Since bidders know they can get away with buying the home cheaper than the true value, they will increase their bids. Without taxes, the bidders would increase their bids by almost the V/2 profit they can expect to make. However, they won’t increase their bids fully, since they will be taxed based on the higher bids. Notice that from the sellers perspective, they get roughly the true value of the house, it is just that part of the home value comes from the land bid while another part comes from the home sale. From the seller’s perspective, this looks like a small “tax” on the value of their home. From the buyers perspective, they will be taxed on the portion of the home price that they included in their land bid.
Isn’t this kind of fatal to the whole idea?
The reason to use auctions is to get a more accurate price, but the “land” value you’re assessing is expected to be off by half the value of all improvements. Given that [it costs around $400k to build a 2,500 sqft house and $100k to buy the land](https://www.ramseysolutions.com/real-estate/how-much-does-it-cost-to-build-a-house) (which incidentally is fairly close to my insurance company’s rebuild cost and the assessed land value of my house), the $300k you’d assess land taxes against is 2/3 improvement. It would get worse with something like a skyscraper where the building is orders of magnitude more expensive than the land it sits on.
It looks like you have different numbers for the cost of land, sale value of a house, and cost of construction. I’m not an expert, so I welcome other estimates. A couple comments:
Land value assessors typically say that the land value is larger than the improvement value. In urban centers, land can be over 70% of the overall property value. I would guess this is where the discrepancy comes from with our numbers. AEI has a nice graphic of this here:
Overhead costs of construction would act to reduce the overall distortion, since those are included in C_b in the formula for distortion. The construction costs look larger in that article than what I used, but I guess what we really need to know is the markup from construction.
Let’s just keep all the construction and demolition costs the same and use your land value ($100K) and improvement value ($400K):
P = 400K + 0.5*(76K -(400K + 10K)) = 233K
B = 100K + ((400-233) − 0.05*(400-233)*10)*0.31 = 126K
Total = 359K
So the buyer gets 500K of property for $359K, a 28% price reduction. The land tax is ~25% improvement value. It’s easy to adjust land taxes down by 25% so that you tax the correct amount, but the implicit tax on property is a big problem in this case.
The thing is, I don’t think land value being only 20% of property values is realistic, especially in urban areas. Median land share in the US is more like 50% so I’m not really sure where the discrepancy comes from.
As for skyscrapers, the interesting thing about this proposal is that hard-to-remove amendments essentially become land. For example, if you made a plot of land fertile, that improvement is difficult/undesirable to remove, so when you go to sell it, the owner pays for it as if it were land. I’ll tackle this more in the second post.
I suspect the discrepencies in our land value vs improvement value numbers have to do with where the land is and how efficiently it’s used. If you have a single family home in San Francisco, most of the value will be land, but it seems undesirable that your proposed tax would very heavily penalize anyone who tries to turn a single-family house in SF into a skyscraper (with a much lower land/improvement ratio).
As for skyscrapers, the interesting thing about this proposal is that hard-to-remove amendments essentially become land. For example, if you made a plot of land fertile, that improvement is difficult/undesirable to remove, so when you go to sell it, the owner pays for it as if it were land. I’ll tackle this more in the second post.
Taxing improvements (discouraging people from improving land) seems like the exactly opposite of what a land value tax is supposed to do. I look forward to how you address this in the second post thogh.
Isn’t this kind of fatal to the whole idea?
The reason to use auctions is to get a more accurate price, but the “land” value you’re assessing is expected to be off by half the value of all improvements. Given that [it costs around $400k to build a 2,500 sqft house and $100k to buy the land](https://www.ramseysolutions.com/real-estate/how-much-does-it-cost-to-build-a-house) (which incidentally is fairly close to my insurance company’s rebuild cost and the assessed land value of my house), the $300k you’d assess land taxes against is 2/3 improvement. It would get worse with something like a skyscraper where the building is orders of magnitude more expensive than the land it sits on.
So yes, taxing property values is undesirable, but it also happens with imperfect land value assessments: https://www.jstor.org/stable/27759702
It looks like you have different numbers for the cost of land, sale value of a house, and cost of construction. I’m not an expert, so I welcome other estimates. A couple comments:
Land value assessors typically say that the land value is larger than the improvement value. In urban centers, land can be over 70% of the overall property value. I would guess this is where the discrepancy comes from with our numbers. AEI has a nice graphic of this here:
https://www.aei.org/housing/land-price-indicators/
Overhead costs of construction would act to reduce the overall distortion, since those are included in C_b in the formula for distortion. The construction costs look larger in that article than what I used, but I guess what we really need to know is the markup from construction.
Let’s just keep all the construction and demolition costs the same and use your land value ($100K) and improvement value ($400K):
P = 400K + 0.5*(76K -(400K + 10K)) = 233K B = 100K + ((400-233) − 0.05*(400-233)*10)*0.31 = 126K
Total = 359K
So the buyer gets 500K of property for $359K, a 28% price reduction. The land tax is ~25% improvement value. It’s easy to adjust land taxes down by 25% so that you tax the correct amount, but the implicit tax on property is a big problem in this case.
The thing is, I don’t think land value being only 20% of property values is realistic, especially in urban areas. Median land share in the US is more like 50% so I’m not really sure where the discrepancy comes from.
As for skyscrapers, the interesting thing about this proposal is that hard-to-remove amendments essentially become land. For example, if you made a plot of land fertile, that improvement is difficult/undesirable to remove, so when you go to sell it, the owner pays for it as if it were land. I’ll tackle this more in the second post.
I suspect the discrepencies in our land value vs improvement value numbers have to do with where the land is and how efficiently it’s used. If you have a single family home in San Francisco, most of the value will be land, but it seems undesirable that your proposed tax would very heavily penalize anyone who tries to turn a single-family house in SF into a skyscraper (with a much lower land/improvement ratio).
Taxing improvements (discouraging people from improving land) seems like the exactly opposite of what a land value tax is supposed to do. I look forward to how you address this in the second post thogh.