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Land Rights and Land Value Capture - Long Form Brochure Draft

Contents:

Land Rights and Poverty
Land Value Capture: Equitable, Efficient, Sufficient
Land Value and Development
Financing Transit and Other Infrastructure
Improving Living Conditions of Slum Dwellers
How Would LVC Effect Other Vulnerable People?
Who Pays More, Who Less with LVC?
LVC and Rural Land
LVC and Gender
Climate Change Considerations
Land Conflict Resolution
The Components of a Land Value Capture System
Land Value Assessment
Next Steps
Addendum

1. LAND RIGHTS AND POVERTY

1.1 The roots of poverty, slums and most social and economic injustice lie in the original dispossession of people from their land. No matter how advanced or complex an economic system might be, there is no escaping the fact that all tangible wealth originates in the raw material of land and natural resources.

1.2 Underpinning the massive wealth divide between the very rich and the rest of the people worldwide is the monopolization of land and the subsequent treatment of land as a market commodity for sale and speculation. When nature’s gifts are treated in this manner they yield an unearned income (land rent) for a few while land prices rise to the detriment of the many who must work longer and harder simply for a place to be. Lacking secure land tenure, millions live precarious lives with chronic fear of eviction and displacement.

1.3 World security is disturbed by struggles over territory and natural resources. Slumdwellers and landless people who organize for land rights are killed, beaten and jailed. Human rights pronouncements have yet to forcefully assert the equal right of all to the earth itself. These problems of land conflicts, resource wars and economic injustice cannot finally be solved until we recognize that the earth belongs to all and implement effective practical policies based on the equal claim of each to the earth as a birthright.

1.4 The mismanagement of the land and inequality in land tenure can result in subsequent economic failures, as happens too often with development efforts. If we want to correct our problems of the past and prevent failures in the future, we need to foster an approach to land tenure that fairly and efficiently rewards productive efforts, promotes affordable land access and prevents poor land management.

1.5 This brochure describes how “land value capture”, a key policy recommended in UN Habitat’s Action Agendas, addresses the land problem that lies at the root of the wealth divide. Land value capture is a fundamental synthesis of the best of “left” and “right”: a reconciliation of justice and efficiency in economic relations. As such, this approach to economic relations and public finance has the potential to build powerful political alliances to solve the problem of wealth inequality. The information herein is one component of the Global Land Tool Network’s program for land value capture.

2 LAND VALUE CAPTURE: EQUITABLE, EFFICIENT, SUFFICIENT

2.1 Recovering land value for the benefit of everyone provides a strong and sufficient source of public finance with little or no need to tax labor and productive endeavors. In most countries today, citizens groan under the weight of taxes on wages, property and commerce. People’s taxes increase with every effort they make to improve the quality of their lives. Land value capture, on the other hand, is unique in that it does not penalize those who work and produce.

2.2 Although sometimes presented as a “tax” for practical purposes, land value capture can be thought of as a user fee - a payment to society for the use of land whose value is determined in relation to the benefits conferred upon land by society as a whole. It is not an arbitrary levy upon the fruits of labor, as is the case with most taxes.

2.3 Since a thriving economy and better public services increase site values, land value capture is a self-financing alternative to oppressive taxation. The recovered land value can finance additional public goods and services while the private sector, freed from tax burdens on enterprise, is given full incentive to improve property and build decent, affordable housing that is needed nearly everywhere.

2.4 By encouraging efficient and appropriate use of land, land value capture eliminates the “leap-frog development” that characterizes urban sprawl and encourages a more integrated development pattern that puts all urban land to good use. Land value capture harnesses economic incentives in a number of ways that assist the goals of good urban planning.

2.5 The world’s resources, if used wisely, fairly and efficiently, will comfortably and sustainably support all people. A robustly applied system of land value capture discourages land hoarding and gives an orderly approach to land reform promoting affordable land access, thereby giving more people an opportunity to produce for themselves, ending the hunger and poverty incorrectly sometimes ascribed to overpopulation.

2.6 Adam Smith, in The Wealth of Nations, said that any “tax” should be a charge for services which benefit all people and are more efficiently performed by a single cooperative effort. He postulated four principles of taxation which any source of public revenue should meet:

1. Light on the production of wealth and does not impede or reduce production.
2. Cheap to collect, requiring few collectors, and easy to understand.
3. Certain; cannot be avoided, little opportunity for corruption, and provides adequate revenue.
4. Equitable and fair, payment for benefits received, impartial and just.

2.7 Land value capture is the only public revenue source that meets all of these criteria. It is the most equitable and fair as well as the most efficient method of raising revenue needed to fund public facilities and services. Justice requires that land values, which are created by society and nature, be made available for public needs. This is the responsibility of good government.

2.8 Other potential sources of public revenue that compliment the land value capture approach and harness incentives for efficient and equitable land and natural resource use, fair wealth distribution and/or environmental protection include:

• congestion charges and street parking
• water withdrawals from surface and underground sources
• taxing air and water pollution by levying "effluent charges"
• hydrocarbons and mineral extraction
• leases on public lands used for timber cutting, etc.
• mooring boats, wild fish catches
• aircraft landing slots and gates
• telecom relay sites, electromagnetic spectrum, geosynchronous orbit slots.

2.9 Most often, the taxable capacity of land is such that land value capture can yield more than local government needs to fulfill its basic responsibilities for the provisioning of basic services for all. In the more developed countries land rent represents more than 30% of gross annual production. For more information on this topic go to The Taxable Capacity of Land, The Taxable Surplus of Land: Measuring, Guarding and Gathering It, and Adequacy of Land as a Tax Base, both by Mason Gaffney which can be linked to online at: http://gltn.lvtproject.org/description.html

3 LAND VALUE AND DEVELOPMENT

3.1 Land value is generated by the community which resides upon it and any value gained by that land is generally due to the improvements and other activities made by the community as a whole, such as streets, sidewalks, waterworks, energy sources, schools, businesses, mass transit stops, police and fire protection, parks. Land value also increases due to proximity to other value-creating mechanisms in the area, such as a harbor or river transport. In other words, the value of a piece of land is created for the most part by its locational amenities. This is why otherwise identical houses can be worth more in one neighborhood and worth far less in another.

3.2a Although the personal contributions made by individuals can also improve (or damage) the value of an area of land, most increases in land value are the result of an increased demand for valuable land locations. This is why the value of highly developed land in the center of the city will almost always be worth more than less developed land on the edge, and why downtowns are usually full of businesses, tall buildings, large institutions, and apartments, and outlying neighborhoods are mainly homes, small shops, and more open spaces.

3.2b The most valuable land by far is city land. Ted Gwartney, a professional land valuer, has compiled data showing that well over half the value of city real estate is pure land value. In big, key cities, prices per unit of land go astonishingly high, dwarfing most other values by comparison. For example, at the height of the Japanese boom, in 1990, land prices in that great city rose so high that the appraised value of the land under the Imperial Palace in Tokyo was as great as all the land in California! At the same time, within California, most of the land value was in the cities, even though California is the premier farm state in the US.

3.3 Because of the nature of land and the origin of its value, land value should be taxed or “captured” by public authorities and used to finance further benefits, not absorbed and lost in the rising value and rent gains of individual properties.

3.4 Buildings and improvements, on the other hand, like the labor necessary to create them, are the rightful property of the people that spend the time and money to produce such things. Because the community as a whole had no productive part in the process, taxing these forms of private property is like confiscating personal wealth for the unfair use of others. If a property owner invests $10,000 into her house, the value of her house will rise, but then so will her taxes if building values are taxed. That increase in building value instead should remain with the owner, and not be taxed.

3.5 Thus the basis of public finance should reward productive efforts while unproductive activities such as land speculation, which contributes to boom and bust land prices, and land hoarding should be discouraged. By reducing and stabilizing land prices, land value capture also reduces the burden of interest payments that land buyers must assume when they borrow to purchase land. If owners of urban vacant land and run-down properties are unwilling or unable to utilize their land to its best potential and afford the to pay land-based taxes, then they shouldn't hold onto it. Land value capture nudges land into more productive hands that can build needed housing and start useful social and business enterprises which can further enhance public revenue.

3.6 An effective way to eliminate the problems of vacant properties, poor land use, land speculation, and the resulting blight is to shift city taxes (including municipal and school taxes, as well as sales, income or business taxes) to a land value only basis. By taxing the value of land as opposed to the buildings there will be multiple benefits. There will be a more than sufficient base of public finance to pay for infrastructure and public services, incentives for major building improvements by the private sector, an end to poor land use, increases in employment and business activity, rapid economic recovery, and the prevention of having land used as a speculative commodity. Though some might think this "sounds too good to be true", hundreds of empirical studies support these claims.

3.7 With increased public funds, a city can invest in more quality services and infrastructure which leads to further tax base gains. Because better government services and infrastructure increase the value of land, a land value capture system of public finance ensures that this increased value will be recovered as tax revenue for social benefit instead of being capitalized and absorbed by private land owners.

3.8 Combined with reductions in taxes on all housing units, other buildings, and productive commercial activities, land value capture stimulates economic development up to the limits allowable by zoning and other land use regulations. Building renovations and new construction is encouraged while rewarding compact, vertical, and otherwise efficient use of land. Instead of vacant lots and ground-level parking, urban areas will experience “infill development” and retain jobs and residents. Valuable downtown land will be well-utilized and improvements will be made to homes and businesses in neighborhoods.

3.9 Growth then radiates smoothly from more intensive use in the urban centers to rural areas without pockets of vacant or poorly utilized land in between. Urban sprawl is curtailed and rural land is more readily retained in its natural state, available for parks and nature preserves. There is also less pressure to build on agricultural land near urban areas. Rational and balanced development which curbs sprawl thus also makes better use of existing infrastructure of transportation, utilities, fire and police protection and other public services. All of these factors increase social cohesion and form the basis for an interesting, safe, “walkable” city.

3.10a Land for safe parks and green spaces in downtown areas is facilitated in at three least ways with land value capture: (1) land is more affordable for public purchase for public spaces because of the elimination of the land price bubble due to land hoarding, under-utilization, and speculation; (2) because parks and green spaces are desirable public goods, living close to them enhances land values in their vicinity, thus bringing more revenue into the public coffer; and (3) capturing full land rent yields a strong base of public revenue to fund upkeep and protective services for parks and green spaces.

3.10b Land rent is the price paid annually for the exclusive right (a monopoly) to use a particular parcel of land at a specific location. People receive wages for work, capital receives interest for investment, and land receives rent for the exclusive use of a location. Equity and efficiency require that the local general public, whose labor and activities altogether create land value, should receive the land rent in exchange for legally exclusive private use of land sites. Land value capture is the mechanism for enabling this approach to raising public revenue.

3. 11 Equality of opportunity to be productive can only be accomplished by recovering all of the socially created land rent and ensuring that all people benefit from its value. The community should use what is needed for public services and improvements such as schools, hospitals, parks, police, roadways, utilities and defense -- and reserve a fund for emergencies.

3.12 If the value of land rent exceeds the community's needs for public services a method of dispensing of the surplus revenue can easily be found. One approach is to divide the surplus at the end of each fiscal year and then to distribute an equal portion to each citizen in that community. This is similar to the method used in Alaska where all citizens receive annual payments from the state’s oil rent investment fund – a significant source of added income and a practical way of fulfilling the equal right to resource rent.

3.12 Many countries were started on the premise of using land rent to fund public services. Unfortunately, many countries now suffer economic loss because they no longer collect the rent of land for public benefit and instead levy taxes on productive activities.

3.13 Land value capture is the most fair, neutral, and stable source of public finance, as well as the most effective way to balance government budgets. Taxes on businesses, sales, labor, tourism, people, and other sources only serve to drive these critical foundations of the tax base out of town. Many of these taxes and their rates are arbitrary and regressive, meaning that they are less likely to be based on the "ability to pay" rule of taxation, which can leads to tax policy becoming highly politicized.

3.14 A number of cities in the state of Pennsylvania in the US have shifted their local property tax base towards land value capture to varying degrees during the past thirty years. The Center for the Study of Economics has collected 237 empirical studies of these cities, each with positive results. Here are some of the findings:

• 45 studies showed that the municipalities adopting land value capture saw a spurt in new construction and renovations. Six of the 18 cities studied experienced a 97% increase within three years.
• 63 studies showed that these municipalities outperformed their neighboring communities in such redevelopment. For example, in the three years after adopting just the first stage shift towards land value capture, Allentown experienced a 32% growth (in dollar value) of construction and restoration activity which was 1.8 times more than Bethlehem, a nearby city of similar size which had received substantial federal grants in the same time period but did not implement land value capture.
• 83 studies determined that most voters paid less during the revenue neutral shift from taxation of buildings to land value based public revenue.
• Since the city of Pittsburgh reverted to broad-based taxation in 2001, the city experienced a 19.57% decline in construction and renovation, a 54% increase in the number of property owners paying higher taxes, and a significant increase in overall space-rent for non-landowners.

3.15 The reason Pittsburgh took these steps backwards is because newly elected public officials and the private assessment company they hired did not understand the effects of a property tax shifted towards land value capture during a period of property reassessment. The learning from this experience is that ongoing professional training of public officials and tax administrators as well as citizen education about this approach to public finance is essential.

3.16 For further reading: The Taxable Surplus of Land: Measuring, Guarding and Gathering It, The Role of Ground Rent in Urban Decay and Renewal, and Red-Light, Green-Light Taxes, all by Mason Gaffney; Development and Derelect Land by Nicolaus Tideman. The Pennsylvania study (?????) and other research on the implementation of this policy can be found at the Center for the Study of Economics website at: www.urbantools.org

A SWOT (strengths, weaknesses, opportunities, threats) analysis of the cities in Pennsylvania which are partially implementing land value capture can be found here along with several SWOTs from other countries: www.earthrights.net/wg/wg2.html

4 FINANCING TRANSIT AND OTHER INFRASTRUCTURE

4.1 There have been dozens of studies showing that public transportation increases the value of land. A review of 96 reports on the subject (Smith, Jeffrey J. and Thomas A. Gihring, Financing Transit Systems Through Value Capture: An Annotated Bibliography)

• Dallas, Texas, USA real estate near light rail lines is worth 25% more than similar real estate elsewhere. When site values around Houston were falling, the drop was less near bus stops than elsewhere.
• In Toronto, Canada, assessed value near subway stations increased 45% (downtown) to 107% (suburbs) compared to 25% elsewhere.
• In Newcastle, U.K., house prices are 20% higher near rail stations.
• In Helsinki, Finland, property located within walking distance of railway or metro stations increased 7.5% over other locations.
• Washington’s Metro, which cost $9.5 billion to construct, generated $10 - $15 billion in increased land value.
• Homes near Portland, Oregon’s light rail stations are typically worth 10% more than elsewhere, despite being at higher density.
• Atlanta and Washington real estate developments around transit stations command a premium of $3 to $4 per square foot. Apartment rents in Washington area decrease by about 2 ½ % for every 1/10-mile distance from a Metro station.
• In London, the Jubilee rapid transit extension cost #3.5 billion and raised the annual rental value of land around it by #1.3 billion.
• In Santa Clara County, California commercial parcels are valued about 23% higher if near a light-rail stop. Around the Pleasant Hill rapid transit station in California, average home prices decline $1578 for every 100 feet distance from the station. In Queens, New York, the decline was $2300 per 100 feet.
• Land for office use, within ¼ mile of San Francisco BART stations, is valued at $74/square foot, compared to $30/square foot for land more than ½ mile away.

4.2 Similar to transit investment, all other infrastructure installations and improvements significantly increase the value of land by substantial amounts. The millions of dollars spent by a city to enhance the quality of life for its citizens should return to the city (i.e. the whole community), not to private site holders. Land value capture does this, correcting the misallocation of investment value and providing a wide range of additional benefits impossible through other forms of taxation.

4.3 If a government needs funds to finance infrastructure or is running a budget deficit, it can tap into the full value of its investment in the land by taxing it at a larger rate instead of going into further debt, floating bonds or cutting vital public functions. Since government budgets are generally a small fraction of the total amount of taxable annual value of land in a community, taxing land at a higher rate is the "smartest" way to balance the budget without damaging economic growth.

4.4 Land value capture is also the most fair and often beneficial tax for taxpayers. Shifting property taxes by increasing rates on regressive taxes like the sales, income, and per-capita taxes provides no relief at all, as the cost of the tax increases are easily passed back to the taxpayer through higher prices for goods and services, rent hikes, reduce investments, and lower wages, especially for those we need to help most: seniors, the poor, the disabled, and other low- or fixed-income citizens.

4.5 Plus, by pressuring owners to manage their land effectively, this policy harnesses private incentives to eliminate the damage done in every corner of the city by blight and land speculation.

5 IMPROVING LIVING CONDITIONS OF SLUM DWELLERS

5.1 Slum dwellers have migrated to urban areas either because land conflicts and appropriations have forced them off their rural lands and/or in the hope of finding employment. Their informal settlements have insecure land tenure, very poor quality housing and little or no water, sanitation, transportation and other public services. Many slum dwellers also experience food insecurity and health problems. Yet most slum dwellers are able and willing to work and actively seek wage employment or self employment.

5.2 How could application of a full and robust land value capture system of public finance improve the lives of slum dwellers? Assuming that such a system is gradually but steadily implemented in stages during a five to ten year period, we can expect that:

1. The city would have a significant source of revenue without having to tax wage income or productive activities, so slum dwellers who find employment would bare no tax burden on their productive activities, thus increasing their purchasing capacity. Market forces would be harnessed for real wealth production, not for land speculation and real estate investment and profiteering.
   
   
2. Slum dwellers who run small business enterprises would likewise have no pressure to pay taxes from their earnings. There would be no complaints that they were operating in “the gray economy.” Their efforts would more readily be considered as legitimate and socially acceptable.
   
   
3. Economic incentives harnessed by land value capture would put “infill development” pressure on underutilized or vacant land sites, thus enhancing economic development and the potential for jobs and housing for slum dwellers.
   
   
4. The necessity for clear and transparent land tenure records in order to implement land value capture would reveal who is making what claims to the land that slum dwellers inhabit. Thus it will be a matter of public record who is currently collecting land rent from slum dwellers and how much they are taking as private appropriation of these funds which should in fact be captured for public benefit of slum communities.
   
   
5. As a slum is a highly concentrated population per any given land area, and as slums are usually located in less desirable and therefore on lower cost land than land elsewhere in the city, an accurate assessment of the value of the land of slums and the apportionment of the land value capture fee to be paid will be significantly less per individual or family than in other areas of the city.
   
   
6. The recorded payment of the land value capture fee by those using any particular land area of the slum will confer rights to continue to use that land area, thus helping to settle land disputes and security tenure for land users.
   
   
7. Absentee landlords who claim title to slum lands will have to pay their fair share of land rent into the public fund. If they do not then their security of land title will be at risk
   
   
8. Those who own buildings and useful structures in slum areas will not need to pay taxes on any of the improvements they make to their current buildings or to any new ones. Slum dwellers who own land or who can effectively claim secure use rights via payment of the land value capture fee to local authorities, would be encouraged to make improvements to their dwellings. Absentees, now unable to profit from the private capture of land rent, will also now have an incentive to make building improvements and hire slum dwellers to do so. Employed slum dwellers will be better able to afford improved housing. Or absentees might decide to simply abandon their land claims, or put their land up for sale at a price affordable to slum dwellers.
   
   
9. Other areas of the city will be improving as well due to the elimination of land speculation and land price inflation combined with the elimination of taxes on wealth creation. As land prices stabilize or even decrease, residents will have more savings to invest in further improvements, again with the possibility of more jobs for slum dwellers and more affordable housing being built which can give slum dwellers the opportunity to move out of the slums.
   
   
10. As land price decrease or stabilize, slum dwellers who might choose to pool their savings, as some are already doing in Nairobi and elsewhere, can more readily afford to buy land on which to form new communities and build new dwellings.
    
    
11. As increasingly affordable land becomes available due to the pressure against land hoarding exerted by the land value capture policy, some former slum dwellers, gaining access to land in outlying areas, would no doubt start growing food to bring to market, thus further building a local based economy.
    
    
12. In addition to these private incentives for improvements to be made by slum dwellers and other residents of the city, the land value capture system will have created a substantial amount of public funds which can be utilized for public benefit. All accounting of funds received via land value capture would be by law a matter of public record readily accessible to all.
    
    
13. With knowledge of their fair share of the public funds, slum dwellers and their allies would be politically empowered to insist that the money generated from land value capture be used to meet their basic human need for clean water and sanitation, public transportation, health services and education.
    
    
14. These public services, combined with the steady decongestion of the slum areas as former slum dwellers found opportunities for employment and livelihoods elsewhere, would improve the quality of life and health for slum dwellers.
    
    
15. As living conditions and public services improve throughout the city, land values might again begin to increase. Public authorities would need to capture the full land rent and utilize these funds for public benefit.
    
    
16. It is conceivable that a city after a few years of land value capture in place could reach the stage of harmonious and balanced growth and development. Public authorities in consultation with the citizenry might then decide to distribute a portion of land rent back as direct “citizen dividend” payments, yet another beneficial result of a public finance policy based on the human right to land rent, the “social surplus.”

5.3 To secure land tenure for slum dwellers or squatters in informal settlements, land boundaries should be clearly demarcated, use rights for specific parcels clearly established, and land values accurately assessed. These lands might best be legalized as leaseholds at least for a period of time because land values escalate immediately, often substantially, once legal land tenure is established. After such tenure is granted and titles secured for individuals on specific private parcels, poor people sometimes sell their parcels for immediate (but one-time only) cash benefit. In many cases such landless people sink into poverty again.

5.4 With land value capture applied to leased land, use rights for occupants are secured, conditional only upon payment of a land lease fee. This could be quite low at first, a kind of subsidy, rising as the occupant’s economic condition rises. With a lease system, poor people do not need to purchase land for housing and thus do not need to pay compound interest on mortgage costs of land. They need borrow funds only, if needed, for the cost of the dwelling itself.

5.5 Similarly, with a landlease system, the private sector construction industry, when building multi-level apartment units, for instance, need not carry land mortgages for land purchase. Thus they can put more capital directly into increasing the supply of decent, affordable housing.

5.6 Additionally, municipalities with a strong established land value capture system can use some of these funds to establish zero- or low-interest revolving home loan funds for poor and low-income people.

5.7 Here are three FAQ’s:

5.8 Question: Won’t the land value fee get passed on to poor tenants?
Answer: Land value capture, instead of enabling the holder of land to charge that much more for his land, gives him no power to charge an additional penny. On the contrary, by making it more costly to hold land idle, it tends to increase the amount of land which owners must strive to secure tenants or purchasers for. Thus the effect of a tax on Land Values is not to increase the rent that the tenant must pay the owner for the use of the land, but rather to reduce it. And since the tax must be paid out of what the land will yield the owner, its effect would be to reduce the price for which the land could be sold outright. (To read a compilation of 11 economists’ views on this issue go to A Tax on Land Value is Not Passed On to the Tenant, a compilation of quotes from 11 economists on the subject compiled by Bryan Kavanaugh at: www.wealthandwant.com/HG/why_the_landowner_cannot_shift.html)

5.9 Question: What if a person living in on slum land has no capacity whatsoever to pay their apportioned land value capture payment fee because they have no source of cash income or need what little they have to buy food? Would they be evicted?
Answer: Slum dwellers should have the legal option to contribute a certain number of hours of his/her labor for the benefit of the community equal to what they would pay in cash as their land value capture fee. Grassroots community leaders could well decide where such labor could be best directed.

5.10 Question: But what if the person is too weak or sick to work?
Answer: With improving living conditions overall, one or a combination of these possibilities can help such a person: 1. family members of the weak or sick person will have increased capacity to care for them; 2. some of the people contributing labor in lieu of cash payments for their land value capture fee could take care of people need