Taxing Land Speculation

Bill Hudnut at the Urban Land Institute wrote a post that attracted some attention at Austin Contrarian and Overhead Wire. Hudnut discusses a different approach to taxing land:

How about restructuring the property tax across America to install a two-tiered system? More tax on those horizontal pieces of empty land and asphalt, less on the buildings. That is, reduce the tax rate on homes and other improvements, and substantially increase the rate on the site value. I think such a system would induce more compact development and more infill work.

It sure would induce more development.

Higher taxes on the land, lower taxes on the building, discourages a land holder from leaving his land fallow and speculating on its increased value, and conversely, encourages improvements on the land and redevelopment. The monograph used Sydney Australia as a case study, but its general point, that a site value tax system puts “pressure on owners to sell their property for redevelopment if they cannot or will not redevelop it themselves.”

Note that ULI is an organization primarily of real estate developers, investors, and related professions. (I am a member.) So, I can see why developers would favor a mechanism that would force more land into development.

Overall, this type of scheme will help drive development in the short run, but be harmful in the long-run.  By encouraging development in the present by discouraging land speculation, we can expect a few consequences:

  • Speculators play an important role in the land market, even if we don’t like the surface parking lots they often operate on their land.  Speculators essentially hold the land until development is optimal for the site, and all sites cannot be optimally built at once. Discouraging speculation drives the land into the hands of developers at cheaper prices than current market prices.
  • At the same time in reaction to the new tax regime, all the new developers will compete for users of the space they are building on the vacant land. This either means they’ll build smaller in anticipation of the glut of new development, or vacancy rates will be much higher.
  • The new supply of space will likely serve to lower rents and condo prices, but this will only be temporary as available development sites quickly disappear.
  • Had speculators been forced to build on their lots, less dense, and less optimal buildings would be in their place, and a future developer faces the opportunity cost of demolishing that building. This would be similar to developing in New York, where vacant parcels are very rare, compared with developing in Chicago where developable parcels are relatively plentiful.  There is a huge affordability gap between New York and Chicago, which can be partially attributed the the availability of development sites.
  • It will harm the diversity of building age that Jane Jacobs claims as a key ingredient that makes for great cities. The stock of buildings will be disproportionately represented by buildings built shortly after the tax scheme is enacted. As new development occurs, affluent people will be attracted to the developing areas. As these buildings depreciate, the more affluent will relocate. Without enough diversity, over a long period of time a neighborhood will be predominantly lower-class residents.
  • This under-developed scenario will breed NIMBYism over the years, as the new development will be of lower density than under current taxes.  Residents will likely be resistant to future higher density development of sites to meet market demand.  However, new development would necessarily involve demolition of existing lower-density buildings, which is costly from an opportunity cost point of view, as well as community relations.

I do favor some regional, state, or other tax based upon acreage. (if offsetting income tax or other productivity-stifling taxes)  However, I would implement the tax to discourage sprawl, not to discourage speculation.  Thus, I would tax each acre equally, whether developed or vacant.  Encouraging development of vacant land may only serve to encourage lower density development as a “tax payer”, as opposed to a more optimal use of the land. As long as density isn’t overly restricted, speculation can allow for higher density, and more optimal land use in the long run.

By burdening speculators, we should expect speculation to shift to under-optimal “development” like this:

View Larger Map

  • http://discoveringurbanism.blogspot.com/ Daniel Nairn

    James Howard Kunstler wrote a chapter in favor of site-based taxation in his book Home from Nowhere. He attributes the idea to a 19th-century political reformer, Henry George. It really is an interesting thought experiment.

    I’m not sure what distinction you are drawing between discourage sprawl and encourage infill. In my mind they are one in the same. Really, under this scheme, speculation will still happen, just the rules will be shifted. “Optimal” will be moved a little forward.

    Living directly across the street from a vacant lot, I certainly wouldn’t mind seeing the holding costs go up a little. However, I’m also pretty persuaded by some of your points – esp. the prospect of quick building and subsequent demolition.

  • http://discoveringurbanism.blogspot.com Daniel Nairn

    James Howard Kunstler wrote a chapter in favor of site-based taxation in his book Home from Nowhere. He attributes the idea to a 19th-century political reformer, Henry George. It really is an interesting thought experiment.

    I’m not sure what distinction you are drawing between discourage sprawl and encourage infill. In my mind they are one in the same. Really, under this scheme, speculation will still happen, just the rules will be shifted. “Optimal” will be moved a little forward.

    Living directly across the street from a vacant lot, I certainly wouldn’t mind seeing the holding costs go up a little. However, I’m also pretty persuaded by some of your points – esp. the prospect of quick building and subsequent demolition.

  • http://marketurbanism.com MarketUrbanism

    Thanks for your thoughts Daniel.

    I’m loosely familiar with Henry George, and intend to learn more. The Henry George School in Manhattan offers free economics classes. From what I understand, George was a proponent of free-enterprise, and advocated a single tax upon real property as opposed to income tax, sales tax, etc. I have seen the ideas of George compared to the usually free-market Austrian Economists. Please share if you have more insights.

    To clarify my idea, a taxing scheme that taxed all land based upon acreage (not use) would discourage sprawl in the long run, as landowners that squander land would still be taxed based upon the size of the sight, while land that is used more intensely is able to distribute the tax over more usable square footage.

    The tax for a one acre parking lot (speculation), a 40-story apartment tower (intense use), and a suburban home on a one-acre lot (sprawl) would be the same amount. Thus, this tax is proportionally more burdensome on the sprawl than on the intense use, while not discriminating between use and speculation.

    I would exempt farms, bodies of water, and wilderness, as long as farm subsidies are ended concurrently. But I would not exempt roads and other infrastructure. In a way, this would act as a more rational, market-based growth boundary in the long-run.

    Perhaps NIMBYs who wish to lower their taxes won’t mind living in higher density if it helps lower their share of tax burden.

  • http://marketurbanism.com Market Urbanism

    Thanks for your thoughts Daniel.

    I’m loosely familiar with Henry George, and intend to learn more. The Henry George School in Manhattan offers free economics classes. From what I understand, George was a proponent of free-enterprise, and advocated a single tax upon real property as opposed to income tax, sales tax, etc. I have seen the ideas of George compared to the usually free-market Austrian Economists. Please share if you have more insights.

    To clarify my idea, a taxing scheme that taxed all land based upon acreage (not use) would discourage sprawl in the long run, as landowners that squander land would still be taxed based upon the size of the sight, while land that is used more intensely is able to distribute the tax over more usable square footage.

    The tax for a one acre parking lot (speculation), a 40-story apartment tower (intense use), and a suburban home on a one-acre lot (sprawl) would be the same amount. Thus, this tax is proportionally more burdensome on the sprawl than on the intense use, while not discriminating between use and speculation.

    I would exempt farms, bodies of water, and wilderness, as long as farm subsidies are ended concurrently. But I would not exempt roads and other infrastructure. In a way, this would act as a more rational, market-based growth boundary in the long-run.

    Perhaps NIMBYs who wish to lower their taxes won’t mind living in higher density if it helps lower their share of tax burden.

  • http://urbanmilwaukee.com/ Dave Reid

    I would think that if you lower taxes on the building then people would want to build more building because they wouldn’t have as large of a tax burden, but more profit.

  • http://urbanmilwaukee.com Dave Reid

    I would think that if you lower taxes on the building then people would want to build more building because they wouldn’t have as large of a tax burden, but more profit.

  • http://marketurbanism.com MarketUrbanism

    I would think that if you lower taxes on the building then people would want to build more building because they wouldn’t have as large of a tax burden, but more profit.

    It depends. If you are simply taxing unused land vs used land, you are only incentivizing to build something. Developers who still want to wait will build anything that satisfies the tax specifications to avoid the new tax until ready to build something more optimally dense for the marketplace. It would not provide any incentive for building a more intense use of that land.

    However, if the land is taxed based upon acreage, the builder has added incentive to use the land more intensely to spread the tax over more built space.

    Where the effect is seen the most is in the exurbs, where the disincentive to develop upon former farmland is hampered greatly.

  • http://marketurbanism.com Market Urbanism

    I would think that if you lower taxes on the building then people would want to build more building because they wouldn’t have as large of a tax burden, but more profit.

    It depends. If you are simply taxing unused land vs used land, you are only incentivizing to build something. Developers who still want to wait will build anything that satisfies the tax specifications to avoid the new tax until ready to build something more optimally dense for the marketplace. It would not provide any incentive for building a more intense use of that land.

    However, if the land is taxed based upon acreage, the builder has added incentive to use the land more intensely to spread the tax over more built space.

    Where the effect is seen the most is in the exurbs, where the disincentive to develop upon former farmland is hampered greatly.

  • http://alwaysintransit.typepad.com/hyde_park_urbanist/ withrow

    Consider a slightly different way of doing this. What if you replaced property taxes with a Henry George-type land tax (taxing the land value instead of the building value) and additionally waited until the property was sold to pay the tax?

    For instance, I buy Block 37 in Chicago. The land is assigned a value commensurate with similarly zoned parcels in that area. I build on my parcel. Maybe I get it re-zoned for what I want to build. Maybe the city re-zones to take away some of my options for rebuilding. Years later, I sell my property and once again a value is assigned to the Block 37 land commensurate with similarly zoned parcels in that area. I haven’t paid any property taxes but now owe some portion of the difference in the beginning land value and the end land value. The portion may be large, maybe even half or more.

    Thing is, the increased land value (adjusted for inflation) has very little to do with anything I accomplished. The increased land value, in fact, comes mostly from what the community has done or not done– changed zoning, increased safety, added new transit, constructed other valuable buildings, etc. It makes more sense for the community to reap the benefits of its contributions to my parcel; it makes little sense to make me pay taxes on improvements I’ve made.

    Now, this is more theory than a practical suggestion at this point, obviously. Will local jurisdictions receive taxes in a timely manner? Should there be a blend of higher land taxes and lower building taxes?

  • http://alwaysintransit.typepad.com/hyde_park_urbanist/ withrow

    Consider a slightly different way of doing this. What if you replaced property taxes with a Henry George-type land tax (taxing the land value instead of the building value) and additionally waited until the property was sold to pay the tax?

    For instance, I buy Block 37 in Chicago. The land is assigned a value commensurate with similarly zoned parcels in that area. I build on my parcel. Maybe I get it re-zoned for what I want to build. Maybe the city re-zones to take away some of my options for rebuilding. Years later, I sell my property and once again a value is assigned to the Block 37 land commensurate with similarly zoned parcels in that area. I haven’t paid any property taxes but now owe some portion of the difference in the beginning land value and the end land value. The portion may be large, maybe even half or more.

    Thing is, the increased land value (adjusted for inflation) has very little to do with anything I accomplished. The increased land value, in fact, comes mostly from what the community has done or not done– changed zoning, increased safety, added new transit, constructed other valuable buildings, etc. It makes more sense for the community to reap the benefits of its contributions to my parcel; it makes little sense to make me pay taxes on improvements I’ve made.

    Now, this is more theory than a practical suggestion at this point, obviously. Will local jurisdictions receive taxes in a timely manner? Should there be a blend of higher land taxes and lower building taxes?

  • http://marketurbanism.com MarketUrbanism

    I think I like that concept, but need to mull it over.

    One tricky part seems to be defining the calculation for land value for tax purposes.

  • http://marketurbanism.com Market Urbanism

    I think I like that concept, but need to mull it over.

    One tricky part seems to be defining the calculation for land value for tax purposes.

  • http://alwaysintransit.typepad.com/hyde_park_urbanist/ withrow

    That land value calculation is indeed subject to dispute, but seems easier than what we do now– assess buildings continually. Or sometimes we don’t do new assessments. I could be wrong about this, but I think assessors would tell you that the land portion of the assessment is the simpler part. And in most locations AFAIK, assessors actually do two separate evaluations– land and improvements.

    One thing I should have mentioned is that waiting until a property is sold to collect the taxes should mitigate the concerns some people have with property taxes going up when the neighborhood improves. If property values go up around them, they won’t have to pay until they sell the property. They won’t be priced out of the home they live in.

  • http://alwaysintransit.typepad.com/hyde_park_urbanist/ withrow

    That land value calculation is indeed subject to dispute, but seems easier than what we do now– assess buildings continually. Or sometimes we don’t do new assessments. I could be wrong about this, but I think assessors would tell you that the land portion of the assessment is the simpler part. And in most locations AFAIK, assessors actually do two separate evaluations– land and improvements.

    One thing I should have mentioned is that waiting until a property is sold to collect the taxes should mitigate the concerns some people have with property taxes going up when the neighborhood improves. If property values go up around them, they won’t have to pay until they sell the property. They won’t be priced out of the home they live in.

  • http://www.austincontrarian.com/ AC

    I posted a reply over at my shop.

  • http://www.austincontrarian.com AC

    I posted a reply over at my shop.

  • http://properscale.blogspot.com/ Eric

    Wow…bad idea. I’d rather see a vacant lot than (a) blight, (b) boarded-up houses that couldn’t sell, and related to “b”, (c) downright ugly, rapidly constructed tax shelters, which will lead to “a” and “b” in no time. As if we needed any more encouragement to further degrade contemporary standards of construction.

    I would tweak your acreage-based tax-scheme by multiplying with a ratio reflecting the inverse proportion of the subdivision or district’s street (and pedestrian link) connectivity index. Low density cul-de-sacs, therefore, would get taxed the highest rates / s.f., reflecting, more accurately, their true costs to society. This, in effect, would be incentivize good planning practices, encourage developers to provide pedestrian infrastructure (by marketing the lower tax rate) and maybe even get some existing communities to link up better.

  • http://properscale.blogspot.com Eric

    Wow…bad idea. I’d rather see a vacant lot than (a) blight, (b) boarded-up houses that couldn’t sell, and related to “b”, (c) downright ugly, rapidly constructed tax shelters, which will lead to “a” and “b” in no time. As if we needed any more encouragement to further degrade contemporary standards of construction.

    I would tweak your acreage-based tax-scheme by multiplying with a ratio reflecting the inverse proportion of the subdivision or district’s street (and pedestrian link) connectivity index. Low density cul-de-sacs, therefore, would get taxed the highest rates / s.f., reflecting, more accurately, their true costs to society. This, in effect, would be incentivize good planning practices, encourage developers to provide pedestrian infrastructure (by marketing the lower tax rate) and maybe even get some existing communities to link up better.

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  • http://lvtfan.typepad.com/ lvtfan

    Market Urbanism, you say that a taxing system that taxed all land based on acreage would discourage sprawl. I disagree. If the goal is to discourage sprawl, the intermediary goal is to encourage the intensive use of land already well-served by infrastructure, so that we don’t need to extend infrastructure into areas not currently served. A tax on the value of the land will nudge the owners of those choice sites to put them to something approaching their best use. An acre downtown properly developed can preserve many on the fringe from premature development. A lot that currently has an obsolete 1- or 2-story building in the middle of the downtown would get redeveloped, and instead of serving 1 street-level tenant, would provide venues for dozens of tenants, some commercial, some residential (depending on the market). That creates a vibrant marketplace, a walkable community, and the sort of density which supports a high quality frequent-service transportation system.

    An acre of good farmland might be worth $5,000 to $10,000. An acre of suburban residential land, within an hour of NYC, might be worth $500,000. An acre in midtown Manhattan can be worth $400 million to $1.2 billion (that was the estimate last summer for a full-block teardown). Taxing each of those acres the same number of dollars doesn’t do any good of any kind. Taxing them in proportion to their value would. (And by untaxing buildings, we take away the disincentives to developing the land well where the market is seeking development — and that isn’t the farmland! Farmers would benefit: their specialized buildings and equipment are worth more than their land. We’d untax them.)

    I suspect many people aspire to a little house in the suburbs with a lawn and a picket fence … but if we could offer them a modern, affordable home close to their work in a school district they had confidence in, many of them would trade the house and the commute for it. We ought to offer them the option … and it seems to me that Land Value Taxation is the only way we’re going to get there. LVT can lower the selling price of the land, which is a huge component of why urban housing is so expensive. Yes, the land rent would be an ongoing cost, but it would be instead of the taxes on buildings and sales and wages, instead of a supplement to them, as it is now.

  • http://lvtfan.typepad.com/ LVTfan

    Market Urbanism, you say that a taxing system that taxed all land based on acreage would discourage sprawl. I disagree. If the goal is to discourage sprawl, the intermediary goal is to encourage the intensive use of land already well-served by infrastructure, so that we don’t need to extend infrastructure into areas not currently served. A tax on the value of the land will nudge the owners of those choice sites to put them to something approaching their best use. An acre downtown properly developed can preserve many on the fringe from premature development. A lot that currently has an obsolete 1- or 2-story building in the middle of the downtown would get redeveloped, and instead of serving 1 street-level tenant, would provide venues for dozens of tenants, some commercial, some residential (depending on the market). That creates a vibrant marketplace, a walkable community, and the sort of density which supports a high quality frequent-service transportation system.

    An acre of good farmland might be worth $5,000 to $10,000. An acre of suburban residential land, within an hour of NYC, might be worth $500,000. An acre in midtown Manhattan can be worth $400 million to $1.2 billion (that was the estimate last summer for a full-block teardown). Taxing each of those acres the same number of dollars doesn’t do any good of any kind. Taxing them in proportion to their value would. (And by untaxing buildings, we take away the disincentives to developing the land well where the market is seeking development — and that isn’t the farmland! Farmers would benefit: their specialized buildings and equipment are worth more than their land. We’d untax them.)

    I suspect many people aspire to a little house in the suburbs with a lawn and a picket fence … but if we could offer them a modern, affordable home close to their work in a school district they had confidence in, many of them would trade the house and the commute for it. We ought to offer them the option … and it seems to me that Land Value Taxation is the only way we’re going to get there. LVT can lower the selling price of the land, which is a huge component of why urban housing is so expensive. Yes, the land rent would be an ongoing cost, but it would be instead of the taxes on buildings and sales and wages, instead of a supplement to them, as it is now.

  • http://lvtfan.typepad.com/ lvtfan

    Yes, and that could be a fine thing in the city, where we already have the infrastructure in place. What was once a single family home gets chopped up into 4 rentals, and then gets replaced by a set of townhouses which house several families, who share the land rent. And since we reduce or even eliminate our annual penalty for their building, they might use better technologies: more modern furnaces, better insulation, solar, geo-thermal; waterheaters closer to the spigots, to waste less water, etc. … which today we penalize them for. So the incentives would be to build for more users … and that means landholders competing for our business as tenants or buyers … which brings down the price. Seems like a win-win-win to me. (Except for the land speculators, who no longer have a business, but, since they don’t contribute anything useful to their community, I won’t miss them!)

  • http://lvtfan.typepad.com/ LVTfan

    Yes, and that could be a fine thing in the city, where we already have the infrastructure in place. What was once a single family home gets chopped up into 4 rentals, and then gets replaced by a set of townhouses which house several families, who share the land rent. And since we reduce or even eliminate our annual penalty for their building, they might use better technologies: more modern furnaces, better insulation, solar, geo-thermal; waterheaters closer to the spigots, to waste less water, etc. … which today we penalize them for. So the incentives would be to build for more users … and that means landholders competing for our business as tenants or buyers … which brings down the price. Seems like a win-win-win to me. (Except for the land speculators, who no longer have a business, but, since they don’t contribute anything useful to their community, I won’t miss them!)

  • http://lvtfan.typepad.com/ lvtfan

    The tax debt could accumulate as a lien against the property. Bill Batt proposed this as a solution to the “poor widow” problem. See http://www.wealthandwant.com/docs/unindexed/Batt_poor_widow_solution.htm

  • http://lvtfan.typepad.com/ LVTfan

    The tax debt could accumulate as a lien against the property. Bill Batt proposed this as a solution to the “poor widow” problem. See http://www.wealthandwant.com/docs/unindexed/Batt_poor_widow_solution.htm

  • http://marketurbanism.com MarketUrbanism

    Thanks for all of your valuable inputs, LVTfan.

    A lot that currently has an obsolete 1- or 2-story building in the middle of the downtown would get redeveloped, and instead of serving 1 street-level tenant, would provide venues for dozens of tenants, some commercial, some residential (depending on the market). That creates a vibrant marketplace, a walkable community, and the sort of density which supports a high quality frequent-service transportation system.

    In the short-run, a tax on speculation would stimulate development. But, my point is that in the long run, driving out speculation hampers vibrancy. Although, in the case of LVT used more universally, it seems that the tax would be relatively neutral on speculation. So far, I can’t think of a downside of LVT. (in concept)

    (And by untaxing buildings, we take away the disincentives to developing the land well where the market is seeking development — and that isn’t the farmland! Farmers would benefit: their specialized buildings and equipment are worth more than their land. We’d untax them.)

    I wouldn’t advocate untaxing buildings. I was responding to an idea in the context that real estate taxes would be a two-tiered system where one tier would be the traditional and another tier a tax on unused land. My point was that if there was to be a two tiered system, I would prefer the second tier not single out speculation, but be applied evenly.

    I suspect many people aspire to a little house in the suburbs with a lawn and a picket fence … but if we could offer them a modern, affordable home close to their work in a school district they had confidence in, many of them would trade the house and the commute for it. We ought to offer them the option … and it seems to me that Land Value Taxation is the only way we’re going to get there. LVT can lower the selling price of the land, which is a huge component of why urban housing is so expensive.

    Since I have you here, can you please explain the main ways LVT encourages urban land usage as opposed to suburban sprawl? It seems it would encourage compactness, but I’d like to better understand the mechanisms. Thanks.

    Yes, the land rent would be an ongoing cost, but it would be instead of the taxes on buildings and sales and wages, instead of a supplement to them, as it is now.

    From what I’ve learned so far, I think I would support an LVT if (and only if) it replaces those other taxes. Unfortunately, the political likelihood seems very close to zero.

  • http://marketurbanism.com Market Urbanism

    Thanks for all of your valuable inputs, LVTfan.

    A lot that currently has an obsolete 1- or 2-story building in the middle of the downtown would get redeveloped, and instead of serving 1 street-level tenant, would provide venues for dozens of tenants, some commercial, some residential (depending on the market). That creates a vibrant marketplace, a walkable community, and the sort of density which supports a high quality frequent-service transportation system.

    In the short-run, a tax on speculation would stimulate development. But, my point is that in the long run, driving out speculation hampers vibrancy. Although, in the case of LVT used more universally, it seems that the tax would be relatively neutral on speculation. So far, I can’t think of a downside of LVT. (in concept)

    (And by untaxing buildings, we take away the disincentives to developing the land well where the market is seeking development — and that isn’t the farmland! Farmers would benefit: their specialized buildings and equipment are worth more than their land. We’d untax them.)

    I wouldn’t advocate untaxing buildings. I was responding to an idea in the context that real estate taxes would be a two-tiered system where one tier would be the traditional and another tier a tax on unused land. My point was that if there was to be a two tiered system, I would prefer the second tier not single out speculation, but be applied evenly.

    I suspect many people aspire to a little house in the suburbs with a lawn and a picket fence … but if we could offer them a modern, affordable home close to their work in a school district they had confidence in, many of them would trade the house and the commute for it. We ought to offer them the option … and it seems to me that Land Value Taxation is the only way we’re going to get there. LVT can lower the selling price of the land, which is a huge component of why urban housing is so expensive.

    Since I have you here, can you please explain the main ways LVT encourages urban land usage as opposed to suburban sprawl? It seems it would encourage compactness, but I’d like to better understand the mechanisms. Thanks.

    Yes, the land rent would be an ongoing cost, but it would be instead of the taxes on buildings and sales and wages, instead of a supplement to them, as it is now.

    From what I’ve learned so far, I think I would support an LVT if (and only if) it replaces those other taxes. Unfortunately, the political likelihood seems very close to zero.

  • http://www.urbantools.org/ Joshua Vincent

    There is an inherent implementational problem that is likely unsurmountable: taxation in all states is ad valorem that is to say “to value.” It would be a challenging, legally, to establish an acreage system, whereas many cities in the USA use the land value tax now.

    Taxes based on acreage are more common in rural and undeveloped countries; once a cadastre is established the tax is based on value.

  • http://www.urbantools.org Joshua Vincent

    There is an inherent implementational problem that is likely unsurmountable: taxation in all states is ad valorem that is to say “to value.” It would be a challenging, legally, to establish an acreage system, whereas many cities in the USA use the land value tax now.

    Taxes based on acreage are more common in rural and undeveloped countries; once a cadastre is established the tax is based on value.

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