by Frank Walker
It is common to hear people express concern over the impact that land value tax reforms will have on farmers. This concern is not really warranted, however, because it confuses a tax on the value of land with a tax on the quantity of land. In reality, the impact of a land value tax in urban areas will be far greater than it will be in agricultural areas, because land values are so much greater in urban districts.
Consider the following facts: According to US Dept. of Agriculture statistics, the average cash rent for an acre of California farmland in 2010 was $261. This is the highest average for any state. A recent report concerning Wisconsin farmland rental values states that average rent for Wisconsin farmers had jumped by $7, to $99 per acre.
For an example of urban land rental values, I will draw from values on my own street in Chula Vista, California, which is located in San Diego County. The two-story, four-bedroom house directly across the street from my house currently rents for $2,250 a month. This rental house is on a lot of about one-fifth of an acre in size, which is typical of the house sites in my neighborhood. All the homes in this large tract were built in 1979 by the same builder using a relatively small number of house plans, same quality of construction, etc. The rental charge for the subject house doesn’ include any extra amenities; it is simply the rental payment for the site and the improvements (the house).
Here is an additional important fact: in the most recent assessments made by the local public tax assessor in my immediate neighborhood, the ratio of land value to total property value is 55%. For example, three doors up from me on the same street is another typical house, which was purchased by its current occupant owners in 2006, at the top of the real estate market, for over $600,000. The assessed value of this house for the current tax year was reduced to $395,000 to reflect the decline in market prices, valuing the land at $218,000 and the improvements at $177,000 (the California constitution requires that the value of land be assessed separately from the value of improvements). The current property taxes on this house are $4,543.74 (the effective tax rate is about 1.15% due to special assessments approved by voters over the years). According to the Davis-Palumbo land data set, which can be found on the Lincoln Institute website, the land value factor for the average home in California in the first quarter of 2011 was 54.7%. Thus, the 55% land value factor determined by the assessor for my neighborhood seems to closely reflect the statewide average.
Accordingly, if we multiply the monthly rental value of the house across the street ($2,250) by the applicable 55% land value factor for typical houses in the neighborhood, we arrive at a monthly land rental value of $1,237.50 or an annual land rental value of $14, 850 for the house site.
Thus, an acre of land used for residential housing in my neighborhood, which is very close to the statewide average, has an annual rental value of about $74,250 compared to the annual rental value of only $261 for the average acre of California farmland!
It is difficult for small farmers and homestead owners to get over the idea that to put all taxes on the value of land would be unduly to tax them. It is difficult for both classes to get over the idea that to exempt capital from taxation would be to make the rich richer, and the poor poorer. These ideas spring from confused thought. But behind ignorance and prejudice there is a powerful interest, which has hitherto dominated literature, education, and opinion. A great wrong always dies hard, and the great wrong which in every civilized country condemns the masses of men to poverty and want, will not die without a bitter struggle. — Henry George, Progress and Poverty
Of course, the rental value of land in San Diego’ more upscale neighborhoods such as Coronado, Del Mar, La Jolla, Mission Hills, Pacific Beach, etc. is much higher than the rental value of land in Chula Vista, and the rental value of land in commercial, retail and high-rise residential districts in central San Diego is greater still.
According to the California Farm Bureau Federation, a federal government survey released in Feb. 2011 reports that the average size of a California farm is 311 acres — more than 100 acres less than the nationwide average. Therefore, the average-sized California farm consisting of 311 acres of average value land will have an annual land rental value of $81,171. This is comparable to the value of a single acre of California residential land.
I have proposed a flat tax rate of 75% of the rental value of all taxable land in California. At first glance, this may appear burdensome to farmers. However, a 75% tax rate on the rental value of land will not have a draconian impact on most Californians in view of the elimination of other taxes that most Californians pay — such as the current annual property tax on land and improvements, sales taxes, and state personal income taxes. In fact, the large majority of Californians — including farmers — will pay less under such a system.