Vox
Tax the land
One radical idea to solve America’s housing crisis.
By Jerusalem Demsas
March 4, 2022
Excerpt:
A six-word phrase keeps popping up on my Twitter feed: “Land value tax would solve this.”
The big question land value taxes help answer is: How can a government raise funds without distorting choices and possibly leaving people worse off? If you tax income, it provides a disincentive to work. If you tax property [land and improvements], it provides a disincentive to improve the physical buildings on top of the land. Sometimes the tax is intentionally disincentivizing an activity — think carbon taxes to reduce greenhouse gas emissions or so-called “sin taxes” on tobacco.
One of the most straightforward solutions a land tax offers is to America’s housing crisis. That crisis is caused, in part, by the failure to appropriately use valuable in-demand land for its best purpose. Millions of people want to live in New York City, Los Angeles, Washington, DC, or Seattle, but local tax regimes actually punish people for investing in their property. When people improve their property — either by adding a new room or building an entirely new structure like a multi-story apartment building, they’ll pay higher property taxes.
But this isn’t just a big-city problem. In small towns, vacant lots contribute to decline — and if there’s no valuable structure on a property, its delinquent landlords likely only pay a nominal property tax. This both lowers tax revenue and hurts neighborhood quality for everyone else.
Here’s where a land value tax can come into play.
Most Americans are familiar with property taxes that tax the value of their homes and the land they sit on as one. Taxing land value means separating out what land is worth without any of the improvements sitting on it (like homes or industrial plants).
By definition, an LVT only captures “rent” — in economics-speak, income you earn by happenstance or luck rather than by actually creating new wealth.
The LVT also has an appealing underlying moral framework: The luck to own a piece of land that happens to appreciate should not come with it the ability to extract rents without providing value.
In other words, since people who own land aren’t actually responsible for it increasing or decreasing in value, it’s pretty absurd that they get to accrue all the benefits of owning a piece of land without having to do any work for it.
America’s housing crisis
At its core, America’s housing crisis is about the nation’s perennial failure to build enough homes. As of last year, Freddie Mac estimated that the country needs an additional 3.8 million homes to meet demand.
Because of our persistent failure to build, prices have skyrocketed. People are moving out of their parents’ homes, starting families, moving to new jobs and competing over a scarce number of housing units. In a healthy market, this rising price signal would push developers to create more homes and prices would fall (or at least stop rising).
The American housing market is anything but healthy.
As a result of various rules and regulations mostly set at the local level, developers can’t simply build and provide more homes. Instead, laws that make it illegal to develop land more intensely — that is, build multiple homes on a single lot of land like a duplex or an apartment building or build smaller single-family homes — keep prices high.
Land and property owners are often the most vocal opponents of liberalizing land use laws. Homeowners trend older and have stronger preferences for stability as well as negative attitudes towards renters and apartment buildings.
Boston University researchers Katherine Einstein, David M. Glick, and Maxwell Palmer looked at planning board and zoning meetings in nearly 100 Massachusetts cities and towns and found that meeting participants were disproportionately homeowners. Participants were consistently likelier to oppose new housing in their communities.
If you add a room for your father-in-law who is moving in with you to help raise your kids or add a home office during a global pandemic, you could receive a penalty in the form of higher taxes since you have made your property more valuable. And if someone turns their garage into an apartment, providing an affordable housing option for their community, they pay higher property taxes than similarly situated neighbors who don’t add housing options to their land.
So how could a land value tax help fix this?
Under a land value tax system, proponents say property owners would be clamoring to be allowed to develop their land more intensely — leading to more homes being built.
Here’s the theory: Taxing land reduces the profit that comes from just owning a piece of property. Instead, you are incentivized to put that land to work.
In Allentown, Pennsylvania, the system worked! According to a 2019 Strong Towns article, after the city adopted an LVT (through a split-rate system that still kept some property taxes in place) in 1996, “construction returned to the city: the number of taxable building permits surged past neighboring Bethlehem, market investment returned and capital improvement reappeared in city budgets. … The losers in this trade were absentee owners of vacant lots, who had to shoulder much more of the burden.”
Sen. Pat Toomey (R-PA) is quoted touting the benefits of the tax: “The number of building permits in Allentown has increased by 32 percent from before we had a land tax.”
So if this change to our taxation system is so simple, why don’t more cities implement it? Well, property tax reform is the third rail of American politics. In California for instance, as Conor Dougherty explained for the New York Times, “In 1978, a Los Angeles businessman named Howard Jarvis led an insurgent campaign to pass Proposition 13, a ballot measure that limited California property taxes and inspired a nationwide tax revolt. The law has been considered sacrosanct ever since.”
…but as rents skyrocket, people are desperately searching for radical solutions to America’s housing crisis.
Comment:
Ms. Demsas attempts to explain the disincentive effects of the conventional property tax on building investments. She also points out that uncaptured rent (rising land value) is a reward for simply owning land, thus amounting to a windfall. Shifting the property tax onto land and off improvements reverses the incentive effects, giving owners the motivation to invest in upgrades or new construction. As the Pennsylvania experience verifies, building activity increases – adding to the housing supply.
An optimal land value tax will disincentivize speculation by keeping land price inflation in check. We wish to encourage ordinary working people and families to own, to have a stake in the local economy, rather than see highly capitalized corporate entities monopolize land as if it were an investment vehicle for profit. LVT will help stabilize the price of our land and other resources for the benefit of society. We need to face the truth: the tax revolts in California and Oregon led to false solutions. It’s time to trade in ill-conceived tax limitations with a property tax system that works.
Tom Gihring, Research Director
Common Ground OR-WA
