FREQUENTLY ASKED QUESTIONS

When communities provide public facilities and services (roads, traffic lights, transit, water and sewer, schools, public safety, zoning, etc.), these activities make places more (or less) suitable for residential or commercial development. As a result, these activities make land more (or less) valuable. “Land value return” is simply the process of returning publicly-created land values to the communities that created them. Most state or local governments employ a property tax. This is a tax levied against the combined value of land and buildings (if any) located on a particular parcel. That portion of the property tax levied against the land value is an example of land value return. It is rare to find jurisdictions that tax only the value of land. Altoona, Pennsylvania, tried this briefly.1 However, there are some jurisdictions that tax building values at a lower rate than land values.2

¹See https://www.fhwa.dot.gov/ipd/fact_sheets/value_cap_land_value_taxes.aspx and also https://www.washingtonexaminer.com/the-short-life-of-pennsylvanias-radical-tax-reform ²See Alanna Hartzok, “Pennsylvania’s Success with Local Property Tax Reform: The Split-Rate Tax”

Other names for this concept include:
● Land value capture or taxation
● Land value recovery
● Land value sharing
● Site value capture or taxation
● Location value taxation
● Value capture
Sometimes, land value return is called a “site value tax” or a “location value tax.” These names emphasize that it is the value of the location that is being taxed. Some communities tax building values at a lower rate than land values. This is referred to as a “two-rate” or “split-rate” property tax. This less-radical approach recognizes the policy foundation for a land value tax, which is that taxing land and taxing buildings have different economic consequences. Several policies grounded in this policy foundation are referred to by the United Nations as “land-based financing” and as “land value return and recycling” by a recent report from the Transportation Research Board.3

³See https://www.local2030.org/public/library/249/Leveraging-Land-Land-based-Finance-for-Local-Governments A-Reader.pdf . See also http://www.trb.org/Main/Blurbs/177574.aspx

There are a variety of policies and programs that can be used to implement land value return:
● Property Tax Options
o Land value tax / Location value tax / Site value tax
o Split-rate or two-rate tax
o Special assessments (against land value only)
● Sale or lease of land or air rights
● Joint Development of public land / public facilities
● Betterment levies
Under “Property Tax Options,” the first option provides three different names for a property tax that levies a tax applied only to land values. Building values are exempt from taxation under this approach. The second option provides two names for a property tax that is applied with a lower rate applied to building values and a higher tax rate applied to land values.
NOTE: Tax Increment Financing (TIF) is sometimes described as “value capture.” However, in most TIF schemes, the underlying tax rates remain unchanged. It’s only the “incremental revenue” that occurs after infrastructure investment that is segregated into a special account to pay off the infrastructure investment. Thus, there is no more (or less) value capture under a TIF than under the regular tax system. For this reason, we refer to TIF as “revenue segregation” rather than as “value capture.”

In brief, people react very differently to taxes applied to the value of buildings and land. Taxes on building values reduce the quantity and quality of buildings while increasing their prices.  Surprisingly, taxes on land values lead to lower land prices and motivate development of high value sites near existing urban infrastructure amenities, reducing sprawl and infrastructure duplication. The mechanics are explained below. 

Building values are privately created. Landowners decide if and when to construct, improve, or maintain buildings. If landowners do not make improvements on a vacant property, there is no building value on that site. A tax applied to the value of a building becomes a cost of production, because it is only applied if building value is created. 

Increasing the cost of production, by taxing improvement values, causes the amount of production to decline. This reduces supply. Therefore, a tax on building value results in fewer buildings (and/or buildings of lower quality) and inflates their price. 

If a community wants to maximize employment and enhance housing affordability, applying a tax to the value of buildings is counterproductive. This tax reduces construction, improvement, and maintenance activities while simultaneously increasing the price of buildings. 

There is a weak relationship between the value of a building and the costs of providing public goods and services. For example, it generally costs the same to construct and maintain streets, sidewalks, and utility pipes in front of a lot, regardless of whether the lot is developed or vacant. There will be more consumption of water, electricity, and transportation services if there is an occupied building, but these “occupancy costs” can be paid for through user fees. 

If a building owner wants to make energy-saving improvements to an existing building, doing so will increase the value of the building, resulting in higher taxes. Higher taxes push the “break even” point of this investment further into the future – perhaps making this investment uneconomical. 

If a building owner allows a building to deteriorate, this reduces the value of the building and results in lower taxes. The owner of a vacant lot or boarded-up building pays less property tax than a neighbor who maintains his or her building. Increasing taxes on owners who invest in their buildings, while reducing taxes on owners who disinvest in their buildings, appears to be contrary to policy objectives for job creation and housing affordability. 

Land value is a reflection of natural resources and public amenities available at a particular location. As such, land value is largely independent of whatever individual owners might do. Surprisingly, increasing the tax on land value causes the price of land to decline. There are several reasons: 

First, the supply of land is fixed. There is just as much land after it is taxed as there was before. Therefore, there is no reduction in the supply of land to drive up its price. 

Second, the price of land is based on the benefits that people expect to receive from owning it. When land is taxed, the benefits of ownership are reduced and this reduces the price that people are willing to pay. 

Third, some land that could be used for residential, commercial, industrial, or agricultural purposes is often held out of use by owners who believe that it might be advantageous to develop this land (or sell it for development) at a later time. This artificial scarcity of developable land can result in increased land prices. If a tax on land value is imposed or increased, it becomes more expensive to hold high-value land off the market, thereby bringing more prime sites onto the market for development. This increase in the supply of land that is available for development also tends to reduce the price of land in that location. 

Tax Shift. Shifting the property tax off of privately created building value and onto publicly created land value tends to make both buildings and land more affordable. It also creates an incentive to develop high-value land. High-value land tends to consist of infill sites near urban infrastructure amenities (e.g., street networks, transit, schools, and parks). To the extent that demand for development is finite at any given time, and to the extent that this demand is satisfied by infill development, there is less development pressure at the urban fringe. More compact development can help preserve rural areas for agriculture, conservation, and recreation while reducing the amount of infrastructure necessary to accommodate new residents and businesses, thereby reducing tax burdens.

A tax is a payment for a general benefit. There is a weak relationship between the amount of taxes paid and the benefits from public goods and services received in return. A fee is paid for a specific benefit or for a specific cost that is imposed upon the public sector. A fee is more like a price. A water bill is a fee based on usage. A parking meter charge is also a fee for usage, not a tax.

Because the value of land reflects the benefits that the public provides to a particular site, a tax on land value is more like an infrastructure access fee because it is directly related to the benefits that the owner receives from all the public goods and services available to that site.

Fees create incentives that encourage the efficient use of resources. When residents pay a per gallon fee for water, the more they consume (or flush), the more they pay. Residents conserve water to avoid paying excessive water bills. They also fix leaky faucets for the same reason. If we paid for water with a sales tax on consumer goods, there wouldn’t be an economic incentive to conserve water or fix leaky faucets.

Owners of vacant lots don’t consume or flush water at these sites. Therefore, is there any justification for the water and sewer authority to charge them a fee? If the water and sewer authority has created water and sewer pipes at the property boundary of a vacant lot, the lot is more valuable than if these pipes were absent. In this case, the water and sewer authority has created land value, and an infrastructure access fee (based on land value), paid by the owner of the lot, compensates the water and sewer authority for this benefit. Access to infrastructure, even if it isn’t used, can have value. That part of the property tax applied to land value is really an infrastructure access fee. Like a user fee, it compensates the public sector for bestowing a benefit.

Thus water and sewer authorities could be justified in charging both user fees and access fees to fairly compensate them for the benefits that they bestow. This is true for transportation agencies as well. Transit riders typically pay fares. Drivers might pay tolls, congestion fees and/or parking fees. But transit and road agencies typically collect little or no revenue from landowners whose land value is enhanced by access to these valuable transportation services and facilities.

Some entities do not pay property taxes because they are “tax-exempt.” Yet, these same entities pay fees for services such as electricity, water, and sewer. By reducing the tax rate applied to building values and increasing the tax rate applied to land values, a jurisdiction converts its property tax into an infrastructure access fee. This increases the likelihood that all property owners could contribute in proportion to the public benefits that they receive.

If land is developed, more water, electricity and transportation resources will be consumed by the people who use that development. For this reason, some contend that there should be a tax applied to the size or value of buildings. However, the consumption of public goods and services by those who occupy developed land can be paid for through user fees instead of taxes. User fees create beneficial incentives. Higher parking and roadway user fees, for example, result in less single-occupant vehicle traffic and less pollution. Communities that have imposed congestion-based roadway user fees have also observed significant reductions in traffic congestion.

If new development exceeds the capacity of existing infrastructure and requires creation of new capacity, user fees will not be sufficient to cover associated capital costs. In such instances, typically in rural areas or at the urban fringe, development impact fees might be appropriate.

Increasing reliance on infrastructure user fees encourages resource conservation while ensuring that payment is proportional to consumption. Likewise, increasing reliance on infrastructure access fees (i.e., land value taxes) encourages more compact development while ensuring that payment is proportional to the benefits received from access to public goods and services. Compact development can make walking, cycling, and transit more efficient, convenient, and affordable, while simultaneously reducing the need for infrastructure duplication.

Taxing building values does not encourage efficient resource utilization and discourages energy saving retrofits to existing buildings. By comparison, infrastructure user fees and access fees enable jurisdictions to recover costs imposed by development more efficiently and effectively.

If a jurisdiction only reduced the tax applied to buildings, it would lose revenue. But, if it simultaneously increased the tax rate applied to land values, this could be orchestrated to maintain revenues. It could be argued, that even if this tax shift was revenue-neutral in terms of property tax revenue at the time of the transition, it would become revenue-positive over time. The reasons for this are as follows:⁴ 

● More vacant lots and boarded-up buildings would be put into productive use. This would increase employment and generate income taxes, sales taxes, and some user fees. 

● Vacant lots and boarded-up buildings tend to encourage criminal activities and arson. Developing these properties would lead to reduced police and fire expenditures. 

● To the extent that this tax shift would promote more compact development, residents and businesses could be supported with a less extensive infrastructure network that makes more efficient use of existing infrastructure, thereby reducing long-term infrastructure expansion requirements and costs. 

⁴See Rybeck “Avoiding Misgivings: Recycling Community-Created Land Values for Affordability, Sustainability, and Equity,” Journal of Affordable Housing & Community Development Law, Vol. 28 No. 2, pp 299-323, October, 2019, p 305.

Property tax rates are different in different jurisdictions, but they typically range between 1 and 2 percent of property value.⁵ This seems low in comparison to sales taxes that typically range between 4 and 7 percent. ⁶ 

Directly comparing property tax rates and sales tax rates is misleading. A sales tax is paid only once, when a transaction is made. A property tax on buildings is paid every year that an improvement adds value to a property. For long-lived assets (like buildings) during periods of low inflation, a “present value” calculation shows that a 1- to 2-percent property tax has the economic impact of a 10- to 20-percent sales tax on construction labor and materials. Thus, a 1- to 2-percent property tax applied annually has a significant impact on the cost of buildings. 

With regard to publicly created increases in land values (from population increases,  improvements to public infrastructure, collective results of private actions within neighborhoods, etc.), the same calculation shows that 80 to 90 percent of this value ends up as a windfall to landowners. This would appear to be an inducement for land speculation – land hoarding in lieu of land utilization. Thus, the economic impacts of property taxation appear to be significant in terms of their impact on real estate investment and disinvestment decisions. 

⁵See, Alan Mallach, The Divided City: Poverty and Prosperity in Urban America 164 Island Press 2018 ⁶See “World Population Review,” “Sales Tax By State 2020”

Communities may have preferences regarding the scale and intensity of development. These preferences are reflected in zoning and other development laws and regulations. These laws and regulations, to the extent that they reduce the scale or intensity of development for which there would otherwise be demand, will reduce land prices. If there is market demand for a 50- story commercial building at a vacant lot, then the price of the land will be commensurate with the net revenue that such a building would generate. If that vacant lot was zoned for a maximum of 10 stories, then the value of the land may be reduced to about 20 percent of the amount previously calculated. That is because land zoned for a 10-story building would not command prices (or taxes) commensurate with land zoned for a 50-story building. A land tax would not compel an owner to develop more intensively than what the zoning would allow. Thus, shifting taxes off of building values and onto land values is not expected to induce “over development” unless existing zoning allows for development that is deemed to be too intense. In that case, it might be more appropriate to amend the relevant zoning and development laws or regulations to ensure that development intensity is “appropriate” as defined by that community.

In today’s market, the relatively high tax on building value (relative to a risk-reward calculation) makes construction more expensive, thereby reducing the amount and quality of construction. The relatively low tax on land (relative to a risk-reward calculation) encourages land hoarding. The net result is that the built environment often fails to fill up the zoning envelope.

A community that transforms its traditional property tax into a public infrastructure access fee will encourage more development up to the limits defined by the intersection between economic demand and zoning permission. Development pressure will be greatest where land values are highest, in downtown areas near urban infrastructure amenities. Thus, vacant lots, surface parking lots and boarded-up buildings in downtowns would be subject to the greatest development pressure. If a downtown contains small historic buildings that are worthy of preservation, zoning changes and/or historic building designation and preservation incentives (such as transferable development rights) could accompany a tax shift away from building values and onto land values.

Any public facility or service that enhances the value of well-served locations could be funded with a land value tax. For example, in a community with significant traffic congestion, a high performing transit station is likely to enhance nearby land values. If the transit system reduces traffic congestion throughout the entire community, it might increase land values more broadly, possibly even where access to the transit service itself is difficult or inconvenient. Thus revenues from a land value tax could be used to fund a particular transit station or even an entire transit network. Indeed, almost any transportation facility or service, if well-designed and well executed, can enhance land values and thus could be funded, at least in part, through a land value tax.

Infrastructure projects such as freeways, roads, and sanitation facilities often have impacts, both negative and positive, on nearby land values. The effects of transportation infrastructure on nearby land values are very dependent on economic conditions and land use contexts. A new highway interchange might enhance nearby land value for trucking-related businesses, but it might diminish nearby residential land value if increased traffic, noise and pollution were the result. When land is sold, buyers assess the pros and cons and determine a value. Land value is publicly created and could serve as a justifiable source for funding the infrastructure that created that value.

Revenue from enhanced land value return be used for any legitimate public purpose. This would include construction, operations and maintenance of public facilities and services. If a new bridge provides improved accessibility to an area, land values are likely to rise. If the bridge is poorly operated and not maintained, that land value will diminish. So it makes sense to return publicly created land value to the public sector that created it and recycle it for the continued utility of that infrastructure.

Reforming the existing property tax so that the tax rate on building values is reduced while the rate applied to land values is increased, will, like a traditional property tax, produces revenue on an annual basis although collections may occur annually, semi-annually, or monthly.
Some jurisdictions outside of the United States have imposed “betterment levies” as a condition for new infrastructure projects.7 Calculated as a percentage of land value enhancement from a proposed infrastructure project, betterment levies are one-time payments from landowners in exchange for new or improved infrastructure.

⁷See https://urban-regeneration.worldbank.org/node/15

Land value return revenues are the product of two processes – one administrative and one legislative.

The administrative process involves the assessment of land value. Due to changes in population, development regulations (such as zoning), infrastructure, and economic markets, the demand for local land and its value are likely to change over time. Determination of land values benefits from a staff trained in land economics and assessment techniques, and from regular updates. This helps local officials understand the trajectory of the local economy. It also helps ensure that property is assessed fairly, based on its current array of publicly created advantages and disadvantages.

The legislative process is the setting of tax rates. Even if assessments are high, no tax is due unless a tax rate is applied to them. Elected officials, working with public agency administrators and constituents, determine what public goods and services should be provided and a reasonable basis for paying for them. If a public services access fee (land value return) is selected as a source of revenue, elected officials are responsible for setting a rate to apply to the assessed value of land.

Typically, land values change over time, both for individual properties and in aggregate. This is true for the traditional property tax as well. It is up to elected officials to set rates that raise the desired amount of revenue. If inflation in land values exceeds general inflation, tax rates could be reduced and still raise the required amount of revenue. On the other hand, if land assessments fall, revenues can be maintained by increasing the tax rate proportionately or by obtaining funds from other taxes and fees. 

Like a traditional property tax, land value return yields annual revenue. Like a traditional property tax, due to fluctuating assessments and tax rates, it is likely that total revenues will change somewhat from year to year. Because most financing tools require constant debt service payments, a portion of land tax revenues could be dedicated to debt service. This would satisfy the loan originators and underwriters that revenue for debt service payments will be reliably available for the term of the loan.

Any type of debt instrument that the implementing jurisdiction has authority to use can be used. Municipal bonds are often used if the cash requirements for the project exceed the cash flow from the land value return. But any legally permissible debt instrument could be used. Additionally, if a project is eligible for Federal loan guarantees, such guarantees can reduce the interest rates applied to those loans and thereby reduce the amount of land value return revenue that must be set aside for debt service payments.

The suitability of an area for land value return varies based on a case-by-case examination. However, successful examples of land value return (or split-rate taxation) can be found in urban, suburban, and rural communities. For specific examples, see the section below: Where has enhanced land value return been implemented?

Land value tends to be a larger share of total property value in rural areas. For this reason, some assume that enhancing land value return would be burdensome in a rural community. However, there is a lot of hidden “improvement value” there, even in the absence of buildings. Rural assessors should be aware that fencing, drainage, irrigation systems, storm water impoundments, terracing, and interior roads are all “improvements to land,” as are barns, silos and other out-buildings. The value of rural property is greatly enhanced by these privately created improvements. It is important that rural assessors subtract the value of these privately created improvements when determining the value of “unimproved land.”

Certainly, if there was a farm in the middle of a city, a revenue-neutral transition to a land value tax would probably increase the tax burden on this property because changes in tax burden would be related to the average improvement value to land value ratio in that city. (Properties with the average ratio would see no change. Properties with a higher ratio would see reduced taxes and properties with a lower ratio would see higher taxes.) However, in a rural area, the
average improvement value-to-land value ratio for that community would reflect the predominant land use – which might be mostly farms. In that case, as long as a farm was characterized by the typical improvement value to land value ratio for that community, a tax shift enhancing land value return would not substantially change the tax liability for that property.

Rural land, while extensive, is much less expensive per unit of area than urban land. Therefore, just as an urban landowner is not compelled by a land tax to build a 50-story building on land that is zoned for 5-story buildings, a rural farmer is not compelled to turn a farm into a subdivision if the land is valued in its unimproved state for agricultural use.

Under the traditional property tax system, farms at the urban fringe are often placed at financial risk if their land is valued according to subdivided urban use instead of according to its ability to produce a crop. Some communities protect farms by regulating their subdivision through zoning and/or the creation of transferable development rights. Often farms and ranches are classified separately from other property with a lower assessment or tax rate. These practices could be continued or expanded under enhanced land value return as long as jurisdictions avoid having the lower tax subsidize land speculators who are hoarding substantial acreage and only pretending to be farmers.

In the late 1800s, Danish farmers petitioned their government for a land tax.8 Wealthy landowners had been buying out family farms and letting them lie fallow. When the government implemented a land tax, the large landowners sold off some of their holdings to family farmers. Small farms tend to have more buildings and other improvements per farm than large farms. Thus, the family farms had a more favorable ratio of improvement value to land value than the large estates.

In the United States, rural examples of land value taxation have occurred within the context of special assessment districts. Pursuant to the Wright Act of 1887 as amended, irrigation districts in California were funded in part by fees levied against the value of land within the districts.9 Likewise, flood control along the Miami River in Ohio was funded from special assessments on the value of farmland which increased in value due to lower risks of flood damage.10

8See, Robert V. Andelson, ed., “Land Value Taxation Around the World, Third Edition,” 2000, pp 185-204.
9The statute of California of March 7, 1887, to provide for the organization and government of irrigation districts and to provide for the acquisition of water and other property, and for the distribution of water thereby f or irrigation purposes, and the several acts amendatory thereof. AKA the Wright Act of 1887. Now incorporated into the California State Code, Water Code, DIVISION 11. IRRIGATION DISTRICTS [20500 – 29978] . See https://law.justia.com/codes/california/2011/wat/division-11/
and, in particular, §§ 23511, 23532 and 25650 which authorize ad valorem assessments on land.
10 See, Robert V. Andelson, ed., “Land Value Taxation Around the World, Third Edition,” 2000, pp 153-154.

Because land value return favors land users over land hoarders, enhanced land value return can be beneficial for communities during all phases of the business cycle. During a “boom” period, rising land prices encourage speculators to hoard land for future sale. This can make it difficult for residents and businesses to obtain prime sites at reasonable prices. Enhanced land value return discourages land speculation and help ensure access to prime sites for land users at more reasonable prices.

During a “bust” period, land speculators who paid high prices for land during a preceding “boom” period are often reluctant to sell it at a loss. Because land-holding costs are low under a traditional property tax regime, these speculators may simply decide to sit and wait for the next boom period. Thus, during an economic downturn, the behavior of land hoarders continues to make it difficult for residents and businesses to obtain prime sites at reasonable prices. Enhanced land value return makes it more expensive for landowners to simply hoard vacant lots and boarded-up buildings, thereby ensuring access to prime sites for land users at more reasonable prices.

Pittsburgh, Pennsylvania, adopted a split-rate property tax in 1913. Data showed that the city weathered the Great Depression better than most cities in terms of losing a smaller percentage of its assessed value.11 Later, during boom times, Pittsburgh was notable for having more affordable housing than most other cities with robust economies. Today, between 15 and 20 cities in Pennsylvania use a split-rate tax.12 Most of them adopted this reform during the 1970s and 1980s when factories were closing and their economies were going bust.13

As with any ad valorem property tax, market conditions may call for legislative adjustments. First, market conditions impact the economic viability of infrastructure projects. Second, if assessments rise more quickly than spending needs, the tax rate could be reduced accordingly. And, if assessments rise less quickly than spending needs (or if they fall), it might be necessary to increase rates.

11 See Percy R. Williams, The Pittsburgh Graded Tax Plan: Its History and Experience, 1963 http://savingcommunities.org/docs/williams.percy/gradedtax.html#g128 (footnote #59) 12 See Alanna Hartzok, “Pennsylvania’s Success with Local Property Tax Reform: The Split-Rate Tax” 13 https://web.archive.org/web/20110419232223/http://www.ourcommonwealth.org/news/lvt-jurisdiction-rates

Projects with highly localized impacts may increase nearby land values substantially. Other projects might increase land values by the same amount, but in a more dispersed and less noticeable manner. Regardless of whether projects have localized or dispersed benefits, some projects might create land values that exceed project costs, whereas other projects might not.

Land value return is a valuable tool for raising revenues because it creates favorable economic incentives in much the same way as infrastructure user fees do. And, if land value return revenues are not sufficient to fund a project in its entirety, a jurisdiction could combine them with other revenue sources such as user fees or grants.

Almost every State employs a property tax that includes a tax on land value. Thus, in every State that employs a property tax, land value return is legal and constitutional. The ability to tax land values at a rate different from the rate applied to building values depends on State laws governing the imposition and administration of property taxes.

Under traditional property tax regimes, the jurisdictions that implement them are empowered to set the tax rates. In some jurisdictions, a legislative body has the authority to reduce property tax rates applied to building values and increase the rates applied to land values. However, the power to set tax rates has been circumscribed in some States by measures such as California’s Proposition 13, which froze property assessments and limited rate increases. This complicates making a transition from a traditional property tax to enhanced land value return.

The first step in the legislative process is to determine what is allowed under State law. If State law prohibits separate tax rates for land values and building values, an enabling law would need to be enacted. If State enabling legislation exists, examine local laws governing property tax assessments and the setting of tax rates. Once these laws are understood, they could be implemented or amended as necessary.

If State and local enabling legislation are in place, then, pursuant to the State and local laws, the tax rates could be set to reduce the tax rate applied to building values while increasing the rate applied to land values. Most places that have implemented this approach have phased it in gradually over a period of years.

In most States, local jurisdictions are empowered to establish property tax rates. However, this power has been circumscribed by Proposition 13 in California and similar measures in other States. State and local laws, including those governing the imposition and administration of property taxes, determine the degree to which voter approval may or may not be required. If local governments are empowered to set tax rates without limitations, exercising this power will not require a ballot measure or special election. But, like any legislation, a bill to set tax rates typically will involve a public hearing. So, there usually will be an opportunity for public involvement, even if a ballot initiative or referendum is not required.

The State attorney general’s office is a potential source of information on whether local officials in the State have the authority to establish property tax rates and, if so, whether they have the authority to set different rates for land values and building values.

If State and local law authorizes setting different tax rates for land values and improvement values, this legislation will indicate whether or not any studies are required prior to implementation. Regardless of whether any analysis is required, legislators are likely to be curious about the impact of this approach. In order to obtain an “apples to apples” comparison, the assessment role can be used to develop a revenue-neutral study comparing tax liabilities under the status quo to tax liabilities when the building rate is lower than the land rate.  Impacts could be assessed by land use type and by neighborhood. If homestead deductions are provided to homeowners under the traditional property tax, then they should also be provided under the new approach. If commercial properties are taxed differently than residential properties under the traditional property tax, this classification could also be retained under the new approach. 

Most taxes are subject to Constitutional requirements for due process and uniformity. In States where a traditional property tax is levied, land value return is already one component of that tax. So at the Federal level, there is no Constitutional impediment to land value return. However, State constitutions and State and local laws such as California’s Proposition 13 (and similar laws in other States), might impose other procedural or substantive requirements governing the validity of applying different rates of taxation to the value of buildings and land. Indeed, some State constitutions or statutes might specifically prohibit the taxation of land and improvements at different rates.

In Maryland, for example, Article 15 of the Declaration of Rights (part of the State constitution) indicates that land and improvements to land are separate classes of property. This would appear to permit land value taxation. However, there are statutes in the Maryland Code that permit municipailties to tax land and buildings at different rates but which prohibit Baltimore City and Maryland counties from doing so.14

14 See MD Code § 6-302 prohibiting Baltimore City and Maryland counties from taxing land and buildings at separate rates while MD Code § 6-303 permits municipal corporations (cities) to do so.

“Uniformity” is the legal principle that requires similar people or things be treated in similar ways. In other words, there should not be arbitrary differences in the way that people in the same situation (or things that are fundamentally the same) are treated by the law.

Many States have uniformity requirements. Some might conclude that all real property must be taxed the same and that taxing land and buildings at different rates violates the uniformity requirement. Yet many States with uniformity requirements, tax commercial property at one rate and residential at another. Agricultural property is almost always taxed at a different rate. Homeowner property and rental property often have a different tax rate. Regardless of rates, homeowner property may benefit from a “homestead deduction” whereby a specified amount is subtracted from a homeowner’s property assessment. Some properties are subject to lower tax rates due to their location within a designated enterprise zone.

In each of these cases, either a State or local legislative body has enacted a law that distinguishes some real property from other real property. Privately created building values and publicly created land values could be taxed at different rates if legislation establishes “unimproved land” and “improvements to land” as separate classes of property.

An examination of statutory and case law in a particular jurisdiction should reveal the potential ease or difficulty in distinguishing “unimproved land” from “improvements to land” as distinct categories subject to different tax treatment without violating uniformity.

Yes. However, some might contend that because many properties contain both land and buildings, it is difficult to determine how much of the total value comes from the building and how much comes from the land. Although this discussion can become very technical, ordinary people accomplish this task every day.

Many individuals and families are in the market for a home to rent or buy. They have certain desires for bedrooms, square footage, yard size, amenities, style, etc. Once they have defined their desired home, they discover that there are many similar homes or apartments in the same condition throughout the community. Yet, homes that are practically identical might be renting or selling for dramatically different prices in different neighborhoods. That is because some neighborhoods are closer to good schools, shopping, jobs, parks, or transportation facilities while others are subject to airport noise, pollution from nearby factories, poorly maintained streets, traffic congestion, crime, etc. In other words, the same house or apartment will rent or sell for very different prices depending on the characteristics of a neighborhood. These neighborhood differences are expressed by different land values. So, families understand that different neighborhoods have different land values as measured by different prices for essentially the same house or apartment.

For professional assessors, there are computers that can perform multiple regression analysis to determine which aspects of a property contribute various amounts of value to the total value or sales price. If anybody needs clarification about the technical aspects of property assessment, the International Association of Assessing Officers or State-level associations can provide support.

In many jurisdictions, property owners may appeal the amount of a property’s assessment if they believe it is in error under the applicable laws and regulations. (Legislation and courts decide what percentage of value constitutes an appealable error.) But because most places apply the same tax rate to both land and buildings, it makes no difference on the tax bill if a $100,000 home’s assessment shows $25,000 in land value and $75,000 in building value or vice versa. Because the apportionment of the assessment between land value and building value makes no difference in taxes owed, many jurisdictions do not allow this type of appeal as long as the total value is uncontested.

But, if a jurisdiction were to adopt enhanced land value return (or “split-rate tax”), the apportionment of value between land and buildings would make a difference in taxes owed even if the total value remained unchallenged. Therefore, if a jurisdiction moves from a traditional property tax to enhanced land value return (or split-rate tax), it would be prudent and fair to modify the assessment appeal process to allow appeal of value apportionment between land and buildings even if the total assessment is not contested.

State or local law will indicate whether or not there is a requirement for periodic reassessments. Market conditions are always changing. Therefore, for both accuracy and fairness, property value assessments should be updated on a regular basis to reflect those conditions.

The primary reason for shifting taxes off of privately created building values and onto publicly created land values is to promote better long-term outcomes in terms of job creation, housing affordability, and land stewardship. Sudden changes in tax rules could create short-term windfalls and wipeouts. To avoid unfairness, jurisdictions could manage these short-term impacts in several ways.

First, jurisdictions might choose to phase in any change in tax rates over a period of years. If the changes are modest in the beginning and become more aggressive in the future, owners of vacant lots, surface parking and boarded up buildings are able to shift their investment decisions to take advantage of the new incentives without suffering from short-term penalties. Second, homestead deductions, property tax deferrals and “circuit breaker” policies can cushion the short-term impacts of tax policy changes on property owners (and renters) who lack cash resources.

Intensity of development determines changes in tax liabilities 

It is important to understand how tax burdens might shift as a result of a policy change.  Each jurisdiction is unique and the impacts for any particular community are revealed by examining assessment data in that community. In general, a revenue-neutral change from a traditional property tax to enhanced land value return (or split-rate property tax) yields the following results: 

● If a property has an improvement value to land value ratio that is the same as the jurisdiction’s average ratio of improvement value to land value, then the tax liability for that property remains unchanged. 

● If a property has an improvement value to land value ratio that is higher than the jurisdiction’s average ratio, then the tax liability for that property will be reduced. (Well-maintained buildings that occupy a large percentage of their lots would be examples in this category.) 

● If a property has an improvement value to land value ratio that is lower than the jurisdiction’s average ratio, then the tax liability for that property will increase. (Vacant lots, surface parking lots and boarded-up buildings would typically be in this category.) 

Because farms typically have more value in land than in improvements, some assume that a land value tax doesn’t work well for farmers. This is not necessarily true. The impact of the transition depends on the improvement value to land value ratio of an individual property being compared to the average improvement value to land value ratio for the entire community or tax classification. Thus, in a rural community, as long as a farm has the typical ratio of improvement value to land value as most other farms, a revenue-neutral shift to a land value tax should not change tax liability significantly. Second, in a rural context, it is important to understand that there are significant “improvement values” that might be misclassified as “land value” by an urban dweller. Thus, the value of fields can be greatly enhanced by fences, irrigation systems, drainage systems, terracing, water retention ponds, interior roads, etc. It is important that rural assessors allocate value created by these improvements to “improvement values” and not to “unimproved land values.” 

Tax rates and application are very malleable. If proper attention is paid to the design and implementation of a new tax policy, short-term impacts can be managed to enhance fairness and political feasibility. 

Rich homeowners versus poor homeowners 

First, there is no necessary relationship between the value of a home and the income of its owner. Although more affluent people tend to have more expensive homes, there is no direct relationship between property taxation and ability to pay. 

Second, many people assume that reducing or eliminating the tax on buildings will benefit affluent homeowners more than others because affluent homeowners tend to have the most expensive houses. However, in most instances, the houses in affluent neighborhoods have a lower ratio of improvement value to land value than homes in middle- and lower income neighborhoods. This is because land prices are proportionately much more expensive in affluent neighborhoods. So although there is no direct relationship between the income of a homeowner and the value of their house, there is more of a relationship between the income of a homeowner and the value of his or her land. As a result, shifting taxes from building values onto land values tends to reduce tax liabilities more for lower and middle-income neighborhoods compared to higher-income neighborhoods because less-affluent areas have higher ratios of improvement values to land values even though the houses themselves have modest value. 

Homeowners versus renters 

In general, rental properties have a higher ratio of improvement value to land value than ownership properties. This happens, in part, as a result of apartment buildings where many units share the same land. It also happens because rented single-family homes are often in middle- and low-income neighborhoods. Thus, in general, shifting the property tax from building values to land values tends to reduce tax liabilities for rental properties. 

Residential property versus commercial property 

Typically, residential property as a class has a higher improvement value to land value ratio than the jurisdictional average, but not always. Commercial property values can vary a great deal within a jurisdiction. If commercial property is characterized by low-value buildings surrounded by acres of parking, then it will likely have a very low improvement value to land value ratio. (This is typical of commercial buildings in suburban areas.) On the other hand, if a commercial building occupies almost its entire lot with little or no surface parking, then it will likely have a high improvement value to land value ratio. (This is typical of commercial buildings in older cities, towns and villages.) 

Developed property versus vacant property 

By definition, developed property will have a higher improvement value to land value ratio than vacant property which will have an improvement value to land value ratio of zero. Thus vacant property will always experience an increase in tax liability from a revenue neutral transition toward enhanced land value return. 

Because vacant land exists within residential, commercial and industrial areas, when analyzing the impact of this tax reform on different neighborhoods or land use types, it is important that vacant lots and surface parking lots be analyzed separately. Otherwise, the tax reductions for well-maintained developed properties may be cancelled out by tax increases for vacant properties thereby obscuring the impact of the reform.

A Capital Improvement Plan (CIP) is a State or local planning document containing all the individual capital projects, maintenance and operations, financial plans, and major studies for a state or local government. A CIP looks beyond a federally-required fiscally-constrained plan and includes projects outside of the fiscally-constrained Plan. Construction and completion schedules can also be included. The plan provides a working blueprint for sustaining and improving the community’s infrastructures. It coordinates strategic planning, financial capacity, and physical development. 

A Transportation Improvement Program (TIP) is a four-year, fiscally-constrained document required for Metropolitan Planning Organizations (MPOs). The TIP lists all transportation projects in an MPO’s _{metropolitan planning area that use federal transportation funding.} Detailed requirements for TIPs and the MPO transportation planning process are located in 23 CFR part 450. 

A land value tax will generate revenue in a similar manner to a traditional property tax. How much of that revenue will be dedicated to capital projects is a political question that a jurisdiction’s legislature will determine when it approves the CIP and TIP. This revenue can be used to fund projects in their entirety, in combination with other sources of revenue, or as a source of local matching funds for grants from other levels of government. 

Land value return is already a component of the traditional property tax that is levied in most jurisdictions. So no special accounting practices are associated with enhanced land value return. 

However, when determining property value assessments, jurisdictions do not always pay close attention to the way in which total property values are apportioned between land value and building value. Under the traditional property tax, both land values and building values are taxed at the same rate, so the apportionment of value does not have material consequences. Under enhanced land value return (or “split-rate property tax”), two properties worth $100,000 dollars would have very different tax bills if one was apportioned with $25,000 in the land and $75,000 in the building while the other property was apportioned differently. Computer assisted mass appraisal (CAMA) programs can accurately apportion total property value between building value and land value components. For the sake of fairness and due process, jurisdictions with enhanced land value return (or split-rate property tax) could allow property owners to appeal the apportionment of their assessment even if they don’t disagree with the total value. 

As mentioned, every property tax contains land value return as one of its components. But pure land value return fees (where the tax rate on building values is zero) are relatively rare. Yet, there are some interesting examples in the USA and around the world.

San Francisco 

San Francisco was quickly redeveloped as a compact and vibrant city after the devastating earthquake and fire of 1906. At that time, there was no Federal Emergency Management Agency nor were there any Federal grants for redevelopment. According to Professor Mason Gaffney, San Francisco’s property tax at that time was applied primarily to the value of land. Thus, when buildings were destroyed, the property tax liability continued to be substantial. This motivated landowners to redevelop quickly so that they could obtain income from which to pay their taxes.¹⁵ 

California Irrigation Districts 

The Wright Act of 1887 created irrigation districts in California and funded them through water consumption user fees. But it was noted that large affluent landowners within these districts could let their land lie fallow, consuming no water. These landowners paid nothing to operate and maintain the nearby irrigation systems, but reaped large benefits from increased land values due to their access to irrigation. The Wright Act was amended in 1909 and 1917 to add a fee based only on land values within the districts.¹⁶ This fee induced many of the large landholdings to be broken up into smaller, intensively farmed operations. 

Pittsburgh 

In the early 1900s, Pittsburgh was poised to become an industrial powerhouse. Iron ore could be shipped there via the great lakes. Coal for furnaces was right there. And the customers for steel were in the east coast cities, just a train ride away. But there was a problem. Steel mills need lots of flat land – and there isn’t much of that in Pittsburgh. There was some of it, along 

the banks of the Monongahela, Allegheny and Ohio Rivers. But that land was controlled by a few landowners who were refusing to sell unless they received above-market prices. So the steel investors urged Pittsburgh’s Council to reduce the tax rate on buildings and increase the tax rate on land. This was phased in over about five years, after which the tax rate on building values was one half the rate on land value. The steel manufacturers got access to the riverfront land and Pittsburgh began making steel and other goods as well. 

During the Great Depression, many large cities lost 25% to 58% of their assessed property value. Pittsburgh’s assessments declined by only 11%. Most of the country experienced a land speculation boom in the late 1920s. The bust of this real estate bubble helped bring on the Great Depression. But in Pittsburgh, the tax system had discouraged real estate speculation. 

Therefore, assessments were not artificially inflated during the 1920s and did not decline as much as elsewhere during the 1930s.¹⁷ 

During Pittsburgh’s Post World War II boom years, the 1940s through the 1970s, Pittsburgh was unusual for having a robust economy and relatively affordable housing. 

During the 1970s, Pittsburgh experienced a budget shortfall. The mayor proposed a wage tax to fill the gap. This would have cost the average family about $200 per year and many were concerned that it would chase jobs out of Pittsburgh. So the Council proposed an increase in the tax on land value instead. Because most of Pittsburgh’s land value is located in its downtown, this proposal to fill the budget gap ended up costing the average family about $80 per year. Yet many were concerned that higher taxes in Pittsburgh’s downtown would hurt business. In actuality, after increasing the land tax to a point where it was four times the rate on buildings, Pittsburgh’s downtown experienced a surge of new development that became known as Renaissance II. 

Beginning in the late 1970s and early 1980s, Pittsburgh’s factories began to slow down and then disappear. Although Pittsburgh suffered, it out-performed many other rust-belt cities. In other rust-belt cities, when a factory closed, the assessed value went down. With very low holding costs, factory owners often decided to sit and wait for local, State or Federal economic development grants or loans to subsidize redevelopment. But sometimes these subsidies never materialized. Because of Pittsburgh’s tax system, the lower assessment of the closed factory did not reduce tax liability as much because land values were taxed more heavily. Owners of closed factories found it too expensive just to sit and wait. Pittsburgh’s split-rate tax system encouraged owners of closed factories to put their properties back into use. 

In the late 1990s, there was a court order mandating reassessment of properties in Allegheny County. Allegheny County includes Pittsburgh, but only Pittsburgh taxes land and buildings at separate rates. According to some, the private firm hired to perform the reassessments did not do a good job apportioning total property value between its building value and land value components. As a result of the reassessment, tax liabilities were going to increase dramatically in Pittsburgh’s affluent neighborhoods. Pittsburgh did not have the time or money to perform its own reassessment. Instead, it was decided to abandon the split-rate tax in favor of the traditional property tax, because the traditional property tax yielded a more favorable result for the affluent communities.¹⁸ 

Miami Conservancy District 

In Ohio, a flood control project along the Miami River was funded through a special assessment based on the increased value of nearby farmland for which flooding risks were substantially reduced. This special assessment was based on land value only – and therefore an example of land value return.¹⁹ 

McKeesport, Clairton, and Duquesne, Pennsylvania 

In the social sciences, controlled experiments are rare if not impossible. Policies are changed and then results are measured. But would these results have occurred anyway? These three small steel towns near Pittsburgh provided as close to a controlled experiment for enhanced land value return as one might hope for. 

In the 1970s, all three towns had similar demographics and a closed steel factory in the middle of town. For several consecutive years, the number and value of building permits had declined in each town. McKeesport then adopted a split-rate property tax. Soon thereafter, the issuance 

of building permits increased and continued to increase for several consecutive years. But would this have happened anyway? In nearby Clairton and Duquesne, comparable towns subject to the same regional economy, the number of building permits continued to decline during the period when permits were increasing in McKeesport. When Clairton and Duquesne noticed what had happened in McKeesport, they also enacted a split-rate tax. And shortly thereafter, building permits in these towns also began to increase.²⁰ 

It is important to recognize that all three of these towns remain economically distressed. Losing a major factory and thousands of jobs has a significant negative impact. Reforming the property tax did not cause the factories to re-open. But each of these towns performed better after enacting a split-rate property tax than it had before. Thus, property tax reform cannot eliminate business cycles or cure major economic problems. But, regardless of the current phase of the business cycle (and even when economic demand and activity are at their lowest), enhancing land value return through a tax shift will allow a community to perform better than it would under a traditional property tax. 

Harrisburg, Pennsylvania 

In 1972, Hurricane Agnes caused the Susquehanna River to flood downtown Harrisburg, Pennsylvania’s state capital. Similar to many other cities, middle class whites were leaving downtown for the suburbs. By 1975, Harrisburg had over 5,000 vacant and boarded-up properties in its downtown. During the early and mid-1970s, Harrisburg was listed as one of the worst cities in the U.S. for its size. 

In 1975, Harrisburg began to reduce the tax rate applied to building values while increasing the tax rate applied to land values. By the end of the 1980s, the number of vacant properties had been reduced from over five thousand to just a few hundred. (This rejuvenation of Harrisburg’s downtown occurred long before the “back to the city” movement of recent years.) Harrisburg began being listed as one of the better cities in the USA for its size.²¹ 

Prior to 1970, only Pittsburgh and Scranton taxed buildings at lower tax rates than land in Pennsylvania. During the 1970s and 1980s, the number of Pennsylvania cities using this technique grew to more than 15. As mentioned earlier, Pittsburgh terminated its two-rate property tax in the early 2000s. 

Peoria Enterprise Zone 

Peoria, Illinois, created an enterprise zone in the early 1980s. One of the benefits to properties within the zone was that the improvement value of new construction or substantial rehabilitation would be exempt from property tax. By abating the property tax only on improvement values for industrial/commercial properties, property taxation for eligible properties was transformed into an approximation of a split-rate or land value tax. The tax abatement for new construction and substantial rehabilitation seemed to spur redevelopment within the zone. The dollar value of industrial/commercial building permits within the zone increased from 8 percent of the city total to 21 percent of the city total, comparing a period after enactment of the abatement to the 3-year period preceding it.²² The enterprise zone in Peoria expired in 2013. 

Hong Kong Transit 

When Hong Kong was about to build its subway system, the city sold land above and around proposed transit stops to the transit authority (MTR). Once the subway was completed, MTR leased these lands to private developers. MTR is one of the few (if not the only) profitable transit operations in the world. Part of the reason is that the transit authority retains transit created land values through developer lease payments to the MTR.²³ This is not a reformed property tax. But, it is a clear application of the principle of land value return. (A tax on land value would be less robust and capture a smaller portion of the transit-created land value that the MTR obtains through land leases.) 

For additional examples, see NCHRP Report 873, “Guidebook to Funding Transportation through Land Value Return and Recycling” at http://www.trb.org/Main/Blurbs/177574.aspx . 

      ¹⁵ Mason Gaffney, “New Life in Old Cities,” The Robert Schalkenbach Foundation, 2006, pp 24-26. Mason Gaffney was a professor of economics at the University of California, Riverside. 

¹⁶ The statute of California of March 7, 1887, to provide for the organization and government of irrigation districts and to provide for the acquisition of water and other property, and for the distribution of water thereby f or irrigation purposes, and the several acts amendatory thereof. AKA the Wright Act of 1887. Now incorporated into the California State Code, Water Code, DIVISION 11. IRRIGATION DISTRICTS [20500 – 29978] . See https://law.justia.com/codes/california/2011/wat/division-11/ and, in particular, §§ 23511, 23532 and 25650 which authorize ad valorem assessments on land.

¹⁷ See Percy R. Williams, The Pittsburgh Graded Tax Plan: Its History and Experience, 1963 See also Dan Sullivan, “Why Pittsburgh Real Estate Never Crashes .” 

¹⁸ Dan Sullivan, “Why Pittsburgh Real Estate Never Crashes.”

¹⁹ Robert V. Andelson, ed., “Land Value Taxation Around the World, Third Edition,” 2000, pp 153-154. ²⁰ Steven Cord, Incentive Taxation, October 1995, cited in Rick Rybeck & Walter Rybeck, “Break the Boom & Bust Cycle,” Public Management, August 2012, pp 7-10, at Note 6.
²¹ National Neighborhood Coalition, “Neighborhoods, Regions And Smart Growth Toolkit: The Smart Growth, Better Neighborhoods Action Guide,” 2003. Case Study: Two-Rate Tax in Harrisburg, p26. ²² Robert V. Andelson, ed., “Land Value Taxation Around the World, Third Edition,” 2000, pp 159-160. ²³ Lincoln Leong, “The ‘Rail plus Property ’model: Hong Kong’s successful self-financing formula.”

It may be less rare than you think. Every traditional property tax includes land value return as one component. In this respect, land value return is almost ubiquitous. However, it is almost always combined with a tax on building values. 

Thus, it is rare for land value return to be implemented without a corresponding tax on building values. There are many reasons for this. 

Lack of Understanding. Most people think that the property tax is one tax. They don’t recognize that it is a combination of a land value return fee and a building tax. (See the discussion above, Why does the distinction between “tax” and “fee” matter?) More importantly, most people don’t realize that returning publicly created land value has significantly different economic impacts than taxing privately created building values. (See the discussion above, Why apply different tax rates to building values and land values?) 

Vocabulary. Misunderstandings about the economics and fairness associated with taxation of land and buildings combined with vocabulary that perpetuates these misunderstandings present significant hurdles for achieving desired public policy outcomes. 

The words and phrases we use to discuss land speculation and taxation contribute to and perpetuate our lack of understanding. When people buy and sell land for future appreciation, we often refer to this as “real estate investment.” This sounds very respectable. And, under capitalism, when people “invest” they take a “risk” and deserve a “profit” if they can get it. 

Buying and selling land for future appreciation is not an “investment” as this term is defined in economic theory. In economic theory, investment is foregoing consumption today to create something that enhances production or productivity in the future. In other words, I might construct a building, hoping that future rents from the building will exceed the costs of construction and operations. This is an economic investment that entails some risk. And, if the risk of not making a profit materializes and my building is foreclosed, society has a building that could eventually be put to use by somebody. 

When land speculators buy and sell land, nothing of value is created. And although buying and selling land can be risky, it is not a “productive risk.” In other words, jumping off of Niagara Falls in a barrel is risky. Playing Russian roulette is risky. But nothing of value is created by taking these risks and most people don’t think it is good public policy to reward these activities simply because they are risky. Succinctly, land speculation is “gambling” and not “investment.” 

Land speculation is a parasitic activity. It creates nothing of value. If land increases in value, it is generally not because of anything that the owner did. Increasing land value results from population increases or improved public infrastructure or from the positive externalities associated with the cumulative results of private enterprise throughout the community. If land values go up, it is the result of other people’s work. 

By withholding prime sites from development today, in favor of anticipated future appreciation, land speculators make it more difficult and expensive for residents and businesses to get access to land, creating hardships for land users and depressing the local economy. Thus, land speculation is “gambling” and not “investment.” There is no social utility obtained from allowing private landowners to profit from the work of others. 

Not only does our vocabulary convey a false “respectability” to land speculation, but it also vilifies the remedy. Some refer to land value return as a “land value tax.” If somebody suggests that a community could increase employment or make housing more affordable with a “land value tax,” people will only hear the word “tax.” And most people’s response to something they perceive as a new tax will be “No thank you!” Thus, the suggestion for a “land value tax” is often dismissed out of hand, without any debate. 

In lieu of the term “land value tax,” some say “value capture.” Most people don’t understand the term “value capture.” To some, the word “capture” sounds hostile and aggressive. 

Explaining “land value tax” or “value capture” as “land value return” might be a better way to talk about this concept. In other words, if a community creates land value through public facilities and services, that publicly-created value should be “returned” to the community and recycled to help create and maintain the infrastructure that generated this value. 

To help people understand that land value return is already being paid (and is not a new tax or fee), advocates could talk about “enhanced land value return” and mention that it could be achieved with a property tax shift. The term “tax shift” helps people understand that the tax on building values will be reduced while land value return is being enhanced. 

Some advocates for land value return talk primarily about the benefits of enhanced land value return. Sometimes, they neglect to emphasize that reducing or eliminating the tax on building values is an integral part of this policy. A “universal tax abatement act” to reduce taxation on all buildings would probably generate more interest and enthusiasm than a “land value tax implementation act” even though the substance of each bill might be identical.

First, land in Upton is already relatively cheap. Yet, BlackRock has not taken advantage of this. Nonetheless, much of the land in lower income neighborhoods is owned by non-resident investors. So the issue is less whether an owner is local or non-local. Perhaps, the issue should be, will the owner contribute to the community or be parasitic?

There are two ways to make money in real estate: 

● Construct,operate and maintain buildings. Producers of buildings and building services hope that people will pay more to use these buildings than it costs to construct, operate and maintain them. [NOTE: Even a self-managed coop will have to cover its construction, operations and maintenance costs.] 

● Buy land and sell it later for more than was paid for it. Because land values are created by the community, land speculators are making money off of other people’s work. 

Sometimes, the same person (or entity) is involved in both types of real estate activity (production and speculation). The typical property tax favors speculation over production. The tax shift reform favors production over speculation. 

Under the status quo, only the affluent can afford to buy and maintain homes. The tax-shift reform makes it cheaper to construct, improve and maintain buildings, thereby making housing more accessible to those who are less affluent. 

Rich people, because they are rich, can purchase more goods and services than the non wealthy. If we could find a way to make bread and milk more accessible to the hungry by lowering the price, should we avoid doing so because it would make bread and milk cheaper for rich people? 

Some investors are bound to purchase properties and lease them out. But, lower land prices also enable nonprofit developers to acquire land to construct affordable rental housing as well as owner-occupied housing that is kept permanently affordable. 

The status quo, which allows private landowners to appropriate publicly-created land values, has been an engine for tremendous income inequality. Taxes (paid by everybody) fund public goods and services which then enrich those who own the best-served land. These prime sites are typically in the downtown and owned by the most affluent and powerful people (typically white) and corporations. 

The proposed tax shift returns publicly-created land values to the community that created them. Of course, political diligence will be required to ensure that tax revenues are spent appropriately. Publicly-created land values could be used to fund the public services and facilities that created them. Land value return could also fund affordable housing and local business start-ups. 

Importantly, the proposed tax shift will increase activity in building construction, improvement and maintenance. (See “The Earth Belongs to Everyone,” Pennsylvania’s Success With Local Property Tax Reform, Alanna Hartzok, 2008, pp 204-205 https://theiu.org/wp content/uploads/2021/10/The-Earth-Belongs-to-Everyone.pdf).This activity creates jobs for both skilled and unskilled workers. Unskilled workers in these activities often have opportunities to apprentice and become more skilled. Also, lower rents make local businesses more profitable and allow them to hire more workers. Most importantly, jobs created in the building trades and in local businesses cannot be exported elsewhere. If a roof is to be fixed or solar panels installed, the labor must be done in Baltimore. 

Regeneration: 

In the early and mid 1970s, Harrisburg was rated as one of the most distressed cities of its size in the country. Urban flight by White households (typical for most cities at this time) combined with severe flooding from Hurricane Agnes in 1972 left Harrisburg’s downtown with over 5,000 

vacant lots and boarded-up buildings. Harrisburg implemented the tax shift in 1975. Over the next 15 years, the number of vacant lots and boarded-up buildings was reduced to just a few hundred. 

[“Neighborhoods, Regions and Smart Growth Toolkit,” National Neighborhood Coalition, 2005, p 26. See web.archive.org/web/20040610031846/www.neighborhoodcoalition.or g/pdfs/content.pdf] 

Displacement: 

As mentioned above, Harrisburg implemented the tax shift in 1975 and experienced substantial regeneration over the next 15 to 20 years. But this development activity did not result in gentrification. According to census data, Harrisburg’s population peaked at 75,917 in 1920 and declined steadily until 1990. Harrisburg’s population has remained at about 50,000 from 1990 until the present time. At the present time, Harrisburg is 51.5% Black and 34.9% White. Of the entire population, about 21.8% identify as Hispanic. Median household income is $39,685 and 23% of households are below the poverty line. Renter households occupy 64.4% of all housing units and median monthly rent is $856. (See https://www.biggestuscities.com/city/harrisburg pennsylvania) 

Typically, cities with booming economies have more severe housing affordability issues. (E.g., San Francisco, Silicon Valley, Boston, Washington, DC, etc.) Yet, Pittsburgh had a booming economy from the early 1920s through the 1970s and during that time housing was relatively affordable for working class people. Pittsburgh employed the split-rate property tax shift we’ve been referencing (taxing buildings less and land more) from 1913 until 2000. 

Also, during the Great Depression of the 1930s, many large cities saw assessed property values drop by between 25% and 40%. In part, this was caused by rampant real estate speculation and property price increases just prior to the 1929 stock market crash. But in Pittsburgh, assessed property values dropped by only 11%. Why? Pittsburgh’s split-rate tax discouraged real estate speculation. Thus, land prices in Pittsburgh didn’t rise so quickly in the 1920s as in other cities because land speculation was discouraged. 

[“Pittsburgh’s Pioneering in Scientific Taxation,” Percy R Williams, (Pittsburgh’s Chief Assessor 1934-1942), fn 59. Republished as The Pittsburgh Graded Tax Plan: Its History and Experience,

Robert Schalkenbach Foundation, New York, 1963. See 

http://savingcommunities.org/docs/williams.percy/gradedtax.html] 

Between 1918 and the early 1970s, Pittsburgh taxed buildings at 1⁄2 the rate applied to land values. In the 1970s, due to a large budget shortfall, the Mayor proposed a wage tax that would have cost the average Pittsburgh family $200 each year. Instead of the wage tax, the City Council enacted higher tax rates on land value while leaving the tax rates on building values alone. Because most of Pittsburgh’s land value was located in the commercial downtown, this tax increase only cost the average Pittsburgh family $80 each year. Thus, increasing the tax rate on land values probably prevented displacement that would have been caused by the proposed wage tax. 

Opponents of the increase in land tax rates predicted that businesses would flee downtown. Instead, there was significant redevelopment in the central business district (new corporate headquarters). (See Oates & Schwalb, “The Impact of Urban Land Taxation,” National Tax Journal, Vol 50 No. 1 (March 1997) pp 1-21. See 

https://www.econ.umd.edu/publication/impact-urban-land-taxation-pittsburg h-experience.) But downtown redevelopment was not accompanied by significant private sector displacement in the residential neighborhoods. 

Reparations: 

The status quo, by redistributing wealth from the general public to the owners of prime sites, is part of the engine for growing income and wealth inequality. The proposed tax shift will reduce the degree to which future infrastructure creation and maintenance will transfer wealth from the general public to the most wealthy and powerful. 

This is not reparations per se, but it is a more ethically-based economic framework that rewards productive activities in lieu of subsidizing parasitic speculation. 

The proposed tax shift does not contradict and is not inconsistent with reparations.

The Tax Shift is broad. It is broad because it corrects a broad adverse policy embedded in the existing property tax that discourages property improvement and encourages speculation. Property improvement is precisely what makes urban areas vibrant and vital places to live and work. Speculation in vacant or underused land, however, saps the vitality of an urban area and holds productive members of the community hostage to inflated land prices. 

Even if the only reason for the Tax Shift were to discourage vacant buildings, a tax penalty on vacant buildings alone would not be a suitable alternative for several reasons. First, it is administratively cumbersome. An inventory will have to be taken of all buildings to determine which ones are vacant. Then, an arbitrary decision must be made regarding how long a building must be vacant before the penalty tax will be imposed. Then, the vacant building inventory must be constantly updated as buildings vacillate between vacant and occupied. (Baltimore already has an inventory of land and building values that is updated each year.) 

Second, and more important, the owner of a vacant building could avoid the penalty tax by tearing down a vacant building. No vacant building, no tax. Because many owners of vacant buildings are speculating in land value appreciation, they are not concerned about the fate of the building. Yet, the cost of building units from scratch is often higher than the cost of rehab. By encouraging owners to tear down vacant units, Baltimore would lose a potential source of new units that could be provided at relatively low cost. 

Similarly, the tax penalty law might want to exempt properties damaged by fire. After all, the property owner has suffered a tragedy. Why add insult to injury? Yet, when the District of Columbia implemented its vacant building penalty tax with this exemption, the number of suspected arson cases rose by 400%. Not only does arson deprive the District of potentially more affordable units, but arson places neighboring properties, residents and fire fighters at risk. 

Vacant buildings are not a static or momentary condition. They are the result of a long process of investment and disinvestment decisions. A penalty on vacant buildings ignores the fact that the existing property tax rewards owners for allowing buildings to deteriorate. A sudden and arbitrary “now you’ve gone too far” penalty tax fails to address this long-term dynamic process. It also fails to address the tax penalty contained in the traditional property tax that will increase property taxes when the vacant building gets improved. 

With a comprehensive Tax Shift, owners of vacant units don’t receive an economic advantage from tearing them down nor are they penalized for improving them.