A big policy discussion recently in Ohio has been about property taxes. They have become such a contentious project that one advocacy group has been pushing to abolish them in Ohio.
A few months ago, my colleague Rob Moore wrote an commentary exploring some of the alternatives to property taxes that could be used to replace the missing revenue should property taxes be abolished. Today, I’d like to talk more in-depth about one of those alternatives: a land value tax.
As the name suggests, a land value tax differs from a property tax by raising revenue from the assessed value of the undeveloped land on each parcel as opposed to the total value of the development of that parcel. This means that two neighbors that have to pay different property taxes because of the differences between their houses would have to pay the same land value tax since their undeveloped plots are essentially identical.
Economists are generally enthusiastic about this idea because it solves a major problem that property taxes have: they disincentivize people from making improvements to their property.
This is not such an issue in properties where the residents own the property since they can internalize all this information and make an optimal decision. However, this creates problems in rental properties where the owners have less of an incentive to improve the living conditions.
Those of you who are familiar with property tax research are probably aware that renters actually bear a large portion of the burden of property taxes, but they don’t bear 100%. This means that if property taxes go up as a result of some improvement, then a landlord would not get the full marginal benefit of the increased rents they would receive. If instead there was a land value tax in place, then making those improvements would not change their tax bill at all, and the landlord would have an increased incentive to make those improvements.
It is interesting to consider what would actually happen in practice if property taxes were replaced with land value taxes. Lets assume that we want to have a revenue neutral land value tax, that is we raise the same total revenue with both.
Property values are almost always higher than land values, so the land value rate would need to be higher in order to make up the difference. The city of Altoona, PA implemented a land value tax in 2002, and they found that the total assessed value of their land was one-seventh the assessed value of all the property, so their land value tax rate was seven times higher than the property tax rate.
If the land value tax rate is seven times higher than the property tax rate, then in order to figure out what this would look like for individuals we just need to determine what the difference is between the assessed value of their land vs. their property.
If the property is exactly seven times as valuable as the land, then they would pay the same amount of taxes under each scenario. If someone’s property is highly developed and is worth more than seven times the amount of the undeveloped land, then that person would end up paying less in their final tax bill. Finally, if the property is undeveloped or underdeveloped, then it would incur a higher tax bill under a land value tax.
This is particularly important when thinking about completely undeveloped land. Speculative real estate investors can purchase undeveloped land and wait until real estate prices go up before selling it at a higher price to someone who is actually interested in developing it. If they had to pay land value taxes instead, they would be faced with much higher taxes in the interim, which could lead to those properties only being purchased by people with plans to develop them in the first place. In an urban setting where there isn’t enough land to go around, a land value tax changes the incentive structure and makes it more worthwhile to improve the quality of developed structures.
Housing is becoming an increasingly important problem for local governments across the country. Land value taxes won’t solve every single problem, but they could be a better alternative to property taxes in some areas.