Connecticut Business & Industry Association
Land-Value Tax Policy Not the Way to Get Results Cities Want
Connecticut’s cities and towns need more economic activity and the tax revenue that comes from it, but a proposal in the legislature to change property-tax policy in three municipalities is not the best way to go about it.
SB 130 requires the Secretary of the State to establish a pilot program allowing up to three municipalities in Connecticut to tax land at a higher rate than land with dwellings on it. The rationale is that higher taxes will spur landowners to develop empty properties or sell to someone else who will.
But would creating a two-tier property tax system actually generate more development? There is no compelling evidence that it is either needed in Connecticut or that it would work here. It’s a risky carrot-and-stick approach.
First, while vacant properties in many urban communities would be better off developed, several factors are involved—including timing, financing, and government red tape.
Right now, a gauntlet of state statutes, agency red tape and a complex liability scheme make it very hard for Connecticut developers and communities to get redevelopment projects off the ground.
Second, proposals allowing municipalities to tax different classes of properties at different rates are risky. Once a classification is in place, for example, it may be politically expedient for local officials to increase taxes on one group of property owners as a way of mollifying another class of property owners.
Third—and significantly–businesses that rely on personal property to run their operations would be harmed by initiatives that would increase the tax on their equipment. That would be a significant roadblock to economic growth and job creation.
Two years ago, the legislature allowed New London to implement a pilot land value taxation program in that city. After considering its options, a committee of stakeholders decided that in the interest of fairness, not to move forward with the land value taxation scheme. There were a number of concerns including the LVT’s impact on shopping centers and automobile dealerships with large parking lots.
“The end consensus was that there just isn’t a quick fix,” said New London assessor Barbara Perry. The committee decided to stay with the status quo. “The LVT plan just wasn’t right for New London.”
State lawmakers should avoid starting down the slippery slope of differential tax classification. Not only is it a problematic economic policy, it’s also likely administrative burden on local municipalities that will have to compute land values and improvements and be able to continually update them.
The overall benefit of land value taxation has not yet proven to be positive. It could potentially reduce overall land values, which would harm landowners that have little or negative equity, or no equity, in realty holdings.
Businesses believe that instead of raising taxes, better policy would be for the legislature to make it easier and more cost-effective for developers to clean up contaminated property.
For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or [email protected].
Hartford Business Journal
Land value taxation won’t spur new development
EDITORIAL
October 31, 2016
Excerpt:
Hartford city councilors last week released a trial balloon on a new policy proposal that would increase taxes on owners of vacant downtown land, in an effort to spur development.
The proposal, according to the Hartford Courant, would allow the city to tap the state’s little-known “land value taxation” pilot program, which was created in 2009 and refined in 2013. The program has never been used, but it allows the state Office of Policy and Management to grant three Connecticut municipalities the authority to levy higher taxes on owners of vacant or undeveloped parcels. The city would consider using it in a small section of downtown.
We have concerns about the policy, which has an overall goal of growing the grand list by promoting private-sector development. While we support measures that would encourage conversion of parking lots and other underutilized land downtown into residential, retail or office development, using a stick rather than carrot approach won’t make up for the various economic conditions that exist in Hartford that discourage new development.
Ground-up development in the Capital City is nearly impossible without tax abatements and/or other government incentives because of Hartford’s significant construction costs, limited tenant demand — particularly for office and retail space — and high property taxes. Ask any broker or developer that does business in the city and they will tell you rents that landlords can charge tenants (office, retail or residential) in Hartford don’t support the costs of new construction, which can range upwards of $300 per square foot.
That is why the Capital Region Development Authority has had to subsidize all the city’s major apartment conversions in recent years, to help close funding gaps created by the gulf between what it costs to build new structures and what developers can profitability sell them for on the market.
Simply assessing higher taxes on property owners of parking lots or other vacant land won’t change those economic dynamics. In fact, it will likely make it even more difficult for businesses to operate in Hartford and potentially lower land values — certainly not a way to grow the grand list. (It could also lead to higher parking rates as landowners pass on the added costs to their customers).
Land value taxation, which has gotten little use in the United States outside Pennsylvania, may help the city raise some extra tax revenues in the short term, but it certainly won’t create a strong enough stick to all of the sudden encourage new development. There would need to be a much more comprehensive policy that promises tax abatements and other incentives to make projects economically feasible.
Hartford does use tax abatements to incentivize commercial development — particularly residential — but such deals are done on a case-by-case basis and aren’t guaranteed.
Hartford’s bifurcated tax system, in which commercial property is assessed at double the rate of one- to three-family homes, has already stunted private commercial investment in Hartford. It’s hard to imagine how creating another, even higher tax bracket for certain landowners would make things better.
If the city truly wants to grow its grand list and encourage private-sector development, it must get its fiscal house in order, work to lower the mill rate and adopt a coherent economic development strategy that takes into account the true economic dynamics of the city.
Counter-view:
The Connecticut Business & Industry Association and Business Journal editors miss the point of LVT. They have a point if commercial and residential uses are taxed at different rates, where competing interests would lobby for tax rate advantages. But land & buildings are not different classes of land use, they are two distinctive components of all real estate parcels. It is these two components that LVT taxes with split rates, and with good reason – they represent community generated value (land) and privately generated value (buildings). Taxing land values at a higher rate captures the unearned increment of value and returns it to the community, whereby applying a low tax rate on improvements owners retain the value they created. That sets up an incentive to improve, not to speculate on land. That’s the purpose of LVT. Also, we are talking here about real estate taxes, not personal property taxes.
Both claim that LVT would potentially lower land values. In this present economy only a recession could do that. The land tax exerts a downward pressure on land price inflation; it does not actually reduce land values in absolute terms. Higher tax levies still would not outpace annual land price inflation. Lowering the pace of property price inflation is a positive goal, making land purchases more affordable over time.
Higher taxes on owners of vacant or undeveloped parcels including surface parking lots? Yes, LVT will raise taxes which are already very low because of the lack of taxable improvements. But that’s the point – to encourage higher and better use, especially in central areas where high density agglomeration is a valued quality. LVT is not just a stick, it is a carrot too. The idea is to reward capital investment in buildings and discourage the holding of land out of production for eventual windfall gains at sale. LVT simulation studies show consistently that redeveloping such sites more intensively is rewarded with a tax advantage.
Yes, State lawmakers should avoid starting down the slippery slope of differential tax classification, that is, taxing land use classes at different rates. No, for-profit landowners do not need subsidies and abatements to construct market-rate projects. No, assessor’s offices will not be burdened by added administrative costs; modern mass appraisal techniques actually reduce the cost of land valuation.
It’s no wonder that the Connecticut Homebuilders Association, Connecticut Coalition for Justice in Education, and the Stamford Urban Development Corporation supported LVT legislation for urban areas. So did the Connecticut Sierra Club, Farmington River Watershed Association, and the Connecticut Farmland Trust [as noted by the Center for Property Tax Reform].
Tom Gihring, Research Director
Common Ground OR-WA
