The Property Owner’s Suicide Bomb
In 1978 the voters of California, resentful of increases in property tax assessments caused by rapidly rising land values, enacted Proposition 13, which added Article 13A to the state constitution. This Article limited annual property taxes to 1% of the assessed value, capped annual increases in the taxable value until the property was sold, and required that the assessed value be the combined value of land and buildings — not the value of the land alone as with the Australian “land tax”. Thus the voters ensured that property owners would be taxed more heavily than ever before, because land tax takes only as much from property owners as it delivers to the Treasury, while almost every other tax takes more from property owners than it delivers to the Treasury.
The overall supply of land is fixed. From the viewpoint of the taxpayer, the supply of land zoned for any particular purpose is also fixed, as is the supply of land within acceptable distance of any particular services, infrastructure, or markets. Yet access to suitably located land is essential to life and livelihood. Therefore land rents and land prices are competed upward until they absorb the entire capacity to pay. All taxes are deductions from that capacity. If a tax is only a deduction from taxpayers’ capacity to pay for land, it will take as much from landowners as it delivers to the Treasury. But most taxes do more than that; most taxes target productive transactions, causing otherwise viable transactions and hence otherwise viable enterprises to become unviable. Thus they reduce the total capacity to pay for land — and reduce the income of landowners — by more than the tax paid: property owners are overcharged!
Direct taxation of land values avoids the overcharge because the taxable value is independent of, and therefore cannot deter, any productive activity of the taxpayer. (Even selling the land does not destroy the taxable value or the incentive to use the asset productively, but merely transfers both to the buyer.) As there is no loss of production, property owners suffer no loss apart from the actual tax paid.
Voters don’t have a choice between property taxes and non-property taxes. They have a choice between visible, efficient property taxes and hidden, inefficient property taxes. The voters of California picked the latter.