A six-word phrase keeps coming up on my Twitter feed: “Land value tax would solve this problem.”
The big question that land value taxes help answer is: how can a government raise money without distorting choices and possibly making people worse off? If you tax income, it discourages work. If you tax the property, it will discourage upgrading physical buildings above the land. Sometimes the tax intentionally discourages an activity – think of carbon taxes to reduce greenhouse gas emissions or the so-called “sin taxes” on tobacco. But there are also taxes that governments want to levy to pay for valuable services without changing behavior too much (or at all).
One of the simplest solutions a property tax offers is America’s housing crisis. This crisis is caused, in part, by the inability to appropriately utilize the precious lands in demand for its best use. Millions of people want to live in New York, Los Angeles, Washington, DC or Seattle, but local tax systems 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 will pay higher property taxes.
But it’s not just a big city problem. In small towns, vacant land contributes to decline – and if there is no value structure on a property, its delinquent owners are likely only paying a nominal property tax. This both reduces tax revenue and harms the quality of the neighborhood for everyone else.
This is where a property value tax can come into play.
Taxing land value means separating what the land is worth without any of the improvements on it (like houses or industrial facilities). Most Americans are familiar with property taxes which tax the value of their homes and the land they sit on. As New York University economist Arpit Gupta Explainpart of what makes property taxes so attractive is that “there should be no economic inefficiency” if you are able to tax “true ground rents”.
A land tax cannot deter anything – the land will continue to exist regardless of the tax system.
“The earth is not moving,” said University of Illinois economist David Albouy. “It doesn’t disappear – so you can reduce taxes on things that disappear.”
As Jeff Spross explained in 2015 for The week:
The key thing to realize about a Land Value Tax (or LVT for short) is that nothing you do can affect it. … This is why economists to like. By definition, an LVT only captures “rent” – in economic terms, income you earn by chance or luck rather than by actually creating new wealth.
Your tax burden under an LVT only increases if the value of the land itself – the one thing over which you have no control – also increases.
LVT also has an attractive underlying moral framework: the luck of owning appreciating land – for example, you bought a house in San Francisco before the tech boom. — should not be accompanied by the possibility of extracting rents without adding value.
In other words, since the owners of land are not actually responsible for the increase or decrease in its value, it is quite absurd that they can accrue all the benefits of owning land without have to do work for it.
I want to again distinguish this idea of adding value to the land by building a business, farming the land, extracting natural resources, or myriad other ways people use the land. Those things are obviously work, and that’s exactly why moving from a property tax system — which taxes things that people actually have control over — to a property tax system could be so effective.
At this point, “land value tax could solve this problem” has become a meme in niche online communities, with its staunchest followers believing that a simple policy has the potential to solve some of the country’s biggest problems. , including our housing crisis.
The housing crisis in the United States
At its core, the housing crisis in the United States is about the nation’s continued failure to build enough homes. Since last year, Esteemed Freddie Mac that the country needs 3.8 million additional homes to meet demand.
Due to our continued inability to build, prices have skyrocketed. People leave their parents’ homes, start families, change jobs and compete for a limited number of housing units. In a healthy market, this rising price signal would cause developers to create more homes and prices would fall (or at least stop rising).
The US housing market is anything but healthy.
Due to various rules and regulations mostly established at the local level, developers can not just build and provide more houses. Instead, laws that prohibit developing lots more intensively – that is, building multiple homes on a single lot like a duplex or apartment building or building smaller single-family homes – maintain high prices.
Land and landowners are often the most vocal opponents of liberalizing land use laws. Landlords tend to be older and have stronger preferences for stability as well as negative attitudes towards tenants and apartment buildings. Local governments, which have been granted almost unchecked authority by state governments, are being captured entirely by landlords.
Katherine Einstein, David M. Glick and Maxwell Palmer, Boston University researchers reviewed planning and zoning board meetings in nearly 100 cities and towns in Massachusetts and found that meeting attendees were disproportionately homeowners. Participants were consistently more likely to oppose new housing in their communities.
If you add a bedroom to your stepdad 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 surrendered 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 lot.
So how could a property value tax help solve this problem?
Under a land value tax system, developers say landowners would clamor to be allowed to develop their land more intensively, resulting in more homes being built.
Here is the theory: Land taxation reduces the profit that comes from simply owning a property. Instead, you are prompted to put that earth to work. Let’s take a piece of land near Times Square. This land is so precious, basically anything you do with it will generate huge profit, so no need to develop it for its most valuable use.
However, if a land tax were to be levied, the owner of that land would need to ensure that ownership of that land was actually profitable since the government levies some or all of the ground rent that might be charged.
In a 2015 Slate article, Henry Grabar illustrated this point well, pointing to the case of a parking lot charging drivers $40 a day for parking and racking up less than $10,000 in property taxes. This parking lot, writes Grabar, is next to a seven-story building that requires more than a quarter of a million in taxes a year.
“It turns NIMBYs into YIMBYs,” explained economist Noah Smith, who has property tax writing. “You are leveraging the same toxic local politics that is now creating NIMBY-ism, you are leveraging YIMBY-ism because now you have people want to to build stuff.
In Allentown, Pennsylvania, the system worked! According to a 2019 Fortified towns article, after the city adopted an LVT (through a split rate system which still maintained some property taxes) in 1996, “construction returned to the city: the number of taxable building permits jumped beyond neighboring Bethlehem, market investment returned, and capital improvement reappeared in city budgets. … The losers in this trade were the absentee owners of vacant land, who had to bear a greater share of the burden.”
Sen. Pat Toomey (R-PA) is quoted touting the benefits of the tax: “The number of building permits in Allentown is up 32% from before we had a property tax.
So if this change to our tax system is so simple, why aren’t more cities implementing it? Well, property tax reform is the third rail of American politics. In California, for example, 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, an election bill that limited property taxes in California and inspired a national campaign. tax revolt. Since then, the law has been considered sacrosanct.
But beyond the political issues, there are also technical concerns: First, valuing the land separately from its developments is not so simple, even if supporters argue it can be done. Second, the establishment of a property tax now, although fair in the medium and long term, could seem radically unfair in the short term for owners who have paid a premium for their lots due to the value of the land only to see it depreciate as a new tax is introduced.
So why is this meme becoming so popular (at least among some online communities)? Lars Doucet, a prominent proponent of the property value tax, says a big part of the reason is that for a long time the automobile made sprawling suburban development possible. This meant that people could still access valuable labor markets even if they could not afford to live close to their work (as long as they were willing to endure long commutes, i.e. ).
“Now we don’t have suburbs anymore,” Doucet argued. “We cannot expand further.”
Remote working is a new development, which could save us time, because it could allow many people to live even further from city centers, but as rents are skyrocketingpeople are desperately looking for radical solutions to America’s housing crisis.