Land Value Tax: A Solution to Albany's Problems with Property Taxes

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 uses to alleviate those problems. While each mechanism has some merit, they all treat symptoms of the problem rather than correcting the problem itself. The state of property maintanence and development in the city proves that there is still a long way to go towards correcting them.

In this article we consider an alternative tax structure, a Land Value Tax, and look at it's implications on the problems we've been trying to address.

Land value tax

A property's tax bill is currently based on the value of any structures on the property in addition to the value of the land itself. In part one we saw how that can result in widely varying tax bills for neighboring properties. When we took our sample block and adjusted the 2016 assessed value for the intrinsic value of each lot we saw a result like the following:

A land value tax simply shifts the tax burden from land and structures to land alone. With a land value tax, a property's tax bill is exactly the same whether it's used as an overgrown parking lot or as a high rise apartment building, since the underlying land value is exactly the same. While land values may vary widely in different neighborhoods of the city (e.g. downtown vs uptown), they generally vary gradually and will be very similar for neighboring properties. Since the tax is based on the intrinsic value of each lot, and we're estimating that that value is uniform within the block, the above image is now a uniform shade of blue:

Under the current tax scheme our block has a total assessed value of $3,597,700. Let's look at how that tax burden is divvied up currently and how it'd get divvied up under an LVT scheme.

As in part one, we'll use frontage as a proxy for land value, and divide up the total tax burden based on each property's frontage as a percentage of the whole. That will give us an effective LVT assessment, which we can compare to the original assessment to see how each property's tax bill would change. Note that the total taxable value for the block remains constant (which is important for the city's budget!):

Address Current Assessment Effective LVT Assessment Tax Bill Change Under LVT
68 L 67000 51914 77%
70 L 58000 51810 89%
72 L 9100 51810 569%
74 L 4500 51810 1151%
76 L 4500 53969 1199%
78 L 4200 58370 1389%
80 L 4200 58390 1390%
82 L 3000 41681 1389%
84 L 2500 41556 1662%
191 P + 193 P + 195 P + 197 P + 7 W + 13 W 61800 411327 665%
199 P 3200 42303 1321%
201 P 229000 34353 15%
203 P 180000 34291 19%
205 P 147000 32091 21%
207 P 112000 32091 28%
207.5 P 191000 31136 16%
221 P 139000 45666 32%
223 P 160000 41515 25%
225 P 133000 42324 31%
227 P 115000 42241 36%
229 P 178000 42905 24%
231 P 159000 74726 46%
235 P 13400 70575 526%
235.5 P 4300 30783 715%
237 P 159000 40228 25%
239 P 156000 40975 26%
241 P 85000 41515 48%
243 P 159000 331266 208%
5 W 229000 42117 18%
744 B 40000 358956 897%
750 B 180100 45811 25%
752 B 34700 45811 132%
776 B 572200 1181382 206%

We can see that tax burdens change pretty dramatically for many properties in the block. The largest decrease happens at 201 Pearl, which is a well maintained row building. The largest increase happens at 84 Livingston, an empty lot.

Let's again consider the three problems we identified with our current tax structure, and see how things change with an LVT.

Assessments

We've seen how difficult it is to get assessments correct. In part one we identified a number of puzzling assessments and assessment changes just on a single block.

By considering the value of land alone, an LVT dramatically simplifies the problem of assessing properties. Land value will vary across the city, but we can expect it to vary smoothly. That means we can assign assessments for neighboring properties using easy, objective metrics like land area and street frontage. We can also sanity check assessments city-wide using colored maps like the ones above (by looking for a smooth gradient of land value assessments).

As a concrete example let's again look at the vacant lot at 78 Livingston Ave. In 2015 it was assessed at $75,000, which we suggested was an over-assessment. Under the current scheme that'd take a lot of research (or explicit complaints from owners) to identify. By switching to an LVT, we can just look at the difference in color between 78 and it's neighbor at 80 to see that there is a discrepency:

Since our current tax scheme involves assessing both buildings and land, it follows that assessing land alone will necessarily be a simpler and less error-prone process.

Incentives

The second problem we found with property taxes was that they create perverse incentives that discourage development / maintenance and encourage blight. We saw how the city uses the IDA to try to make large development projects feasible by abating increases to their tax assessments. We also saw how those types of "fixes" aren't really available to smaller projects and to incentivize ongoing maintenance.

With an LVT, the incentives are reversed from the status quo. Since the tax bill will be the same for a parking lot and an apartment building, the owner has a strong incentive to put land to good use. Letting properties go underutilized and unmaintained becomes an expensive proposition, so those properties will get sold to somebody who intends to use them productively.

Let's again look at the parking lot at 776 Broadway on our example block. In part two we heard about plans to build a large building there. We also saw how the IDA stepped in to abate tax increases and make that project feasible. In that analysis we saw that the current assessment for the lot was $572K. The expected final assessment of the new building was $6.17MM. What the IDA did was to negotiate PILOT payments so that the effective assessment of the final project would be $1.64MM instead. While that cuts the developer a break, it's also a lot better for the city than the status quo if the project didn't go forward.

From the table above, under the LVT scheme 776 Broadway has an effective assessment of $1.18MM. That will stand whether the property remains a parking lot (in which case it'd be a big increase from $572K) or whether the building project goes through (in which case it's even less than the negotiated PILOT agreement). This is a perfect example of how an LVT acts as a development incentive in the same way that the IDA currently does.

The benefit of an LVT vs. something like the IDA, though, is that this incentive is in place for all properties citywide, and doesn't require negotiation and bureaucracy. The tiny empty lot at 84 Livingston gets the same development incentive as the large project - its tax bill goes up in the short term but remains constant when it's put back to good use. It also helps encourage ongoing property maintenance, not just new development.

Destructive Speculation and Zombie Properties

The last problem with our property tax structure is that it encourages destructive speculation and leads to zombie properties. This problem is cleanly addressed by an LVT as well.

Zombie properties are encouraged by the current tax structure because the assessments on empty lots and poorly maintained buildings are so low. Since their assessment is low, the cost of holding those properties idle for long periods of time is also low. Speculative owners sit on them, hoping for the rest of the community to improve and thereby increase their value.

By raising the tax burden on empty lots and unmaintained buildings (see examples like 84 Livingston in the table above), an LVT discourages unproductive speculation. It becomes much more expensive to hold an unproductive property for a long period of time, so owners are encouraged to either develop the property (remember the incentives section above!) or to sell it to somebody who will.

Problems

Hopefully we've now convinced the reader of the benefits of an LVT and how it could help address some of Albany's most nagging problems. So what are the drawbacks?

From a practical perspective, the biggest challenge with an LVT is that it would be a big change. There is a risk of confusion (although the concept is quite simple once explained!) and uncertainity about any new system. One way to address this would be to phase in the LVT over a period of time, by gradually shifting more of the tax burden from buildings to land over time. Any change would obviously also need to be accompanied by public outreach and education.

Another problem with an LVT is that there is some political overhead to changing the city's tax structure. Changing the way taxes are computed would require enabling legislation at the state level. An encouraging note, however, is that this type of legislation already exists in neighboring states (PA) and has even been experimented with in NY before.

Next time

In the next article we examine a development scheme that would provide the benefits of an LVT for an important section of the city while avoiding both of the problems mentioned above.

Comments

Criticism or thoughtful comments on this article are greatly appreciated! Email your comments or questions to albanyargus@gmail.com and we'll post them here. We won't post your email address.