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Proposed Land Value Tax Could Threaten Property Ownership and Prop 13 Protections

California State Assembly Member Alex Lee has proposed a bill that would amend a Revenue and Taxation Code to change the way land tax is determined.

A new bill introduced into the California Legislature could threaten Prop 13 protections.

Assembly Bill (AB) 362 “would require the California Department of Tax and Fee Administration to conduct or commission a study on the efficacy of a statewide land value taxation system as an alternative to the current appraisal methods utilized for real property taxation.”

The current appraisal method for land taxation in California places a 2 percent cap on annual property tax increases, keeping annual property taxes predictable for property owners and stable and reliable for local governments. 

AB 362 threatens the popular Prop 13 which placed the 2 percent cap and stabilized the unpredictability of property tax increases. Prior to 1978, property taxes fluctuated unpredictably until the prop was passed.

The Public Policy Institute of California in a June 2018 survey found that the majority of Californians, 57 percent, believed that the current tax structure afforded in Prop 13 benefitted residents, and was supported by nearly every racial demographic and age group.

Local governments, school districts and other essential community services are better able  to plan with a stable, reliable, and growing property tax revenue afforded by Prop 13.

A land value tax system on which AB362 is based, estimates the market value of land minus any infrastructure or improvements.  Such property tax assessments could generate a much higher tax rate forcing property owners to sell or utilize the property to generate enough revenue to cover the taxes annually. One can imagine coastal property owners having to bulldoze swatches and create parking lots simply to retain ownership and create income to cover the tax bill.

The bill indeed states “a land value tax removes financial incentives to hold unused land” and “was founded by American political economist and journalist Henry George.”

However, Henry George was a proponent of a single tax on land from which the government should fund all of its projects. He noted that income tax reduced incentive to earn income, taxes on commodities reduced the production of the product, and taxes suppressed productive behavior. The land value tax was, in his philosophy, meant to be the only tax by the government.

California is already one of the most heavily taxed states in the union, charging the highest gas taxes, sales tax, and income tax in the nation and topping Wallethub’s findings which saw three of its counties reported to have the highest inflation rates further pushing costs in rent and healthcare.

Some economists recognize that a land tax is really a tax on production potential created by the improvements to land in the area and so intrinsically the value is only determined by improvements already made.

Lee’s proposed partisan AB 362 directs the findings to be presented to the California Legislature by January 1 2025.

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