New York City loves taxes. The crown jewel of the city’s innumerable levies is undoubtedly property taxes, serving as the Big Apple’s largest source of tax revenue. In NYC and much of the world, a property owner is essentially taxed based on the assessed value of whatever is on the lot, including the land itself plus any improvements.
While widely tolerated today, this taxation model has actually been a point of contention for economists for over two centuries. There exists an alternative called land value tax (LVT), which some experts daringly refer to as “the perfect tax.” In a city like New York with an ongoing housing crisis, the overhaul of the traditional tax code could be a surprising solution.
The initial premise behind LVT is that land value is created by what publicly surrounds it – a property location is a quality location because the properties in the neighborhood or block have collectively created a desirable, and therefore valuable, area. The municipality that the land is in contributes, and thus has some claim, to the land’s value.
With this premise in mind, land value tax suggests that municipalities only tax based on the value of the land rather than any improvements. This assertion radically alters the distribution of property taxes. Suddenly, an unimproved acre lot pays the same taxes as an adjacent acre lot with a high-rise on it.
Despite challenging popular convention, land value tax offers several advantages over traditional property tax. First, LVT is pro-development, as it incentivizes landowners to improve their properties by not increasing taxes on improved lots. Likewise, if an owner is not capable of developing the lot, the high taxes will encourage him or her to sell to a developer who can. The current property tax system in effect subsidizes owners who sit on their property while drastically increasing the tax burden on those who choose to make improvements, unintentionally creating an incentive to let land or property stagnate.
Despite the significant upside that LVT offers over traditional property tax, land value tax in America does not exist in any meaningful capacity on a state or federal level. Failure to implement LVT thus far can be attributed to the political resistance that would result from overhauling accepted taxation systems. Radical changes in taxes overnight would likely result in a mob of pitchfork-wielding landowners. Further, fairly assessing the value of land alone for taxation could be difficult, as it is simpler to assess improvements due to their income-producing ability. But still, in a city like New York where land is extremely limited and development is disincentivized by exorbitant costs, LVT could entice the creation of desperately-needed housing.
Should we explore the age-old concept of LVT as a serious treatment of the housing crisis? Or is tax overhaul too much of an idealistic dream?
I don’t see any relationship between the way land and improvements are taxed and the demand-supply imbalance of affordable housing in NYC. Therefore, if the rationale behind promoting an LVT in NYC is to promote affordable housing development, I do not support an LVT.
The primary reason for the imbalance in affordable housing is because there are more low income households seeking housing than there is affordable rental housing. Note the word “rental.” This imbalance is not due to the way that land is taxed, but rather, it’s due to the federal, state, and local subsidy plans that have resulted in the luxury over affordable housing barbell strategy many developers have pursued in NYC to great effect, which is unhealthy for our economy.
One of the reasons this imbalance is increasing is because more residents are attempting to age in place, rather than move to more affordable neighborhoods, which increases net demand in a given area, all else being equal.
There is a rather simple solution to the affordable housing crisis: promote home ownership, not rental housing. Fully amortizing, fixed-rate mortgages provide homeowners with (i) fixed loan payments that do not escalate each year as rental rates do and (ii) equity buildup.
A fixed-rate mortgage with predictable payments would mitigate rental rates eventually becoming unaffordable for senior citizens who want to age in place, which as noted, is currently a major problem, and which results in the unfortunate reality of people being forced out of areas as economic development ensues.
Alternatively, simply keeping rental rates static or close to static is not a real solution as it requires unprofitable federal, state, and local subsidies and opportunity costs to induce developers and operators to accept this limitation on upside. This is the fundamental flaw of affordable rental housing vis-a-vis owned housing stock.
Furthermore, enabling equity buildup would provide retirees with a source of capital to live out their golden years, while renters typically develop very little to no net worth over time relative to their owner peers, as most net worth among Americans is developed through their personal residence.
The real problem is that NYC (i) has too many barriers to entry for low down payment mortgages and (ii) very little effort is made to enable home ownership and instead the city focuses all its messaging and resources on rental housing.
Let’s move past all the band-aid solutions like manipulation of tax assessment approaches and focus on fundamental solutions to affordable housing like actually promoting the same level of home ownership enjoyed by most Americans throughout the rest of the country, which is perhaps the single best solution to the affordable housing crisis now and in the future.
Thank you for the thoughtful and well-written comment, Steven. The rental-versus-owner discussion is certainly worthy of its own article. I definitely agree that we should be pushing for way more homeownership in NYC, as the ability to build equity is fundamental to the prosperity of low-income families.
Note that land value tax is not incompatible with your idea of promoting homeownership here in New York. All I am attempting to do in this article is to point out that there exists a disincentive for improving land based on the current way taxes are levied, and that maybe with adjustment, more housing development could occur due to the reduction in taxes on improvements. LVT is simply one consideration in what should be a multi-faceted approach to the housing crisis, and one that I believe would promote both rental and owner-occupied housing development.
Best,
Andrew