The Capitalization of the Property Tax and Idle Land: Reply

Abstract

In his comments on the paper by Mike Owen and myself, Bentick alleges that we have confused income and property taxes, that our treatment of idle land as an inventory is inappropriate and, more importantly, that our conclusions with respect to property tax capitalization and the influence of property taxes on land use are incorrect. My response to these remarks comes in four parts. In the first place, I will indicate where Bentick has misinterpreted parts of our paper and try to clarify the nature of our land-use model. Secondly, I will explain the source of Bentick's demonstration that higher property taxes will hasten land development and show that it results from a fundamental error in discounting. Next, I will present a slightly modified version of our original model that confirms our conclusions and which will hopefully serve to rectify what, in retrospect, has been an unfortunate choice of words on our part. Finally, I will suggest how our results might be altered if a general equilibrium approach to the problem were taken. The starting point for our analysis was the assumption that knowledgeable investors, including current landowners, shared the same set of expectations concerning the future evolution of land prices. If landowners attempted to maximize the value of their wealth, that is, did not waste any profit opportunities in allocating land, we examined how their pursuit of this objective would be affected by the introduction of a property tax-a tax on one type of wealthor, equivalently, by an increase in the property tax. A basic misinterpretation occurs over the definition of idle land. Is it idle out of choice or necessity? Bentick maintains that we have assumed idle land to be that class of real estimate for which there is no current use (i.e., net rents are zero for this type of land). If this were true, it is obvious that increases in the property tax could not induce land development. However, nowhere do we argue that idle land conforms to this particular definition and thereby trivialize our model. As we have tried to explain in footnote 4 of our paper, idle land could be employed in a current use (i.e., the current price of land is positive) but will be withheld if the current price, less the present value of future conversion costs, is less than the present value of the future price at which the land would sell for some other use. In the absence of these conversion costs, there would be no incentive to hold land idle