It is a bad idea to eliminate Kansas City’s land tax. Almost every economist sees the advantage of land taxes. The general welfare calls for taxes that do the least harm in the form of affecting the quantities of goods or services that people ultimately care about. Nearly all economists agree that a land tax is one of those policies in which taxing land affects the value of the parcel, but does not affect the quantity of land. Henry George, Milton Friedman, Paul Samuelson, and Joseph Stiglitz all recognize the desirable properties associated with land taxation.
The land tax’s fundamental premise is straightforward. The tax collected is the product of the rate and some measure of the land. Any improvements to the land are not subject to the tax. With such a tax in place, the price of the land will change. Indeed, the price is simply the present value of the streams of future income that the land generates. Unlike most goods, the price change accompanying the tax implementation does not affect the quantity of land available. In other words, the supply of land is inelastic with respect to price. Under this rule, landowners seek the land’s use with the highest return. That is a good thing.
In addition, land taxation is easy to implement. The Kansas City version is based on assessed valuations of land already computed by various counties as part of the comprehensive property tax system. So, take the existing assessments, set the rate, compute the tax, and collect.
Kansas City is the only local government authorized to collect a land tax in Missouri. One would assume that when you are the only city in Missouri authorized to enact a tax that economists almost universally recommend, you would want to expand it and remove other, more harmful taxes, right?
Wrong. The Citizens’ Commission on Municipal Revenue (CCMR) recently recommended eliminating the land tax and replacing it with higher sales taxes. Whatever the sales tax is applied to will undoubtedly change the prices and quantities of goods and services. (As an aside, the proposed swap is not revenue neutral. The final result would be a substantial tax increase.) The CCRM, a group consisting mostly of lawyers and former government employees, did not explain why welfare would be higher under the sales tax. Rather, they pointed to the small monies collected from the land tax, which can be addressed by raising it instead of the sales tax. Other factors rendering the land tax undesirable, in their view, are its low growth rate over time, and the fact that it is confusing. They provide no analysis as to why the growth rate is low, and we frankly disagree that it is confusing. It is a tax on the value of land. What is confusing about that?
Let us be clear. The sales tax replacement will be added onto an already comparatively high local sales tax. Thus, prices for goods and services subject to the sales tax will rise and the quantity purchased within the taxing jurisdiction will fall. Consumers will find lower-priced items in neighboring towns, including those across the state line, with lower sales tax rates. The point is that every other taxable item has a higher elasticity and therefore, will cause greater welfare harm to people. If Kansas City seeks to minimize the harm, it would raise the land tax, not eliminate it.
If eliminated, Kansas City is unlikely to be able to re-implement the land tax due to changes in state law since it was first instituted. Kansas City has a tax that other cities in Missouri should envy, and economists would almost universally encourage. And this is what voters are being asked to eliminate in August. We hope Kansas City voters think twice before replacing the least harmful taxes like the land tax with less desirable substitutes.
Joseph Haslag is chief economist and David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.
