Three Key Advantages of the Reform

1.  A stronger economy and more jobs

With the enactment of this reform, California will become the most attractive state in the US in which to engage in productive activity.  Not only will the reduction of existing taxes increase the earnings of businesses and individuals who produce goods and services, but the tax on land rent itself will open up many new productive opportunities by compelling owners of under-utilized but valuable sites, especially in aging or deteriorating urban neighborhoods, to put those sites to their highest and best use or to sell to those who will.

Economists have long recognized that a tax on land rent is a very efficient tax because, unlike taxes on labor and capital goods, a tax on the value of land does not reduce the supply of any productive factor.   As the noted American economist Paul Samuelson has written, “Pure land rent is in the nature of a ’surplus’ which can be taxed heavily without distorting production incentives or efficiency.”

Tax income earned by labor, and there will be less labor exerted in production.  Tax the sale of goods, and there will be fewer goods sold and fewer goods produced.  However, no matter how heavily land rent is taxed, there will not be any less land.

Since land cannot hide or flee, a tax on the rental value of land cannot be evaded and is easily administered and collected. The cost of compliance for the owners who pay the tax is also extremely low compared to compliance costs involved with the personal income tax, the corporations tax and sales taxes.  The very low cost of both administration and compliance is another reason why a tax on land rental value is such an efficient tax.

Once a tax on the rental value of land has been introduced, any purchaser of land discounts the price to allow for the tax. Thus, such a tax is not a burden on anyone other than the owner at the time of introduction.  A landowner who does not want to pay the tax can always sell the land but will receive a lower price as the tax will be bid into the selling price as a lump sum reduction.

Because it is effectively a lump sum tax, a tax on land rental value has a marginal tax rate of zero.  Therefore, it does not deter marginal work effort or reduce net returns from investment in productive capital goods.

Australian economist Terry Dwyer, PhD (Harvard) has explained that a tax on land values is so efficient because, in a deep sense, it is not really a tax but part of a market-determined rent on a natural resource which is fixed in supply.

Accordingly, as California replaces so many current taxes which penalize productive effort with a tax on the rental value of land, new investment attracted by higher net returns will flow in, redevelopment and construction activity will flourish and jobs for Californians will multiply.   This is the economic stimulus that California really needs – without a single dollar of federal deficit spending!

2.  Lower taxes for most Californians

Taxes will be reduced or eliminated for a substantial majority of
Californians. Millions of working homeowners, especially those households with two wage-earners, will benefit significantly because the reduction in taxes they now pay (state income tax, sales taxes and current property taxes) will be greater than the new land rent tax they will pay instead.

Non-landowners, such as the one-third of Californians who rent their housing at market rates, will effectively be freed from state and local taxation except for taxes on gasoline, alcohol and tobacco. This is equitable because non-landowners give value to land by paying rent for housing which increases demand for residential land, by purchasing goods and services which increases demand for land used for commercial and retail purposes and by participating in the work force which effectively increases the demand for many kinds of land by their employers (the value of California agricultural land, for example, would plummet if there was not a large pool of farm labor available to care for and harvest crops).

It is not landowners alone who give value to land. Rather, it is the demand of the entire community, landowners and non-landowners alike, for the use of land which gives land its value. Accordingly, when a portion of land rent is collected for public purposes in California, non-landowners will contribute to the source of public revenue no less than the landowners who benefit from the rental value of land and who will directly pay the tax levied on that community-created value for the benefit of all Californians.

The explanation of why taxes paid by the large majority of households in California will be reduced under this tax reform initiative without diminishing current state and local public revenue lies in the simple fact that the ownership of much of California’s most valuable land is heavily concentrated in the hands of a relatively small percentage of Californians as well as in the hands of non-residents (often corporate interests whose ownership largely resides outside of California).

3.  Ample public revenue for Californians

Unlike California’s present tax system, the new system based upon the taxation of land rental value will provide ample revenue to meet state and local needs. While present land rental value is already sufficient to meet current public budget needs, the rental value of California’s commercial, retail and industrial lands will rise sharply as existing state and local taxes on productive activity are eliminated.

The fiscal analysis of this tax reform prepared by California’s Legislative Analyst and the Department of Finance states in pertinent part as follows:

“Taxes under the current system totaled (sic) about $170 billion annually.  We estimate the new tax system could generate roughly equivalent revenues.”

“Land Tax.  We estimate the tax on land would generate revenues of $130 billion to $160 billion annually.  Our estimate is subject to considerable uncertainty, however, due to the difficulty in estimating the current fair market value of land.”

Substantial reduction of those taxes which now discourage productive enterprise and commerce will considerably increase the demand for land in California.   Since land in our state is in fixed supply, an increase in demand for that land will result in higher rents. With the switch to the land rent tax at the same time as most current state and local taxes are eliminated, California’s public revenues will significantly increase over present levels even as the number of jobs and the production of goods and services also increase.

The Legislative Analyst and Department of Finance recognize that an increase in public revenue brought about by the proposed tax reform may occur but do not attempt to quantify this increase, explaining as follows:

“Behavioral Effects.  The measure proposes major changes to the way California raises revenue to fund public services.  By reducing and removing existing taxes on business income, sales of goods, and property, economic theory suggests that the measure  could increase investment and stimulate economic activity in the state.  In the long run, greater economic activity would enhance income and land’s rental value, and generate higher tax revenues.  The size of these indirect effects is unknown.”

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