the British system as a tax on use.
Our property tax measures property
by capital value; the British "prop-
erty tax" measures it by annual
value. But annual value is just as
intrinsically an attribute of property
as capital value. It is only an
American usage that limits property
and property taxes to capital values.
What then are the essential differ-
ences?
1. As between owner and tenant.
As between the owner and the ten-
ant it is difficult to discover any
1944]
SHOULD U. S. USE OCCUPANCY TAX?
331
way in which the form of the tax
will affect the final incidence of the
burden. I do not say this because
"the owner will shift the taxes to
the tenant anyhow," of, conversely,
because "the tenant will shift the
taxes back to the owner." Both
statements are current, and both are
obviously inadequate. There are con-
ditions under which the major part
of the burden will be borne by build-
ing owners, and other conditions
under which the tenant will bear the
final burden.
These conditions will include the
supply of building space, the de-
mand for space, changes in build-
ing costs, the extent to which recent
building operations have been gov-
erned by speculative factors, and
sometimes still more complicating
elements. But whatever the condi-
tions may be, I am unable at the mo-
ment to discover any way in which
they will be altered by the form
of the property tax, assuming, of
course, the same amount of taxation.
If this is true, there is then no
problem of relative justice between
owner and tenant, since, under any
given set of conditions, the impact
of the burden appears to be the
same. (We are omitting for the time
being consideration of the exemption
of vacant land and idle property,
where no owner and tenant relation-
ships are involved.)
But we may hazard one qualifica-
tion here. We are familiar with the
fact that under our property tax the
pressure of taxation on the owner of
unimproved land frequently forces
him to make improvements which
otherwise he would not make or
would delay indefinitely. Freedom
from this pressure would therefore
relieve the market of this segment
of supply, and to that extent should
raise the general level of rents.
But there are two other factors
which would seem to operate more
powerfully in the opposite direction.
The first arises from the fact that the
pressure of taxation on the owners of
older properties has forced an enor-
mous demolition of improvements
which were still capable of useful
service. The absence of this pressure
would preserve this segment of sup-
ply and to that extent reduce the
level of rents.
The second arises from the greater
security of ownership under the
British system, the freedom from
confiscatory procedures in the col-
lection of taxes, and the freedom of
the ownership itself from tax lia-
bility, all of which would afford sub-
stantial encouragement to a type of
ownership which in this country is
heavily penalized. I would hazard
the conjecture, therefore, that under
a given set of conditions the British
system would offer substantially
greater inducement to building and
ownership, which would have the
effect of reducing the general level
of rentals the owners, in accord-
ance with familiar investment psy-
chology, accepting a lower yield in
return for greater security of yield.
2. As between both owner and ten-
ant on the one hand and the
taxing authority on the other.
The essential differences in the
two systems lie not between the own-
er and tenant, but between the prop-
erty on the one hand and the tax-
ing authority on the other. These
332
NATIONAL MUNICIPAL REVIEW
[July
differences have been discussed by
Mr. Collins and other writers and
need only be enumerated here. They
would include the following:
(a) Reduced liability in times of
decreased occupancy and rentals;
that is, the flexibility of the system
in its adjustment to the situation of
the taxpayer in contrast with the
extreme rigidity or inverse flexibility
of American assessment. In New
York City assessments continued to
increase for three years after the
collapse of property values in 1929.
(b) Entire freedom from confisca-
tory procedures against the property.
(c) Ease and certainty of collec-
tion, with practically no problem of
delinquent taxes.
(d) Exemption of vacant land and
idle property.
(e) Perhaps we should add, reduced
revenue from property taxes in times
of depression because, to the extent
that relief is afforded the taxpayer,
the taxing authority must necessarily
forego revenue. In this way, Eng-
lish municipalities automatically re-
linquish the "distressed" taxes upon
which our local governments subsist
for years at a time, with only Wal-
rus tears for the victims.
If the summary above may serve
to set out the essential differences
and lack of difference between the
two systems, what are the grounds
for choice between them?
Theoretical Aspect
Theoretically I am obliged to hold
that our property tax rests on sound-
er principle. Property ownership is
a valid index of financial ability
and is universally regarded as such
except, strangely, when discussing the
property tax. Sometimes it may be
a less accurate index than income,
but sometimes it is more accurate.
Of two men with $5,000 income
each, one of whom owns $100,000
worth of property and the other none,
the former certainly has an element
of taxpaying ability not possessed
by the latter.
Since, however, this analysis would
seem to indicate that the final im-
pact of both systems on the tax-
payer is essentially the same, we
may perhaps assume that both must
now embody much the same princi-
ple, whatever their original theories
may have been with one excep-
tion. This is the exemption of va-
cant land and idle property. Here
the difference in theory emerges
visibly. And whatever considerations
may be advanced, it is certain that
American thought will not support
the complete exemption of vacant
land and unused natural resources.
One-third of the area of Chicago
was vacant in 1930; much more of
it is vacant now, and destructive
taxation is partly responsible for this
new increment of vacancy. But why
one-third of the urban area should
be completely exempt from any con-
tribution to the city whose growth
created its value is not clear. To
Americans it doesn't make sense.
In fairness to the problem, how-
ever, we must concede that exemp-
tion of vacant land is not a neces-
sary feature of an occupancy tax.
It would be possible to set up an
occupancy tax, within whose frame-
work provision could still be made
for reasonable taxation of vacant
land and temporarily idle property.
With this adjustment I would con-
cede that any theoretical differences
between the two systems would large-
ly disappear.
Furthermore, the difficulties of ad-
ministration and the collateral evils
1944]
SHOULD U. S. USE OCCUPANCY TAX?
333
associated with property taxation in
this country have been such that
we may cheerfully waive any the-
oretical superiority in return for a
more workable system, if that can
be found.
Administrative Aspects
The evidence is convincing that the
British system has operated with
greater flexibility, better adjust-
ment to the taxpayer's situation, and
better administrative results than
we have attained in this country.
How far the latter is a matter of
the system and how far a matter of
British civil service and administra-
tion is open to question. Mr. Col-
lins speaks of difficulties being solved
by "skilled assessors on each side of
the table" and by "competent assess-
ors serving the tax authorities."
With competent assessors, supported
by the tax authorities, almost any
system will work.
It is not giving away any military
secrets to say that we do not have
these conditions in the United States.
We do have some brilliant excep-
tions, but exceptions conspicuous by
their rarity. If we do occasionally
get a "skilled assessor" around the
table, there will be a political boss
sitting at the head of the table and a
local political organization that
must be served. With political prac-
tices as they are in this country to-
day, particularly in the cities, it is
difficult to foresee any material
change in the quality of local tax ad-
ministration.
Under these conditions the diffi-
culties of applying an annual rental
concept throughout the whole field
of real estate and property taxation
seem almost insurmountable. Even
the more standard types of urban
property, such as office and apart-
ment buildings, would involve the
assignment of rentals to each tenant,
with the proper allocation of oper-
ating, overhead, and maintenance
costs. More difficult areas would in-
clude the department stores and
large commercial properties; indus-
trial plants, some of them gigantic
in size; public utility plants and
equipment; theatres; garages and
shops, large and small, operated by
their owners; farms, special types of
agricultural operations such as stock-
breeding, nurseries and seed farms,
greenhouses, poultry, and so on.
Finding a valuation for these prop-
erties is difficult enough. But for the
ordinary local assessor to undertake
to ascertain or impute a reasonable
rental for each of these units, many
of them situations in which no one
ever heard of "rental" and would
scarcely know what was meant by it,
somehow seems beyond the range of
practical undertaking.
This may be over-estimating the
difficulties, but, strangely enough,
I find in my collection of British as-
sessment manuals indications that,
under the variety and complexities
of modern forms of property, the
British themselves are finding new
difficulties. For example, one au-
thority, referring to the Finance Act
of 1931, says: 1
Speaking generally, the land value
will be represented by the price which
a purchaser would pay for the land
in the open market.
*W. E. Wilkenson, The Land Value
Tax A Guide to Part III, of the Fi-
nance Act, p. 8.
334
NATIONAL MUNICIPAL REVIEW
[July
This sounds suspiciously like the
"willing buyer, willing seller" phrase
of our own statutes.
Another manual states: 2
The practice of valuing theatres
and picture houses on a figure per
seat has come into great favour,
however. Sometimes hotels and
boarding houses are valued per bed,
and an attempt is made to value
golf courses per hole.
We have our difficulties, but it is
hard to see how these would be less-
ened by undertaking to "appraise"
the beds in a boarding house; and
it would require more than a com-
petent appraiser to "assess" a diffi-
cult hole on a golf course.
Further on the British assessor is
instructed: 3
If examples of rents are rare . . .
a percentage on capital value (i.e., the
price the property would fetch in
the open market) gives the mini-
mum rent the purchaser would re-
quire . . . and is prima facie evi-
dence of the rent he would presuma-
bly be prepared to give if he wished
to become a tenant.
Here we have assessment on "an-
nual rental," to be sure, but it is a
rental derived unblushingly from
capital value, and capital value in
the sense of ordinary market value.
If we have to go through all the
processes of determining market
value first in order to arrive at a
rental basis, it is apparent that the
problem of assessment is not sim-
plified.
And finally, at pages 137-138, we
are told:
The rental value of a hereditament
2 F. A. Amies, The Law and Practice of
Valuation for Rating, p. 66.
'Ibid., p. 63.
valued on structural cost is: A com-
mercial rate of interest applied to
the present day cost of reproducing
the hereditament. . . . Buildings are
valued on cubic capacity, i.e., the
number of cubic feet they fill, taking
outside measurements, this being
the normal basis employed by a con-
tractor in his estimates. . . . The
most important feature of the build-
ing is the substantiality of it.
Then to aid the assessor in apply-
ing our "brick and mortar" for-
mula, a table of cubic foot costs for
various types of structures is ap-
pended, which, except for differ-
ences in costs, might have been de-
rived from any American manual.
Some British Features Good
In short, under the changing con-
ditions affecting the forms of proper-
ty and the ownership and operation
of property, the traditional English
methods are becoming less applica-
ble. It would be a strange irony,
indeed, if we should abandon our
system for the English, just at the
moment when the English find it
necessary to shape their assessment
technique in the direction of our own.
It is a mistake to which great minds
are prone, like Bacon laboriously
translating his essays into Latin,
in order to preserve them, just at
the moment when Latin was to be
replaced by native English as a
vehicle for preserving the greatest
literature of the world.
But whatever we may do about
the British system as a whole, there
are three features of British prac-
tice which we may borrow, with
enormous benefit to ourselves.
The first is a lesser dependence
upon local property taxation of any
kind and a larger reliance upon
broader types of taxation that can
1944]
SHOULD U. S. USE OCCUPANCY TAX?
335
be administered by the states, with
allocation of portions of the revenue
to the local governments.
The second is a larger reliance
upon income, in the form of capi-
talization of income, as a factor in
determining the valuations of prop-
erty. This is a technique available
to assessors, so far as the writer is
aware, in every state in the Union,
subject only to reasonable limita-
tion imposed by the courts.
The third is the more flexible ad-
justment of assessments to the actual
course of property values, in contrast
to the rigid maintenance of assess-
ments to suit revenue needs, regard-
less of the trend of actual values.
If we can incorporate these fea-
tures, we shall be making substantial
progress and may perhaps look with
complacency upon the British ap-
propriation of our "brick and mor-
tar" method, where there is no other
way to determine the "substantiali-
ty" of a hereditament.
Other Opinions
EDMUND A. NIGHTINGALE
School of Business Administration
University of Minnesota
ANY suggestions relating to the
substitution of the British sys-
tem of assessment of real property
for the existing American system
should be considered only in the light
of the full implications of such a
fundamental change. Comments on
the British rating system will be re-
stricted to that of England and
Wales.
Ratable value of industrial here-
ditaments used for industrial pur-
poses (factories) and freight transport
hereditaments used for transport pur-
poses (railways) is denned at only
25 per cent of net annual value there-
of by the Local Government Act of
1929. These industrial and freight
transport properties accounted in
1938-39 for only 9,571,832 of the
total ratable value of 310,781,944 in
England and Wales. Agricultural land
and buildings excluding dwellings,
vacant sites and unoccupied proper-
ties any optional compounding ar-
rangements excepted contribute
nothing in the general case to meet
the cost of providing local services.
Steadiness in the aggregate of rat-
able values of the local unit of gov-
ernment is apparently regarded by
Mr. Collins as a sine qua non of the
rating system. Other British author-
ities, however, emphasize the advan-
tages of stabilization of rates (shil-
lings and pence per pound of ratable
value) as a psychological factor
which encourages the development of
industrial and commercial enterprises.
Fiscal adequacy, however, is gen-
erally regarded as one of the basic
criteria of any major tax. Rate col-
lections in England and Wales dur-
ing the last five years have averaged
around 200,000,000. According to
the 1942-43 Summary Report of the
Ministry of Health, rates amounted
to only one-third of the income side
of the revenue account of the local
authorities in 1939-40. National gov-
ernment grants and reimbursements
were 181,899,737 or about 30 per
cent.
The report of the Bureau of the
Census on the finances of 92 leading
American cities for 1942 indicates
336
NATIONAL MUNICIPAL REVIEW
[July
that taxes accounted for 75 per cent
of the general revenues of these ci-
ties ; property taxes alone supplied
65 per cent of general revenues. Lo-
cal units of government in agricul-
tural areas still rely upon property
taxes as the chief source of revenue.
Notwithstanding admitted adminis-
trative weaknesses in American prop-
erty assessment, substitution of the
English rating system and its derat-
ing provisions for certain industrial,
freight transport, and agricultural
properties would raise serious fiscal
questions. Losses in revenues of the
local units would undoubtedly have
to be made up through grants by the
state governments, financed presum-
ably by increases in state taxes ex-
cluding any existing levies on prop-
erty. It is even conceivable that some
state governments might look to
Washington for funds.
Those familiar with the proceed-
ings of the annual conferences of the
Incorporated Association of Rating
and Valuation Officers, the Institute
of Municipal Treasurers and Ac-
countants, the representations of the
Central Valuation Committee, the
recent I. A. R. V. O. interim report
on the rating system, and the unsuc-
cessful efforts of the London County
Council to get the British govern-
ment to introduce legislation which
would empower local authorities to
levy a rate on site value are fully
aware of British criticisms of the
weaknesses and incidence of the ex-
isting rating system. Significant les-
sons in administration, however, can
be learned from the able career men
who are the rating and valuation offi-
cers in the more important local units.
LAWRENCE G. HOLMES, Secretary
National Council
of Real Estate Taxpayers
>ROPERTY taxation based on
capital value (ad valorem taxes)
releases forces which are economical-
ly and socially undesirable.
Property taxation based on the
usefulness of property and measured
by the amount paid for that use
occupancy tax principle avoids
those undesirable effects and still pro-
vides adequate and stable revenues
for essential government services.
The American ad valorem tax is
levied against the physical prop-
erty and against ownership of prop-
erty regardless of its productivity or
the ability of the owner to pay. This
was workable in the past. Sensation-
ally increasing population in Ameri-
ca created demands for real estate
which produced annual gains in prop-
erty values enough to offset annual
increases in ad valorem taxes. The
fundamental weakness of the tax on
capital value became apparent when
the population pressure began to ease
off which, with other economic fac-
tors, caused the financial slump start-
ing in the 30's. Tax foreclosures
against billions of dollars worth of
private assets is one of the visible re-
sults. Its concomitant threat is com-
plete socialization of land through
this forced reversion to government
ownership.
The dual principle on which occu-
pancy taxation is based avoids these
pressures and unhappy results. First,
the property assessment is based on
the productivity or "value-in-use."
Second, the levy is directed against
1944]
SHOULD U. S. USE OCCUPANCY TAX?
337
and paid .by the user, whether he be
owner or renter. The physical prop-
erty is not taxed. The tax is against
the earning power or productivity,
not against bricks and mortar. The
user of the property is responsible
for paying the taxes, not the owner
if he is not the occupant. Hence pri-
vate ownership rights are inviolate
against despotic taxation or conspir-
acies to use the power of taxation
as a power of destruction.
Other injurious forces which are
unleashed by ad valorem theories
are controlled under the use taxation
principle. For example, ad -valorem
taxation creates the need to build on
vacant land just to try to pay the
taxes so-called taxpayers. The use
tax system says in effect, "No use,
no tax."
Only the United States and Can-
ada hold on to the ad valorem tax.
England has had 343 years experi-
ence with the occupancy tax, so the
idea can hardly be called a radical,
new experiment. The social and eco-
nomic results seem much preferable
to the ad valorem results. The fact,
for instance, that private ownership
is safeguarded from tax forefeiture
is in itself enough to recommend the
principle to a democratic culture.
In these three centuries adminis-
trative and technical difficulties have
been met and solved. America, there-
fore, could start with the benefit of
long laboratory experience to guard
against technical errors.
Such a start is being made in the
United States. Modern tax assessors
are coming more and more to depend
on the income of real property as
the cornerstone of their valuation
computations one of the keystones
of the occupancy tax principle. Fifty
per cent of the U. S. property tax
problem will be solved when dollars-
and-cents facts replace esoteric the-
ories of valuation for tax purposes.
ALBERT W. NOONAN
Executive Director
National Association of Assessing
Officers
OHOULD the United States adopt
M the British system of assessing?
My answer is "No."
It is my understanding that under
the British system farm lands are
exempt, all vacant lands are exempt,
unoccupied improved properties are
exempt at the option of the owner,
while industrial and public utility
properties pay only one-fourth the
rate charged occupants of residential
properties. The tax is a legal obliga-
tion of the tenant, not the owner.
If. not paid, the tenant's personal
property may be seized, or he may
even be sent to jail, but the owner
incurs no penalty. In other words,
the burden of supporting local gov-
ernment is imposed almost entirely
on the resources of the tenant popu-
lation. We seriously doubt if such
pverzealous regard for landowners
would be tolerated long in America.
Mr. Collins attributes the contin-
ued success of the system in England
to two factors tradition and the pro-
nounced stability of tenants both
of which would be absent in this
country. Perhaps it is also due to
the fact that the tax has not been
subjected to severe strain, in that
many municipal functions in England
education, safety, health, etc.
338
NATIONAL MUNICIPAL REVIEW
[July
are heavily supported by grants from
national revenue, whereas in America
such services are financed almost en-
tirely from the property tax. Accord-
ing to one report, national grants were
47 per cent of municipal revenue in
1939-40.
In his article Mr. Collins mentions
that in certain districts the owner,
rather than the tenant, pays the
taxes, whether the premises are oc-
cupied or not. It should be noted
that this is a matter of agreement
rather than legal obligation. Some
districts permit such agreements
where the ratable value of dwellings
is below a certain but quite small
amount and the rent is paid more
frequently than quarterly. In consid-
eration of his agreement to pay, the
owner is granted discounts ranging
from 5 per cent to 20 per cent. Thus,
if the properties were almost contin-
uously occupied, it would be to the
advantage of the owner to enter into
such an agreement, otherwise not.
These are features which I don't
believe the American people would
like. In passing, it should be noted
that there has been considerable
agitation in England in recent years
to supplement the occupier's tax with
a site-value tax or to abolish it and
substitute a municipal income tax,
but neither proposal has yet acquired
sufficient support.
One feature of the British system
which deserves consideration is the
handling of personnel. Space does
not permit much comment except to
say that great emphasis is placed
upon technical and administrative
competence, security of tenure, ade-
quate compensation and a promo-
tional system unhampered by resi-
dence qualifications all of which is
encouraging to career service. On the
other hand, we have noted many
organizational defects which would
be as undesirable here as apparently
they are in England.
HARLAND C. STOCKWELL
Assistant Executive Secretary
Chicago Civic Federation
T BELIEVE that the present ad
- valorem system should be basi-
cally maintained in the United
States, but that more weight should