How local property taxes discourage density

In yesterday’s post about a proposal in Philadelphia to mandate adherence to certain “visitability” standards in new residential construction, but only for multifamily units, I asked if anyone knew of any other burdens that are heaped unfairly on apartment-dwellers. Regular commenter Alon Levy rose to the task, and pointed to a huge one: property taxes. He linked to this great explanation of New York City’s arcade property tax regime that favors outer-borough owner-occupied properties over apartment and condo dwellers, but after just a little bit of digging I found that these property tax differentials are in no way unique to NYC. Here’s (most of) the abstract to a 2006 paper published in the journal Housing Policy Debate (.pdf):

The study finds that for the nation as a whole, multifamily rental housing bears an effective tax rate (tax divided by property value) that is at least 18 percent higher than the rate on single-family owner-occupied housing. This gap appears to have arisen during the 1990s. The level of taxation and the apartment/house differential vary considerably by location. Much—but not all—of the differential is associated with the fact that apartments have a lower average property value per unit than houses. The residential property tax, as implemented, promotes low-density development, disproportionately burdens lower-value properties, and may impose higher taxes on apartment residents than on homeowners with identical incomes.

This is on top of the fact that the vast majority of property taxes in the US are used to fund local roads and schools (right?), which apartment-dwellers surely make lesser use of. So even if the taxes were levied across the board, they’d still be redistributing wealth from poorer apartment dwellers to richer homeowners.

I should also emphasize that these are local property taxes, and are completely separate from the mortgage interest deduction that homeowners can also use to lower their federal tax burdens. We hear a lot about that one, but this is the first time that I’m hearing about property tax differentials. I’m guessing the reason for this is that national journalists find it much easier to cover federal issues that apply nationwide, but this this is a shame, because although local issues are more heterogenous and difficult to research, I think they’re ultimately more important than federal ones when it comes to land use and transportation. I’d like to say that the urbanism blogosphere is immune to this pro-federal bias, but unfortunately I don’t think that’s the case.

So again, thanks to Alon Levy for pointing this out, and for his steady stream of insightful comments. Every so often I fear that I’ll soon uncover every possible tool that governments use to favor suburbs over cities and run out of things to blog about, but then I snap out of it and remember that the possibilities are truly endless.

  • Dan

    In Texas, homestead exemptions* lower property taxes for people on their principal residence. Applies to condos as well as houses, but not rentals, of course.

    *http://www.window.state.tx.us/taxinfo/proptax/exmptns.html

  • Daniel

    This is very intriguing. Makes me actually want to slog through my local property tax structure to have a look.

  • David

    Hi Stephen – I saw a talk yesterday by a New York City-based group called Citizen’s Housing & Planning Council and thought you might be interested in looking into them. They’re doing a lot of research on how NYC building codes and space standards skew heavily towards the nuclear family structure and those who want a lot of space. Turns out that the minimum size of a studio to receive city subsidy (and hence state subsidy) is 500 SF. Of course, the City has nowhere near the resources to subsidize 500 SF units so the huge segment of the housing market that comprises low income single adults gets the shaft. The immigrant population is particularly vulnerable, since they can only afford crowded boarding houses, which are unsafe and exploitative in large part because they are illegal. Consider it more fodder for blogging.

  • http://www.cat-bus.com ant6n

    Also, if most of the municipal income is through property taxes, it means that homeowners will generally vote just with property taxes in mind. Which means that if they want to keep the property taxes low, they will want no development, no transit, no density. NIMBY, really. If you don’t want to pay local taxes, you want to vote for decay.
    Also, it means that municipal income is subject to real estate bubbles.

  • Anonymous

    I think part of the reason this doesn’t show up in the public consciousness is that landlords simply pass the tax on to renters, who don’t actually pay the tax (in terms of writing a check to the municipality) and don’t think of it as a separate expense. As a result, renters don’t get upset about property tax hikes because they may not even be aware they are affected by them.

  • http://marketurbanism.com MarketUrbanism

    Here’s how it works in Cook County (Chicago), where I’ve analyzed this before the rates changed:

    Take this Assessment Level and plug it into the formula below:
    ???? Class 1 (Vacant Land): 10% (formerly 22%)
    ???? Class 2 (Residential 6 units and less): 10% (formerly 16%)
    ???? Class 3 (Apartment Buildings over 6 Units): 16% in tax year 2009, 13% in tax year 2010, 10% in tax year 2011, and subsequent years. (formerly 20% for 2008)
    ???? Class 4 (Non-Profit): 25% (formerly 30%)
    ???? Class 5a (Industrial): 25% (formerly 36%)
    ???? Class 5b (Commercial): 25% (formerly 38%)

    http://www.mayerbrown.com/realestate/article.asp?id=5751&nid=9544

    where the tax amount is calculated as follows:

    [Estimated 2007 Property Value] X [Assessment Level] X [2007 Estimated State Equalizer] – [Homeowner Exemption]
    take that and multiply by Estimated Tax Rate to get your Estimated Tax Bill in Dollars

    In other words, the variable that changes according to property type is the “Assessment Level”, where I listed the factors above. Then account for the homeowner tax exemption.

  • http://marketurbanism.com MarketUrbanism

    As you can see the tax Assessment Levels are skewed to favor homeowners (who vote more) over renters, and burden commercial and industrial uses (who don’t vote). From what I understand, most taxing bodies have a similar bias. Let us know if you are aware of places that take a more enlightened approach.

    So, you can understand that the property tax structure is an obstruction to mixed uses and local jobs. The big companies can always find some kind of tax abatement, as an incentive to relocate or stay in the taxing district, but small business is nearly powerless against this.

    One interesting idea that I like, only in theory, is the concept of a land value tax (LVT) that is advocated by the supporters of Henry George’s economic ideas. The discussion touches on it in this post: http://marketurbanism.com/2009/01/22/taxing-land-speculation/ It’s a really interesting topic that I hope to cover more in the future.

  • http://marketurbanism.com MarketUrbanism

    I agree that since the renter does not see how much of the rent goes to pay taxes, they don’t realize how much they are being victimized. But, I’d like to clarify one thing: microeconomics tells us the tax is still a burden on the landlord. The landlord shares the burden with the tenant, and cannot pass it all on. Think of it this way: if the tax was removed completely, the landlord could charge less, but ultimately make more profit because demand for rental housing would increase. see this video for a better explanation: http://www.youtube.com/watch?v=pJypeUeZ5fM

    Thus, in the long run, there is less incentive to develop rental housing…

  • http://twitter.com/BruceMcF Bruce McFarling

    Land Value Tax was make an excellent adjunct for transportation system taxation, since genuine improvements to transportation systems in a local area ought to improve land values. But a new tax is always hard to get started ~ harder to get started than a rate increase on an existing tax.

    One approach is an Incremental Land Value Tax, where, for example, an investment in a local rail station, trolley line, aerobus connector, etc., with gateway parking is tied to a zoning easement, such as multiuse three story without parking minimums within a quarter mile radius, and the incremental value of the land due to the easement is assessed the ILVT.

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  • cynical_developer

    It may be the case that property taxes discourage density, but I find the arguments here lacking. The assertion that “the fact that the vast majority of property taxes in the US are used to fund local roads and schools (right?), which apartment-dwellers surely make lesser use of”. I would expect that many apartment dwellers are indeed school age children; it’s a fairly common occurence that parents move into suburban apartments all the time to get in better school districts. Also, while schools generate all of their income from property tax in the US, but other taxing entities may collect property tax as well, so definitely more than roads are being supported via the property tax.

    I also tend to wonder if the higher property taxes collected for commercial in particular don’t represent an attempt to allow for greater uses of services and infrastucture.

  • http://marketurbanism.com MarketUrbanism

    it’s a fairly common occurence that parents move into suburban apartments all the time to get in better school districts

    Sure, there are “many”, but I think you’ll find a MUCH greater proportion of families with school-aged children in single-family homes than in multi-unit apartments. In my apartment building of say 40 units, there aren’t any school-aged children that I know of, and we are a block away from one of the best public elementary schools in Brooklyn.

    I also tend to wonder if the higher property taxes collected for commercial in particular don’t represent an attempt to allow for greater uses of services and infrastructure.

    But they don’t use the schools. Plus they generate sales taxes, income taxes, and jobs.

  • Anonymous

    Not mentioned here–homeowners (and landlords) can deduct property taxes from Federal adjusted gross income; renters cannot.

  • cynical_developer

    Well, to me this is an interesting argument, so let’s see what the facts are. It turns out we are both kind of right on housing unit choices. http://www.census.gov/hhes/www/housing/ahs/ahs05/tab2-9.xls has the goods, and it would appear that households with children are more likely to be homeowners than renters, by a factor of 2 to 1. However, you definitely see a higher share of renters with children in suburbs.

    Finally, whether commercial properties use schools is beside the point. I mean, I pay Social Security taxes :)

  • http://marketurbanism.com MarketUrbanism

    Finally, whether commercial properties use schools is beside the point. I mean, I pay Social Security taxes :)

    I’m confused, because you wanted to consider if the justification for higher taxes on commercial use is that they demand greater usage of services and infrastructure; and schools are typically the biggest “service” paid with property taxes. Of course, commercial uses play a roll in the demand for infrastructure, but not for schools. I don’t doubt that bureaucrats spout out all kinds of “justifications”, but I don’t think they would be correct in making such an assertion. I’m sure it has been studied somewhere…

    Thanks for the census data link.

  • cynical_developer

    I think I confused your points as well. Also, that’s a good point about a pro-federal bias, as there are probably thousands of different tax rates for property.

    When I read your post below about Cook County tax rates, I assumed that the rate quoted was for Cook County, not Cook County School District. In other words, it might make sense that a taxing entity that provides more services to an Industrial property (that doesn’t pay sales tax) assesses a higher property tax. If the rates below are school district rates…well, that’s another matter entirely. Nevertheless, I suppose you could argue that commercial users shouldn’t be taxed by school districts at all.

    Here in Texas, you likeley will pay a combined property tax City, County and School District tax rate, but not a state tax, and the constitution requires the rates to be uniform.

  • Daniel

    Thought of another one:

    From time to time, some localities give tax rebates if there is a budget surplus for the year. These are usually just refunded back to the original property taxpayer. The trouble is that renters have already essentially paid through the increased rents passed on by their landlord, but the rebates are unexpected and rarely passed back to the tenants. This happened in Montana while we were living there. Giving directly back to renters was contemplated but did not pass.

  • Paul Justus

    The Council of Georgist Organizations will be holding their annual conference in Bloomington MN this coming summer and much of it will be on capturing land value for transportation costs. http://www.cgocouncil.org/conf11.htm As you may know the Lincoln Land Institute was originally established to do research on LVT and is a depository of much information on this. The basic idea is that labor and capital, two factors of production that come from human effort should not be taxes. Taxing these factors reduces production. Taxing land — and not the buildings sitting on the land (this is capital) results in a wiser use of that land and provides incentive for higher density without the heavy hand of government planning.

  • Civicst

    Well, I hate to suggest something so obvious, but renters (and owners of rental property) do not get homestead exemptions. Given the generosity of these exemptions in most parts of the country, I’m surprised the gap is only 18%. Perhaps the exemption is less generous in New York.

  • http://marketurbanism.com Stephen

    You’re right, the 18% gap does seems a little small. It’s possible that if you weighted the differentials by the amount of multifamily housing that was actually in a county, you’d get a much higher number. (I.e., maybe the calculation includes a lot of areas that have no differential, but then again also barely have any apartments.) Also, I’m not sure if they’re measuring it by unit of value, or by floorspace. I could probably go look these things up, buuuut…speculating about them on the internet is just so much more fun, isn’t it!

  • http://marketurbanism.com Stephen

    Huh, so basically they’re eliminating the anti-residential density bias and lessening the anti-commercial bias? That’s interesting…I wonder if any other cities are moving in that direction…

  • Paul Joice

    One good way to alter property tax structures to incentivize density would be to tax the value of land rather than the assessed value of a property including improvements. The idea originated (as far as I know) with an economist named Henry George in the 19th century (http://en.wikipedia.org/wiki/Georgism). It would encourage land owners to build their property up to the highest possible use, rather than penalizing them for putting a really valuable building on a small piece of land.

  • Anthony

    California’s property tax structure avoids most of that, by taxing the actual sale price, and limiting increases to 2% in years where the property is not sold. In fact, since apartments tend to be sold less often than single-family homes, they tend to have lower assessments relative to current value.

    A minor point regarding deductibility of property taxes – only that portion based on the value of the property is deductible; any taxes on a per-parcel or square-foot basis are not deductible.

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