Posts Tagged ‘tax policy to encourage infill development’

How to Change Tax Policy that Encourages Vacant Lots to Encourage Infill Development Instead

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Economist Harry Gunnison Brown equated speculative developers who hold onto to land without building on it to laborers who go on strike. “Has there ever been a strike — or a series of strikes — by labor, of such magnitude as this more or less perpetual strike by our owners of vacant land? And while workers hold back their own labor, owners of vacant land hold back from the use of others, a considerable part of the earth,” he consternates in the 1959 paper he wrote called Incentives, Vacant Lots and Your City.

Vacant urban land isn’t only a problem in Phoenix, it’s a problem all over the country, and actually in many parts of the world. But some cities have put in place some smart tax strategies to discourage vacant lots and encourage infill development.

The key to a tax strategy that incentivizes urban renewal is land value tax. Land value tax is an annual tax on the rental value of land based on permitted land use, not on current use. So if a piece of land is permitted for a 30-story high-rise, the land value tax would be levied as a percentage of that use. And so land value tax is a progressive tax falling most heavily where the benefit to the community is greatest and most lightly where the benefit is least.

Some cities across the country have adopted the land value tax philosophy as part of their property tax code in the form of a split-rate tax. Many cities, including Phoenix, tax vacant land at a much lower rate than developed land because its appraised value is lower. This incentivizes developers to keep their land vacant. Other cities, like Pittsburgh, have adopted a split-rate tax rate which does the opposite. The split-rate tax rate uses the concept of land value tax and taxes undeveloped land at a higher rate than land that is developed. This strategy incentivizes infill development and disincentivizes vacant lots, land speculation, and leap-frog development that results in sprawl.

Pittsburgh adopted the split-rate tax system as far back as 1913, where it taxed vacant land owners twice the rate it taxed owners of developed property. In 1979, they expanded the system where it now taxes vacant landowners a whopping 6 times the rate of owners of developed property. What are the results of this strategy? Pittsburgh has a more compact development pattern than many cities because its tax policy discouraged leap-frog development, which is what happened to Phoenix’s downtown. And as for those who think a split-rate tax system would hurt the economy, the opposite is true, as it encourages development. Pittsburgh had a 70.4% increase in building permits while the 15 city average decreased by 14.4% a decade after it expanded its split-rate tax system.

Benefits of the split-rate tax system include:

  • Land value tax is an additional source of public revenue.
  • Fewer vacant lots in urban areas. The higher tax rates on vacant land would make it more onerous for owners to just sit on land and wait for it to appreciate in value. It incentivizes them to either develop it themselves or sell it to someone who will.
  • Less sprawl. Land value tax encourages more infill development in urban vacant lots, making use of existing infrastructure. This decreases the need to build on greenfield land on the fringes of the city.
  • The boom and bust cycle is greatly mitigated. Land value tax makes it much harder to just speculate on land, which is the source of the real estate bubbles, and so it stabilizes the real estate market.

Image Credit: Image by Chris Wass and Derek Welte.