Common Ground OR-WA
SPOTLIGHT

How a Land Value Tax Can Motivate Reluctant Landholders

September 16, 2022

The September 2 issue of Willamette Week published an article exposing the case of a derelict building on the 2800 block of NE Alberta Street, owned by Gregory Martin who over decades bought up real estate in rapidly gentrifying Northeast Portland.  Besides multiple buildings owned by Mr. Martin that are abandoned or falling into disrepair, the Alberta Steet parcel has accumulated years of unpaid property taxes.  Relatives filed a judgment against Mr. Martin resulting in a lien on the property, claiming damages and repossession.  Nevertheless, neither the family or the owner appear interested in selling the debris-strewn 7,800 square foot lot and the 1,377 sq. ft. dilapidated building.  Perhaps the parties of interest realize that land-holding is a potentially profitable enterprise.

Shrewd investors will capitalize on a rising land market by purchasing properties in high value locations, letting existing buildings deteriorate while holding onto the land.  The expectation of windfall gains from soaring location values compounds inflationary pressures, as others join in the race for maximizing unearned profits from eventual resale at higher prices.  Land speculation leads to a tightening of the real estate market and inefficiencies in the allocation of urban land resources.   Neighbors, adjacent property owners, and prospective developers all suffer from the socially detrimental activity of “slumming.”

Has anyone given thought to how Oregon’s property tax system encourages this kind of building neglect?  Slumlords know that if they did repair their properties, their tax bills would increase.  The present method of taxing land and buildings at the same rate is not neutral in its affects.  It encourages unwise land use practices by imposing heavier financial burdens on property improvements and lighter burdens on under-improved parcels.   

Fortunately, Common Ground-OR/WA possesses a set of data from the 2017-18 Multnomah County assessor’s files that can shed light on how the current property tax regime and a reformed tax system incentivizes negative and positive behaviors.  We engaged the Northwest Economic Research Center at PSU to conduct a comparative tax simulation study of the Alberta Arts District in Northeast Portland.  The NERC land value taxation report was released in 2019.

The real market value (RMV, in 2017) of the parcel at 2812 NE Alberta St. is $358,990.  The lion’s share, $325,610 or over 90 percent of the total value, is in the land due to the building’s deteriorated condition.  But, as we all know, because of Measure 50 limitations on individual property assessments (three percent increase per year beginning in 1993), the RMV is not the tax base, but rather the maximum assessed value (MAV) combining land and improvements.  By 2017 the taxable MAV on this parcel was down to $15,310.  Mr. Martin’s 2018 tax bill comes to a sum total of $399.

If the tax base were not limited by M-50, and instead the RMV was used to calculate the tax levy, Mr. Martin’s bill would have been $3,816.  We can probably assume with some confidence that a property tax bill of $400 is not sufficiently daunting to discourage him from holding onto the parcel longer.  In fact it is ridiculously low; the average tax bill (based on MAV) on developed commercial sites in the district is $7,344.

Under Oregon’s convoluted tax system, taxes on vacant and underutilized parcels such as this are extremely low.  If a property is put up for sale, the tax liability is in effect figured into the resale value.  The capitalization effect allows landowners to fetch a higher price than what could be obtained had the tax bill been higher.  Nevertheless, there is no incentive to sell the property soon because having such a minimal annual tax outlay lowers the holding costs.  

Would this property’s tax bill of $3,816 based on true market value instead of MAV boost the incentive to sell or redevelop this parcel?  Not likely; the average RMV tax liability on all developed commercial properties in the district is $14,890.  

The current tax system encourages land holding with the expectation of eventual windfalls at resale by imposing heavier fiscal burdens on property improvements and lighter burdens on under-improved parcels.  If we changed the system to a split-rate model – a land value tax (LVT), the perverse incentives are switched to positive incentives.  Let’s see how:

First, we abolish M-50 limitations and revert to the normally higher RMV assessments; then we select two different tax rates that apply uniformly to all properties in the county – raising the tax rate on land assessments and lowering the rate on improvements.  For modeling purposes we choose a rate differential that reaches a high impact target: 90 percent of the total rate applied to land value and 10 percent to improvement value.  Hypothetical tax simulations assume revenue neutrality at the county level, using a reduced tax rate combination to accomplish this.  Hence, the county total revenue obtained from all taxable properties is the same for MAV and RMV assessments.

By simulating property tax applications on the 2812 NE Alberta site, comparisons of tax liability between the existing system and the LVT can be made.  Since more than 90 percent of the total value is in the land, we presume the tax will be higher because the higher tax rate is applied to land.  Indeed, Mr. Martin’s tax bill under the 2-rate system is now $7,586, that is 1,880 percent higher than the current levy.  And because land values in this district are rising faster than this site’s relative diminishing building value, the land portion of total value will be increasing every year.  This hefty boost in annual holding costs just might motivate the family to sell or find a contractor to redevelop this site and its other derelict property holdings.

Lesson number two is the converse: investing in building maintenance and upgrades will keep your tax burden lower.  The fact is, because the ratio of land-to-total values for the whole county is 39.5 percent, and the land portion of the average developed commercial property in the district is only 24 percent of the total assessment, the tax burden for this group would actually be lower than an equal rate RMV tax.

If we want to open the real estate market to make more properties available for new construction or rehabilitation; if we want to end the socially detrimental activity of land holding and speculation; if we want to constrain rampant property price inflation, then look to reforming Oregon’s distorted property tax system.

Tom Gihring, Research Director
Common Ground OR-WA