Buying Back the Land

Peter Barnes

[Reprinted from The People's Land, A Reader on Land Reform in the United States, edited by Peter Barnes for the National Coalition for Land Reform, printed by Rodale Press, 1975]

It is just within the realm of possibility that low-income groups, by joining with environmentalists, labor and other progressive forces, can bring about a better distribution of land. The mechanism for doing this could be a series of state government trust funds which, for purposes of public salability, might be called Land Conservation Funds (LCF).

An LCF would make land acquisition funds available for uses consistent with environmental protection and economic justice. It would do so without imposing new levies on most taxpayers. It would thus be a much stronger political device than is presently available for land acquisition and control. With relatively minor modifications, the LCF model could also be adopted at the federal level.

An LCF would not itself own land, operate farms, or set up local enterprises. These functions would be filled by other public and private institutions, some of which already exist, many of which still need to be built. An LCF would be a politically salable transfer mechanism that would make financially possible a redistribution of land. Its uniqueness is that it would do so in a way not dependent upon the diminishing willingness of the legislatures (or Congress) to tax the working and middle classes for the benefit of the poor.

Here's how an LCF would work. Like the highway, social security, and other existing trust funds, an LCF would be a separate government account into which money would pour from special taxes - in this case, taxes that fall not on the average taxpayer but on the wealthy few who profit most from land and resources. Revenues from these taxes would be allocated for carefully specified purposes and recipients: half would go to cities, towns, counties and regional park districts for the purchase of open space land; the remainder would be granted to low-income cooperatives, community development corporations (CDCs), public utility districts and non-profit land trusts for the purchase of productive land. Like other trust funds, an LCF, once established, would be self-perpetuating and relatively immune to political sabotage.

The principal taxes feeding an LCF would be a severance tax on the extraction of oil, gas, other minerals and timber, and a tax on the unearned increment in land value. The severance tax is a well-known tax applied in many mineral-rich states, including Texas, Louisiana, Oklahoma and Alaska. The unearned increment tax is a kind of capital gains tax applied to land. It has been used in England, South Africa, Australia, Denmark and other countries, and was recently adopted in Vermont. Its name derives from what John Stuart Mill called the "unearned increment" - the rise in land value brought about by public expenditures (highways, sewers, irrigation projects, etc.) and by economic and population growth. Capturing the unearned increment for private gain is what land speculation is all about. Recapturing it for the public good is the objective of an unearned increment tax.

A state severance tax would fall most heavily on the holders of working interests in oil, natural gas, cement, sand and gravel, other mineral properties and timber - i.e., the major oil, timber and landowning companies. Since these companies benefit from a wide variety of federal and state tax preferences-and since the resources they extract are a gift of nature to all, not to just a privileged few - a severance tax is a highly appropriate levy. From an environmental standpoint, the severance tax is an excellent one because, unlike the ad valorem property tax, it encourages conservation rather than depletion of resources. For added effect a differentially high rate might be applied to the severance of resources (such as virgin redwoods) deemed particularly worthy of conservation.

The unearned increment tax, if universally applied, would be borne by all owners of land that is appreciating in value. It would be wise, however, to exempt land immediately related to most residential property, small farms and small businesses. The tax would then be borne almost entirely by large landowning corporations and real estate speculators. Its impact would be greatest on large owners of urban and urban fringe land.

In practice, an unearned increment tax could take a variety of forms. The National Commission on Urban Problems, chaired by former Senator Paul Douglas, described several, ranging from a total shift to site value taxation to a transaction tax on land value increments. I favor tacking on an annual land gains tax to the state income tax. This would be similar to the ordinary capital gains tax except that it would be payable while gains accrue, rather than at time of realization - a necessary difference since one objective of the tax is to induce large absentee landowners to sell.

Collection of an annual land gains tax would be relatively simple. Local assessors, when mailing out their annual property tax bills, would make two extra carbon copies; one would be mailed to the property owner, the other to the state revenue agency for verification purposes. Each non-exempt property owner would then submit a self-declaratory land gains schedule along with his state income tax return. He would attach to this schedule copies of all appropriate property tax bills, much as employers' W-2 forms are attached to the regular income tax form. His tax liability would be calculated in the following fashion: from the current total value of his non-exempt real estate he would subtract the total value as of the preceding year. Then he would subtract the amount expended on capital improvements during the preceding year, and add the depreciation (if any) claimed elsewhere in his return. This would yield the land value increment for the previous year - i.e., the increase in value not attributable to the owner's own improvements - which would then be taxed at an appropriate rate.

Exemptions might be structured as follows: the first $40,000 worth of a taxpayer's owner-occupied home, plus the first $40,000 worth of an owner-operated farm or business property, plus an equivalent value for each rental unit owned, would be excluded in computing the land gain. In addition, the first $1,000 in gain would be exempt. People who owned no property (or only owner-occupied homes worth less than $40,000) would not have to file a land gains schedule. Over 95 percent of households would thus be spared direct contact with the tax, while the rental exemption would avoid a shifting of its burden onto tenants.

The revenue potential of a land gains tax would be considerable. Consider the following data for California. Land in California is rising in value at about 8 percent per year. That creates an initial tax base of about $7.5 billion. Approximately half of that would be excluded under the residential, small farm and small business exemptions. That leaves about $3.7 billion that could be subject to uniform, progressive or differential tax rates. A flat 10 percent rate would yield $370 million annually; a 15 percent rate would yield $555 million.

Besides raising money to buy back the land, an annual land gains tax would, by itself, have several desirable consequences. By diminishing the tax advantages of investing in land, it would encourage the wealthy to put their money elsewhere, and perhaps prompt present large owners of land to begin selling. This would create a downward impact on land prices - downward enough (if the tax rate were reasonable) to slow the natural rate of increase but not to depress land values below their current level. To some extent this downward pressure would diminish the revenues raised by the tax, but it would also make buying land cheaper for LCF recipients.

Another consequence of a land gains tax would be the creation of jobs and housing. This would occur because a tax on land gains does not discourage productive investment. In fact, it encourages construction of income-producing improvements on land, especially in the central city and on the urban fringe. Because of the exemption for low and middle-income homes and rental units, the greatest incentive would be to build low and middle-income housing, as opposed to luxury highrises, shopping centers and office buildings. If a differentially high rate were applied to land rezoned for higher use, the incentive would be to construct new housing in areas already zoned for it, rather than to sprawl into still-unspoiled areas. If the housing were built by low-income co-ops or CDCs that received land acquisition funds through an LCF, housing costs could be cut as much as 30 percent.

Three objections to the land gains tax might be: (1) it does not allow for appreciation attributable to inflation; (2) it taxes unrealized gains; and (3) it constitutes double taxation, since land gains would be taxed while accruing, then again by the state and federal governments when realized. These objections are readily answered. (1) No correction for inflation is allowed in taxing inflation-induced increases in wages, dividends, interest or ordinary capital gains, so why should landowners be entitled to special treatment? (2) Any large landowner who did not have sufficient cash to pay the tax on unrealized gains could easily sell a portion of his holdings without hardship. In any case, the ordinary ad valorem property tax, which constitutes a heavier burden than would a land gains tax, is worse than an unrealized gains tax because it taxes property values annually even when gains are not accrued. (3) The double tax argument is unconvincing because the "double tax" is not more than a higher rate of taxation on capital gains, a rate that in to to would still not equal the rate of taxation on wages. Moreover, taxes paid to a state LCF would be deductible from federal income taxes.

Who would get the money to buy land, and how would allocations be made?

The law establishing an LCF would contain a formula for allocating funds by purpose, type of recipient, and location. Thus, 50 percent of the revenues might be allocated for open space acquisition. These funds would be divided among state agencies, cities, towns, counties and regional park districts in accordance with population density, quality and quantity of open space available, and other factors. Some funds would be used for preserving wilderness and wildlife refuges, some for recreational areas, some for urban parks and suburban greenbelts (in which land might be leased back to small farmers and co-ops). Grants from the LCF could cover up to 100 percent of land acquisition costs.

The remaining 50 percent of LCF revenues would be divided among the following types of recipients:

• Cooperatives of low-income families, for the acquisition of land for agriculture, related enterprises and housing. For example, farmworkers might wish to buy out a corporate farm and run it cooperatively.
  
• Community development corporations in rural and urban areas, for the acquisition of land for housing and non-polluting industries.
  
• Public utility districts, for the acquisition of land, water or energy resources.
  
• Non-profit land trusts, similar to the Jewish National Fund in Israel, for the acquisition of land for lease to family farmers and rural cooperatives, or of common land for Indian tribes and Mexican-American ejidos.

As with open space funds, grants to private recipients could cover up to 100 percent of land costs. Recipients would thus be free of debt burden on their land, and could use their land as collateral to borrow money for farm equipment, housing supplies and other capital outlays. The debt-free gift of land would be in the tradition of the Homestead Act. It would, of course, be a subsidy, but one that would barely match the subsidies and tax breaks given to railroads, cattle barons, timber companies, energy corporations, wealthy tax-loss farmers, real estate developers and the like.

Grants by an LCF to private recipients would be subject to a number of restrictions and conditions. First, carefully drafted language in the law would assure that recipient corporations, cooperatives and land trusts would either be genuinely nonprofit or owned in major part by persons of low or moderate income who lived and worked in or near the enterprises involved.

Second, nonprofit trusts receiving grants would be permitted to lease only to resident farmers and cooperatives. In no event could a trust lease farmland to an absentee operator, nor could it lease more than 320 acres of irrigated farmland, or 1,000 acres of unirrigated farmland, to the same family, or double that amount to the same cooperative. In leasing farmland the trust would give preference to people with farm work experience and low incomes. Violation of any of these conditions would cause for revocation of all grants, with grant money repayable (with interest plus a penalty) to the LCF. Co-ops and CDCs would be subject to similar restrictions.

Third, all recipients would be barred from resale of LCF-funded land for at least fifteen years. After that time the LCF would retain first option to purchase at a price not greater than its initial grant, plus an allowance for inflation.

What would happen if something like an LCF were established today? Would co-ops, CDCs and nonprofit land trusts be able to handle a million acres if they received them, free of debt burden, next week or next year? Sadly, I suspect that the answer is no. There is an immediate, desperate need to improve the management capabilities of community and cooperatively owned enterprises, and to increase the readiness of low-income families to participate meaningfully in such undertakings. Government, university, foundation and other private resources should be poured into this task.

Politically, however, I think we are much further along than many people realize. Voters in California, their sensitivities heightened by smog, sprawl and environmental activism, approved a statewide coastal zoning initiative in 1972 as well as numerous local open space bond issues. (School bond issues, meanwhile, were generally going down to defeat.)

The Republican county executive of Suffolk County, New York, recently proposed that the county buy up farmland threatened with subdivision and lease it back to the farmers who are using it. A report financed by Laurance Rockefeller recommended creation of "public corporations" to acquire land for new town development. Robert Wood, former secretary of Housing and Urban Development and now president of the University of Massachusetts, has said that "public ownership and public planning are probably the essential components for a genuine land reform program."

Many if not most of these "land reformers" see public land ownership as beneficial primarily to profit-seeking new town developers, bankers and well-to-do farmers, rather than low-income groups. In my view, public land ownership is not a very promising device for helping poor people, although it's fine for open space preservation. Helping the poor requires that they have more direct access to the land than public ownership per se has provided or can provide. The point, however, is that people are ready, or almost ready, to accept the notion of buying back sizable quantities of land from its present owners. The political task is to make sure that "buy-back-the-land" programs are not used solely for parks and commercial developers, but are also designed to benefit low-income and community groups.

What is necessary over the next few years, it seems to me, is a two-front strategy. On the political front, we must deal with the fact that voters are prepared to spend public money to purchase land for migratory birds, but not yet to do the same for migratory workers. While lamenting and fighting this reality we might as well take advantage of it; there are no other sources of large-scale money for community economic development on the horizon.

The second front involves developing the psychological and managerial capabilities necessary for running new economic structures such as cooperatives, CDCs and land trusts. This is a much more difficult task than the political one, and a persistent problem over the next few years will be that of timing - how to develop social structures fast enough to keep up with the political gains I believe are possible.

It would be wrong to conclude on too optimistic a note. The forces opposed to genuine land reform are powerful. If locally owned economic institutions are to survive, much less to flourish, there must be more than a redistribution of land. There must also be far-reaching changes in federal tax, subsidy and anti-trust policies. Such changes will be extremely difficult to bring about. It can only be said at this time that the possibilities are there. It is up to us to work strenuously for their attainment.