The Economics of Land

I recently saw this picture of the house of a women who won an eminent domain lawsuit against the developers who offered her $1M dollars for her little home. It got me thinking again on eminent domain and government control of real estate. Most people don't pay much attention to this issue unless they see a strange example like this. This is an issue where both sides makes points that I think are very valid and I'm sympathetic to both. On the one hand, I think property rights should hold a sacred place in our system of government. I don't like the thought that whatever property you own can be deprived from you by the iron fist of the government. On the other hand, I realize that the collective good of society is often served by by some of these actions – think about the interstate highway system in the absence of eminent domain.

First, let's explore what owning land really is. In the US, everyone who owns real estate is still obligated to pay property taxes – you can't opt out. You only have true ownership when you have no burdens based on holding property – which is known as having allodial title. All the other forms of ownership are called feudal title where the people of the United States, by proxy of the US government, own the actual allodial title of the land. It's not that different than the land under communism really.

Now we see that really the ownership of land we actually had does have some limits, but having feudal title also has its perks. One of the big ones is the ability to get loans. That's right allodial property can't be foreclosed on, so there is a high risk that you'd never pay the bank back – not so under feudal title which can be confiscated. Another obscure land rights “infringement” would be the rights to fly over your land without your permission which actually came to court in the early days of aviation.

If the concept of ownership is already not as pure as our ideals might have it, what extent should our land rights exist? Certainly, it seems like the highway system has caused all our lives to be benefited at the expense of many landowners. The same can also be said for railroads and nearly all utilities. I think some would argue that we've already done these misdeeds, and now we can repeal the government's ability of eminent domain. I think this is very short sighted.

With this said, however, I don't believe that government should have the extent of these rights as they do today. For instance, I think they should be limited to those public goods, and only then in the case of conveyances – whether in the form of highways, utility lines, etc. In those cases, it might even be good to have a referendum from the benefiting community. Land development should not be a valid reason to cease another person's property. Really, this lets those with political clout to pick the winners and losers of a particular area. Let them secretly buy up land if they want it.

However, this issue is not so easy to put by the wayside. Many cities, including my own Pittsburgh, have a massive surplus of real estate that is either abandoned, held in speculation, or horribly underutilized. I believe recently they even used eminent domain to cease land for yet another damn colosseum here in Pittsburgh in the hopes that it will revive our economy through sports. Reality to Pittsburgh, sports are not an economic panacea – even if everyone here loves them. Let them donate to the team to build their sports temples if they're so inclined – don't take my tax dollars to fund it.

Back to the point, we need a system that exists between ceasing land and letting it go to waste. I've heard of two. One is the formation of development zones where the businesses vote on how to utilize their given public assets and yes eminent domain. This seems like another brand of eminent domain for profit's sake, which leads to the next idea: Land Value Taxation. This idea is a take on property taxes, but instead of assessing your home and land together as a unit, it assess them separately. Almost always, the land is given more weight than the structure. The idea is to tax the land for its ability to produce rent - in the economic sense of the word. Over time, this would make situations like the picture above non-existent. As the area started to become more developed, the productive value would increase which would raise the land value tax. Higher rents (lease rates) would be required to compensate for the tax which would drive out low productive renters like: land speculators, low income housing, etc. This would allow growth in only the highest productive development once demand had begun to swing that way. This adds up to create better economics for the area affected.

A problem that people cite with this tax, like all others, is the ability to determine what it should be. The productive value is a real dollar amount which is a fraction of the total economic rent the area will be able to create. I believe this would have to be determined by looking at what the same land is producing near by and allowing for uniform weighting & correction factors. Since, land is the ultimate inelastic good (as they say, “they stopped making it”) it will always be owned by someone, hence by noting which areas are nearing there full productive capacity we should be able to adjust the ratio of tax to economic rent.

Speaking of rents and public goods, an interesting side note to this is the citizen's dividend which is like a reverse of the land value tax. Basically, whichever government entity owns allodial land title should make payments of all rents from the land held in common. The best case for this is the dividend check Alaskans receive from oil production. If the government sells mineral rights to the oil, coal, stone, etc. the people should get a cut of that to spend as they wish. Really, a government is corporation that we, as citizens, all hold equal % shares in (think: every four years we vote for the CEO, and we get a stockholders meeting every year too) This means we're entitled to any funds from the assets we hold in common like natural resources.

These ideas aren't new. LVT has been around since ancient times when the land value was based on what you could plant in your field. The citizen's dividend was proposed by Thomas Paine and Alexander Hamilton. None of these people knew the modern ideas of deadweight loss, but it made intuitive sense to them. Often common sense is truly real sense. I'm not an economist by any means, but these seem like some good ideas I've found in my economics reading. Let me know your feedback guys.

Comments

[Seth]

If the US were to switch over to an LVT system, which agency would determine the value of that land for taxation purposes?

Secondly, I can understand taxing out low rents in some cases, but with eminent domain laws at least you get a fighting chance. With LVT, I can see people forced to sell their homes dirt cheap because developers would just sweat them out until they couldn't pay their property taxes.

And you're right about Pittsburgh's economic plans. Building new arenas alone won't fix things. You gotta build more bars too.

ps. Go Pens

[Nick Pinkston]

Well, currently the system in the US has property taxes controlled by the municipalities. Apparently, they are the ones holding the allodial title which allows them to extract taxes from use of "their" land. The agency would be the city / country / township that already does property taxes & assessments. Really, only a simple equation is needed to adjust the tax based on usage of the land, vacancy rates, etc. which can be done very quick compared to assessing each house piecemeal.

The US Gov't might be able to indirectly get at this tax if they started taking taxes directly from the states & the states had the freedom to get this tax anyway they saw fit - such as with a LVT.

Eminent domain is good in some cases like roads, utilities, etc., but usually it screws people more than LVT. Harrisburg is a local case study of LVT in practice. LVT tax adjustments happen slowly (because real estate development is a slow process) - you'd notice your taxes going up & eventually you'd move if you were priced out of the market.

Even if you found oil on your property the month before reassessments, the tax would go up quickly, but your property value has just changed rapidly too. This means you can now borrow against your increase in equity to pay this tax in the short term before the pumps are installed.

This "fighting chance" of eminent domain is actually much smaller than your ability to fight under LVT. With LVT the tax % is based on the value on your property. Remember all land values are based (via mkt value) on the economic rents that said land can produce - whether lease prices, mineral rights, etc. This means as your land goes up in value - your LVT tax moves up accordingly. If you're forced to sell because of high taxes, it would be at fair market value - which is the same that eminent domain gives you anyway. Also, you could form community groups so that no one else would sell (this has been done too) so that the land value remains at current prices.

To me, I'm fine with building arenas & bars - just not with my money. Perhaps if they build these arenas they could at least give the citizens of Allegheny County dividends from their use.