Tax Shift Sequential to a Land-Based Property Tax System in Salem, Oregon

By Tom Gihring, Ph.D. & Kris Nelson, M.B.A.

November 1999

In cooperation with
Marion County, Oregon
Department of Assessments

The Portland based Geonomy Society conducted a study of tax shift in the Salem metropolitan area, with the aim of illustrating how a reform of the state’s property tax system might be implemented. Measure 5, Measure 50, and the Enterprise Zone program all place limits on the growth of individual assessments as well as caps on tax rates. The cumulative effect of these tax initiatives approved by Oregon voters since 1990 is a shift in tax burden from some classes of property onto others. Reforming the property tax system would first correct the assessed value distortions caused by tax limitations currently in effect, and secondly introduce a graduated land-based tax system that targets land rent as the legitimate source of local government revenue.

The study design employs a two-step tax simulation process. First, individual property assessments are changed from the current taxable values to true market values, allowing an examination of tax burden and revenue shifts that accompany a departure from the normal practice of applying uniform tax rates to current full market values. Secondly, a split rate land value tax is applied to the true market land and building assessments.

Differential-rate tax outcomes are compared to conventional tax outcomes to ascertain the direction and amount of tax shift that would occur in a transition to LVT. The data base consists of 70,000 tax lots, with land use, location and valuation variables provided by the Marion County Department of Assessments.

Study reveals the disproportionately high tax burdens that accompany current property tax limitations: on central business district developed parcels, lower value locations, and residential properties in general.

A change to true market assessments and land-based taxation is shown to be less punitive to owners who undertake substantial capital investments—who put their land into production or use land more intensively.

The greatest benefits accrue to multifamily and smaller lot residential properties, as well as centrally located fully developed sites. Conversely, LVT tax simulations demonstrate upward tax shifts associated with vacant and underutilized sites, especially those in central locations.

Owners of all real estate, including owner-occupied residential properties, realize land rent as long as site values continue to rise. Land rent capture rates as well as the land price-dampening effects of LVT are simulated by extrapolating observed home price increases over a hypothetical holding period and modeling the tax effects on speculative gains.

The study questions assessment practices that tend to adjust building values on developed sites roughly in proportion to land value increases, and devalue “excess” land on large-lot parcels. Both practices weaken the incentive effects of LVT. The question could also be raised as to whether industrial and some commercial sites are undervalued, thus shifting added tax burden onto residential sites.