BUSINESS INSIDER
Housing economists have a great idea that could fix just about everything
Story by [email protected] (Eliza Relman)
Excerpts
Cities and towns across America are dealing with either an abundance of underused land or a shortage of housing — or both.
Economists and policymakers are increasingly promoting a relatively simple policy that could go a long way to addressing both of these crises, simultaneously bringing housing costs down in the most expensive places and boosting investments in struggling communities.
It all started in 1879 when the American political economist Henry George published a bestselling book: “Progress and Poverty.” The opus, decrying industrial capitalism and the oppression of the working class, made George a popular hero and, eventually, spawned a whole school of thought called Georgism.
The ideology is centered on the idea that natural resources should be shared by everybody, rather than monopolized by the wealthy elite. Fast-forward nearly 150 years, and a Georgist proposal — land-value taxation — is being promoted by urbanists and pro-development advocates as a solution to the housing affordability crisis and much more.
In a late-August note, Chris Porter and John Burns of John Burns Research and Consulting published a list of cities where they see migration trends rising and falling, citing address change data from the US Postal Service.
Strong migration continues in:
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Houston
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Jacksonville
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Charlotte
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San Antonio
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Fort Worth
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Nashville
Previously strong migration is now trending less strong than one year ago in:
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Dallas
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Atlanta
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Tampa
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Boise
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Orlando
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Raleigh-Durham
Previously strong migration is now trending to barely positive migration in:
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Phoenix
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Austin
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Las Vegas
The losers: Weak housing demand
Previously strong in-migration is now trending negatively in:
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Sacramento
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Riverside-San Bernardino
Previously small out-migration is now trending as a big out-migration in:
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Denver
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Salt Lake
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Philadelphia
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Seattle
Very negative domestic out-migration continues, which is likely somewhat offset by strong international migration, in:
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East Bay Area
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Orange County
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San Diego
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San Jose
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Miami
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Washington, DC
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Boston
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Chicago
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San Francisco
Populations are growing in Denver and Nashville but shrinking in San Diego and Boston.
One crucial element determining how home prices in a given market will perform is population growth. If more people are moving to a city than those leaving it, it could mean increased demand for housing, which supports prices. If more people are leaving a city than are coming in, prices may soften.
Land appreciates in value when demand for it increases. Demand rises when a neighborhood sees an influx of new residents or visitors, an investment in infrastructure, new jobs in the area, or new amenities, including restaurants, schools, and public spaces. This value isn’t created by the landowner, but instead by the community.
The idea is to tax landowners annually based on the value of their land and reduce or eliminate taxes on any developments made to it, such as apartments, office buildings, or retails stores.
The principle is: “tax what you take out of the natural world, not what you make,” said Stephen Hoskins, research director at Resource Justice and a self-described Georgist.
Land-value taxation has gotten some mainstream attention in recent years. “A land value tax would fix that” has become a popular Twitter response to a range of policy conundrums among urbanists and YIMBYs.
While the politics of any new tax are tricky, land value taxes have appeal across the political spectrum. Those on the left like that it’s a more progressive tax, while free-market conservatives and libertarians like how efficient and pro-development it is.
Just a handful of American cities — and countries around the world — are experimenting with it. More than a dozen cities in Pennsylvania have had success with land value taxes. Since the taxes were first levied, new construction has shot up in places like Pittsburgh, Harrisburg, and Allentown.
Lawmakers in Detroit and Minnesota have also proposed versions of the tax. Detroit Mayor Mike Duggan is a passionate advocate for raising taxes on land and lowering them on homeowners as a way to fight blight and encourage building. He wants to make it more expensive for investors to buy up and sit on scrapyards, parking lots, and vacant property in the city, just waiting for it to appreciate while actively hurting the neighborhood.
Raising more revenue in a fairer way
Land value taxes encourage investment and the most efficient use of land — fixing a problem created by property taxes, which tax the investments made to land. It would incentivize landowners to maximize the revenue from their property — building an apartment building instead of, for example, a parking lot.
The tax is both more efficient and more equitable than other kinds of taxes. While taxes on capital and labor penalize and reduce the amount of both, land isn’t going anywhere. And because rich individuals and corporations own most land in cities and towns, land taxes would disproportionately fall on the wealthiest.
“The main point is that the supply of land will not be reduced by the tax and so you’re not discouraging economic activities,” said Gregor Schwerhoff, an economist in the Structural and Climate Policies Division at the International Monetary Fund.
Pure Georgists advocate for abolishing all taxes besides land value taxes. But most proponents won’t go that far. Instead, they want to see more regressive levies — like sales taxes — or those that penalize investment — like property taxes — reduced.
“If you could reduce your sales taxes to some extent, and replace them with land value taxes, that is a very big win for progressive causes or for equity because these taxes are disproportionately paid by the poorest households,” said Shane Phillips, a housing researcher at UCLA’s Lewis Center for Regional Policy Studies.
There’s another fairness element to it: Under our current tax scheme, even if you do nothing to improve a building, home, or any other kind of structure, the land it sits in will appreciate if it’s in desirable area. That means wealthy landowners can end up making money by doing nothing other than holding property in a hot location.
The challenges
Land value taxes are particularly attractive for cities facing either a shortage of housing or an abundance of underused or ill-used land.
But passing any kind of tax reform is notoriously difficult. And re-thinking how we value property gets to some fundamental dynamics in the American economy. Most Americans — and certainly most voters — own their homes and rely on those homes as their most valuable asset.
Doing something that could devalue some Americans’ biggest investment “sounds really scary and daunting,” Hoskins said. “We are in a world where speculation on land or building your wealth through owning a piece of real estate that just rises and rises in value is the main mechanism to get into the American middle- and upper-middle class,” he added.
So the trickiest challenge is protecting those who own valuable property, but don’t have enough income to pay a land tax, including retired, low-income, and recent homeowners.
There are a few practical ways to address this. Land taxes could be deferred until a property is sold or the owner dies. The tax could be phased in at a certain land value, or exempt primary residences. The tax could also be paired with a universal basic income or a significant decrease in property, income, and other taxes that would help homeowners pay the new tax.
“In the real world, this is gonna happen in tiny increments anyway,” Hoskins said. “There’ll be little ones here and there and it’ll start at half a percent or 1% or whatever. Those make it a lot easier to slowly transition.”
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Comment:
Eliza Relman gives a good rundown of the land value tax idea. Population growth and the government services and infrastructure that are needed to support that growth add to land values.
And indeed the LVT is the most efficient, fair, and equitable tax available to fund government services.
And it’s true that gaining popular support is a difficult proposition. Existing homeowners are accustomed to the notion that equity accumulation in real estate holdings is a good investment. Unfortunately, this view is directly at odds with the interests of newly-forming households seeking affordable housing. Somehow, we have to get across the idea that housing is not a lucrative investment, it is shelter – a universal necessity. We’re all in this together.
Ms. Relman observes, those on the left like that LVT’s a more progressive tax, while free-market conservatives and libertarians like how efficient and pro-development it is. Our experience in communicating with legislators and Yimby activists is: conservatives respond to “LVT is pro-growth and promotes economic development”; liberals respond to “LVT is more fair and equitable”.
Stephen Hoskins, research director at the Schalkenbach Foundation posits “this is gonna happen in tiny increments anyway… mak[ing] it a lot easier to slowly transition.”
We at Common Ground OR/WA have proposed six steps to ease the transition from a conventional equal rate tax to LVT, and to address unnecessary hardships that may result. Many jurisdictions are facing a familiar problem when property assessments have over time fallen short of true value. The first step in transitioning to a land value tax is to make certain that assessments are accurate and up-to-date. If they are not, an immediate full introduction of real market assessments with LVT will be a shock to most property owners whose taxable assessments fall short. Enacting an assessment phase-in rule would allow for the value adjustment needed to correct an under-assessment to be phased in over a five year period.
The next step is to phase-in the split-rate LVT option. Our solution is to begin with “LVT light”: phasing in the differential rates on land and improvement assessments, beginning with a small rate differential and gradually increasing over a ten-year period. In Oregon and Washington the standard method is to express the split rate as the percentage of the total tax rate applied to land assessments. Start with a low ratio, for example 55/45, where 55 percent of the total rate is on land and 45 percent on improvements. This differential would then be increased to 65/35, and eventually to 95/05.
In order to minimize the burden of a sudden increase in tax liability for homeowners when transitioning to LVT, we recommend a property tax deferral rather than a broad-based exemption. Revenue losses can be avoided if a relief measure were in the form of a deferral – making the tax obligation due at the point of resale when the accumulated home equity is liquidated. Because the long term trend in real estate shows substantial land price increases, homeowners have been seeing significant equity build-up. The land value portion of private property yields an unearned increment, a public benefit received. As the principal creator of land value, the public sector is entitled to recapture most of this value through property taxation. This will achieve the dual objectives of returning to the public jurisdiction revenues in proportion to benefits received and retaining the broad-based financial incentives built into the LVT system.
Tom Gihring, Research Director
Common Ground, OR/WA
