Renters Will Benefit Immensely
The roughly one-third of Californians who rent the houses and apartments in which they live will benefit immensely from passage of this initiative. These millions of Californians will no longer be paying sales tax of nearly 10% on many of the goods they buy for themselves and for their families and will also no longer be paying any state personal income tax if they earn less than $150,000 a year.
Since renters do not own land, they will not be paying the tax on the rental value of land which will provide most revenue for state and local government in California once this reform is implemented. Thus, millions of California families — often lower income families — will in many cases save several thousands dollars a year or more in taxes which they now must pay.
Renters Contribute to Land Value
However, even though Californians who rent their living quarters will not pay the new tax, these Californians contribute greatly to the rental value of land in our state by their effective demand for that land. Their demand is expressed when they pay a market rental rate for houses and apartments which occupy land, when they make purchases in stores and other businesses which occupy land, when they go to work for employers who occupy land and who could not stay in business without employees and in many other ways.
Demand for its use gives value to land. Since the supply of land in California is fixed, an increase in demand for the use of land in California increases the value of land in our state. Non-landowners use land just as the owners of land do, and so the demand of California’s many millions of renters for the use of California’s land contributes greatly to the rental value of that land. Accordingly, when public revenue in California is largely provided by a tax on the rental value of land, renters will have substantially contributed to that public revenue from which all Californians will benefit.
Taxes on Land Rental Value Cannot Be Passed on to Tenants
If a tax is levied upon auto manufacturers for each vehicle they produce, the tendency is for fewer vehicles to be produced. As the supply of vehicles drops, prices increase until the earnings of the manufacturers return to the same level per unit produced as before the tax was imposed. Under these circumstances, fewer vehicles are being produced in total but the tax has been passed on to the end user of the manufactured goods — vehicle buyers.
Those who live in rental housing — tenants — are the end users of rental housing. However, a tax on the rental value of all land, including land used for rental housing, in no way reduces the supply of land. Neither does such a tax increase the demand for land. Therefore, a tax on the rental value of land cannot be passed on to tenants who are already paying the market rent for the housing in which they live.
Any attempt by owners to pass on such a tax to tenants is an attempt to compel tenants to pay rent in excess of the market level. Such attempts, whatever their motivation, are doomed to failure. When faced with a demand that they pay rent at a higher than market rate, tenants tend to vacate and leave.
Consider the following example involving three different apartment complexes in the same urban area. The complex with the best location and nicest amenities charges a market level average rent of $1,200 a month per apartment and the land rent constitutes one-third of the total rental value, or $400 a month per apartment.
The next complex is not as well located and doesn’t offer the same amenities as the first complex and charges a market level average rent of $9oo a month per apartment. The land rent also constitutes one-third of the total rental value, or $300 a month per apartment.
The third complex has a location and amenities inferior to both of the first two complexes. This complex charges a market level rent of $750 a month per apartment and the land rent portion of the total rent is $250 a month per apartment.
Assume a tax on the rental value of land at a rate of 75% is imposed in the state in which this urban area containing these three complexes is located. The owner of the first complex will now be paying $300 a month in tax on average per apartment while the owner of the second complex will be paying $225 a month in tax on average per apartment and the owner of the third will be paying $187.50 a month in tax per apartment.
Assume further that the owners of the first and second complexes each attempt to add the additional tax they must pay onto the rent they ask for apartments in their respective complexes. The average rent charged by the owner of the first complex will increase from $1,200 a month to $1,500 a month while the average rent charged by the owner of the second complex will increase from $900 a month to $1,125 a month.
The owner of the first complex is now in the position of asking his tenants to pay a rent which is $300 in excess of the market rent they have been paying without any change in the supply of land or rental housing in the community. The tenants of the first complex will have several options available to avoid paying the new rent of $1,500 a month. They can choose to move to a less expensive apartment such as one of the apartments in the second complex which, at $1125 a month, are $75 a month less than the rent they had been paying at the first complex before the rent increase. They can also choose to share housing with friends or family which will decrease the total number of apartments demanded and, if the rent is also shared, decrease the amount of rent being paid by each tenant.
Thus, the first complex will lose a considerable number of its tenants who will choose to vacate their apartments rather than pay the new rent of $1,500 a month. As the complex begins to empty out, its owner(s) will very likely be forced to rescind the rent hike because the loss of income due to vacancies will exceed the additional rent paid by those tenants who choose to remain.
The owner(s) of the second complex will have the same experience with their tenants if the rent for this complex is increased from $900 a month to $1,225 a month under these circumstances. This complex will also begin to empty out as its tenants react to a substantial rent increase without any decrease in the supply of apartments or increase in demand for apartments. The owner(s) of the second complex will quite likely be forced to rescind the increase in rent due to the large increase in vacancies in that complex.
And so it will go right down to the least expensive rental units. The tenants of these units are the ones who most likely will be compelled to start doubling up with others in shared living quarters in response to rent increases by owners attempting to pass on the tax on the rental value of the land. Vacancies in even the least expensive rental units will increase as the number of separate households declines in response to the owners’ efforts to pass on the tax on the rental value of land.
Although owners of rental properties will also benefit from the elimination of sales taxes and current property taxes on land and buildings as well as the substantial reduction in state personal tax liability (and will be able to claim all taxes paid on the rental value of land as a credit against that liability), and will also benefit from the increase in demand for housing as California’s economy gains strength, they will be unable to pass the tax on land rental value through to their tenants.
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