Don’t Let Your Community Become Captive to Real Estate Speculators
Introduction
Oneonta’s Main Street was once a premier shopping destination for everyday necessities. Families would venture over to Bresee’s Department Store to shop.
Fast forward to today. A shifting retail environment coupled with consumer preferences geared toward obtaining things as fast as possible for as cheap as possible led to the development of the Southside Shopping Center in 1983. The shopping mall was followed by the construction of the Walmart Super Center in 1995. Now, on Main Street, between Chestnut and Elm Street, 32% of storefronts are vacant.
Overview of Downtown Oneonta’s Retail Environment
Along Main Street, there are 12 establishments selling food, banks, storefront offices, and government buildings. There are a number of retail establishments anchored by merchants like Serenity Hobbies, the Underground Attic, and the Green Toad. In 2016, the substantial private investment made by Downtown merchants was met with a $10 million public investment via the Oneonta Downtown Revitalization Initiative. Despite the large public investment in our Downtown, why hasn’t there been a substantial decrease in the vacancy rate along Main Street?
There are several contributing factors that could explain the lack of private investment in our Downtown. However, I bet there is one factor that many of you have overlooked: taxes. Under our current tax system, property owners are punished for investing in their buildings through increased assessments. Property owners who choose not to invest in their buildings are rewarded through lower assessments and, you guessed it, lower taxes.
I want to spend some time to share with you what can be done to address this problem, examples of cities that fixed their broken tax system, and what you can do to advocate for a possible solution — a land value tax in Oneonta.
The Problem
Under our current tax system here in Oneonta, improvements such as buildings, improved facades, etc. are taxed at a much higher rate than the actual land that sits right under it. Want to add a new façade provided by grant money from the DRI? Get ready to have the assessed value of your property increase. Those who don’t want to invest in their property or who choose to allow it to diminish in value get taxed less. As Chuck Mahron with Strong Towns says, this taxing regime makes slumlords possible allowing them to buy distressed properties and ride the cash flow down a slope of steady decline, paying minimal taxes along the way.
Put more simply, the vacant lots, the distressed buildings, the slumlord-owned properties all receive city services like police, fire, water, and sewer. Yet, they don’t pay the same share as landlords who invest in their properties. Sound fair? No, it isn’t. By choosing to hold onto their properties without improving them, those landowners are dumping the tax burden on the very same people trying to improve their community.
Property taxes also encourage idleness. Buying a vacant lot in Downtown Oneonta or an otherwise improving area, waiting for all of these revitalization projects to come in, all while paying low taxes, is a smart investment strategy. Also, the investor who refuses to improve their property while charging higher-than-market rents for storefronts is a common frustration as well. Idle landlords are more than happy to let the folks trying to implement DRI projects continue as it will drive up property values while they themselves pay low taxes. Do you ever wonder why the folks who own the lot next to Foothills choose not to develop their property or why the owner of the Java Island building asks for astronomical rents that no one will pay? Well, this is why. This is a direct byproduct of the property tax.
Local governments receive a large portion of their revenue from property taxes. According to a Lincoln Institute Report from 2009, local governments received nearly 72% of their tax receipts via property taxation in 2006. The idea of raising property taxes are an absolute lightning rod in most communities, with most politicians pledging to either lower or hold the line on taxes. What this creates however, is a limited pool for communities to gain revenue from. With limited revenue streams communities become increasingly reliant on state aid in the form of grants. Grants often come with strings attached meaning that communities often cannot spend state money the way they please.
So what should we do? I argue that we should consider the adoption of either a land value tax or a split-rate property tax.
A brief history of the land-value tax
The most famous case for land value taxation is found in Henry George’s 1879 book Progress and Poverty. During the late 19th century, George was struck by the persistence of poverty despite the rapid growth and industrialization being experienced in cities throughout the United States. George thought that the social inequality and periodic economic crises of the 19th century was caused by private ownership of land and land market speculation. His solution: a single or 100% tax on land rents received by private landowners.
George was optimistic in that his “single tax” could substitute for all other forms of taxation all the while funding essential government services.
How Land Value Taxes Work
According to Strong Towns, a land value tax is a tax that is assessed on the value o fa piece of land, rather than the value of the buildings that sit on it. Under a land tax, the property owner is effectively taxed on the value of their location, which is a direct function of what is nearby. Naturally, property owners in valuable locations with access to proper infrastructure, public transit, and amenities such as restaurants and shopping destinations would have their land valued higher than someone living on the outskirts of town.
Under an alternative taxing regime like a land value tax, it is important that the same amount of taxes are collected. The following table shows three taxing scenarios: 1) a traditional property tax system; 2) a split rate property tax with a higher tax rate applied to land; and 3) a pure land value tax.
Alternative Property Tax Rates Can Yield the Same Result
Land Tax Payment (Land Value= $100,000)
Improvements Tax Payment (improvements value =$300,000)
Total Tax Payment
Traditional property tax (1% on both values)
Land Payment: $1,000
Improvements: $3,000
Total: $4,000
Two-rate property tax (2.5% on land and 0.5% on improvements
Land Payment: $2,500
Improvements: $1,500
Total: $4,000
Pure land value tax (4% on land value only)
Land Payment: $4,000
Improvements: 0
$4,000
As you can see, the total tax payment does not change. What does change, however — is the tax rate applied to improvements as compared to land. Under the split rate scenario, there is a 100% decrease in the amount of taxes paid on improvements as compared to a 150% increase in the taxes paid on the land itself. This incentivizes investment in your property as opposed to letting it sit idly by.
From a pure economics standpoint, a land tax is what is known as an efficient tax — it makes the economy more productive and thus creates wealth. Most taxes, in comparison are inefficient because they siphon money from the private sector to fund public activities. A land value tax shifts the tax burden entirely onto landowners. Traditionally, taxes are shared among producers, consumers, and other affected parties as the price and amount of the taxed good or service changes in response to the level of taxes applied.
Land, however, is a fixed quantity. The value of the land is determined by the demand for the fixed amount available. Market forces set the price at what the land is worth to buyers, and what willingness to pay will not change because a land tax is imposed.
Who Got it Right?
Domestically, the State of Pennsylvania provides a great insight into the powers of the land value tax. Let’s start off with the City of Harrisburg. In 1982, Harrisburg instituted a tax rate on land that was four times the rate on buildings. By 1994, the land value tax contributed to over $1.2 billion in new investment occurred reversing three decades of very serious decline. The number of vacant structures in Harrisburg declined from over 4,200 in 1982 to under 50 by 2001. The number of businesses on the tax roll grew from 1,908 to 8,864.
The City of Allentown adopted a land-value tax in 1996, establishing a split-rate property tax of 5.038% on land value and 1.072% on building value. U.S. Senator Pat Toomey was an early fan of the land value tax stating:
“When the people of Allentown voted for the land value tax in 1994, nearly three out of every four properties saw at least some sort of tax cut. Today, many of the properties that did pay more have new or better buildings on them, stabilizing the tax base to the point where we haven’t had a tax increase in five years. In that time, the number of building permits in Allentown has increased by 32% from before we had a land tax”
After the land value tax was adopted in 1996, 70% of residential parcels saw a tax decrease. 90% of homes in distressed areas saw their tax liability decrease as well. Local business taxes were frozen at 1996 levels as well. Who lost, you might ask? The losers in this trade were absentee owners of vacant lots who ended up shouldering most of the tax burden.
The Key to Success
As Joshua Vincent, Executive Director of the Center for the Study of Economics (CSE), writes, the key to a land value tax is to tax what can’t move. Vincent elaborates: “land isn’t something that can’t be shipped to the Caymans or Texas. This makes it a unique revenue raising system for government in comparison to other programs…” Under our current tax system, cities and suburbs like the City and Town of Oneonta are locked in a perpetual battle to attract private investment. Since land in the City is made more valuable by already existing infrastructure: parks, libraries, police, fire, and schools, land in the City is placed at a competitive tax disadvantage. Suburbs like the Town of Oneonta can skate by with low taxes because of the newness of their infrastructure.
By rewarding investments in improvements and buildings, the City can encourage people to use their land productively. The City can open themselves up to new investment. Vincent reminds us that the important thing to remember is that many cities already make a regular practice of giving away tax subsidies to investors and builders. What a land value tax does is it makes this tax abatement available to everyone across the board.
Common Stumbling Blocks
It’s important to remember that the land value tax is not a panacea. In fact, the land value tax faces several stumbling blocks that deserve examination. Chief among these stumbling blocks is the issue of legality. Property taxation in the United States is administered by local governments subject to the power granted to them by state governments. So, before shifting to a land-value tax, it will be important to carefully evaluate the New York State Constitution and relevant statutes.
Most state constitutions have language dealing with the idea that property taxation should be applied equally or proportionally across all types of property. In recognition of this issue, a study by Richard Coe published in 2009 notes that several states have language in their constitutions granting exemption of some properties from taxation. He suggests that this language could open the door for some sort of split rate property taxation to be implemented.
A successful land value tax relies on frequent, accurate assessments and the establishments of tax rates that are data driven. Sloppy and inaccurate assessment procedures can undo the gains set by a land value tax. Bourassa (2009) — a leading scholar on the application of a land value tax in Pittsburgh, Pennsylvania — suggests that it was infrequent, inaccurate assessments and clumsy tax rate setting procedures that derailed the land value tax in Pittsburgh.
To shift away from realm of policy and into the realm of politics, there is a lot of inertia around the notion that the City has always done the proverbial “it” the same way. Want to shift the way we tax property? Chances are local leaders will balk saying “we’ve always taxed property this way,” or “changing will require too much work.” Politicians will be hesitant to make a big change right away — which is understandable, but frustrating nevertheless. Also, your local assessor and finance department may balk because a shift it taxation will draw attention to the way they do their jobs.
So What’s Next?
Early in my career, I was a cage rattler. I would point out a problem, shake my fist, and then walk away — falsely claiming that no one will listen to me. Over time, I realized that proposing big changes requires identifying a path forward. Here’s what I suggest as next steps for evaluating a land-value tax in Oneonta:
The Candidates for Mayor and the Common Council can work with the City Attorney, Finance Director, and State officials to determine the legality of a land-value tax or a split-rate property tax in Oneonta. Proposed legislative changes can be evaluated by the City Council
City Staff can begin to identify which landowners benefit from the current tax system in Oneonta and identify a way to phase in a land value tax or a split-rate property tax over a period of time to limit adverse impacts
Citizens and Volunteer Boards can identify stakeholders and experts to come speak to our local leaders. They can work with local media outlets to report on tax issues at the City level. They can conduct outreach to building owners asking them to buy into this taxing regime. They can also ask representatives from municipalities who have alternative taxing strategies such as folks from the City of Rome, Village of Saratoga Springs, or the City of Oneida to discuss their experience.
As both a professional planner and a person, I find it difficult to rationalize the idea punishing people with higher taxes for investing in their property. Receiving large grants to upgrade facades or add more housing, is nice and all, but ultimately it will jack up your taxes in the long-run. A land-value tax represents a progressive, bold idea, rife with its own pitfalls, but worthy of further investigation at the very least.
The opinions expressed above are of a private individual and do not represent those of the City of Oneonta, County of Otsego, or the Otsego County Conservation Association.
Further Reading
Lincoln Institute Report on Land Value Taxation: https://www.lincolninst.edu/publications/articles/land-value-taxation
Strong Towns Series on Land Value Taxation: https://www.strongtowns.org/landvaluetax
