Thoughts on Property Tax

This post was written for The Ground Floor by Bill Hudnut, senior resident fellow/Joseph C. Canizaro Chair Public Policy at the Urban Land Institute.

How about restructuring the property tax across America to install a two-tiered system? More tax on those horizontal pieces of empty land and asphalt, less on the buildings. That is, reduce the tax rate on homes and other improvements, and substantially increase the rate on the site value. I think such a system would induce more compact development and more infill work. 

Pittsburgh has used the system for years until problems arose with the way assessments worked out, as my colleague and former Pittsburgh Mayor Tom Murphy has told me. Nonetheless, if assessments are fair, the higher land tax would bring vacant or woefully under-used central sites into use, giving new life to inner cities and reducing sprawl. It would also stem land speculation, which is the big engine behind house price escalation, thus stabilizing neighborhoods and keeping sale prices and rents more affordable. The land tax returns to government--the values it creates with bridges, roads, and other infrastructure--helping to pay for maintenance and necessary improvements.

Years ago, in 1972, ULI issued a Research Monograph (No. 19) by R.W. Archer, discussing the Australian States' use of the site value system of taxation. It quoted an American land economist, Professor M. Mason Gaffney: "If the real estate tax as it continues to grow (in America) is not to scorch the earth, it must be modified to exempt improvements. That can be done by focusing it on the base of land value or site capability, which not only permits improvement but positively prompts it." In short, a two-tiered property tax system taxes land and building values separately. Higher taxes on the land, lower taxes on the building, discourages a land holder from leaving his land fallow and speculating on its increased value, and conversely, encourages improvements on the land and redevelopment. The monograph used Sydney Australia as a case study, but its general point, that a site value tax system puts "pressure on owners to sell their property for redevelopment if they cannot or will not redevelop it themselves."

1972 was over a quarter of a century ago; but could there be here an idea whose time has come?

Comments

[Brian]

Doesn't this induce more sprawl by placing more of a burden on those on the edge who aren't interested in developing their land?

[Joshua Vincent]

Actually sprawl is mitigated by stressing/incentivizing development and infill in the urban core. That's where we find most of the high site values and land values. A great example is the urban core of Philadelphia, dominated by flat top lots, vacant lots and other pits, that have been held for decades.

That's why the land value tax has most recently been endorsed in Connecticut by many of the major environmental groups along with urban governments and builders (yes, a strange amalgam):

New London City Council
New London Landmarks
Connecticut Coalition for Justice in Education Funding
Connecticut Sierra Club and SECT Sierra Club
Rivers Alliance
Connecticut Conference of Municipalities
New London Main Street 's Economic Development Committee
CT Home Builders Association
New Haven Mayor's office

The Pittsburgh experience, although lost due to a political fracas in 2001(in which Mayor Murphy was unfairly treated), fairly conclusively demonstrated that land value tax worked, especially for the downtown commercial sector, and lower to middle-income homeowners.

Harrisburg, home to 2006 US Mayor of the Year Steve Reed, has also concluded that the effective tax rate has been kept stable for a quarter-century, and the tax base has increased, with the help of a land value tax, in conjunction with more traditional development plans.

The sprawl issue has been looked at in Australia, and there is sprawl, but around Sydney, the urban/rural divide is pretty clear, if Google Earth is any indicator.

[LVTfan]

You might go explore Mason Gaffney's website, at http://www.masongaffney.org/ -- particularly "Repopulating New Orleans" and "New Life in Old Cities."

More of Mase's writings are at http://www.wealthandwant.com/ and http://www.schalkenbach.org/

[H W Batt]

The reality is that the higher the tax on land value the greater the incentive to earn a return on the carrying costs. In fact if all the land value were taxed by the full collection of ground rent, it could easily supplant taxes on labor and goods. Moreover, pricing land totally in terms of its rental value would make its market far more liquid, increasing economic efficiencies and rationalize land use configurations. Lastly, because land has an inelastic supply, the tax cannot be shifted, meaning that it's highly progressive: tenants wouldn't pay a dime and neither would anyone else who didn't own land.

[Will Wright]

Could anyone explain how this might impact urban green space (including spaces like yards/gardens, and privately owned nature preserves)? It sounds as if there would be increased pressure to develop every piece of land within the urban landscape, with limited consideration to the value of undeveloped land (as opposed to underdeveloped land).

[Joshua Vincent]

Re: Green Space,

It is vital that we differentiate between the reality of public space and privately owned space. We have all seen "Current Use" property "preserved" until it was time to cash in. That's not what we want.

In an urban setting, the community has decided what privately owned green space is through TDR's, easements, land trusts, etc. Each of these restrictions reduces the actual and potential land value by law by removing some of the "bundle of rights" that gives a site its highest value. A land tax imposed at a higher rate would not collect an unreasonable charge.

What this plan targets is not land per se, but land value. Land values are what people will pay or rent for a certain site. Most often, even after years of urban decline, the value of urban land in the core - land which once was built upon - is quite high, as it is served by infrastructure and services. That's the large target of a land value tax.

Allentown has had a land value tax for about a decade, and there has been some reduction in vacant lots, but no mass de-greening of a city noted for its greenspace.

I think the key is to make more small spaces public, by removing them from the tax rolls; the pocket park concept. It raises surrounding property values and assures that a green space does not disappear as green cash onto the landowner's pocket.

[LVTfan]

Will, so-called "privately owned nature preserves" are usually a case of land speculation: keeping a piece of land as a fine nestegg for a grandchild, ignoring the current needs of other people, who must walk around, drive around, pay for police patrols around, and sewers around, and water supply around, etc. They are closed off from the public. Public parks, whose presence benefits all would use them, are very welcome.

Private "parks" would likely give way to land uses which meet pressing human needs -- housing, jobs, etc. They could be turned over to the community and made available to all as recreation space, if there was general agreement and the budget available to maintain it. The presence of a park generally creates an increase in land values in the surrounding area, unless it is perceived as a nuisance for some reason. (Think of Central Park in NYC. Views of the park are very valuable.)

And good development of centrally located sites will preserve greenspaces on the fringe from premature development. Ag land will stay ag; wild will stay wild.

[Roy Langston]

There is a difference between publicly accessible green space -- parks -- and privately owned vacant lots choked with weeds and trash. Taxing land value does away with the latter, not the former, because an appropriate reserve of parkland increases the taxable value of nearby land by more than the foregone tax revenue from the parks.

[Walter Rybeck]

Bill Hudnut's excellent piece asks if the land value tax is an idea whose time has come. It is extremely timely. The nation is about to launch a massive public works program. it will inevitably generate billions of dollars worth of new land values. Without a land value tax, these values will be raked off by land speculators, diminishing the stimulant effect of the new infrastructure. With a land value tax, the new or improved public works will have maximum positive impacts. And they will largely pay for themselves.