GEORGISM RISES FROM THE GRAVE

The association of progress with poverty is the great enigma of our times. ~ Henry George 

Georgism? What’s that? Does it have anything to do with a dearly-departed former Beatle or a cult affiliated with our first president? Nope. Until recently, only students who took a course in the history of economic thought, like I did eons ago, ever came across the mention of Henry George. He was a 19th century journalist and political economist born in Philadelphia just like me, who became famous for advocating a single, solitary tax on private land to support a government’s expenditures for public benefit.

His groundbreaking book Progress and Poverty, published in 1879, argued that a tax on land’s value should be the sole basis for determining public tax revenues, rather than taxing income or sales. Several million people bought his book, which helped stimulate this nation’s Progressive Era. His land-based fiscal philosophy became known as Georgism. In 1886, Henry George ran on the United Labor party ticket to be the mayor of New York City. He lost, as did the Republican ticket’s Theodore Roosevelt.

Henry George

George deemed the value of land depends on its permanence and immobility, as well as the economic activities that are pursued on top of it. He thought land’s unique and enduring characteristics would eliminate the need for all other types of taxes. George fervently believed in a tax based on the value of land but not on the improvements on it. George’s promotion of a single Land Value Tax (LTVs) influenced tax policies in the US as well as other nations. Denmark’s “ground duty” land tax, implemented almost a century ago, remains a key component of its federal tax system. Other nations that have used LVTs in various ways include Australia, Germany, Lithuania, Mexico, Singapore and Taiwan.

After the turn of the 20th century, Georgism mostly slumbered in the US. However, once again discussions have surfaced about Georgism as a result of two events.

The first event. A Kansas City trial jury’s decision last month determined the National Association of Realtors (NAR) and major real estate brokerages have conspired to keep their commission fees artificially high. The jury apparently believed this cooperative behavior was tantamount to price-fixing, and thus not consistent with anti-trust law. Consequently, the jury awarded $1.8 billion to a half-million Missouri home sellers. Georgism is not directly related to this case, but it hovered around it. Anyone who’s ever purchased or sold a dwelling knows the standard 5%-6% commission has been inviolable that realtors on each side of the transaction jointly agree between themselves how to split their fees before the sale. This is ever so slowly changing. Realtors’ commissions have been dwindling especially in states like California where housing prices remain stratospheric.  The average 2022 California realtor commission was 4.91%.

This court decision already has sent tremors through the real estate and financial industries. Zillow’s publicly-traded stock dropped about 7% after the verdict was announced. Realtors fear that it will transform their century-old cooperative fee system. Without such fee cooperation, buyer agents’ fees are likely to be more exposed because they would have to compete on the worth of their services. Separating the buyers’ and sellers’ agent commissions could also result in lower home prices announced through the highly-used Multiple Listing Services (MLS) that realtors own.

Some real estate specialists believe there is a surfeit of realtors among the 1.6 million active agents, including many part-timers. One industry authority characterizes the US real estate market as “a congested, part-time industry where the part-timers are draining income from the full-timers. This glut of agents is killing the industry.” This sense is reflected by realtors’ 2022 median annual salary of $52,000.

Other experts are predicting that buyers agents could veer to an explicit multi-level fee system, where the amount of service that agents provide their clients will depend on the agreed-upon fee level. A higher fee, say 3%, might result in more personally-provided services by the realtor like personal showings of newly-listed homes that are consistent with the potential buyer’s stated preferences. A buyer who has agreed to a lower 1% commission fee might receive email announcements of newly-listed MLS homes for sale that are consistent with the prospective buyer’s desires.

Predictably, the NAR is appealing the court’s ruling. If the federal trial decision is upheld, the $100 billion that US consumers pay in real estate commissions will likely plummet, conceivably as much as 30%. That would be a significant victory for lots of property buyers and sellers way beyond Kansas City and a potentially significant loss for the NAR’s realtors.

The second event. Detroit’s three-term mayor Mike Duggan asserts his city’s come-from-way-behind efforts to revitalize itself would be much more fruitful if it wasn’t being stifled by real estate speculation. Absentee owners who inexpensively purchased plenty of Detroit properties after the Great Recession have done next to nothing in the way of beneficial improvements. In June 2020 Detroit’s property vacancy rate was over 20%; it has dropped only a bit since then. The mayor believes these shadowy investors are taking advantage of the city. They’re speculators, passively waiting for their land’s value to increase without undertaking any direct investment to improve their properties.

Mayor Duggen is not at all happy about this. As he puts it, “Blight is rewarded, building is punished.” The mayor’s proposed salve is a relative of George’s Land Value Tax, although he apparently has never heard of Mr. George. The mayor wants to raise property tax rates on unimproved Detroit land, and lower them for land that has existing structures which are occupied. Perhaps Henry is smiling from his grave. If the mayor is successful, Georgism may be renewed as it captures Detroit territory.

Like most municipalities, it's no simple matter to modify property taxes in Detroit. Mr. Duggen first needs approval by the State of Michigan. So far, lawmakers in Lansing have not been moved into action and are dubious of the merits of the mayor’s proposed new property tax. If and when the legislature approves it, Detroit voters also would have to vote their support of the new tax.

Does it take just 2 steps to tango back to a revitalized Georgism in the 21^st century? Maybe, but breath-holding isn’t recommended. Nevertheless, lowering land taxes on improved, inhabited properties is likely to be an appealing idea for many.