Land Value Tax in Albany: A Proposal for Near-term Implementation

In the first part of this series we examined a single block in Albany and identified several problems created by the city's property tax system: assessments are difficult to get right and to reason about, perverse incentives exist that reduce development, and destructive speculative behavior is encouraged.

In part two, we identified a bunch of mechanisms that the government currently uses to try to alleviate those problems. Unfortunately, those mechanisms are partially effective at best.

Part three introduced the concept of a Land Value Tax and showed how that would address all of the problems identified in part one. It also identified some practical problems that stand in the way of switching to an LVT.

In this article we propose a scheme that would allow Albany to test an LVT in a way that avoids the practical problems mentioned above. It also would function as a demonstration of the benefits of an LVT in order to encourage it's wider use.

LVT problems

To reiterate, the first problem with an LVT is that it represents a significant change and could be confusing to existing taxpayers who are used to the current system of taxation. For those whose properties are being put to good use it will result in a tax reduction, so for most it will be a welcome change. But it will be a large change nonetheless, and that means it needs to overcome significant inertia.

The second problem is that switching to an LVT would require enabling legislation at both the state and local levels which could be politically complex. This isn't a dealbreaker, but does mean that any change will likely require years of concerted effort to get implemented.

In this article we propose a workaround to the above two problems by implementing an LVT for a small portion of Albany in a manner that doesn't require widespread legislation.

Convention Center Land

Many residents of Albany are already familiar with the ongoing saga of the convention center, but for those who aren't, All Over Albany has done a great overview of the RFP issued by the state. Basically, the state acquired a bunch of prime land (mostly vacant) for the purpose of building a convention center in Albany. Later, they decided to site the new center elsewhere. All of that land is still state owned and still mostly empty, and the state is hoping to find a private developer to return it to productive use. Here's a map of the site from the state's RFP:

Since the RFP was issued in January 2015 and the deadline passed in March of that year, we've heard no substantial updates about possible uses for that land. From the RFP, it seems that they're looking for a monothilic type project by a single developer (although they do throw around the term mixed-use), but have yet to find an interested party.

Our proposal

We propose getting the convention center land back on the tax rolls as soon as possible. We propose maintaining the existing, historic street grid and getting land into developer's hands as individual lots rather than monolithically. That will encourage actual mixed-use, organic development. Finally, we propose putting that land into a special tax structure that functions as an LVT to encourage immediate development and reap all of the benefits mentioned in our last article.

How it could work

One advantage of this proposal is that it avoids the first problem with LVT we mentioned: that of abrupt change. Since this land is off the tax rolls currently the new owners wouldn't experience any change from the status quo. They'd understand the LVT arrangement from the time they purchase the property. But what about the second problem, enabling legislation for LVT?

Our proposal relies on transferring property using 99-year renewable, transferable, leases rather than deed transfers. These long term leases can be structured to be equivalent to ownership in all respects, with the only difference being who pays the tax bill. It may seem like an unnecessary complication, but this allows the whole thing to work without any changes to current state tax law. Here's how it could work:

Our proposal is for the state to transfer all of the property to a new public benefit corporation, called the Albany Land Tax Authority (ALTA), or something equally catchy and official sounding. ALTA would divide the land up into lots while maintaining the historic street grid.

The city of Albany would continue to (re)assess each of the lots and buildings exactly as is done elsewhere in Albany. As the land owner, ALTA would get the annual tax bill and would be responsible for paying all of the property taxes for all of the lots.

In order to get land redeveloped, ALTA would auction each lot off individually. Immediate proceeds from the auctions could go to NYS as reimbursement for the land.

Upon winning an auction, the new owner would be granted a 99 year renewable, transferable ground lease from ALTA. The lease is designed to be equivalent to ownership, with lease payments replacing property tax payments. Those lease payments would be computed on an LVT basis. So ALTA pays the city a plain old property tax (land + buildings) but the lessees pay ALTA an LVT equivalent (payment based on land value alone).

Example

Let's look at a simplified example to try to get this proposal straight. Imagine the convention center land consisted of only three lots, A, B, and C:

Assume that lot B currently has a building on it valued at $100K, but that lots A and C are vacant. The assessed land value of both A and B is $10K, but C is twice the size and is assessed at $20K. So the city of Albany bills ALTA based on a $10K assessment for A, a $110K assessment for B, and a $20K assessment for C. ALTA owes taxes based on that total of $140K.

ALTA simulates an LVT, however, by dividing that $140K tax basis up among it's leaseholders by land value alone. Since C is twice the size of both A and B, it's owner pays twice the share. So C pays ALTA a lease based on an effective tax assessment of $70K, and A and B each pay based on an effective assessment of $35K. ALTA still collects based on a total assessment of $140K, it's just divvied up differently. The owner of lot B gets a huge tax break (basis of $35K instead of $110K) since they're the only one who has put their lot to good use. The following table breaks down the math above. ALTA is paying taxes based on column C but the lessee is making lease payments based on column E:

Lot Land Assessment
(A)
Building Assessment
(B)
Total Assessment
(C = A + B)
Land Fraction of Total
(D = A / a)
ALTA Effective Assessment
(E = c * D)
A $10k $0 $10k 0.25 $35k
B $10k $100k $110k 0.25 $35k
C $20k $0 $20k 0.5 $70k
Total $40k (a) $100k $140k (c) 1.0 $140k

Let's say that the owner of A decides to follow B's lead and builds a new building assessed at $200K. The new total assessment for lot A is $210K and the city charges ALTA a higher tax based on that. ALTAs new total tax basis is $340K, and all three lease payments are adjusted based on that total. A and B now each pay based on an effective assessment of $85K, and C pays based on an effective assessment of $170K (twice as much). The total effective assessment is $340K, so ALTA still takes in in lease payments exactly what it pays out in taxes. Here's the updated table with changes in bold:

Lot Land Assessment
(A)
Building Assessment
(B)
Total Assessment
(C = A + B)
Land Fraction of Total
(D = A / a)
ALTA Effective Assessment (k)
(E = c * D)
A $10k $200k $210k 0.25 $85k
B $10k $100k $110k 0.25 $85k
C $20k $0 $20k 0.5 $170k
Total $40k (a) $300k $340k (c) 1.0 $340k

This simplified example shows how adding ALTA as an intermediary between the city and the users of land allows for the simulation of an LVT without any enabling legislation. One complication is that ALTA needs to assign relative land values for each lot (that's column A), but that can be done and publicly announced before any of the lots are auctioned off. The new owners (lessees, really) will have a clear idea of what they owe and will have a strong incentive for immediate and productive development from the get go.

One more quick note: the above example is obviously a gross simplification, in reality the convention center land would consist of many more than 3 lots. So the dramatic swing in effective assessment we saw above would actually be much milder in practice (when divided up among more total lots). The incentives would remain exactly the same, however.

Future Growth

The convention center land represents a perfect test-bed for an LVT in Albany, but it'd be nice to allow the experiment to expand as it proves successful. One option would be to allow neighboring properties to opt-in to ALTA as they see fit. The idea would be that if a property owner would pay more to ALTA than they currently do in taxes they could opt in at any time. They'd transfer their deed to ALTA for free and be granted a lease as above. Their lease payment would initially be higher than their current taxes (that's the restriction to allow opt-ins), but presumably they'd only opt-in if planning on redevelopment. After redevelopment they'd end up with a lower effective tax payment because of the LVT structure of ALTA - it's a built in tax incentive for development.

A great example of a property neighboring the convention center land that might want to opt-in is the absurdly large McDonald's parking lot on Pearl and Madison:

There's plenty of valuable land there that could be put to productive use with the right tax incentives in place.

Another option for expansion would be to integrate with the Albany County Land Bank that we described in part two. When the land bank acquires a property it could transfer it to ALTA and take ownership of the resultant leasehold instead. That way when the land bank transfers ownership to a new caretaker that property will effectively be taxed under an LVT and will have incentives towards productive use.

Comments

We believe that this proposal represents an innovative new way forward for the convention center land and for the city of Albany. That said, we're sure there are outstanding questions to be addressed and tweaks that could be made. Please contact us with criticism or thoughtful comments on this article! Email your comments or questions to albanyargus@gmail.com and we'll post them here. We won't post your email address.