F. Tax exempt land.

The extreme form of preferential assessment is complete exemption, about which so much has been written and so little said. To raise this topic is to arouse every latent anti-cleric, but their paranoia is out of proportion to the facts, at least in this country, unless we blame the churches for the cemeteries, which really are vast. Cemeteries in Milwaukee, Wisconsin, with space for the corpses of ages to come, preempt more land than all industry. Otherwise let us leave the dead past to Henry VIII and survey the present.

While serving on a Commission on Property Tax Reform in British Columbia I compiled extensive data on this matter and learned to look to the Universities -- not to their libraries but to their real estate records, if they keep any. Accordingly in California I find that UC-Riverside holds some 400 acres of urban land splitting up and repelling needed industries from its matrix, the City of Riverside; and another 840 acres blocking the path of the new boom city of Moreno Valley. It has no intention of relinquishing any part of either tract because they are tax free and the annual opportunity cost never appears in the budget.

But that is peanuts. Statewide the UC system holds 58,000 acres in fee. Meanwhile back at the "Leland Stanford Junior Farm" there are 9,000 acres in Palo Alto, less than the UC total but in perhaps the most desired industrial and residential area in the country, whence electronics firms are spinning outwards to find industrial sites. The area of San Francisco, for comparison, is 27,000 acres.

Around older eastern campuses a wry city planner has remarked that "Slums must create great universities, because it couldn't possibly be the other way around."

But as bad as we academicians may be we yield to the Pentagon, concerning which I will merely cite one small item, The Presidio in San Francisco, case closed.

Some assessors keep values on exempt land which often are not current because the incentive is weak to give priority to work with no payoff. On the other hand for someone wanting to estimate the subsidy value of exemption such values are very, very interesting. The social tragedy, however, is that the value of the subsidy to the beneficiary is usually much less than the cost to society.

G. Minerals.

Minerals generally enjoy a high degree of preferential assessment. California is said to do an excellent job of valuing them but even here the man in charge, Robert Paschall, writes articles favoring a net proceeds tax instead. Things get worse as you go east, reaching rock bottom in Appalachian coal, noted earlier. The problems must be more institutional than physical: underground coal reserves are easier to measure than oil and gas. One notorious institutional problem is the provision of the Montana State Constitution that lands bearing copper shall never be assessed higher than the original price of $1.25/acre paid to the U.S. Land Office, a modest figure indeed for what was for decades "The Richest Hill on Earth" in "The Treasure State."

The preferential assessment of farmland based solely on farm income is an excellent way to keep mineral values off the tax rolls, at least until there is a mineral lease. The share of U.S. farmland that is prone to commercial minerals is perhaps 15%.

Minerals offshore in the OCS are in no state or local taxing jurisdiction. Upland Federal lands are, and local assessors can get taxes from private "possessory interests" thereon. Not so under the salt, however, and that is where so much of the action is today.

H. Water.

Where there is a surplus of dry land, water is limitational, so part of the economic surpluses attaching to land are shifted to the water, and licenses to appropriate water assume great value. Some of those values show up on the tax rolls, mostly where some resented southern intruder is tapping northern waters. Thus San Bernardino County taxes Riverside, and Inyo County taxes Los Angeles. But those are exceptional, and more symbolic than substantive.

Licenses are colloquially called water "rights", and the colloquialism is tendentiously adopted by some lawyers, but such usage is legally presumptuous considering the precarious nature of licenses. The legalisms are complex and shifting, but the upshot is that many licensees have the best of both worlds: an asset with the economic substance of real property but a legal form that exempts it from the property tax.

Acquiescence in this condition is rationalized by presuming that the value of the water is reflected in the market value of the land to which it is applied and is, in some measure, "appurtenant". It is a half truth. The other half is that many licensees hold large surpluses of wasting waters which add little to their land values, and whose opportunity cost simply disappears from any social accounts.

It is widely believed that the removal of "legal obstacles" to free transfers of water will remedy the problem, and that such relief is imminent in this libertarian and deregulatory era. It is a touching faith which I was once guilty of encouraging. It is redolent of the 19th century dogma that "free trade in land" would solve the Irish land problem and reform and uplift English agriculture and modernize Europe and so on. Assemblyman Richard Katz of Sepulveda successfully carried legislation to remove legal obstacles to transfer of water rights in California. That was two years ago, but the first ensuing transfer has yet to occur.

There is plenty of frustrated demand. The problem is that it takes two to tango and the suppliers are in no hurry. Real estate agents abhor the unmotivated seller, and a resource holder free of cash drains and with no moving deadline is the least motivated seller in the world. There is opportunity cost, of course, but keep your eye on California and see how fast that moves the market. Meantime a substantial share of our limitational water resource remains without economic valuation because it is not assessed and it does not move in any market that creates recordable values.

That points up the mutual dependency of markets and assessments, a mutuality that is universal. We all know that assessments presuppose markets, but assessments help to make markets, too. Without assessments and land taxes, land markets turn to glue. Where there is neither one or the other some drastic exogenous force may be needed to start the system going. Was that not the historical mission of the Northwest Ordinance and the Homestead Act?

As valuable as water itself is the aquifer or reservoir site to store the water. Most of those escape assessment almost completely.

This article is an excerpt from an invited paper presented at the Assessment Workshop cosponsored by USDA-ERS-NRED and the International Association of Assessing Officers, Chicago, IL, June 25-26, 1985. The paper was published in Almy, Richard R., and T.A. Majchrowitz (eds.), Property Tax Assessment (Chicago: U.S. Department of Agriculture, International Association of Assessing Officers, and The Farm Foundation, 1985), pp. 91-109. The whole paper will be published daily in increments over this week and part of next week. This is excerpt 6 of 9.