It is not surprising that proposals for land value taxation (LVT) should elicit strong reactions in public debate. Land, taxes and information are a combustible combination, but they are critical to our political system. Without land we cannot live; without taxes we cannot be governed; without information about land and taxes we are powerless to change the way we are governed. Although Britain has not confronted basic land or tax reform in recent years, there are several signs, outlined below, that this is changing, and such changes can open the way for renewed attention to LVT initiatives.

Increasing Awareness of the Tax Burden

There is now widespread acceptance that Britain taxes jobs and enterprise far too much. In 1997 the European Commission (now known as the European Union) asked its 15 member states to produce employment action plans, including proposals to relieve the burden of taxes on employment. In 1999 British Prime Minister Tony Blair and German Chancellor Gerhardt Schroeder issued a joint statement that said, “. . . overall, the taxation of hard work and enterprise should be reduced.” Britain’s Liberal Democrat Party manifesto in 1998 called for a “major tax shift off people and on to pollution and resources.” Across the political spectrum consensus is building for a shift in the tax burden.

Devolution and Constitutional Reform

The United Kingdom is in the midst of far-reaching constitutional changes involving elections by proportional representation, which almost guarantee coalitions and make continuity of policy more likely. The number of voting hereditary peers in the House of (Land) Lords has been reduced from 400 to fewer than 100. Unlike a century ago, the Lords can no longer block an elected government with a mandate to introduce LVT or other land reforms. Although Britain still has one of the most centralized governments in Europe, Scotland and Wales now have considerable autonomy through their elected Parliament and Assembly.

Northern Ireland also has an elected Assembly, and land policy there is arguably more forward-thinking than on mainland Britain, with integrated ministerial responsibility for maps, land registers and property valuation. By 2007 there will be a fully electronic, map-based comprehensive land register and up-to-date property assessment. Uniquely in the UK, residential areas will be assessed through computer-aided mass assessment (CAMA) techniques imported from the U.S.

Scotland can vary income tax by up to 3 percent and can choose the tax base for its 28 local authorities. There is a much better understanding of LVT in Scotland than elsewhere in the UK, and the Scottish Executive has promised to initiate a thorough study of the economic implications of LVT before the next elections in 2004.

London now has its own devolved regional government, the Greater London Assembly, with an elected mayor, Ken Livingstone, who has become keenly interested in the potential of land values to fund transport infrastructure. The mayor’s transport commissioner, American Bob Kiley, is even more interested and has gone on record saying LVT might have a role, and not just in transport funding. There is currently a lively political battle concerning the London Underground, addressing who pays for investment and who benefits from it, which may provide a context for considering the role of LVT.

In most of the UK, however, local government is still a creature of the central state. Seventy percent of local government revenue comes directly from central grants, and over 90 percent of local expenditure is constrained by directives from the central government.

Advances in Geographic Information Technology

There have been amazing changes in information technology since the last thorough review of local government finance in Britain, in 1975. Then, base map information was held on a quarter of a million glass plates that were only revised on a 10- to 25-year cycle, using manual cartography, steel tapes and parchment paper. Now the entire national mapping system is computerized, using satellites, hand-held field data recorders and Internet map access. The Ordnance Survey MasterMap data structure recognizes land and building parcels and can hold attributes as diverse as height, material of construction, value and ownership. It is updated on a continuous basis and can incorporate pre-build and historic information. In 1975 the map archive occupied a large four-story building; now it fits on just eight CD-ROMs, covering every building and land parcel occupied by 60 million people.

All of these advances could assist the introduction of a tax based on land value, although there are serious institutional problems in getting all agencies that would be involved in LVT to apply the technology fast enough. However, the government has a target of enabling all information-based functions to be delivered electronically by 2005.

Unpopularity of the Uniform Business Rate

The uniformity of taxation in Britain is reflected in the name of the nonresidential property tax: Uniform Business Rate (UBR). At the end of the 1980s, local councils lost the power to fix the rate of the tax, and with it any direct financial connection with their local business communities. The central government at Whitehall decides what each council will collect from its business ratepayers, and how much each council retains, which can be substantially more or less than is collected locally. All that remains is some discretion over businesses exemptions, at the expense of local residents. No wonder that a recent government study showed a deep disdain for local councils among business owners and huge ignorance by both business and councils about their respective roles and problems.

Because this tax is based on occupancy and not on ownership, vacant and underused land largely or wholly escapes taxation. The UBR is regarded as a most regressive tax, accounting for up to one-third of the turnover of the smallest independent traders but only 3 percent of turnover of large multiple stores. My research has found UBR to be extremely unpopular: it penalizes success and fails to compensate for harm done by irresponsible neighbors. So this is another factor in the return of interest in LVT. As others have noted in recent years, the replacement of UBR, in part or totally, with a site-value-based tax would most likely be an extremely effective policy for urban renewal.

Business Improvement Districts

BIDs are coming to Britain after years of use in the U.S. These special districts allow commercial and office sectors to raise funds through property assessments for maintenance and improvement of their neighborhoods. But the only tax currently proposed for BIDs is a supplement to the occupier-based UBR. The business community does not like this idea, and LVT campaigners are now working with others to persuade prospective BID partnerships to consider assessments on owners and also to press for the creation of new tax powers.

LVT supporters propose that if a large majority within the BID support such measures, the BID should be able to compel all owners in the district to pay them; free-riders should not be allowed. The idea, known as “Smart BIDs,” is to support the BIDs with taxes on owners rather than business rates, and perhaps even to reduce the UBR rate within Smart BIDs.

Environmental Concerns

Current interest in LVT in Britain was boosted by an Urban Task Force report and formal support for LVT pilot projects by Friends of the Earth (which has more members in the UK than the Liberal Democrat Party) and the Town & Country Planning Association. These environmental organizations are interested in taxation as a tool for sustainable development, and such concern will only grow in the future. People in Britain will recycle even if it costs them time and money to do so. The same concern for the environment will increase acceptance of LVT when it is understood as a means of keeping towns and cities viable and protecting the countryside.

Practical Administrative Considerations

Two surveys of the town of Whitstable by Hector Wilks in 1963 and 1973 support the view that LVT presents fewer assessment difficulties than do traditional rating systems. Recent advances in computerized assessment systems make LVT more feasible than ever before. My own preliminary studies of other countries that use computerized assessments, especially Denmark and Australia, show that the overall cost of property tax administration is far lower there.

Denmark’s property tax, with annual revaluations, costs 20 percent less per property than Britain’s. When I visited Denmark last year, I found an extremely efficient property tax system tapping into land values in a modest way. Tax administrators told me that, aside from the environmental benefits of the tax, the greatest interest came from Treasury officials concerned about the growth of offshore tax havens. They are attracted to LVT because it costs very little to administer and there is virtually no possibility of avoidance or evasion.

If a British government were inclined to switch to LVT, it would not find any insuperable problems within our highly intelligent and incorruptible valuation profession. We have a professional, politically independent agency for conducting property tax assessments and the best national mapping agency in the world. It is simply a matter of exercising political leadership.

The Way Forward

In addition to supporting Smart BID pilot projects, my personal list for projects to help realize the potential of LVT includes:

• updating basic economics courses and making them available on the Web;
• implementing exchange programs between relevant tax professionals in Britain and countries with LVT;
• developing easy-to-use value mapping tools;
• studying the links between planning and LVT;
• comparing compliance costs of LVT and other taxes;
• developing indicators of the economic impact of LVT;
• monitoring public perceptions of land and tax issues over time and across countries; and
• providing more accessible nontechnical publications about LVT. These are.

The subject of tax reform is one of the most important issues of our age and political environment, and after years of neglect LVT is being considered in Britain again. The Lincoln Institute’s sponsorship of work by many LVT thinkers, writers and researchers in Britain and elsewhere has been instrumental in advancing public awareness of and professional appreciation for the potential benefits of LVT.

Tony Vickers recently completed a David C. Lincoln Fellowship in Land Value Taxation at the Lincoln Institute, and this article summarizes his Founder’s Day lecture on the topic in Cambridge, Massachusetts, in June 2002. Vickers is the former CEO of the Henry George Foundation in London, and he is currently pursuing a Ph.D. at the School of Surveying, Kingston University, London.

In the wake of the housing market collapse and the Great Recession—which caused a substantial increase in residential foreclosures and often precipitous declines in home prices that likely led to additional foreclosures—many observers speculated that local governments would consequently suffer significant property tax revenue losses. While anecdotal evidence suggests that foreclosures, especially when spatially concentrated, lowered housing prices and property tax revenue, the existing body of research provides no empirical evidence to support this conclusion (box 1). Drawing on proprietary foreclosure data from RealtyTrac—which provides annual foreclosures by zip code for the period 2006 through 2011 (a period that both precedes and follows the Great Recession)—this report is the first to examine the impacts of foreclosures on local government property tax values and revenues. After presenting information on the correlation between foreclosures and housing prices nationwide, we shift focus to Georgia in order to explore how foreclosures affected property values and property tax revenue across school districts throughout the state. Our empirical analysis indicates that, indeed, foreclosures likely diminished property values and property tax revenues. While still preliminary, these findings suggest that foreclosures had a range of effects on the fiscal systems of local governments.

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Box 1: Existing Research into the Impacts of Economic Factors on Property Tax Revenues

While there is existing research examining the various impacts of economic factors on property tax revenues, these studies use data that reflect only a previous recession (e.g., the 2001 recession) or that cover only the very start of the housing crisis in the Great Recession. Doerner and Ihlanfeldt (2010), for example, focus directly on the effects of house prices on local government revenues, using detailed panel data on Florida home prices during the 2000s. They conclude that changes in the real price of Florida single-family housing had an asymmetric effect on government revenues. Price increases do not raise real per capita revenues, but price decreases tend to dampen them. Doerner and Ihlanfeldt also find that asymmetric responses are due largely to caps on assessment increases, positive or negative lags between changes in market prices and assessed values, and decreased millage rates in response to increased home prices. Alm, Buschman, and Sjoquist (2011) document the overall trends in property tax revenues in the United States from 1998 through 2009—when local governments, on average, were largely able to avoid the significant and negative budgetary impacts sustained by state and federal governments, at least through 2009, although there was substantial regional variation in these effects. Alm, Buschman, and Sjoquist (2009) also examine the relation between education expenditures and property tax revenues for the 1990 to 2006 period. In related work, Alm and Sjoquist (2009) examine the impact of other economic factors on Georgia school district finances such as state responses to local school district conditions. Finally, Jaconetty (2011) examined the legal issues surrounding foreclosures, and the MacArthur Foundation has funded a project on foreclosures in Cook County, Illinois.

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Potential Links between Housing Prices, Foreclosures, and Property Values

Local governments in the United States rely on various own-source revenues, including local income, property, and general sales taxes and specific excise taxes, fees, and user charges. Of these, the dominant source is by far the property tax. In 2011, local property taxes accounted for roughly three-fourths of total local government tax revenues and for nearly one-half of total local own-source revenues (including fees and charges).

Some local taxes, such as income and sales taxes, have bases that vary closely with the levels of economic activity, and the Great Recession seriously depressed revenues from such taxes. The basis of the property tax is assessed value, which does not automatically change in response to economic conditions; in the absence of a formal and deliberate change in assessment, a decrease in the market value does not necessarily translate into a decrease in assessed value. Assessment caps, lags in reassessments, and the ability to make deliberate changes in millage or property tax rates combine so that economic fluctuations that influence housing values may not affect the property tax base or property tax revenues in any immediate or obvious way. Over time, however, assessed values tend to reflect market values, and property tax revenues also come under pressure.

A weakened housing market—with lower housing values and more foreclosures—may reduce local government tax revenues from several sources (Anderson, 2010; Boyd, 2010; Lutz, Molloy, and Shan, 2010), including real estate transfer taxes, sales taxes on home construction materials, and income taxes from workers in the housing construction and home furnishings industries. Because property tax revenues are such a large share of local tax revenue, however, changes in property tax revenues are often larger than the changes from these other housing-related taxes.

Foreclosure Activities Nationwide During and After the Great Recession

Figure 1 (p. 24) presents the total nationwide numbers of foreclosures at the 5-digit zip code level as a share of the number of owner-occupied homes in 2010. This figure demonstrates the clear geographic concentration of foreclosures. Arizona, California, and Florida were especially hard hit by the collapse of the housing bubble. However, other areas also experienced significant foreclosure activity.

The Federal Housing Finance Agency (FHFA) produces a housing price index for each metropolitan statistical area (MSA). We matched the RealtyTrac foreclosure data to the FHFA housing price index for 352 metropolitan statistical areas. Figure 2 (p. 24) presents a simple scatterplot that relates total foreclosures over the years 2006 to 2011 as a share of the number of owner-occupied housing units in 2010, to the change in the housing price index over the period 2007 to 2012 for all 352 metropolitan areas. The simple correlation coefficient between foreclosures per owner-occupied housing units and the change in housing price index is -0.556; if we consider only those MSAs with non-zero foreclosures over the period, the correlation coefficient is -0.739. This simple analysis suggests that foreclosures have a significant negative relation with housing values. The next step is to explore the effect of foreclosures on the property tax base and on property tax revenues. In the next section, we examine this issue for the state of Georgia.

More Detailed Analysis: Foreclosures, Property Values, and Property Tax Revenues in Georgia

By examining the effect of foreclosures on property values and property tax revenues in a single state, we eliminated the need to control for the many ways in which institutional factors may differ across states. Georgia is a suitable focal point because in many ways it is roughly an “average” state. For example, local governments in Georgia rely on property taxes only slightly less than the national average; in 2008, property tax revenue as a share of total taxes for local governments was 65.1 percent in Georgia compared to 72.3 percent of the U.S. (Bourdeaux and Jun 2011).

We measure foreclosure activity with the Realty-Trac data, aggregating zip code observations into the corresponding counties. The Georgia Department of Revenue supplied the annual property tax base (referred to as “net digest” in Georgia) and property tax rates. Property tax and total local source revenues for school districts came from the Georgia Department of Education. The tax base is as of January 1 of the respective year. The property tax rate is set in the spring with tax bills being paid in the fall, the revenue from which would be reported in the following fiscal year. School districts are on a July 1 to June 30 fiscal year, so the 2009 tax base and millage rates, for example, would be reflected in revenues for fiscal year 2010. We also use various demographic and economic data (income, employment, and population) measured at the county level to help explain changes in the base. Because these variables are at a county level, for the analysis that follows, we added the property tax base and revenue variables for city school districts to those for the county school systems in each city’s county to obtain countywide totals for 159 counties. For counties that include all or part of a city school system, the tax rate is the average of the county and city school tax rates, weighted by the respective property tax base.

Only county governments conduct property tax assessment in Georgia, but the state evaluates all property tax bases annually, comparing actual sales of improved parcels during the year to assessed values, and determining if the assessment level is appropriate relative to fair market value, which is legally set at 40 percent. The resulting “sales ratio studies” report an adjusted 100 percent property tax base figure for each school district in the state, along with the calculated ratio. We use these adjusted property tax bases, covering the periods 2000 through 2011, to measure the market value of residential property.

Georgia has very few institutional property tax limitations. School district boards can generally set their property tax rates without voter approval, which is required only if the property tax rate for a county school district exceeds 20 mills. Currently, the cap is binding on only five school systems. Also, there is no general assessment limitation, although one county has an assessment freeze on homesteaded property. In 2009, the State of Georgia imposed a temporary freeze on assessments across the state, potentially affecting property tax revenue only in school year/fiscal year 2010; however, with net and adjusted property tax bases declining on a per capita basis for most counties in 2009 through 2011, it is unlikely that the freeze has constrained assessments.

Foreclosures

Table 1 provides the statewide mean and median number of foreclosures by zip code for 2006 through 2011. Total foreclosures almost doubled between 2006 and 2010, before declining in 2011. The mean number of foreclosures is much larger than the median, implying that the distribution is highly skewed.

Table 2 shows the distribution of Georgia zip codes by the number of years that the zip code had non-zero foreclosures. Over 65 percent of the zip codes had foreclosures in each of the six years, while only 7 percent had no foreclosures in all six years. This distribution suggests that very little of the state was immune to the foreclosure crisis.

Figure 3 (p. 25) shows the distribution of foreclosures across the state over the period 2006 through 2011. Because zip codes differ in size and housing density, we also map the number of foreclosures per owner-occupied housing units for 2010 in figure 4 (p. 25). Note that zip codes marked in white either have no foreclosures or are missing foreclosure data. As one would expect, urban and suburban counties (particularly in the Atlanta metropolitan area) have the most foreclosures. However, there are large numbers of foreclosures in many of the less urban zip codes as well.

Figure 5 shows the annual distribution of foreclosures per hundred housing units in each of Georgia’s 159 counties. Note that the bar in the box represents the median value, the box captures the observations in the second and third quartile, the “whiskers” equal 1.5 times the difference between the twenty-fifth and seventy-fifth percentiles, and the dots are extreme values. The median number of foreclosures by county increased from 0.17 per 100 housing units in 2006 to 1.18 per 100 units in 2010—more than a sixfold increase in the median. There is a high positive correlation between foreclosure activity in 2006 and 2011 across the counties. This correlation is 0.78 when measured relative to housing units and 0.74 when measured on a per capita basis, indicating that counties with above (below) average foreclosure activity before the housing crisis remained above (below) average at its peak.

Property Values

As for changes in property values, figures 6 and 7 show the distributions of annual changes, respectively, in the per capita net property tax base and in the per capita adjusted 100 percent property tax base across the 159 counties from 2001 through 2011. Studies suggest that foreclosures may have spillover effects on the market values of other properties in the jurisdiction (Frame, 2010). We attempt to estimate the effect of foreclosures on market values as measured by the adjusted 100 percent property tax base.

Our results are preliminary, in that the analysis included only Georgia data. Even so, they suggest significant negative effects of foreclosures on property values, controlling for year-to-year percent changes in income, employment, and population. The coefficient estimates on the foreclosures variable suggest that a marginal increase of one foreclosure per 100 homes (or approximately the increase in median foreclosures from 2006 to 2011) is associated with a roughly 3 percent decline in the adjusted 100 percent property tax base over each of the two following years. Similarly, an increase of one foreclosure per 1,000 population is associated with nearly a 1 percent decline in the adjusted 100 percent property tax base after one year, and a slightly lower percent decline in the following year.

Property Tax Revenues

We also explore the effect of foreclosures on property tax revenues. Figure 8 (p. 27) depicts the distribution of nominal changes by county in total maintenance and operations property tax revenues since 2001, showing considerable variation across the school systems in the annual changes in property tax revenues. Even in the latest three years of declining property values, at least half the counties annually realized positive nominal growth in property tax revenue. To understand the effect of foreclosure activity on local government property revenues, we estimate regressions that relate foreclosures to property tax levies and to actual property tax revenues.

We find that a rise in foreclosures is associated with a reduction in the levy, after controlling for changes in the property tax base as well as fluctuations in income, employment, and population. An increase of one foreclosure per 100 housing units is associated with about a 1.5 percent subsequent decline in the levy, all else held constant. We also find that foreclosures have a negative impact on revenues, all else constant. Like our earlier estimates, these results are for Georgia only, but they indicate a significant negative relationship between foreclosures and local government property tax levies and revenues. It may be that higher foreclosure activity makes local officials hesitant to raise property tax rates to offset the effect of foreclosures on the tax base.

Conclusions

How have foreclosures driven by the Great Recession affected property values and property tax revenues of local governments? Our results suggest that foreclosures have had a significant negative impact on property values, and, through this channel, a similar effect on property tax revenues, at least in the state of Georgia. Our results also suggest additional effects on levies and revenues after controlling for changes in the tax base. Further work is required to see whether these results extend to other states.

About the Authors

James Alm is a professor and chair of the department of economics at Tulane University.

Robert D. Buschman is a senior research associate with the Fiscal Research Center in the Andrew Young School of Policy Studies at Georgia State University.

David L. Sjoquist is a professor and holder of the Dan E. Sweat Chair in Educational and Community Policy in the Andrew Young School of Policy Studies.

Resources

Alm, James and David L. Sjoquist. 2009. The Response of Local School Systems in Georgia to Fiscal and Economic Conditions. Journal of Education Finance 35(1): 60–84.

Alm, James, Robert D. Buschman, and David L. Sjoquist. 2009. Economic Conditions and State and Local Education Revenue. Public Budgeting & Finance 29(3): 28–51.

Alm, James, Robert D. Buschman, and David L. Sjoquist. 2011. Rethinking Local Government Reliance on the Property Tax. Regional Science and Urban Economics 41(4): 320–331.

Anderson, John E. 2010. Shocks to the Property Tax Base and Implications for Local Public Finance. Paper presented at the Urban Institute-Brookings Institution Tax Policy Center and the Lincoln Institute of Land Policy Conference, “Effects of the Housing Crisis on State and Local Governments,” Washington, D.C. (May).

Bourdeaux, Carolyn and Sungman Jun. 2011. Comparing Georgia’s Revenue Portfolio to Regional and National Peers. Report No. 222. Atlanta, GA: Fiscal Research Center, Andrew Young School of Policy Studies, Georgia State University.

Boyd, Donald J. 2010. Recession, Recovery, and State and Local Finances. Paper presented at the Urban Institute-Brookings Institution Tax Policy Center and the Lincoln Institute of Land Policy Conference, “Effects of the Housing Crisis on State and Local Governments,” Washington, D.C. (May).

Doerner, William M. and Keith R. Ihlanfeldt. 2010. House Prices and Local Government Revenues. Paper presented at the Urban Institute-Brookings Institution Tax Policy Center and the Lincoln Institute of Land Policy Conference, “Effects of the Housing Crisis on State and Local Governments,” Washington, D.C. (May).

Frame, W. Scott. 2010. Estimating the Effect of Mortgage Foreclosures on Nearby Property Values: A Critical Review of the Literature. Economic Review 95(3): 1–9.

Jaconetty, Thomas A. 2011. How Do Foreclosures Affect Real Property Tax Valuation? And What Can We Do About It?” Working paper presented at National Conference of State Tax Judges, Lincoln Institute of Land Policy, Cambridge, MA (September).

Lutz, Byron, Raven Molloy, and Hui Shan. 2010. The Housing Crisis and State and Local Government Tax Revenue: Five Channels. Paper presented at the Urban Institute-Brookings Institution Tax Policy Center and the Lincoln Institute of Land Policy Conference, “Effects of the Housing Crisis on State and Local Governments,” Washington, DC (May).