid by this group) (see Table VI). 5.31 The Effect of the Shift on the  Single Family Home The average single family home (found by dividing total taxes incidence to single family residences by the number of single family properties) in the City of Vancouver in 1973 i s one whose land i s assessed at $13,131 and whose improvements are assessed at $9,586 (total taxable value i s $20,320). Total annual taxes payable by this "average" home-owner (including general, hospital, and school taxes, ex-cluding local improvements and other charges) are $581 ($381, i f the homeowner i s eligible for the $200 provincial home-ownership grant). Under a system of taxation in which revenues TABLE VI The S h i f t i n Property Tax Burdens i n the C i t y of Vancouver Following a S h i f t i n the Base of Taxation from Land and Improvements to Land Alone Property Class Pre-Shift Tax Payable Land Assessment (General Pur-poses) After S h i f t Tax Payable $ Change i n Tax Burden % Change i n Tax Burden Vacant 1,608,062 56,290,388 3.174,777 1,566,715 +97.4 Residential Single Family Duplex & Equiv. Conversions Combined with Commercial Miscellaneous 42,755,875 2,596,5^2 2,251,202 1,595,618 64,229 967,604,029 54,256,867 50,430,478 21,109,960 2,188,358 54,572,86? 3,068,087 2,844,2?8 1,190,601 123,423 11,816,992 471,5^5 593,076 -405,017 59,194 +27.6 +18.? +26.3 -25.0 +92.2 Residential Total 49,269,466 1,095,589,692 61,791,258 -12,521,792 +25.4 Apartments Total 13,632,721 159,587,742 9,000,?48 -4,631,197 -33.9 Business Commercial I n d u s t r i a l 25,160,562 11,809,655 382,211,713 150,067,426 21,556,740 8,463,802 -3,603,822 -3,3^5,853 -14.3 -28.3 Business Total 39,539,128x 532,279,199 30,020,546 -9,518,582 -24.1 Total Payable 104,050,128 1,843,747,021 103,987,331 62,797 ,06 2 Column does not balance because taxes on machinery and u t i l i t i e s have been omitted. Rounding error. 113 formerly obtained from the taxation of land and improvement values, are raised by taxing land alone at 56.4 m i l l s (the rate necessary to generate the 1973 City of Vancouver reve-nues) the average taxpayer would be l i a b l e to pay $7^0, an increase of $159 annually. I t can be seen from t h i s example that a s h i f t to land value taxation has a s i g n i f i c a n t e f f e c t on a large, powerful group of taxpayers; the single family homeowners. The importance of t h i s effect i s magnified when (returning to the central theme) i t i s r e a l i z e d that the 56.4 m i l l rate that produced these substantial s h i f t s i n burden are only | to i (depending on the marginal income tax rate assumed f o r the speculator) of the land value tax rate needed to reduce the present speculative value of the land to the present development value. 5.^ S h i f t s i n Tax Burden When Land i s Taxed  Xt a Rate Necessary to Reduce Speculative  Land Value to Development Land Value In order to show the s h i f t s i n burden which occur when land i s taxed at a rate necessary to reduce the specu-l a t i v e value of land to the development value, a m i l l rate of 130 (13% of land value) (assuming no taxable income f o r the speculator) and at 260 m i l l s (assuming a 50% marginal income rate f or the speculator) was applied to the assessed values for land i n each land use c l a s s . The r e s u l t s of t h i s analysis appear i n Table VII. I t can be seen from Table VII that even at the low marginal income tax rate assumption, large increases i n tax TABLE VII The S h i f t i n Property Tax Burdens i n the City of Vancouver Following a S h i f t from the Present Tax Base and M i l l Rate To a Land Tax Base and a M i l l Rate S u f f i c i e n t to Reduce the Speculative Value of Land to the Development Value of Land Property Class Pre-Shift Tax Payable After S h i f t Tax Payable (@ 130 M i l l s ) fo Change i n Tax Burden After S h i f t Tax Payable (@ 260 M i l l s ) % Change i n Tax Burden Vacant 1,608,062 7,317,775 +355 14,635,500 +810 Residential Single Family Duplex & Equiv. Conversions Combined with Commercial Miscellaneous 42,755,542 2,596,542 2,251,202 1,595,618 64,229 125.788,523 - 7,053,392 6,555,962 2,744,294 284,486 +194 +171 +191 +72 +342 251,577,047 14,106,785 13,111,924 5,488,588 568,972 +488 +438 +482 +243 +785 Residential Total 49,269,466 142,426,659 +189 284,853,319 +477 Apartments Total 13,632,721 20,746,406 +52 41,492,812 +204 Business Commercial I n d u s t r i a l 25,160,562 11,809,655 49,687,530 19,508,295 +97 +65 99,375.060 39,017,530 +294 +230 Business Total 39,539,128 69,196,295 +75 138,392,591 +250 Total Payable 104,050,128 239,687,112 +130 479,374,224 +36O 115 burdens occur f o r a l l classes of property, with vacant land experiencing the largest increases i n taxes and commercial and i n d u s t r i a l properties suffering l e a s t , ( I t should also be noted that t o t a l c i t y revenues have more than doubled under the 130 m i l l tax rate and more than quadrupled under the 260 m i l l tax rate.) 5.41 The Effect on the Average  Single Family Home The average ..single family home was again h i t hard by the increase. The same home discussed before with land assessed at $13,131 that paid t o t a l taxes of $581 under the ex i s t i n g system would pay taxes of $1,707 (per year) when i t s land i s taxed at 130 m i l l s (the rate needed to reduce the present speculative value for land to the present develop-ment value) (assuming zero taxable income f o r speculators). The rate necessary when the speculator* s income i s taxed at a marginal rate of kOfo (260 m i l l s ) increases the tax payable by t h i s average home from $581 (under e x i s t i n g taxing arrange-ments to $3,414 (assuming no home ownership grant). 5.5 Summary - Sh i f t s i n Burdens of Municipal Taxation The purpose of t h i s chapter was to examine the con-sequences of attempting to lower the price of land (from the speculative value to the development value by r a i s i n g the tax on land values). Since an effe c t i v e r i s e i n the rate of taxation of land i s accomplished by s h i f t i n g the base of the land and improvements to land alone (when revenues are held 116 constant) t h i s change was the f i r s t step. Since t h i s s h i f t did not raise the tax rate on land s u f f i c i e n t l y to reduce i t s price from the speculative value to the development value, the tax was then raised to a l e v e l which would accom-p l i s h t h i s price change under two d i f f e r e n t assumed marginal income tax rates for the speculator. The effect of the s h i f t from the tax on improve-ments and land to land alone was to r e d i s t r i b u t e the burden of the property tax, increasing the burden on vacant and r e s i d e n t i a l land while decreasing the burden on apartment, commercial and i n d u s t r i a l land. As the tax was raised to the l e v e l necessary to remove the speculative value of land, large increases i n the tax payable by a l l land-use c l a s s i f i -cations occurred. The upshot of t h i s discussion i s that even i f i n -creasing the tax on land does decrease land prices by re-moving the speculative return to holding land, i t must be r e a l i z e d that t h i s goal i s not accomplished without substan-t i a l increases and s h i f t s i n the burden of municipal taxation. 5.6 Limitations of the Analysis The p r i n c i p l e l i m i t a t i o n s of the conclusions reached from the preceding analysis, occur when an attempt i s made to apply the findings to c i t i e s other than Vancouver. From the model, i t can be seen that the change i n the rate of land value taxation (thus the s h i f t i n the burden of the tax) needed to effect the changes i n land 117 valuation, depend on the rate of land value appreciation, the present tax and the speculator's discount rate. C i t i e s experiencing lower rates of land value appreciation, or already taxing land at higher rates than Vancouver, w i l l require smaller increases i n the rate of land value taxation needed to achieve a s i m i l a r e f f e c t (to Vancouver) on speculators. In addition, the structure of the c i t y , that i s the proportion of land use i n each category, may have an influence on the s h i f t s i n the burden that occur with an increase i n the rates at which land i s taxed. However, while i t might be said that Vancouver as a central c i t y i s not representative of "average" c i t y structure, evidence shows that a s i m i l a r s h i f t i n burden of taxation may be expected to occur i n suburban areas. Probably the most serious l i m i t a t i o n , i s the selection of a single speculator discount rate. As noted i n Chapter I I I , l i t t l e i s known about the diverse group of landowners c o l l e c t i v e l y known as speculators. Without further knowledge of the c h a r a c t e r i s t i c s of these individuals or of the group as a whole, i t i s impossible to determine with assurance, the actual number of speculators which would be influenced enough by any given increase i n the rate of land value taxation, to put t h e i r land onto the market. Relatedly, i t must be said that the selection of the single rate of taxation increase, relegates the effect to an " a l l or nothing" proposition. With a range of rate and knowledge of speculators, i t might be possible to pre diet the amount of land that would come onto the market under variable tax rate increases. 1 1 9 Chapter V - Notes and References A l l s t a t i s t i c s r e l a t i n g to land values were obtained from issues of Real Estate Trends, published annually by the Greater Vancouver Real Estate Board. 2 Marion Clawson, "Urban Sprawl and Speculation i n Suburban Land," Land Economics, May 1 9 6 2 , p . 1 0 3 . -'Thompson, Berwick and P r a t t , I n f i l l , a report done for the Greater Vancouver Regional D i s t r i c t , December 1973. L A l l s t a t i s t i c s r e l a t i n g to assessments, rates of taxation and municipal revenues were obtained from a report published by the Department of Finance, of the C i t y of Vancouver. -'Since improvements are only taxed at 75% of t h e i r assessed value the relevant r a t i o of which to speak when considering the s h i f t i n burden i s the t o t a l taxable value/land value r a t i o . ^Clyde Browning, "Land Value Taxations Promises and Problems," Journal of the American I n s t i t u t e of Planners, November 1963, P. 307t Mary Rawson, Property Taxation and  Urban Development, Research Monograph: No. 4 , Urban Land I n s t i t u t e , Washington, D.C., 1961; Thompson, Berwick and Pr a t t , op. c i t . , p. 2 ? . 7 'Dennis G. Swan, "An Analysis of Land Value Taxation i n Relation to Delta Municipality," Graduating Thesis, B.A., School of Commerce, University of B r i t i s h Columbia, 1971. 120 CHAPTER VI FINAL EVALUATION OF THE LAND VALUE TAX 6.1 Introduction In t h i s t h e s i s , i t has been shown how the levying of an increased land value tax can help to solve the problem of a housing shortage and urban sprawl, by decreasing the p r o f i t a b i l i t y and thus the incidence of land speculation. Some of the questions that have arisen during the course of th i s study are* (1) Are the goals (e.g. reduction of the shortage of housing and urban sprawl) which the tax w i l l be used to achieve, worthwhile goals f o r society to pursue? (2) Are the problems (the housing shortage and urban sprawl) the r e s u l t of land speculation? (3) I f the answer to question two i s "yes," i s an increased land value tax the most effe c t i v e means of accomplishing the goals? (4) I f the answer to question two i s "no," what alternative p o l i c i e s may be used to accomplish these goals? I t i s the purpose of t h i s chapter to examine the worth of the land value tax by attempting to answer these four questions f o r the two pol i c y issues (urban sprawl and the housing shortage). 1 2 1 6 . 2 Unearned Increment However, before getting into that discussion i t i s necessary to digress, for a moment, to say a few words about a property of the land value tax, which although mentioned at the outset of the th e s i s , was not part of the mainstream discussion. The issue i s the unearned increment of land values and the tax's property f o r recovering t h i s increment fo r the public coffers. The unearned increment has been a contentious issue, at least since the time of Henry George. I t has caused con-siderable debate, especially i n times of rapid urban growth when land prices are r i s i n g most quickly. There can be l i t t l e doubt that during such periods, land prices do r i s e quickly and so make possible c a p i t a l gains by those who hold land through the period. The question of whether the increment i s unearned or not i s a more d i f f i c u l t one to answer. A c a p i t a l gain i s made by a landowner whose pro-perty suddenly leaps i n value with the announcement of the construction of a new road which makes his land more access-i b l e and so more desirable as a location f o r a new suburb, and i s , i n a l l l i k e l i h o o d , an unearned increment. The land-owner has not made any investment to earn t h i s increment. His only action was to be i n the r i g h t place at the r i g h t time. However problems arise when increments occur that are not due to public expenditures but due to private invest-ments. Taking the same landowner, f o r example: Would not the increment i n property value be unearned i f the value of his land rose i n response to the announcement of a new shopping centre planned near his land? Would he be forced to compensate the member of the public (the shopping centre developer) most responsible f o r the increase i n the value of his property? Whatever the answer may be, the point i s that questions of the determination of what i s or what i s not an unearned income and i f an increment i s unearned by the pro-perty holder, who did earn i t ? are d i f f i c u l t questions to answer i n a world i n which the l e v e l of interdependence means that p r a c t i c a l l y every economic action confers some external economy or diseconomy. The second point which has been made before i n t h i s t h e s i s , i s that while taxing the value of the land of a landowner w i l l most c e r t a i n l y recover the unearned incre-ment for the p u b l i c , there i s no guarantee that the incre-ment was earned by the landowner paying the tax. This par-t i c u l a r l y i s true i f the tax i s implemented at a l a t e r stage i n a c i t y ' s development or i f i t i s implemented immediately following the purchase of the land by the landowner. A further problem occurs i f differences i n motives of owning land have bearing on the designation of an incre-ment as earned or unearned. Is the p r o f i t earned by a sharp speculator on an acre of vacant suburban land, the same sort of unearned increment as the paper p r o f i t earned by the owner of a house who has no intention of "cashing i n " but merely i s interested i n l i v i n g i n his own home? 123 F i n a l l y , the designation of the gain made by the speculator (as mentioned before), i s only unearned i f society values the service provided by the speculator, less than the amount which the speculator earns from the provision of t h i s service. As stated before, the value of speculation i n a1 product or resource i s the s t a b i l i z a t i o n of i t s price through the equation of s o c i e t a l preferences through time. These are d i f f i c u l t services to which to attach a value. As noted i n Chapter I, the existence of a mono-p o l i s t i c market structure may be a c r i t i c a l factor i n determining whether the speculator's p r o f i t i s earned or unearned. I f a single landowner or group of landowners does have control over the market, there i s reason to be-li e v e that speculative, returns may be greater than the service provided. This has implications f o r the choice of the means by which to recover the unearned increment. From Chapter I I i t w i l l be remembered that a tax on a monopolist w i l l tend to be shifted forward to the user of the product. Thus, a land value tax on a monopolistic landowner may, i n r e a l i t y , be passed d i r e c t l y on to the ultimate user of the land (consumer of housing). The preceding discussion has, hopefully, outlined some of the problems of defining and recovering the unearned increment. While i t i s d i f f i c u l t to come to any conclusions on the normative issue of recovery of the unearned increment, 124 i t i s easier to make an evaluation of the effectiveness of the tax i n accomplishing the goal. There are two problems i n addition to the problem of taxing the monopolist, i n using t h i s method of recovering the unearned increment. F i r s t , since the tax i s levi e d on the assessed value of the property there i s no way i t can distinguish between the hard cash increment earned by the land dealer and the paper p r o f i t of the homeowner. Secondly, land i s not the only commodity which i s capable of earning a c a p i t a l gain, or unearned increment f o r i t s owner. Cap i t a l gains occur whenever there i s a rent or quasi-rent associated with the use of a resource or product ( t h i s occurs frequently with other resources or durable goods). Therefore, to tax c a p i t a l gains earned from land while not taxing those gained from other goods seems to be inconsistent. A p o l i c y device f o r recovering the unearned incre-ment, that avoids these p i t f a l l s i s the c a p i t a l gains tax. The tax on c a p i t a l gains has the advantage of being non-discriminatory (neutral i n effects among incomes gained from d i f f e r e n t types of c a p i t a l gains). While a d i s t o r t i o n may be created between incomes earned as a r e s u l t of c a p i t a l gains and income earned i n other ways, i t would not single out the gains made through increases i n land values f o r special treatment. Secondly, through the use of the c a p i t a l gains tax to recover unearned increment, i t i s possible to separate the 125 paper p r o f i t s from the cash p r o f i t s . Since the tax i s le v i e d only at the time of sale, i t does not force a home-owner to s e l l his house i n order to be able to pay the tax. 6.3 The Housing Shortage There are few people i n the Vancouver area who are not aware of the extreme shortage of housing. Zero vacancy rates, and rapidly r i s i n g rents and property values are evidence of a demand f o r housing that has overwhelmed the supply capacity of the housing industry. Therefore the norma-ti v e question of whether or not to increase the supply of housing may probably be answered without much disagreements Yes, something should be done about the shortage of housing. 6.31 Effects of Tax Since the tax* s main effect i s to reduce the specu-l a t i v e value of land, the effectiveness of the tax i n reducing the housing shortage depends upon what proportion of the housing shortage i s due to the hoarding of land by speculators and on the effectiveness of the tax i n pushing t h i s land onto the market. An i n c r e a s e i i n the importance of the role of land speculation i n creating the housing shortage or an increase i n the effectiveness of a tax on land value i n eliminating speculation w i l l increase the effectiveness of the tax i n reducing the shortage of housing. I t w i l l be remembered from Chapter I I I , that the amount of housing produced i s determined by the decisions of 126 numerous participants i n the land conversion process (of which the speculator i s one), who are influenced by a variety of factors (of which taxation i s one). Thus i f the amount of housing produced i s influenced more by market par-t i c i p a n t s other than the speculator or these participants are affected more by factors other than property taxation, i t i s l i k e l y that p o l i c i e s other than an increased land value tax w i l l have a greater effect on the reduction of housing shortage. 6.32 Causes of the Shortage There can be l i t t l e doubt that part of the shortage of housing i s due to the increased demand f o r housing that has occurred i n Vancouver as a r e s u l t of heavy in-migration, r i s i n g incomes, and increases i n net household formation, and age c h a r a c t e r i s t i c s of the population. 1 To compound problems, changes i n f i n a n c i a l conditions:have enabled more people to purchase more housing. The drop i n mortgage rates i n 1971» combined with a general surplus of funds, s i g n i f i c a n t l y 2 increased the buying power of the average family. I t seems then, that as long as migrants continue to arri v e i n Vancouver, and incomes (either conventional, increases i n wages and sal a r i e s or ef f e c t i v e through changes i n the cost or a v a i l a b i l i t y of c a p i t a l ) continue to r i s e and as long as l i f e - s t y l e preferences encourage increases i n net household formation, i t may be expected that demands for housing w i l l continue to r i s e i n the future. 12? I f public p o l i c y i s unable or unwilling to decrease demands fo r housing by i n s t i t u t i n g p o l i c i e s that would de-crease the number of migrants coming into the area, decrease incomes or tamper with the tastes and preferences of housing consumers, the only alternative i s to implement p o l i c i e s which w i l l increase the quantity of housing supplied. In Chapter I I I i t was shown that the quantity of housing supplied by builders and developers i s closely re-lated to the p r o f i t a b i l i t y of producing housing. I t was shown how decreases i n the cost of c a p i t a l or increases i n the a v a i l a b i l i t y of c a p i t a l , affect the quantity of building that i s carried out. Goldberg's study^ found developers not only to be sensitive to f i n a n c i a l conditions but also to a variety of factors influenced by public p o l i c y . These i n -cluded zoning regulations and the a v a i l a b i l i t y of servicing. Goldberg went on to mention the importance of time lags from project conception to completion that are caused by i n -creased public intervention into the development process. Since developers usually have high opportunity costs of c a p i t a l , these delays reduce the p r o f i t a b i l i t y of develop-ment and are most l i k e l y to reduce the amount of housing produced. Another factor, influencing the amount of housing that i s produced i s the municipality's attitude toward i n -creased growth. I t seems that the e x i s t i n g populations are hesitant to see t h e i r communities grow any larger than they 128 are at the present. This reluctance may be attributed to the r e a l i z a t i o n on the part of these m u n i c i p a l i t i e s that increases i n population mean increases i n municipal costs f o r the provision of the additional hard and soft services necessary to serve these increases i n population. I t has been argued by developers that no-growth p o l i c i e s are being implemented by methods (charging of high impost charges) which act to discourage r e s i d e n t i a l development by reducing the p r o f i t a b i l i t y of producing housing.-* (Because of the seemingly i n e l a s t i c demand f o r housing, these p o l i c i e s more l i k e l y r e s u l t i n an increase i n the cost of housing, as the developer passes the increased cost on to the consumer of housing.) 6.33 Policy Alternatives I t seems then, that i f the above mentioned factors are indeed obstacles to the production of adequate quantities of housing, the implementation of the following p o l i c i e s may help to increase the supply of housing. (1) Planning to ensure that adequate land i s zoned f o r r e s i d e n t i a l demands. (2) Increasing expenditures on infrastructure investment to make available more serviced land f o r r e s i d e n t i a l development. (3) Streamlining the municipal approval processes to avoid costly delays that reduce the amount of housing being produced. (k) Establishing cooperation among municipalities to determine the appropriate shares of re-gional growth so as to minimize the incidence of i n d i v i d u a l attempts to halt growth by i n s t i t u t i n g p o l i c i e s which act to reduce the amount of housing supplied by developers. (5) E stablishing programs to ensure adequate c a p i t a l i s available to developers pro-ducing houses. 6,4 Urban Sprawl The arguments as to the appropriate pattern of land use were b r i e f l y presented i n Chapter I , The most commonly heard arguments against the "scatteration" type development were l i s t e d as (1) the high costs of servicing t h i s type of development, and (2) the waste of resources that occurs while the land i s i n storage. The strongest arguments f o r t h i s s p a t i a l pattern of development are that i t (1) provides needed open space, and (2) provides f l e x i -b i l i t y of adaptation to future change. I t i s d i f f i c u l t i n the space available to make an adequate assessment of the advantages and disadvantages of t h i s type of development. However, the argument of providing f l e x i b i l i t y f o r change has a strong appeal (to t h i s author) and probably merits more intensive study. When considering t h i s problem, an important question becomes, whether or not there e x i s t patterns of development that provide a s i m i l a r degree of f l e x i b i l i t y and open space (as scatteration) without the high ser v i c i n g costs of t h i s pattern of development. I t seems probable that some of the costs of such types of development could be reduced by pro-moting a degree of i n f i l l i n g which would not sub s t a n t i a l l y reduce the p o s s i b i l i t i e s f o r adaptation i n the future, and which under c a r e f u l development controls would provide 130 adequate amounts of open space. How effective a land value tax would be in fostering the development of these "leapt-over" areas depends on the degree to which this pattern of development i s due to the influences of land speculation and how effective the tax i s in encouraging speculators to s e l l their land to developers. 6,41 Causes of Sprawl As the quantity of housing produced can be related to the p r o f i t a b i l i t y of producing housing, so can the spatial distribution of land developed, be related to the profita-b i l i t y of developing individual parcels of land. Developers, seeking to maximize profits, w i l l tend to develop those lands which offer the probability of the highest profit. While the asking price of the speculator, which the tax i s designed to lower, i s an important factor in the determination of the p r o f i t a b i l i t y of developing a particular parcel of land, i t is only one of many factors, (a) Dead Lands A certain proportion of the potential i n f i l l land in any municipality remains undeveloped for a variety of physical or institutional reasons, that decrease the profit-a b i l i t y of developing the lands. These factors may include small or irregular shaped lots, tax delinquencies, clouded t i t l e s or obsolete subdivision designs. 7 A study done for the Greater Vancouver Regional Di s t r i c t found 45% 7 of a small sample of potential i n f i l l sites to have small or irregular 131 shaped l o t s . Developers w i l l pass over these "dead lands" to develop other more p r o f i t a b l e lands, (b) Public P o l i c y As public p o l i c i e s can have an influence on'.the t o t a l p r o f i t a b i l i t y of developing land so public p o l i c i e s are responsible f o r differences i n the p r o f i t a b i l i t y of developing d i f f e r e n t parcels of land. An obvious example i s the case where the munici-p a l i t y i n which the urban core i s situated, f a i l s to provide adequate amounts of r e s i d e n t i a l l y zoned land f o r expansion. Developers are forced to jump land designated f o r other pur-poses to a municipality further from the core to secure land with the proper zoning. Second only to proper zoning i n location factors deemed necessary f o r p r o f i t a b l e development by developers (as shown by Goldberg's study) i s the a v a i l a b i l i t y of serviced land. Areas of developable r e s i d e n t i a l land w i l l be skipped over by developers i f access to trunk sewers or water l i n e s i s not available. As noted e a r l i e r i n the discussion of the t o t a l amount of land that i s developed, an anti-growth p o l i c y which manifests i t s e l f i n such p r o f i t reducing devices as high impost charges may encourage developers to skip over lands i n these mun i c i p a l i t i e s i n search of more p r o f i t a b l e opportunities, perhaps further from the core. 132 I f consumers of housing are also consumers of transportation f a c i l i t i e s and seek to minimize t o t a l costs of housing and transportation, increases i n transportation investment which decrease t r a v e l times from more distant areas and so reduce the t o t a l costs of l i v i n g at a distant location r e l a t i v e to the costs of l i v i n g i n a p o s i t i o n nearer to the urban core, w i l l tend to increase the desira-b i l i t y of more distant locations (assuming that t h i s accessi-b i l i t y i s not completely c a p i t a l i z e d into the price of the more distant land). This means that distant locations are more p r o f i t a b l e to be developed by the developer. Thus d i s -continuous development i s encouraged. I t i s necessary, not only to consider the effects of municipal p o l i c y but also the effects of the p o l i c i e s of higher l e v e l governments. I f f o r example, land prices near the core cause housing prices to exceed maximum l i m i t s f o r government guaranteed mortgages (C.M.H.C. $25,000 l i m i t ) consumers w i l l tend to locate further from the core where land prices are less i n order to secure the advantages of a government guaranteed loan. (c) Independent Decision-Makers Perhaps as important i n determining the differences i n the p r o f i t a b i l i t y of developing one parcel of land r e l a -t i v e to another as the physical and public p o l i c y influences, i s the heterogeneity of the owners of the vacant land. As discussed i n Chapter I I I , the value placed on a piece of land thus the price asked f o r by the landowner i s a function of a variety of factors including the landowner* s motivation for holding land, his opportunity costs of c a p i t a l , his i n -come time preferences, his income, his l i q u i d i t y and his expectation of future rates of land value appreciation. Differences i n these c h a r a c t e r i s t i c s that are responsible fo r land valuations of some landowners being higher than developer valuations have a s i g n i f i c a n t influence on which land becomes developed. 6.42 P o l i c y Alternatives I f i t i s accepted that the reason f o r sprawl i s that the p r o f i t a b i l i t y of developing more distant land i s higher than the p r o f i t a b i l i t y of developing land which i s closer to the core, then i t seems that p o l i c i e s designed to increase the p r o f i t a b i l i t y of passed over land or decrease the p r o f i t a b i l i t y of more distant land w i l l promote a non-sprawl type development. P o l i c i e s other than increasing the tax on land values which would tend to remove t h i s d i f f e r e n t i a l include* (1) The use of municipal expropriation powers to assemble small or i r r e g u l a r shaped l o t s into usable development t r a c t s . (2) The rezoning of p o t e n t i a l i n f i l l land f o r the use f o r which there i s the greatest demand. (3) The provision of adequate municipal services to p o t e n t i a l i n f i l l s i t e s . (4) The adjustment of sprawl inducing p o l i c i e s of higher l e v e l s of government. (5) The provision of information systems to decrease differences i n land valuations among landowners. 6.5 Land Value Taxation and Speculation In the preceding two sections of t h i s chapter, i t was argued that, while speculation i n land i s a possible cause f o r both the problem of the housing shortage and urban sprawl, there are other factors that may be responsible f o r both of these problems. P o l i c i e s to correct both problems were suggested to deal with the di f f e r e n t causes of the two problems. I f , however, i n the end, the problems specified are s t i l l seen to be caused by speculation i n land and the benefits of t h i s speculation are seen to be outweighed by the costs of the problems i t creates, the remaining question to be asked of the land value tax i s j Is the land value tax the most e f f i c i e n t means by which to decrease the speculation i n land? In Chapter V, the costs of applying a tax to a l l land at the rate necessary to remove the speculative value of land were shown to be high. One means of discouraging speculation i n land which already has been mentioned i s to increase the rate at which c a p i t a l gains are taxed. However, the c a p i t a l gains tax l i k e the general land value tax and a l l general taxes w i l l probably induce secondary effects which may be undesirable (e.g. reduction of the incentive to invest i n a l l sectors of the economy). 6.51 Tax on Vacant Land I f society i s concerned with a s p e c i f i c problem, i t makes sense to deal with i t i n a s p e c i f i c manner with a p o l i c y device which i s able to h i t hard at the problem while causing a minimum of adverse side-effects. I f the problem i s defined to be the withholding of vacant land from the housing production process, why not implement a p o l i c y s p e c i f i c a l l y designed to influence the holders of vacant land? Instead of implementing a general land value tax increase which, i f levied at the rate necessary to af f e c t the landowners, causes substantial s h i f t s i n the burden of municipal taxation, why not ( i f taxation i s the p o l i c y vehicle to be used) increase the tax on vacant land only. While there may be d i f f i c u l t i e s i n defining what actually i s vacant land and other problems i n designating lands which are most suitable f or development, t h i s type of p o l i c y would have a f a r greater impact on land-owners with fewer adverse side-effects than a general land-value tax. 6.6 Conclusions - Directions f o r Further Research As the research f o r t h i s thesis progressed, i t be-came clear to the researcher that the o r i g i n a l question of the usefulness of the land value tax as a policy device to ease the housing shortage and reduce the incidence of urban sprawl of large c i t i e s was merely the t i p of a planning i c e -berg which when uncovered, was seen to be based on a myriad of c o n f l i c t i n g b e l i e f s and assumptions. 136 Not only was disagreement found to ex i s t with regard to the effectiveness of the tax i n achieving the two goals, "but disagreement was also seen to occur even over the d e s i r a b i l i t y of one of the goals i t s e l f . Given that the reduction of sprawl and the increasing of the supply of housing are desirable s o c i e t a l goals, further disagreement occurred over the nature of the cause of these two problems. Much of t h i s disagreement can be traced d i r e c t l y to the f a i l u r e to f u l l y comprehend the nature of the land conversion process. As mentioned before, i n order to evaluate the effectiveness of the tax i t i s necessary to know: (1) the importance to the f i n a l outcome of the land conversion process (quantity and loca-t i o n of housing produced) of the decisions of the speculator, r e l a t i v e to the import-ance of the decisions of other p a r t i c i p a n t s . (2) the importance of the effect of the tax, r e l a t i v e to the effects of other government p o l i c i e s a f f e c t i n g either the speculator or other p a r t i c i p a n t s . (3) the secondary effects of various p o l i c i e s designed to influence the outcome of the process. To answer these questions i t i s necessary to examine more cl o s e l y , the decision-making processes of the p a r t i c i -pants involved i n the land conversion process. Specific studies that might be i n i t i a t e d include: (1) A study to determine the magnitude and nature of the demand f o r housing. (2) A study to determine the capacity of the housing industry to meet t h i s demand. 13? (3) A study to determine the effects of various public p o l i c i e s (e.g. providing more serviced land) on the amount of housing supplied by developers. (k) A study to determine the nature of the specu-l a t o r i n the market. Who are the landowners? What are t h e i r c h a r a c t e r i s t i c s ? Are there monopolistic landowners i n the market? (5) A study to determine the secondary effects induced by the various public p o l i c y devices designed to modify the outcome of the housing production process. F i n a l l y a question which has not been d i r e c t l y addressed i n t h i s study i s i Should municipal taxation, whose o r i g i n a l purpose was to raise revenue f o r municipal services, be used to perform a planning role which may be better f i l l e d by other methods? 138 Chapter VI - Notes and References """Greater Vancouver Regional D i s t r i c t , Report of the  Residential L i v i n g Committee, Vancouver, December 1973, P» 6. 2 . J.C. Bysse, "Who's to Blame» A Housing Special," Vancouver Province, November 6, 1973• %.A. Goldberg, op. c i t . , p. 88. ^ I b i d . ^Vancouver Sun, Monday March 4, 1974, "Municipal Levies Hike Home Costs." ^Goldberg, op. c i t . , p. 89. 7O.F.T. Ashman, "Dead Land," Land Economics. May 1944, pp. 240-245; H.G. Berkman, "Decentralization and Blighted Vacant Land," Land Economics, August 1956. 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