In one misguided move, a midwestern state proposes to transition from a “least worse” tax regime to the worst tax code in the U.S. Other state legislators are nibbling on the populist bait by proposing the elimination of property taxes. This choice is based on erroneous assumptions.
OP-ED Response to State Senator Erdman’s, “Nebraska’s Tax System Needs Fixing”
by Fred Foldvary
January 29, 2021
Excerpts:
State Senator Steve Erdman’s “Nebraska’s tax system needs fixing” was published in the Star Herald, January 23, 2021 and there are a few points worth addressing.
Erdman begins by asserting that the property tax, among others, is bad, Nebraska being the “seventh worst state.” This begs the question of which is the best, or least-worst, tax. I agree that “Nebraska’s tax system needs fixing.” The question is, how best to overhaul the state’s tax system?
Erdman’s proposed legislation would repeal the state income tax, the state sales tax, the state inheritance tax and all property taxes, and replace them with a consumption tax, which would actually be a sales tax that exempts used goods
In economics, “consumption” means the using up of economic value. Why tax this using-up? Consumption is the purpose of an economy. To live, and live well, we consume goods such as food, utilities, transportation, housing services, and energy. To tax this using-up of value is to destroy the very purpose of the economy!
Taxing production is also bad since the purpose of production is consumption. So, if we should not tax production or consumption, what should we tax? We should tax what human beings do not produce: natural resources like land, which includes space and natural materials. Real estate consists of buildings and land. The property tax on the buildings is indeed a bad tax, but a tax on land value is actually beneficial, as it promotes the best use of land.
An advantage of a consumption tax, says Erdman, is that it “ties government taxation to the economy.” But so does a tax on income, as well as a tax on land value.
Erdman claims that “The consumption tax would make Nebraska the envy of the nation!” That reward now goes to New Hampshire. That state has only a limited sales and income tax, and relies on the property tax. New Hampshire would do even better if its property tax was only on land value and not on the value of buildings.
A sales or consumption tax reduces consumption and increases the cost of living. A consumption tax indirectly taxes wages and other income that are used to pay for consumption. We should examine why we would seek to tax the very purpose of an economy, when there is a better alternative: land value.
Taxes on production and consumption create a “deadweight loss,” a waste of resources by reducing the amount of production and consumption. Since the amount of land is fixed, a tax on land value or rent has no deadweight loss. The replacement of other tax with a tax on land value would therefore increase production, consumption, and growth.
Economists from Adam Smith to Milton Friedman have concluded that a tax on land value is indeed the best. Nebraskans, and all others, should take heed.
Comment:
Indeed, the land value tax is the only tax that is not a drag on the economy. Now, why would any U.S. jurisdiction want to eliminate the “best” tax and replace it with the “worst”? Apparently, others are following Nebraska’s lead down a slippery slope. A bill filed in the Texas State House would abolish ad valorem property taxes entirely and replace them with value-added taxation – a consumption tax. And would you believe…? In the state that pioneered the land tax, Pennsylvania, lawmakers recently proposed a constitutional amendment ending the collection of school property taxes, replacing the levy with a combination of sales and income taxes. They claim residents living on fixed incomes struggle to afford their homes as tax rates climb, ignoring the fact that land prices (unchecked by a higher tax on land values) are also climbing. This results in accumulated equity which is real money in the hands of homeowners at the point of sale. In reality the land value tax is a wealth tax. If they wanted to make housing more affordable, legislators would reinstate the LVT system which exerts a downward pressure on escalating residential prices. Other “best tax” nations such as Estonia, Australia, New Zealand, Denmark, and now Germany have learned the benefits of LVT.
