Land Value Taxes Can Resolve Property Tax Systems’ Inequities

Property tax systems across the US have come under scrutiny for inequities—especially with homeowners in economically disadvantaged areas. Transitioning to a land value tax may be the solution.

Taxing the value of land alone can encourage development and reduce speculation while stabilizing residential tax burdens. It also would allow for alternative avenues to progressivity, such as an income-adjusted tax system. On the revenue side, it can create a consistent tax revenue stream for municipalities, decoupling tax revenue from real estate boom-and-bust cycles.

Traditional property tax systems account for the value of both land and buildings or improvements on the land. As such, they can place an unsustainable burden on residents and fail to encourage productive land use. They make vacant land cheaper to own than productive land—creating incentives for property owners that run counter to maintaining a sustainable tax base. Loss in property value through disrepair and disuse is effectively subsidized by the community through the decrease in property taxes owed.

In the south suburbs of Chicago, for example, decreasing commercial property tax revenue and rising residential property valuations have forced some low- and middle-income homeowners into choosing between debt or loss of their homes. Other municipalities are experiencing similar erosion of real estate tax bases, leaving a shrinking group of homeowners to shoulder the entire tax burden.

Traditional property taxes are essentially wealth taxes for property owners. They’re levied on land and any improvements to it ever year but require no realization event on the property owner’s part. A homeowner can see the value of their home surge overnight—and with it, their tax bill—without a corresponding increase in income or liquidity.

Property taxes also can unduly penalize property owners who improve their homes. Applying the tax rate to structures discourages investment in property maintenance or renovation by people who struggle to pay their existing tax bill. This hurts areas where economic recovery depends on revitalization and improvement efforts.

Further, property taxes are often regressive, as tax assessment systems fail to adjust rates based on income or ability to pay. A unilateral action by the municipality, such as a property reassessment, can put tax bills out of reach for residents who haven’t moved or made any improvements. Their options beyond appealing the reassessment dwindle to taking on debt or losing their homes.

This inequity is playing out in Chicago’s south suburbs. In towns such as Harvey, Ill., where the median household income is relatively low, a property tax hike of 30% has left many residents in precarity. Residents of Wake County, N.C., have seen similar spikes, with some property value increases topping 50% there.

These stories reflect a trend in which the tax burden disproportionately falls on low-income homeowners due in part to their proximity to commercial properties with falling valuations and reduced tax revenue. A vicious cycle emerges: Property taxes force out residents and reduce the tax base, which strains government budgets, which prompts rate increases or property reassessments to make up the difference.

A land value tax could break the cycle by shifting tax bases away from improvements and onto the land itself. This would be more equitable and productive, addressing some shortcomings of traditional property tax policies.

LVTs don’t punish homeowners or developers for construction, renovation, or improvement. Instead, they make underutilized land more expensive than productive land, encouraging development and deterring land speculation.

A switch to an LVT in an area with large amounts of undeveloped land or abandoned properties immediately would cause some property holders to reevaluate the profitability of leaving property fallow. They would face financial pressure either to develop the land or sell it to someone who will.

LVT rates also would be stabler than property tax rates. An LVT is based on the value of the land, which has a fixed supply and isn’t tied to the volatile value of homes or commercial buildings. Homeowners are protected from sudden sharp increases in tax bills due to fluctuating property values, but the tax base could still be adjusted as land values or revenue needs change over time.

Residents would have more financial security and reason to improve their property. This could help revitalize economically depressed areas, with the increased productive use of land leading to more businesses and economic activity in the area.

LVTs align incentives of property owners with the economic health of their communities. They also help protect homeowners from being unfairly burdened by rising property values caused by a shrinking base. As US municipalities search for solutions to both the growing property tax issue and ongoing housing crunch, LVTs stand out as an equitable and workable solution.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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