How affordable housing, sprawl, and property taxes can be winning issues for Dems.

Sprawl is an issue everyone is concerned about but few have any answers to or new ideas. On the other hand most sprawling metropolitan areas have a center city with little affordable housing that is driving people to the suburbs, which is exacerbating the sprawl problem. A winning issue for Democrats in local elections is to make housing more affordable in urban areas to mitigate this flight. A novel way to encourage more growth in the Urban housing supply is to increase the land-tax portion, while decreasing the building-tax portion of property taxes. Let me explain how this simple change could make a large difference in urban housing.

Let me explain how this would help. All property taxes are assessed by combining the following two components. First the municipality assesses the value of the land, based on its location, a tax rate based on the value is then charged. Next the value of the building on the property is assessed and is taxed at a given rate. The two amounts are then added together and a final tax bill is given. In a typical city 80% of the property tax rate is based on the building, only 20% is based on the land lot. I will use the figure of a $100,000 house extensively to make the math easier, recognizing that today for most of the country $100,000 house is not realistic.

For example on a $100,000 house (of the total property value Land is $20,000, building is $80,000)
Property tax rate = (Land Value x taxrate) + (Building Value x taxrate)
Property tax rate = ($20,000 x .02) + ($80,000 x.02) = $2,000/year

The current system usually leads to a number of problems. Imagine two identical lots side by side to each other, each with ramshackle apartment buildings equally valued. The two lots would have equal value and the land part of the taxes would be equal. Now image that on the first lot someone improves the ramshackle building, and builds serviceable housing, improving the value of his or her house. Lets say their good effort doubles the values of their building. Their " reward " would be a sharply higher tax rate. In effect the city would penalize them for making home improvements!

For example on a house now valued at $160,000
Property tax rate = (Land Value is constant x taxrate) + (Improved Building Value x taxrate)
Property tax rate = ($20,000 x .02) + ($160,000 x.02) = $3,600/year

Now imagine if the ratios were reversed, 80% based on land 20% based on the buildings value. The landlord who improves their place would still see a tax increase but not as great of one. The remaining ramshackle hut would now see a higher marginal tax rate for leaving his or her building in disrepair, but no actual tax increase. The same rules of value lots based on their location would still apply. A small house in a working class area of the city land-tax, would still be valued less than the land under a McMansion in a posh area of town. The major difference would be that if two small houses lay next to each other the owner who fixes up his place wouldn’t be penalized as much for it

For example on the $100,000 house
Property tax rate = (Value of the land x taxrate) + (Building Value x taxrate)
Property tax rate = ($80,000 x .02) + ($20,000 x.02) = $2,000/year


For example on the improved $160,000 house
Property tax rate = (Land Value x taxrate) + (Improved Building Value doubled x taxrate)
Property tax rate = ($80,000 x .02) + ($40,000 x.02) = $2,400/year

In the above example the owner who improved his property, still saw an increase but much less of one than that under the current tax regime. The other owner who chose not to fix up his building saw no tax rate increase so he or she really doesn’t care!
Now this tax fix can also create its own problems so its not suited for every environment. I will list some ground rules for when or where it would be ideal.

Cities with lots of undeveloped lots or empty buildings

Under the current system speculators are rewarded for not building . By leaving the land empty they pay a lower proportional tax rate than developed land. Under the current system they face no penalty for leaving their land empty and therefore often do. A property developer is actually penalized for improving his house because his taxes will face a commensurate increase.

For example on empty lots
Currently (values based on 20% land 80% building)
Property tax rate = (Value of the unused land x taxrate)
Property tax rate = ($20,000 x.02) = $400/year
New System (values based on 80% land 20% building)
Property tax rate = (Value of the unused land x taxrate)
Property tax rate = ($80,000 x.02) = $1600/year

The land speculator above would see a four-fold tax increase! Land speculation would become more expensive to pay for the tax increase this investor would have to but his land to work more quickly.

Densely populated cities

For land to be taxed more than buildings a scarcity of lots need to be a factor. In rural areas where land is more plentiful and therefore cheaper, higher land-taxes would not be effective. In areas where land is at a premium (where the old adage "location, location" is in effect) the land should be charged this premium not the building.

Areas with lots of multi-unit apartment buildings

Although I used single family units in my examples a land-tax work better for apartment buildings because the owners are more likely to be investors. When landlords make improvements they tend to raise rents to recoup their expenses. One of the increased expenses they attempt to recoup is the increased property tax. This is why landlord improvements are often a mixed blessing for tenants. They love the improvement but hate the increased rents. By making the buildings value less of a factor in the tax rate this would tend to lower any rent increase.

Business with large land use requirements would need special exemptions

The classic example of this is a car dealership. No one could legitimately argue a car dealer isn’t putting his land to good us. On the hand the car dealers parking lots require lots of area with his actual building little taking up relatively little area.

Let me make some final points. The aim of this new tax ratio is to encourage the building or improvement of housing in existing urban areas. Areas attempting to slow growth would not benefit from this system in fact it would have the opposite effect of encouraging growth. This could also be sold in many areas as sprawl control, and would make a center city mayor quite popular with the surrounding Suburban dwellers, acting as a jumping pad to higher office. This plan could also be quite affective in densely populated states like New Jersey. I also need to acknowledge the effect growth ordinances have on stifling housing stock growth thus driving up housing prices, that is a problem that needs to be addressed locally in a different manner. Finally talking about tax incentives as a Democrat allows us to challenge the GOP on what is normally their turf.

NOTE

I first heard of this idea from a professor tenured at a University in Pennsylvania, I believe it is U-Pittsburgh I will attempt to research it and post and update.

comments or rants doublepennyblog@hotmail.com