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Amid the pages of descriptive analysis, the Report makes essentially three points of criticism regarding the property tax: 1) it is burdensome to homeowners, 2) it puts the state at a competitive disadvantage vis-a-vis other states and localities, and 3), it is unfair. Each of these arguments I will address here at length in hopes that it will edify the debate and point to solutions for what is a growing problem for both the state and its localities.

It is helpful first to understand that to an economist the real property tax as we know it is really two taxes that each have very different dynamics: a tax on the land value of a site and a tax on its improvement value. Further one must understand that improvements -- i.e., structures sited on the land -- depreciate in value over time, just as do cars, computers and refrigerators. Only land values increase, so that if a property parcel sees higher market value in time, the increase in land accounts for it. The Controller's Report makes no mention of this extremely important fact, leading to its many subsequent failings.

Note was made in the Report, and picked up in the NY Times, that in the last five years property tax bills increased statewide by 42 percent, compared with inflation of 13 percent. Yet the cost of housing is no longer even included in today's consumer price index. A far more accurate comparison would be the index of real estate prices, which have quadrupled in some places over the past decade, even though they have varied enormously statewide. Downstate New York has shown robust growth, but the upstate economy is moribund. Eliot Spitzer said it's "an economy that is devastated," and "looks like Appalachia." It is no wonder the tax rate supporting schools and localities can be lowered downstate and still provide the necessary finances.

An economy's vitality is reflected in its land values, and those values have little to do with what any individual titleholder does on a site. John Stuart Mill observed that, "landlords grow richer in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title." The values are reflected in landsite locations because of what economists call economic rent. If the economic rent were recovered for the community in the form of taxes, land values would be stable, and housing -- as well as all other real estate ventures -- would be more affordable. To jump ahead, the solution to our tax dilemma rests, then, in a small computer modification in the conventional property tax formula so that only the economic rent from the land component is taxed.

The failure to collect land rent leads to the increase in market values of property parcels and to the vicious circle of higher property taxes. The burden grows according to the vicissitudes of the economy, because locational sites have a fixed supply and therefore amplify what scarcities might normally exist. Land speculators feed the frenzy, and every homeowner gets caught up in the game of rejoicing in growing property values. But the burdens of those higher values are reflected in higher taxes. Owners often shed wolves' tears, even while they look to "cashing out" their increased holdings down the road. One answer to these plaints might be to defer the tax burden borne until such time as owners sell and those inflated home values allow what is due to be paid off more easily. The deferral provision is already available in some twenty-four states, letting owners continue living in their homes as long as they can or wish to.

The Controller's Report could have offered these thoughts for perspective and as a way of helping the public understand the genesis of the problems it enumerated. It did not.

The Report suggested that its design puts the State at a competitive disadvantage. Yet it gave no explanation of the economic dynamics or its impact. The truth is that the land component constitutes the most perfect tax that could be. This is because it is based on a resource of fixed supply -- land -- absorbing in its market price whatever tax or other encumbrance is imposed upon it. It is not passed forward, imposes no "excess burden" (a fancy economic word for friction) on the economy, and complies with all the other textbook principles of sound tax theory. In fact the higher the tax on locations is, the greater it fosters economic vitality in a region. It's the tax on improvements that is so problematic.

The real property tax as it is understood in the US penalizes the titleholder who keeps his property in good order, and rewards the property owner who lets its condition decline and then be assessed at a lower rate. Although structures depreciate while land appreciates, our tax structure promotes this tendency even further. Land rent that comes to rest on locations raises the market value of parcels, and the structure gradually becomes a smaller proportion of its total worth. Given our present tax incentive system, a newly built-on parcel that might have an initial improvement value of 70 percent and a land value of 30 percent will see those proportions reversed over the course of two generations. So it is that older neighborhoods often become slums when they never need to have been.

Another solution is to collect the economic rent as it is reflected in site values. The more rent recovered, the more stable the land values become and the greater the incentive to maintain a structure on it worthy of its carrying costs. Whatever increases arise by taxing the rent accreting to land-sites can be ameliorated by a reduction in the tax on the improvement component. This is phased in according to schedule in what has come to be called a "two-rate" tax. Some twenty municipalities in Pennsylvania now employ such a design, and it is catching on worldwide in many other forms. Homeowners typically pay less in taxes because their houses are no longer subject to levy. In fact all structures worthy of sites on which they sit will pay less; sites or vacant lots under-used relative to their locational value will pay more, just as the incentives should be. Harrisburg PA has seen the restoration of some 5,000 previously boarded up brownstones since the inception of its two-rate tax in 1982.

The conventional property tax contains within it what economists have come to call "perverse incentives." Its inefficiencies are rife, and its distortions impose heavy impacts on environmental decisions, especially in locational choices and land use configurations. To be sure the impact of the usually mentioned alternatives -- taxes on sales or income -- are even worse, but this is all the more reason it's important to think outside the framework of neoclassical economic theory and recognize land as a distinct factor.

The Report claims that the tax is egregious because it is unfair. But its analysis of that unfairness is loose if not erroneous. Most of the argument is based on a comparison of the different tax rates among the various jurisdictions statewide. Additional criticism is leveled on the poor quality of the assessments from place to place.

The fairness argument needs special explication, as "ability to pay" has come to be the measure of its acceptability. But as a start, one needs to recall that the property tax is really two taxes, each with its own economic dynamic. The tax on the land component is absorbed -- economists say "capitalized" -- in the market value of the property parcel and is never passed forward to its tenant. The tax on the improvement portion is partly shifted to the tenant. One way to bring the tax into greater conformity with ability to pay is to relieve tenants of any tax burden that has been passed forward -- the improvement part. Taxing only the land component relieves everyone who owns no land -- typically poor people -- of all such tax burdens. The burden is then carried solely by residential and non-residential landowners, usually about half each. (Farmers' land is usually so geographically remote that its value is inconsequential relative to that in the cities.)

Moreover, the fairness of a tax on the land component is arguably based on the use of a location, and those who avail themselves of high value sites should pay accordingly. The highest value sites are downtowns, and site values fall quickly as one leaves an urban center. Homes are typically on sites a fraction of the value of urban centers. Paying for locational advantage is not only fair but fosters spatial configurations in accord with what planners most advise. "Tax what you take, not what you make," is one way to say it. "Tax waste, not work," is another way. What could be fairer?

The Report takes special note of the poor assessment practices that prevail among the hundreds of districts statewide. But this is to conflate and confuse criticism of the administration of a tax with the design of the tax itself. To be sure, the tax is poorly administered, but the answer to that is to correct those problems, not to scuttle the tax. Technology exists that make valuation very simple and feasible, especially since the advent of computer mapping applications. In fact taxing the land component is far easier than taxing improvements, and far less intrusive, so that the promise of taxing land value by itself would reduce the costs of administration, litigation, and other management to a fraction of those today.

The Report made no mention of the distortion typically created by assessors' tendency to first value structures and then treat land components as residuals. Elsewhere in the world, land is valued first and any improvements are residuals. The failure to conform to standard practices elsewhere in the world is probably due to the advantage over-valuing structures gives for depreciation on corporate tax schedules.

To this extent, assessors serve the interests of the finance, insurance, and real-estate industries. The distortion can be seen in the fact that the aggregate land value proportion in a typical American city is 1/4 to 1/3 of the total tax base, far less than in municipalities elsewhere. Greenwich, Connecticut, a city that employs the building residual method, has a land value proportion of 71 percent. This dimension of fairness was never touched by the Report at all.

A last issue involving the fairness of the New York State property tax involves the Balkanization of taxing districts. There exist some 1,300 assessment districts in New York, and an even larger number of overlapping jurisdictions for purposes of water and sewer service, fire departments, libraries, school districts, and so on. The result is that there are enclaves of poverty bordering pockets of affluence. The Report attempts an exploration of this problem in a cursory way. But its solution is to rely for correction on other state-level taxes, mainly the income and sales taxes. A statewide property tax would ameliorate this significantly, and would likely see some of the high-land-value localities raising more revenue for some of the poorer districts upstate. In fact, a land value tax imposed statewide would go far toward not only relieving upstate financial stress, but also relieve downstate communities of the impediments they face to improve and restore some of their real estate investments. This is because, unlike other taxes, increasing the tax on any base with a fixed (inelastic) supply engenders more economic vitality the higher it is. As it is, attempts to redress present statewide inequities in public school finance are now focused on transferring more revenue downstate -- some $4 billion -- from upstate regions that are economically flat on their backs already.

In all, the Office of State Controller's recent Report on Property Taxes in New York State is revealing as much for what it does not address as for what it does. Never once does it mention that the two studies done in the early 1970s on the property tax by recognized national scholars concluded that the property tax is marginally progressive, more so for the land component. In what every graduate textbook in public finance refers to as the "new view," this is explained in detail. Apparently, the authors of the Report never took a graduate course in public finance.