The Minnesota Planning Environmental Quality
Board's report, Smart Signals: Economics for
Lasting Progress, was issued in early December 1999.
Composed of "five citizen members and heads of 10 state
agencies that play a vital role in Minnesota's environment
and development, the board develops policy, creates long-
range plans and reviews proposed projects that would
significantly influence Minnesota's environment. The
Environmental Quality Board coordinates the Minnesota
Sustainable Development Initiative, a collaboration of
business, government and civic interests to promote
policies, institutions and actions that ensure Minnesota's
long-term environmental, economic and social well-being."
Of special interest to Georgists and of special joy
to Minnesotan John Burger is the report's recommendation
for site value taxation (also called split-rate taxation).
Burger formerly served as a Minn. State Rep. and ran for
Governor in Minnesota. He was active in 1973 in the
workings that culminated in the 1973 Minnesota Tax Study
Commission recomendation findings that are quoted in the
Nov. 1999 Smart Signals report. Burger, now retired in
Spring Park, MN, worked with Mark Haveman, the lead for the
"Making the Property Tax Work for Smart Growth" chapter in
Smart Signals. Burger is a director of Common Ground-USA.
Another Common Ground-USA member, Dr. William Batt, did
two-rate research for the Smart Signals chapter on
"Making the Property Tax Work for Smart Growth."
Besides Minn. Planning's Environmantal Quality
Board Project Team Leader Mark Haveman and Dr. William Batt
of Central Research Group, Albany, NY, other contributors
to the property tax chapter were: Clark Rieke, Commercial
Appraisal and Consulting Group; Bart Lossing, Hennepin
County Assessor's Office; Tom Clark, Minnesota Department
of Revenue; Jack Pasternacki, City of Bloomington
Assessor's Office; and Phil Wheeler, Rochester/Olmsted
County Planning Department. Rolf Nordstrom and Jonathan
Hubschman helped with overall project design and
development.
Quoting from the www.mnplan.state.mn.us web page
headed "Study Says Tax Laws, Economic Incentives Send Mixed
Messages": ..."Smart Signals found a number of state tax
and spending policies that work at cross-purposes. For
example, government spending for affordable housing is
neutralized by the property tax and tax code treatment of
housing. Without addressing such economic distortions,
housing affordability will likely be a chronic urban
problem regardless of the amount of money state and local
governments devote to the issue. Smart Signals proposes
consideration of an alternative, called site-value
taxation, that would support home ownership without
penalizing other types of housing."
The chapter, Making the Property Tax Work
for Smart Growth, "investigates the influence of the
state property tax structure on the nature and quality of
development in Minnesota and evaluates the potential of
site value taxation as a way to correct the harmful
economic signals the current property tax system sends."
"As the Minnesota Tax Study Commission noted in
1973, the design and structure of our property tax system
does not support the long-term economic, environmental and
social welfare of the state. In short, it does not support
smart growth."
"Why does the current property tax create these
problems? Because of its structure, the property tax is
actually two taxes--a tax on land values and a tax on
building values. In Minnesota land and buildings are taxed
at the same rate. But land and buildings have different
economic characteristics....
"Taxes on land and buildings yield different
results. Taxing buildings value increases the cost of its
use. But because land cannot "move" or change in supply in
response to higher taxes, the price of land decreases when
taxed.
"Tax experts give taxation of land values high
marks for adhering to fundamental principles of sound tax
policy (such as efficiency and equity) while it imposes
minimum distortions and damage to the economy. This cannot
be said for taxation on improvements. ...
"What's the best way to restructure Minnesota's
property tax? This study concludes that site value
taxation--an approach that decreases tax rates on building
values and increases tax rates on land values--is an
important element in Minnesota property tax reform and an
especially appropriate reform strategy for the smart growth
of cities and urban areas.
"From the standpoint of financing local government,
site value taxation is both economically just and
economically logical. Site value taxation recognizes that
government investment in infrastructure and general
community growth creates private wealth in the form of
higher land values. As a result, a logical approach to
financing government activity is to capture the increase in
land value that comes from community factors and government
investment and use it for public revenue. This approach
would also offer a way for communities to pay for new city
services while avoiding more harmful forms of taxation.
"In considering the economic, social and
environmental implications of the property tax, this study
concludes that the economic signal created by site value
taxation offers at least six potential advantages:
- It would help make all housing more affordable and
support home ownership without penalizing other types of
residential living.
- It would encourage a better use of land already serviced by
public infrastructure.
- It would encourage urban redevelopment and potentially reduce
the need for government subsidies and public financing of urban
renewal projects.
- It would hold down the inflation of land values so all types of
development are more affordable and less risky.
- It would reduce the need for cities to use heavy-handed land
use policies to manage growth and reduce the financial
motivation for cities to adopt exclusionary zoning practices.
- It would help financially support the preservation of open
space and parkland."
Recommendations of the Smart Signals
report are to:
- Create enabling legislation that allows local governments to
adopt site value taxation, if they so desire, with differential
tax rates for land and improvements.
- Increase the potential effectiveness of site value taxation by
reducing the number of property classes, eliminating tiered
rates and compressing class rates.
- Investigate the economic and administrative potential of a
multidistrict site value taxation system to address metropolitan
regional development concerns. Options might include replacing
the county tax with a regional site value based system or using
a split-rate tax in each metropolitan county.
- Explore the designation of particular levies--such as school
district levies for bonded debt, school referendum levies for
operating expenses, or the general education levy--to be
assessed under a site value taxation approach.
- Explore the potential for establishing site-value transportation
taxing districts to pay the capital costs of new public
infrastructure investments.
Smart Signals report's Background of
Minnesota's Property Tax System explains.
... "Minnesota's present-day system features a
complex property classification system with different class
rates for different property types. It also features a
number of different exemptions, limitations and credits.
Together, these features create large redistributions in
property tax burdens--some property owners pay less while
others pay more. ...
"Nearly 30 years ago, the domino-like cause and
effect relationships of the property tax were recognized by
the Minnesota Tax Study Commission. The predicted results
provided a glimpse into Minnesota's future, our present:
"The taxation of improvements discourages intensive
developments of sites and so contributes to urban sprawl.
As the metropolitan complex spreads into the countryside,
land prices are pushed up. ...
"The very process which accelerates the
encroachment of the metropolis into the countryside
simultaneously causes the decay of the inner city. As
structures depreciate, the tax on improvements penalizes
their repair. Construction on new sites becomes more
attractive than renovation. ...
"Any machine which is not kept in repair incurs
higher maintenance costs and more frequent breakdowns. A
city which decays is analogous: the cost of providing
basic services escalates and social problems multiply. As
structural depreciation continues without renovation, the
property tax base shrinks commensurately...
"The economic costs of this policy are gigantic:
the costs of the social problems exacerbated are beyond
measure.
(Minnesota Tax Study Commission. 1973)"
"What makes the property tax so
potentially damaging to economic and social
welfare? A fundamental problem has to do with how
property is taxed. The property tax is actually two taxes:
one on the value of the land and another on the value of
the building. Together, the land value and building value
make up a property's market value. Minnesota's system
taxes these two parts at the same rate.
"The problem arises because land and buildings have
different characteristics:
- Land generally appreciates over time but structures depreciate
over time.
- The value of a piece of land is created by natural forces (such
as being on a hill or next to wooded area), by the community
(roads, schools, sewer systems) and by the quality of
surrounding properties. The value of a building is created by
private investment and market forces.
- The supply of land is fixed. Higher prices do not create more land and taxing it does not reduce the supply. Taxing the value
of buildings, on the other hand, discourages the construction
and improvement of homes, businesses and apartments.
"Taxing building value increases the cost of its
use. Because of the unique economic qualities of land,
taxing its value has a counterintuitive result. Since land
cannot 'move' or change in supply in reponse to higher
taxes, the price of land decreases when taxed.
"Policy experts give high marks to taxing land
because doing so supports the fundamental principles of
sound tax policy. It does not dampen economic activity.
It does not shift burdens and distort other aspects of the
economy. It encourages efficient allocation of resources.
Taxing buildings does not stand up as well to principles of
tax policy. It influences the incentive to build, how well
the property is developed, and when the property is
redeveloped. It dampens economic growth and distorts
investment decisions.
"Most property tax revenue in Minnesota comes from
taxing the value of buildings. ...
"The current property tax does not sufficiently
recognize and account for the special characteristics of
land. By failing to place greater property tax emphasis on
land values, three problems result. These problems help
explain the economic, environmental and development trends
apparent today."
The Smart Signals report elaborates on Land
value inflation is a problem.
"Under the current property tax structure, land
values appreciate at rates faster than wages and building
values, thus reducing housing affordability.
"A critical condition necessary for affordable
housing is that the rate of increase in wages over time
must match the rate of increase in the cost of the two
elements of housing--land and buildings. Evidence suggests
that for the past two decades, building costs have largely
stayed in equilibrium with wages. The cost of land has
not, and the Minnesota property tax structure allows land
to appreciate at a faster rate.
"Land is a unique factor in the cost of housing,
and land value appreciation has long been identified as a
significant but largely hidden issue in housing
affordability. A 1978 report by the Task Force of Housing
Costs of the U.S. Department of Housing and Urban
Development noted that the developed lot as a percent of
the cost of a single-family house had risen from 15 percent
in 1960 to 20 percent in the late 1970s.
"Data from Hennepin County shows that this trend
has continued to the present. Information from the
Hennepin County Assessor's Office shows that the developed
lot for single-family residential homeowners now accounts
for 28 percent of the cost of the house compared to only 23
percent in 1980. Importantly, this disproportionate land
value appreciation is evident in both new lots and existing
residences.
The Smart Signals report explains why Low land
holding costs are a problem.
"Under the current property tax structure, economic
incentives exist for withholding land from development or
keeping urban land underdeveloped in relation to its value.
"The Minnesota property tax system has subtle but
important influences on the nature and timing of property
development and redevelopment.
"If the land value of a parcel is high and the
economic return on the property in its current condition is
insufficient to pay the tax, the property tax liability
creates an economic signal that development or
redevelopment to better use is appropriate. Examples of
this type of property turnover can readily be found along
new transit corridors and next to major development
projects where land values appreciate rapidly...
"The problem with the existing system is that the
turnover is often slower than economic efficiency would
dictate. The reason is that the property tax often creates
a low holding cost for land. That is, an owner can keep a
property underdeveloped in relation to its value because
the capital gains from land value appreciation exceed the
cost of holding onto the parcel. The owner benefits, but
the city pays the opportunity cost--the lack of
redevelopment and the reduction in effective supply of
land.
"An example of this can be seen in the impact on a
commercial-industrial parcel located near the Mall of
America in Bloomington....."
Quoting the August 8, 1983 Fortune magazine
article, "Higher Taxes That Promote Development," the
Smart Signals report recommends Site value taxation
as a sustainable development approach to
reform.
"Land values and taxation of land values unify such
seemingly diverse topics as sprawl, affordable housing, and
urban redevelopment. With regard to the property tax, the
damage done by overtaxing building values is equaled by the
damage done by undertaxing land values. Refocusing more of
the property tax burden on land value can help the property
tax work for, rather than against, economically and
environmentally sound development.
"Site value taxation (or the "split-rate" property
tax) offers an approach to property tax reform tailored to
Minnesota's economic, social and environmental interests.
Site value taxation "splits" the property tax into its two
components, a tax on land value and a tax on building
value. Land values are "uptaxed" at a differential rate
greater than the buildings and improvements which are
"downtaxed." Differential rates would be phased in over an
extended period of time to allow real estate markets and
property owners to adjust to the change."
In the Summary and Overview section of the Smart
Signals report, the question is asked:
"Should state tax policy discourage urban
redevelopment and smart growth? When a company reduces its
air emissions, should the fees it pays for each ton of
pollutants increase? Should state and local governments
ignore a company's environmental performance when providing
economic aid? ... Perhaps not. But, if nothing else, these
three examples show how Minnesota laws and policies often
send mixed economic signals. The manner in which tax
revenues are collected is frequently at odds with how tax
dollars are spent. ... Minnesota is doing many things well,
but some tax and spending policies work at cross-purposes.
... The major recommendations are designed to move
Minnesotans toward the goal of sustainable development."
"Measuring What Counts for a Health Economy,"
"Developing a Certified Wood Industry," "Sending Clear
Signals for Air Pollution Control," "Ensuring Clean, Safe
and Reliable Transportation," "Making Home Heating
Affordable," and "Connecting Corporate Subsidies with
Environmental Citizenship" are other chapters in the
report, which is on the Internet at www.mnplan.state.mn.us.
Copies are available from Minnesota Planning Environmental
Quality Board, 658 Cedar St., St. Paul, MN 55155, phone
651-296-3985. Project manager and sustainable development
team director is John Wells.
Study funding was approved by the Minnesota
Legislature, ML 1997, as recommended by the Legislative
Commission on Minnesota Resources from the Minnesota Future
Resources Fund.