Resource Justice RSF – ROBERT SCHALKENBACH FOUNDATION
PRIMER: A LAND VALUE TAX FOR NORTH CAROLINA
Excerpts:
Policymakers in North Carolina are locked in a budget debate as they search for a way to simultaneously cut income taxes, maintain the state’s fiscal health, and invest in education and innovation. This short primer explains how a small statewide land value tax can achieve all three of these objectives, provides some preliminary revenue estimates (with options for deploying these funds), and concludes with guidance on next steps.
LAND VALUE TAX: A “GOOD TAX”
As the conventional wisdom goes: Tax something; you get less of it. Taxes on income penalize productive work; corporate taxes reduce investment and innovation; sales taxes raise prices and cause employment to shift out to neighboring states; and taxes on buildings discourage construction. However, there is one exception: taxes on land. Because the amount of land in each location is physically fixed (land cannot be moved to avoid a tax), taxes on land do not distort economic activity or discourage growth.
One policy tool that leverages land’s unique characteristics is the land value tax (LVT): a recurring levy charged against the market value of land. LVT is similar to a property tax, except that homes and other structures are wholly exempt from taxation. In the next section, we provide an example of how LVT would be calculated for a typical home in Raleigh.
LVT has many desirable features. Shifting the tax base onto land can boost housing construction and maintenance, stimulate entrepreneurship, and raise overall property values. Property taxes in general, and LVT in particular, are significantly better for economic growth, income and consumption than corporate and personal income taxes. LVT can reduce per capita energy use and carbon emissions, as well as incentivize efficient local governance. Crucially, LVT does not get passed on to tenants in the form of higher rents; rather, it reduces inequality by directly capturing the economic rents of land and its location.
Best of all, LVT can help policymakers to shift the tax base onto land rents while achieving current budget objectives of giving tax relief to hard working North Carolinians, and while promoting an attractive business environment and maintaining fiscal health. It is for these reasons that land value taxes have been supported by a wide range of thinkers, economists, and policy institutions, including Albert Einstein and Adam Smith.
WHAT CAN BE ACHIEVED WITH A 1% LVT IN NC?
So let us examine how a statewide LVT would work and what revenue possibilities it would create, by considering a revenue-neutral land tax rate of 1% (i.e. an annual tax obligation of $1 per $100 of assessed land values). The average single family home in Raleigh is valued at $477,000, of which $235,000 is land value, this corresponds to an annual tax obligation of around $2,350 if the LVT revenues are used to cut more harmful taxes.[1] Such a revenue-neutral 1% LVT would generate at least $4.2bn in revenue[2], equivalent to 13% of 2022 revenues into the State General Fund. This demonstrates how a small tax on land values can produce significant tax revenues.
While there are many ways in which these revenues could be deployed to provide tax relief to NC’s workers and businesses, we explore two options here. First, statewide individual income taxes could be cut by fully one-quarter from their current levels, enabling the income tax rate to be slashed from its current 4.75% level to 3.60%, immediately achieving all of the reductions planned through to 2026, and then some.
As a second option, NC could use this 1% LVT to abolish the corporate income tax (which currently generates $1.6bn) and still have sufficient revenue left over to cut individual income taxes by 15% relative to their current levels, to a tax rate of 4.04%. This approach would significantly boost North Carolina’s attractiveness as a place to invest and do business, while simultaneously providing tax relief to hard working families.
[1] This statewide LVT would be charged in addition to existing county and municipal property taxes, which are around $5,200 for our example Raleigh home. However, note that these households are also likely to enjoy reductions in their income taxes, as we discuss above.
[2] This is equal to 32% of the total property value of $1,335bn reported by NCDOR. For the purposes of this analysis, we ignore exclusions, exemptions & deferments.
[3] Here we assume that cutting income taxes will maintain LVs at their previous levels, while noting that the real effect is likely to be a small increase, generating more than the stated $4.2bn of revenue.
STEPS TOWARDS IMPLEMENTATION
While a LVT is relatively simple to implement, we explore a few administrative issues that can help to pave the path forward.
We do not anticipate any legal issues surrounding the implementation of a statewide LVT in North Carolina, as the Constitution grants the General Assembly the power to determine property classifications for tax purposes, NCDOR already considers land to be distinct from buildings for the purposes of assessment, and our proposal is for a uniform statewide LVT rate. However, a legal review should be conducted to confirm the constitutionality of this proposed LVT, with particular consideration of the uniformity clause in Art. V Sec 2(2) which requires that each class of property be taxed at the same rate across a given jurisdiction (further discussion here).
One alternative strategy would be to implement a statewide property tax in combination with a universal exemption of the value of structures, similar in principle to the property exemptions applied in most counties.
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Comment:
A joint study by the Center for the Study of Economics and the Robert Schalkenbach Foundation’s Center for Property Tax Reform (CPTR) produced a preliminary analysis determining the on-the-ground effects of implementing a land value tax (LVT) in Richmond Virginia, another southern state. The preliminary study includes two scenarios: a split-rate tax on both land and improvements, and a 100% tax on land (excluding improvements altogether). The results shows that the adoption of both LVT variations would yield tax savings for occupied residential properties, while raising the holding costs for owners of vacant land, thus providing the incentives to either make improvements or sell to someone willing to make much-needed building investments. The results appear to be similar for North Carolina.
Here in Oregon, we have explored a revenue-positive land tax as an alternative to a revenue-neutral split-rate LVT. Oregon’s current property tax rates are about 1% of property Real Market Value. We propose an additional 1% tax on land value to fund a Resident’s Dividend, payable to each resident of the state having lived here for at least one year, amounting to about $700 per year.
As in North Carolina, the uniformity clause in Oregon’s constitution requires that each class of property within a taxing district be taxed at the same rate. Taxing all classes of land use at the same rate is actually constructive. But unfortunately, Oregon courts interpret uniformity to mean that land and improvements on the same parcel are two classes of property and must be taxed at the same rate. This rules out a split-rate LVT, a reform alternative to the conventional equal-rate tax, where land assessments are taxed at a higher rate and building value at a lower rate.
Thus, we avoid the constitutional prohibition, combing the equal-rate property tax with a separate 1% tax on land assessments (call it a “land lease fee”) that excludes improvements altogether. The higher combined tax levy would, as in the NC proposal, put a damper on land price inflation, thus helping to keep residential land prices affordable, and give every resident (landowners and renters) financial stability. Both residents and non-residents would contribute to the commonwealth for the privilege of using land privately.
Tom Gihring and Jeff Strang,
Common Ground, OR/WA
