Wednesday, January 7, 2009

Restructuring Property Tax to Land Alone

I don't remember posting this when it popped up, but its something I remember a classmate discussing in grad school and I just found it again after the break. At the ULI blog:

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.

I think this is a very interesting idea. This would keep large swaths of downtown land from continuing on in life as parking lots. But it might also have the effect of having something built, but not quite to the density that it really should be over the long term.


The Urbanophile said...

I presume you are familiar with the works of Henry George?

The land value tax is not well known, and its supporters are often fringe figures or make overly grand claims for what it can accomplish, but it has a lot going for it.

1. The supply of land (that is, sites, not actual dirt) is perfectly inelastic, thus taxing land does not distort production.

2. The value of land, unlike the value of many other things such as our physical house, depends little on what the owner himself does, but often depends on the community as a whole, or on the provision of government infrastructure paid for by all of us. Land profits are mostly speculative.

3. It encourages high intensity of usage and rewards productive behavior. Today's tax system punishes the person who builds a high rise with a huge tax bill while rewarding the person who tears down a historic building to create a parking lot. This is perverse.

This only scratches the surface. There are some technical and transition challenges associated with a land-only or split-rate tax, as well as legal problems in many areas, but there is a heckuva lot of goodness in it.

kenf said...

The only problem I can see is it might encourage the destruction of older buildings that don't generate enough income. Remember, we need a stock of older buildings to provide lower cost space for "marginal" businesses and as a way to provide some affordable housing.

Alon Levy said...

Kenf, in many older housing markets, the problem is too few new buildings, not too few old ones. Manhattan is a good example: many neighborhoods have hardly any building postdating 1950 apart from housing projects.

Anonymous said...

Think also about implications for sprawl at the edges (which seems to have tax-related incentive problems no matter what).

Under a traditional tax regime, the value of undeveloped land at the edge of a city rises, creating an incentive to develop it in order to cover the tax burden (value rises because of potential use, forcing the potential to be used).

Under a Prop 13 tax regime, new homeowners want to buy in the sprawl to get the home at a law price before the land value rises (so that they can lock in the new tax rate).

Under this proposal, with a higher share paid by land, the effect seen in traditional tax regimes may be strengthened.

Not sure what to say, property tax is tough.

neroden@gmail said...

This is not the most effective thing to do. It's not a bad idea but attempting to determine the difference between land value and building value is nearly impossible -- attempting to determine the combined value is already bad enough.

The most effective thing to do is to tax property according to the cost of providing city services to it -- stuff like roads, sewer, water, power, police, etc. This is substantially higher per capita for more spread-out areas -- the running costs are *MUCH* higher and the capital costs are higher whenever new construction is involved.

For example, builders should (a) be required to pay the full cost of constructing new sewers, water lines, roads, etc., including the costs of new capacity in the trunk lines they're feeding into; and (b) be required to pay compensation for loss of open space, wetlands, the local ecology, etc.

Fire services are actually largely about protecting buildings, and in that case it's actually appropriate to tax based on the value of the buildings -- though clearly it also should be related to the area's flammability. But ad valorem taxation doesn't make sense for very much else. Maybe for police, who also spend much of their time on property crime. Maybe.

Anything which isn't related to providing services to property (schools, for instance) shouldn't be funded by property tax. Period. Fund this stuff, stuff like schools, from the income tax if possible. This would, by itself, cut property taxes in half in much of the country, and by larger amounts in big cities than in small towns. (And would solve the problem of inequitable school quality.)

If you have anything left which can't be funded from income tax (general local government overhead, special projects) -- well, much of that is for the benefit of businesses, so fund it from the sales tax.

The property tax is badly overused in this country, and it's just a historical artifact; it was one of the oldest taxes to be established, it's relatively simple to administer and enforce, so it's just sort of stuck around, an archaic and troublesome mistake.