Ashok Rao has an interesting blog post about the relevance of Ricardian economics. (See Matt Yglesias' comments on these issues here). One thing that Ashok argues for is replacing the current property tax regime with a land tax. He explains really well why this is beneficial in economic terms, but it is worth discussing the practical consequences of this sort of shift in policy.
When local governments assess property values, they usually try to determine the market value of your property--how much you could currently sell it for. This assessment implicitly considers both the value of the land, and the value of the structure. According to the Minneapolis government website, land value makes up about 20-25% of the total property value assessment. (Minneapolis--where I live--also considers property classification, but lets ignore that for now).
The problem with this scheme is that it disincentivizes the productive use of land. Let's say you currently own a piece of vacant land in downtown Minneapolis. Doing nothing with the land will keep your property taxes low, but you also won't make any profits. Building an office or apartment building will cause your property taxes to skyrocket, but you will presumably make some decent profits. But let's say you want to keep your property taxes low, but also want to make some profits. You build a parking lot! And now downtown Minneapolis is filled with half-used parking lots, that are taxed at very low rates despite their prime locations.
Now what if we taxed land value? If this were the case, and you owned a vacant piece of land in downtown Minneapolis, you would pay the same tax rate regardless of how you used the land. This would make sitting on the empty property a terrible choice, building a parking lot a bad choice, and building a large useful structure a great choice.
This also has another important consequence that is often overlooked. By shifting to a land value tax, the overall tax burden on residential property will shift from multi-unit structures to single family homes.
Lets say you are a developer who owns a piece of vacant property right now, and are deciding between building a single family home or a multi-unit building.* Under the current property tax regime, a multi-unit building may be more valuable, but it will also be taxed more heavily. This will result in a greater number of single family homes being built than is optimal. By switching to land tax system, the taxes will remain the same regardless of which type of structure is built, this should lead to fewer single family homes and more multi-unit structures.
This will benefit those who live in multi-unit structures (who are often renters, and usually less wealthy) in two ways. First, if more multi-unit structures are built, rents will go down. Second, the overall tax burden will shift away from multi-unit structures--whose taxes are payed by the renters through rent--to single family homeowners. The best way to picture this is to imagine you have a single family home and a multi-unit structure siting adjacent to each other. Because they are next to each other, their land values are likely the same. Under the current property tax regime, the multi-unit structure owes more in taxes than the house. In a land tax regime, both the multi-unit structure and the house owe the same amount in taxes.**
Overall, a land tax regime would increase density, incentivize the productive use of land, lower the tax burden on those who live in multi-unit structures, and increase the tax burden on those who occupy single family homes. Import Its an idea that progressives should get behind.
*obviously zoning laws matter for these types of decisions, i'm ignoring them to make the post simpler
** This can also be conceptualized another way. Suppose that all the land in a city were worth the same amount, and all the property was residential. Under a land tax regime, each parcel would pay the same amount in taxes, regardless of how many people lived on it. This would mean each individual's tax burden would be directly proportional to how densely populated the structure they occupied was. This would incentivize density, and reduce tax burdens on those living in multi-unit structures. Which, as I mentioned above, are often less wealthy individuals.
Not sure you're quite right that the tax on SF and MF land would be the same. As you say, land use regulation has a huge effect here, and while I agree that it's too complicated to unpack in a blog post, it is important to note that the value of urban land is very closely tied to the development permitted on it.
ReplyDeleteNow it's highly likely those downtown parking lots enjoy the same entitlement as high-rise office and condo towers, so those would be subject to much higher taxation. But, if for some reason the owners REALLY didn't want to develop the land, one can easily imagine them seeking something like agricultural zoning in an effort to reduce the taxable value while still receiving some cash flow. It would be a terrible policy, but probably not too hard to sell - no budgetary impact (since it's already not generating much tax revenue) green space, local food, etc.
Incidentally, this also points to another implicit tax subsidy to SF lots (at least those in desirable urban areas). The land value is artificially depressed by the restrictions on more intense use, which further transfers the tax burden to others.