Tax Land, Not Buildings

The following is republished by permission by the author Chris Keimig.  It first appeared on Streets.MN, a website dedicated to expanding the conversation about land use and transportation issues in the Minneapolis/St. Paul and Greater Minnesota areas.  As in Buffalo and many other cities, there’s been a lot of discussion in Minneapolis about the scourge of surface parking lots downtown.  Keimig has some potential solutions (see here) including the one below. 
 
Earlier this year, the city of Minneapolis received a grant from Met Council to study possible strategies for doing away with its over-abundance of downtown surface parking. For lots of reasons, the fact that surface parking covers one-third of the entire surface area of downtown is bad news for the city. (You can find an exhaustive discussion of these reasons here.)
One solution to this problem that the city should seriously consider: taxing land at a higher rate than buildings.
The conventional property tax, which taxes land and buildings at the same rate, is essentially backwards when it comes to the behaviors it incentivizes. It penalizes property owners for building or making improvements to their structures, while rewarding speculators and absentee landlords who would rather allow their properties to decay than make expensive (and annually taxable) improvements. Taxing land and buildings at the same rate means that as long as you don’t put any buildings on your land, your tax bill is going to remain relatively cheap. If you’re a speculator, this means that you only need a modest amount of revenue (say, a few bucks a day from people driving into the city for work or to go shopping) in order to sit on that land indefinitely, or until someone comes along offering your “pie-in-the-sky” price (to quote one downtown city planner I spoke to)–effectively keeping the land out of the hands of those with genuine interest in putting it to productive use.

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By taxing land at or near its development potential, however, owners of land being used at less than maximum productivity would be paying a disproportionate amount in taxes in order to keep it that way.
Aside from the obvious goal of raising money to pay for public services, we levy taxes either to discourage a particular behavior in favor of another (taxes on cigarettes and alcohol discourage consumption and thus promote healthier lifestyles/lower health care costs), or because a given resource is scarce while demand for it is high (i.e., the gasoline tax). But if the city is trying to encourage development–and to attract the 70,000 more downtown residents it seeks by 2025–it hardly makes sense to place a tax on that behavior. Similarly, if the city wants potential developers to treat land as the scarce resource that it is–encouraging them to build up rather than out in order to maximize economic output and reduce sprawl–it makes sense to tax land at a higher rate than buildings. 
The intersection of 5th Avenue South and 3rd Street South in downtown Minneapolis provides an instructive example of how our property tax code is currently sabotaging the city’s development goals. At this intersection, we see three distinct forms of development: a surface parking lot (owned by the Star Tribune Co.), a multi-level parking garage (Gateway Ramp), and a commercial space (the Minneapolis Grain Exchange building).
When you look closely at the property tax bill for each, it becomes clear that the conventional property tax deters development and risk-taking. The surface parking lot spans 2.5 acres, and its owner pays $1.57 per-square-foot of land in annual property taxes to the city. The parking garage across the street spans roughly the same area (2.48 acres), and because of the lot’s structural improvements, pays a bit more than double the surface lot in property tax –$3.70 per-square-foot of land. The Minneapolis Grain Exchange building (which occupies 1.22 acres of the adjacent block), however, pays a staggering $65.34 per-square-foot of land–a rate almost 42 times higher than the surface parking lot.

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This is completely backwards. From the city’s perspective, the Grain Exchange building is the best and most preferable use of land of the three, while the surface lot is the least. And yet, looking at the tax figures one would think exactly the opposite. By simply taxing land at a higher rate than improvements, owners would be motivated to maximize the productivity of land. Parking lots would still exist of course, but they would be condensed into above- or underground garages rather than in mile-long parking corridors. In this way, by removing the penalty for production and development, two-rate taxation is actually a form of economic stimulus.
But two-rate taxation is about more than encouraging dense urban development and reducing sprawl. As Rick and Will Rybeck note in this recent essay, two-rate taxation also addresses the root cause of the boom-and-bust cycle of the real estate market:
Higher land taxes discourage land speculation by making it less profitable. Prior to the Great Depression, there was a nationwide real estate boom and bust. Not surprisingly, land values in major U.S. cities declined drastically. Between 1930 and 1940, land values declined in New York, 21 percent; Milwaukee, 25 percent; Cincinnati, 26 percent; New Orleans, 27 percent; Cleveland, 46 percent; Los Angeles, 50 percent, and Detroit, 58 percent.

But Pittsburgh adopted a two-rate property tax in 1914. As evidence that this reform reduces speculation, Pittsburgh’s decline in total land values was only 11 percent between 1930 and 1940. 
After increasing the tax differential between land and building taxes in the late 1970s (land was taxed at a rate 5.77 times higher than buildings), Pittsburgh also saw significantly increased development activity at a time when most cities its size were experiencing declines.
There are obstacles, of course, to implementati
on. Current law requires the value of properties in Minneapolis to be assessed every five years. Two-rate taxation would require more frequent land valuation, and the process of assessing the value of a piece of raw land absent its improvements is difficult. Furthermore, as is the case with any tax, there would be winners and losers. Owners with a high improvements-to-land ratio would generally benefit or remain neutral, as would most residential properties (especially owners of multi-family units), while those with a low ratio (think car dealerships and parking lot owners) would see a tax increase. The redistributive nature of the tax could prove politically difficult.
Nevertheless, the benefits almost certainly outweigh the potential costs. As the city ponders ways to encourage denser downtown development and bring more people (and jobs for those people) to the city, implementing a two-rate tax should be under serious consideration.
 
Chris Keimig is a writer and teacher living in Minneapolis. He’s the founder of the blog Empty Lots, a documentary photo project that examines Twin Cities transit and urban planning issues through the lens of the city’s excess parking infrastructure. He earned his MFA in Creative Writing from the University of Minnesota, where he also studied transit planning in his spare time.

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33 comments
sonyactivision
sonyactivision

Taxes are probably why so many surface lots exist in the first place. If there were no taxes on any property or incomes, the lines of people coming in to buy those lots and build something would likely stretch for miles.

300miles
300miles

You should learn how to parallel park. Street parking downtown is free during evenings and weekends. I can't even remember the last time I paid for parking in Buffalo, unless it was 50 cents during lunch hour.

Old First Ward
Old First Ward

First, I disagree with the premise that taxing certain elements is used to discourage certain behaviors. Taxing is used to raise revenue. Politicians could care less if people smoke or drink, as many do themselves. But, by taxing a citizen's vice you gain more easy revenue while convincing the public that you are maintaining low property tax rates thus justifying the racket of government worker salaries, benefits, and pensions.

Same with the scarcity of resource theory with the gas tax. It is nothing but a dedicated revenue stream designed to fuel spending while maintaining tax income rates.

Consider all the money changing hands at the closing table. Everybody wants a cut from transfer taxes $9 per $1000 to insurance companies, the lawyer fees for shuffling paperwork and signatures, title searches and surveys and misc. expenses.

When you walk out of the county building the city assessor receives a text from some county desk clerk and rushes to increase your assessment and sends an inspector to find code violations. By the time you arrive at your property, Carl Paladino has purchased the property next door, demolished it and is parking cars. Tough to compete with that.

Up and coming
Up and coming

I'm still waiting for your real world evidence.

ohnobuffalo
ohnobuffalo

i live in the burbs but will head to the city for various reasons. if im interested in going to DT proper not Elmwood, Allen, NorBuff, etc where parking is scarce and I am forced to pay more than $6 i will stay home. Buffalo does not deserve high parking costs like NYC,Boston, Toronto, Philly, etc because there is nothing downtown. If i want to see a concert canalside dont charge me $15 to park, you raise parking costs you better build hugeeee ramps b/c downtown is weak. would limiting parking deter downtown traffic??

buffalofalling
buffalofalling

Aside from some major issues with this idea from an economic perspective, this entire article is based on a region with growth and development pressure... also known as the opposite of Buffalo. It states "land as the scarce resource it is," which doesn't jive with Buffalo. Further, his article suggests that taxes are used as an incentive or disincentive based on scarcity, using gasoline as a scarce and valueable resources and hence worthy of higher taxation. Again, this argument fails in Buffalo as land is in many neighborhoods a valuless resource, and hence not worthy of higher taxes due to scarcity and willingness to pay said higher taxes for a finite resource.

One of your poster's was in a recent article stating the case for higher taxes on vacant land and it only shows the complete lack of knowledge of economics by her and most here who seeks to infliuct revenge for urban decline on current land owners who had zero to do with the poor economic conditions of the city.

This is one of the worst, most unattainable policy ideas ever presented here and that's saying a lot.

pampiniform
pampiniform

This would seem as though it could have some unintended consequences. Part of the reason there is so much parking downtown is that parking is in more demand than a lot of the buildings were. So rather than having an empty building you had to pay taxes on, you could tear it own and charge people to park there instead. I could see that in that case, such a change in property tax policy might save some buildings. The problem is, unless there is a demand for a building there, no on is going to build one just to try to lower their tax rate. It's hard to say what the upshot of this might be, but I wouldn't be surprised if it just results in the city owning more land than it already does. I'm not saying that the idea shouldn't be perhaps considered, but I doubt it is going to really solve anything.

HighPost
HighPost

[Use one screen name please]

bufflow
bufflow

ex-716, you a shill for those unscrupulous land speculators?

I figured I'd counter baseless conspiracizing with my own little absurd assertion.

Also, you have a skewed concept of "liberty." One person's property "rights" stops where it begins to have a negative effect on the surrounding community.

ex-716
ex-716

This isn't something the city can do by itself! Property tax laws are state law and are grounded in the state constitution. The city can't start violating constitutional rights by imposing extra taxes on properties it doesn't like. Geesh.

longgone
longgone

Short term I think parking would increase. Which is fine. Parking, all things considered, is cheap in downtown. That said, one would assume (I don't know) that property taxes for buildings would go down although not that much.

Thinking about this a bit more, I think for it to work there would need to be some incentives for the construction of parking ramps. Looking at the Core Parking Study for the city, there are 32,720 spaces downtown, 75% of which are off street. Do not know the % of ramps v. lots.

One would think that 4 parking structures of 1,500 spaces each would be easy to absorb. The difficulty is funding the construction.

One idea would be to give tax breaks equal to 50% of the construction for the first 4 projects to break ground. Make it a competition. The rest of the lot owners would be forced to look into alternatives for their lots or pass the cost to their customers.

300miles
300miles

Couple questions on this.

I've seen this tax idea tossed about for years. Has our city govt ever actually considered it or studied it? Or so far has this purely been a coffee discussion in the blogosphere.

Also, considering the potential for unintended consequences, could a new tax law like this simply exchange No Development for Bad Development? For example, someone with a huge parking lot simply builds a tiny tacky McDonald's in the middle of it instead of, say, building a mind-blowingly-cool condo tower. What part of the new tax rules would ensure the new building result is actually better than the original parking lot?

Up and coming
Up and coming

I'll put it this way. If you tell me I'm wrong, you better be willing to prove you're right.

ex-716
ex-716

I wouldn't be surprised if the N.Y.S. constitution requires uniform taxation of all real property (improved or not) within any taxing jurisdiction based on its value. The reason for that rule is clear -- once you get away from that, it's not a property tax but a free-for-all where politicans can pick winners and losers.

Elites and politicians then get to dictate what is a "good use" and what is a "bad use." This harms liberty and property rights.

The proposal in the article would also cause results I doubt the elites would like, such as taxing woodlands and green spaces (elites say "good") higher than Wal-Marts and suburban developments (elites say "bad, very very bad").

The proper (and constitutional) way to reach the goal indicated in the article is to continue to base property taxes on value, but factor in value based on development opportunities. The free market values property not only on current use but also potential use.

Jesse
Jesse

Uh, real-world evidence says you're exactly wrong.

Up and coming
Up and coming

The only thing this plan would do it keep prime real estate from being developed, especially if it's taxed higher. Also, higher taxes should be paid when a higer amount of services are rendered. How many services is the city pumping into a parking facility....zero.

paulsobo
paulsobo

but there is money to be made in neglecting buildings and money to be made by taxpayer paid demolition.

STEEL
STEEL

either way you pay less in poor neighborhoods. This plan would not change that

Jake from Abbott Road
Jake from Abbott Road

My understanding is that the tax RATE is the same across the city. Prosperous neighborhoods pay the same rate as less prosperous neighborhoods. The difference is that the less prosperous neighborhood is assessed at a lower value. So when you multiply (RATE/1000)x(AssessedValue), the less prosperous neighborhood pays less due to the second half of the equation.

longgone
longgone

I have to disagree with you on that.

For starters, both the mayor and council memebers can be 'purchased' for the right amount of political capital. Second to this, the downtown property owners are small in number and not always friends with the mayor. Carl is not, Croce is. Regardless, Brown can be purchased for the right price and he would be forced to pick his East Side block over Croce if forced.

I actually think this should be done citywide. Help the property owners who put money into their houses at the expence of slumlords on the east side.

OU812
OU812

While I agree to a point with this article..I don't believe all parking lot owners here in Buffalo are specualtors waiting to cash out on a large development deal (unlike we see in Niagara Falls). Also this is a car-oriented town..people still need to park Therefore additional ramps would be needed or as another writer posted, business may go to the burbs.

Tim
Tim

Let me reiterate that my first instinct was to raise questions. In the case of buildings paying scores x more in taxes per square foot, yes that seems like an excessive difference. But would it actually result in more development in buffalo? I'm not sure.

longgone
longgone

Does anyone have anything that would close to a before and after comparison on tax rates using this. Even a projection model?

Always been a fan of not allowing a parking lot to be taxed like a parking lot, as that's a good thing. But for something like this to ever happen...the top half of people paying property tax are going to need to see a break.

What does the cut in taxes look like for owners of condos at Avant for example?

Tim
Tim

Hmmm. While it may encourage some development, You'd have to ask if this would increase parking rates? Would parking companies be able to pay these taxes? Would this scare downtown tenents to the suburbs? Would there be unintended negative consequences? A good discussion no doubt. But ask questions people.

Allentwnguy
Allentwnguy

This could never happen. Simply because of the "networking" that happens downtown. You have Greater Buffalo Building Owners and Managers Association, Buffalo Place and other associations that represent the interests of the people who own and run downtown. They won't easily give up revenue just as we property owners fight to keep our taxes down. If the money was spent diligently it would be another story. We are lucky that there are a few free parking places still available for the rare occasion I have to take the car there.

Jesse
Jesse

Good grief. Buffalo needs such a land value tax in the worst way.

downincircles
downincircles

Home Run Idea. Makes perfect sense. Fairly speechless.

STEEL
STEEL

That land would obviously be taxed at higher rates in prosperous neighborhoods and lower rates in not so prosperous neighborhoods so this should not be a problem.

SenecaFire
SenecaFire

This article is spot on, to address the concerns mentioned by 16th street maybe it starts with specific "areas" or "zones".

Travelrrr
Travelrrr

Absolutely needed in Buffalo, as in many other cities. We've emptied out 60% of our DT (no, we have definitely not "saved everything"). Wonder who could lead this charge? It wouldn't be part of the Green Code, correct?

16thStreet
16thStreet

I totally agree with this article, but does it only apply to Downtown or city limits? That would hurt places like the Wilson street farm on the East side, and MAP on the West.

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