Overhauling America’s Property Tax System May Go a Long Way Towards Solving the Housing Crisis
The land value tax (LVT), which for years primarily had a following among a niche set of urban economists, has started to receive substantial mainstream acclaim over the past decade and may partially hold the answer for helping to solve the U.S.’s housing shortage.
At its fundamental level, the LVT is a tax on a piece of land rather than on the property sitting on top of it. The way property taxes work in most U.S. municipalities now, is that a property owner’s tax is a direct function of any improvements they may or may not make to the property. For example, a parking lot will have a significantly lower assessed value than if there was a ten-story apartment building on top of the same lot. Many times, this system disincentives property owners from making improvements that would inherently provide more value to the surrounding community, like creating new housing, as that would lead to a higher assessed property value and tax bill.
While a LVT is not some elixir that will solve all of America’s housing woes overnight, it encourages landowners to make more efficient use of their property. With a LVT, a property owner’s tax burden only goes up if the value of the land itself increases. Per the current property tax system, if you were to own a valuable piece of land, it may make sense to just sit on your asset, let it appreciate in value over time, and then sell it off to another party. While you may want to make better use of the land and develop a building on-top of it, the risk of having to pay a higher property tax bill on the developed plot may not make the cost and stress of construction worth it.
A LVT would work particularly well in high-density settings. Per Noah Smith, urban property has value for several reasons. 1) Land has value due to its location. I.e. Proximity to where you work or being close to popular shops and restaurants. 2) People want to live near one another so it is easier to socialize with friends and family. 3) As Edward Glasser has written extensively about, skilled workers such as engineers, creative workers, and scientists, have proven to be more productive when they live in high-density areas and in-close proximity to one another. Because of this, the land in many urban areas is worth more than the structure sitting atop it.
Because landowners in high-growth urban areas reap such large gains from capital appreciation, there is little motivation for them to build a new structure.
In 2015, Henry Graber wrote an article for Slate that gave a prime example of this. On the West Side of Manhattan, near the Highline, there was a parking lot charging drivers $40 a day to park in its vacant lot. The annual property taxes for the lot were $9,404. Adjacent to the lot, a seven-story building was paying around $250,000 in property taxes a year. It makes sense why the owner of the parking lot would have no interest in increasing his tax bill at least over 26 times and developing a building on an already moneymaking property.
A LVT has been attempted in a few municipalities, and its results seem to be pretty convincing for helping to encourage the creation of more housing, and it has even been shown to lower taxes for most residents and businesses. Allentown, PA adopted a hybrid version of the LVT in 1996, a split-version system that kept some property taxes in-place. Here is an article detailing the experiment. When Allentown implemented the split-rate system, nearly 75% of properties saw some tax cut and the number of building permits increased in Allentown by 32% prior to the LVT being implemented. Around 90% of homes saw their tax liability reduced.
While the LVT has a plethora of benefits versus the way real estate is currently taxed in America, it is not a panacea that will once and for all solve the nation’s housing issues. Per Jerusalem Demsas’ recent piece in Vox, valuing land separately from its improvements would be no small feat. While I imagine there are some technological innovations that can be deployed around this, it is not the most straightforward issue to figure out. The second concern is that it would unfairly penalize current landowners who bought property under the assumption that they would be operating under the old-property tax system. One solution to this, could be a one-time tax break that municipalities could provide to these landowners or cities could grandfather in a LVT.
The property tax system in the U.S. should incentivize rather than punish property owners who want to build on the land they own and better their communities. Implementing a LVT would go a long way towards helping to achieve this.