Chapter 3.1
Development Patterns and Infill

• ALL
• Remove Code Barriers
• Create Incentives
• Fill Regulatory Gaps

Land Value Taxes

INTRODUCTION

Nationwide, local governments and communities are struggling to find affordable housing.[i] They are facing increasing home prices and rental rates, while simultaneously dealing with the decline of their downtowns and increases in office vacancy rates.[ii] A contributing factor to both of these issues, rising rents and declining downtowns, is the structure of municipal tax codes, and how they discourage infill development that localities require to stay vital.[iii]

One tool that can help encourage infill development, particularly affordable residential infill development, is a land-value tax (LVT).[iv] Henry George, the famed 19^th century American economist and philosopher, was the first major proponent of this tax, arguing that since land cannot be produced and its value is produced collectively, land is an ideal commodity to be taxed, because the tax cannot negatively impact the supply of land. The value of the land, created by the community, is then provided back to the community, through the aforementioned tax revenue.[v] Additionally, LVTs reduce sprawl by reducing barriers against development on which the tax is applied. Thus, the incentives for sprawl in a community with an LVT are less than the incentives for sprawl in a community without an LVT.

It is important to note that LVTs apply to the value of a property’s unimproved land; they do not apply to the value of any structures or improvements.[vi] This differs from a traditional property tax, which taxes both the land and the building at the same rate.[vii] LVTs can also be used in conjunction with traditional property taxes in what is known as a split-rate system. In a split-rate system, by far the most common type of LVT, the land that a property sits on is usually taxed at a higher rate than any buildings and improvements on the lot.[viii] Essentially, this tax is assessing a higher tax on land than on buildings in the form of a mill rate. A mill rate is a tax rate whose value is the amount payable per dollar of the assessed value of a taxed item. For instance, a mill rate of three mill on land and 1 mill on property would require $30 in tax to be paid on land valued at $10,000, and only require $10 in tax on an equally valuable building.[ix] This encourages property owners to develop land because improvements have a lower tax burden when compared to a traditional, combined rate property tax regime.

Let us now examine how these various systems would play out in the real world. In our first example, let’s assume a hypothetical landowner has a parcel with an assessed land value of $200,000 and an assessed improvements value of $200,000 as well. A traditional property tax scheme with a mill rate of 0.002 for both land and improvements would tax each of those assets at $400 apiece, with a total tax bill of $800. In a split-rate LVT, with a mill rate on land of 0.003 and a mill rate on improvements at 0.001, the land would generate a $600 tax bill, and the improvements, a $200 one, for an equal final bill of $800. In an exclusive LVT system, a mill rate of 0.004 on land is required to generate the same $800 in tax revenue, since there would be no tax on the improvements.

Now, if our hypothetical landowner developed their property such that the improvements had a total value of $500,000, we can explore how this changes the tax bill. In the traditional example, they would pay $400 on the land, an unchanged value, and $1,000 on the improvements, for a total bill of $1,400. In the split rate system, they would pay $600 on the land, again an unchanged value, but only $500 on the improvements, for a total tax bill of $1,100. Lastly, in the exclusive LVT example, the tax bill would remain at $800 on the land and $0 on the now more valuable improvements. In this second example, the hypothetical developer saved $300 in a split rate system when compared to the traditional system, and $600 in an exclusive LVT system. Thus, the developer is more likely to develop their land in a municipality with some sort of LVT, since the LVT makes development more attractive when compared with a traditional tax regime.

LVTs can be difficult for municipalities to implement due to uniformity clauses in state constitutions that may require amendments to legalize a split-rate system.[x] Specifically, many states have uniformity clauses in their constitutions that require taxation to apply uniformly within a jurisdiction, and courts may take issue with the classification systems that the split-rate systems adopt. Indeed, in Wells v. The Commissioners of Hyattsville, (1893), the Maryland Court of Appeals argued against the constitutionality of the LVT as the town of Hyattsville had implemented it.[xi] However, restrictions will vary from state to state, and since the aforementioned Maryland case, there have been no instances of a court striking down a LVT on the basis of the uniformity clause. In fact, a 1915 amendment to Article 15 of the Declaration of Rights in the State Constitution of Maryland seems to have overturned the 1893 decision.[xii].

Currently, LVTs have been authorized by the states of Pennsylvania, Virginia, and Connecticut.[xiii]^,[xiv],[xv] The policy has been most widely adopted in Pennsylvania.[xvi] The Virginia cities of Fairfax, Poquoson, Richmond, and Roanoke have also been granted permission, but have not yet acted on that authority.

There was also a pilot trial from 2009-2020 allowing for any city in Connecticut to institute a LVT, although it does not appear any city took advantage of the pilot. Lastly, Hawaii experimented with a LVT from 1963-1977, but subsequently removed the LVT.[xvii] In Hawaii, state income was 20% below the national average in 1950 and 25% above the national average by 1970.[xviii] While this increase cannot be wholly attributed to the LVT, as other economic factors were doubtless contributors, the LVT presumably facilitated construction and growth.

Perhaps the most challenging aspect of implementing a split-rate tax system is the requirement that land and improvements be assessed separately.[xix] This would create significant administrative and technical challenges for a municipality and has certainly cooled aspirations to implement such a system. These challenges may be overcome, through at least two different methods.[xx] The first is the cost-based approach, which relies on the existence of comparable vacant lots to assess the value of land independent of the improvement and the existence of a strong improvement replacement cost model. The second method is the subtraction approach, wherein assessors estimate the overall value of the land and improvements, and then subtract the replacement cost of the building to estimate the value of the land.

One last potential difficulty is that an LVT can face opposition from both homeowners and large landowners.[xxi]  Homeowners are known to challenge property taxes generally;[xxii] however, if a local government can show that the median tax bill per resident will go down because more of the burden is shifted to large landowners of vacant lots, such homeowners may be persuaded to support the LVT. Large landowners, particularly those who own large expanses of undeveloped land, have funded measures to oppose LVTs in the past, seeking to avoid the increased tax burden on their expensive land assets.[xxiii] However, a major public campaign could be used to support the LVT. Such a campaign would need to stress the tax benefits the new system provides, including to many homeowners and renters, and that the net societal benefit outweighs the increased burden on the large or vacant landowners. Others may also appreciate the fact that the LVT would not affecting zoning regulations, and any new development that the new tax would encourage would still go through the traditional planning process. LVTs therefore have the potential to be a viable tool to help encourage denser development and ease the housing affordability crisis.

EFFECTS

Since improvements are taxed at a lower rate than land, barriers to development are reduced and thus more development is likely to occur. LVTs can thus be seen as a useful policy choice to encourage the development of new housing supply.[xxiv] This tax policy encourages more urban densities, which can assist in driving down the cost of market-rate prices.[xxv] This also works to reduce urban sprawl as well. A 2021 study found that LVTs resulted in sprawl reduction because LVTs maximize the central business district and surrounding areas while also cutting down on “incompatible land uses.”[xxvi] Another recent study found that urban sprawl is further disincentivized by the fact that LVTs promote more housing units, rather than larger units.[xxvii] The increased housing density arose because an LVT incentivizes early development, as the landowner faces economic pressure to avoid the LVT on their vacant land, hurting their profits.[xxviii] Since increased development is a more profitable use of land than speculation as a result of the LVT, the landowners used their land more intensely by building more houses.

Researchers have also come to similar conclusions based on empirical economic models when assessing the performance of LVTs in major metropolitan areas. A study of the 1980s building boom in Pittsburgh found that increased commercial development could be traced to the city’s tax on land, which was five times higher than its tax on improvements.[xxix] The study found that while the pre-existing lack of commercial space in Pittsburgh spurred development, the LVT created by the city “played an important supporting role by enabling the city to avoid rate increases in other taxes that could have impeded development.”[xxx] Researchers explained the disparity by noting that the Pittsburgh LVT was implemented instead of higher taxes on improvements or wages, which researchers believe would have depressed growth in the city.[xxxi]

Not only do LVTs encourage denser housing, but they also encourage the development of denser commercial properties as well. This commercial development leads to other desirable outcomes for city governments as a result of the LVT. One such outcome is greater tax revenues, as dense commercial retail properties are typically more valuable than those in less dense locations, and so provide more tax revenue owing to their greater value. A 2013 study found that, on average, denser developments generate 10 times as much tax revenue as more traditional suburban ones.[xxxii] Dense retail sectors also encourage pedestrian traffic, reducing carbon emissions by replacing car trips with trips on foot.[xxxiii] Since LVTs apply to commercial as well as residential properties, they would also incentivize the development of the aforementioned dense retail sectors, and the Pittsburgh study referenced above bore this out.[xxxiv] This is another important goal for city governments to consider, as the importance of reducing carbon emissions to fight climate change becomes clearer by the minute. Pedestrian traffic is also a healthier way for city residents to travel because of its active nature, and so supporting that mode of transit also helps reduce city healthcare costs and empowers more fulfilling lives for the residents.[xxxv] Ultimately, LVTs can be seen as efficient tools for city tax revenue generation and can result in more commercial and residential density than traditional property taxes, bringing a whole host of associated benefits with that density.

When LVTs are implemented, it is possible that some residents may see a decline in their property taxes, again dependent on the value land provides to property owners across parcels. The shifting of the tax burden onto large landowners with vacant land inherently shifts the burden away from the typical homeowner. While an LVT could incentivize homeowners to develop their lot by adding an Additional Dwelling Unit (ADU), the overall effect would be a decrease in their tax bill.[xxxvi]

A study from Richmond, Virginia found that the city could generate the same amount of revenue while allowing residents to save up to $19 million.[xxxvii] The residents would be able to save money because the LVT taxes their lower-value assets (the unimproved land) at a higher rate and their higher-value assets (the property) at a lower rate, resulting in a net lower tax bill. Yet this tax structure is still able to keep overall revenue constant, as certain landowners who have valuable, unused land, would experience a tax increase as a result of the LVT, and thus cover the difference, as it were.

EXAMPLES

Harrisburg, PA

In 1980, Harrisburg, the state capital of Pennsylvania, was in distress. Due to rising vacancies, increasing crime, and falling tax revenues, the mayor and city council of the town of 50,000 decided to implement an LVT at a mill rate four times greater than the mill rate applied to buildings.[xxxviii] The Harrisburg tax code designated land as belonging in a separate tax category than buildings and site improvements, and taxes them at different rates. For reference, the modern code taxes land at a rate of 0.03097 mill per dollar, while buildings and improvements on the land are only taxed at a rate of 0.005160 mill per dollar, a roughly 6:1 ratio.[xxxix] When this tax adjustment was first introduced, it helped reduce the number of vacant lots from 4200 in 1982 to just 500 in 2001.[xl] The number of businesses in the town has also increased from 1,908 in 1982 to over 8800 as of 2019 [xli], and the taxable value of properties in the city increased from $212 million in 1982 to $1.6 billion as of 2010.[xlii] The City was able to use the LVT to help revitalize its downtown, as the building spurt has increased urban density while maintaining City revenues.[xliii] Even though the City still struggles with economic challenges, the institution of the LVT has helped increase urban density, efficiently fund city projects, and offer a healthy, walkable community for new residents.[xliv]

To view the tax, please see: City of Harrisburg, PA, Licensing and Taxation Code, Chapter 5-501, https://perma.cc/562L-YY8K.

Allentown, PA

Inspired by Harrisburg’s example, citizens of the nearby city of Allentown decided to adopt a similar LVT in 1996 and experienced similar success.[xlv] Their LVT placed a 5.038% tax rate on land and a 1.072% tax rate on building value, which resulted in a tax decrease for 70% of parcels in the City while maintaining overall tax revenues.[xlvi] The number of building permits increased by 32% in four years after the LVT passage, as stated in a letter by former US Senator Pat Toomey.[xlvii] Indeed, Allentown is the fastest growing major city in the state as of the 2020 census.[xlviii] Downtown Allentown was even recognized as having been one of just six “success stories” by the Urban Land Institute in 2016.[xlix] Downtown Allentown currently has seen over three million square feet developed with over $800 million in investments, and some of this success can be traced to LVTs. The City has noted this success, and the current mill rate for land is 23.5376, over five times higher than its mill rate for improvements, which is 4.4528.[l]

To view the tax, please see: City of Allentown Ordinance 15776.*

*The SDC has the City of Allentown Ordinance 15776 on file, please contact us if you would like to view it.

ADDITIONAL EXAMPLES

Additional Examples:

City of Scranton (PA) Real Estate Tax: City of Scranton. (2022). Real estate tax – city of Scranton. Scranton Single Tax Office. Retrieved November 4, 2022, from https://perma.cc/49R3-AYDS  (sets millage rate of land in city limits at 0.24431142, and millage rate of improvements in city limits at 0.05157528)

City of Washington (PA) Real Estate Tax: City of Washington Tax Department. (2018, January 24). Tax Department: City of Washington PA. City of Washington -Tax Department. Retrieved November 4, 2022, https://perma.cc/N9QN-Q2FW  (sets millage rate of land in city limits at 32.71 mills and millage rate of buildings in city limits at 2.08 mills)