Taxes


The following post is part of my periodic good ideas series, where I highlight good ideas from other cities that could help improve Richmond.

Fair warning: this post deals with taxes, about which I have only a rudimentary understanding. Please feel free to use the comments section to correct any mistakes or bad assumptions I’ve made.

Property taxes on real estate in Richmond tax two things:

1. The value of the land
2. The value of any “improvements” made to the land- primarily buildings.

There’s a movement around the world* to stop taxing improvements and only tax land, implementing what’s known as land value tax. The tax rate would increase in order to compensate for lowered taxable values. Here’s why I support adopting a land value tax for Richmond:

Taxing buildings creates a disincentive for development and encourages land speculation.

If I buy a vacant lot downtown, under the current tax structure I’m only taxed on the value of the land because there are no improvements. I would typically pay very little, and the government collects relatively little, simply because I’ve built nothing.

As soon as I build something, my tax bill soars. Likewise, if I own a surface parking lot downtown, because the improvements are minimal I’m not highly taxed.

For example, the YMCA on W. Franklin St. has an assessed land value of $1,030,000 and an assessed building value of $5,855,000, making the total taxable value $6,885,000.

Meanwhile, the surface parking lot across the street, owned by the Jefferson Hotel, has an assessed land value of $512,000 and no improvement value. The total taxable value, then, is $512,000.

The disparity in taxable value under the current tax structure is $6,373,000. There’s no incentive from our tax system to build on that unimproved land.

In other words, it is to my advantage to do nothing with my “unimproved” land until the real estate market is at a peak (when downtown development picks up) and I can sell my land at a much higher cost than I originally bought it; or I can build on my parking lot and be sure to recoup a larger cost by selling my new condos or leasing my retail space at high cost in the new stronger market.

Clearly, taxing land improvements discourages development and encourages speculative real estate purchasing. This is one reason why there are so many surface parking lots currently in downtown Richmond, and why the old hotel at the corner of Franklin and Belvidere sat empty for so many years- there is no significant tax burden for owning land with minimal or no valuable improvements on it.Surface lots

If, however, land were the only thing taxed, there would be no incentive to hold on to land without improvements. If my tax bill for a one-city-block-sized surface parking lot was the same as the tax bill for the high-rise office building next door which is collecting rent from its tenants, I would be a fool to NOT build.

Other reasons for implementing a land value tax are more philosophical:

A land value tax recovers for community purposes the monetary value the community creates. In other words, when the government or private individuals build infrastructure, buildings, or other improvements, they increase the value of neighboring land, which then increases the tax revenues more quickly than the current system.

Another reason to support this tax is practical:

It is an inexpensive tax to administer because land ownership is easier to track than sales transactions, land leases, etc. Also assessments, while still subject to dispute and controversy, are simplified as only land value and not building value need be determined.

My suggestion would be to implement this new tax structure in a special district downtown. I would create a downtown tax district east of Belvidere, north of the river, south of 95, and west of 14th st. (thereby exempting most of Shockoe, which could be considered for inclusion). I would exempt all properties currently zoned for single-family houses, such as those in Jackson Ward and Carver. Then I would increase the tax rate and stop taxing the buildings.

Returning to the YMCA and its neighbor, the surface parking lot, under a land value tax system the disparity in taxable value drops from its current $6,373,000, to a more reasonable $518,000.

This seems more fair than our current system, and a good economic incentive to develop vacant land in the downtown core.

* Places around the world that have implemented some form of the land value tax include Denmark, Jamaica, and 15 cities in Pennsylvania.

**For more info on this topic, read wikipedia’s entry on land value tax. Also see the wikipedia entry’s bibliography for further reading.

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Want $100? Head over to Haduken.com where Max Power has picked up on Scott Burger & the Green Party’s revolt against Richmond’s regressive “water tax.” Burger is offering $100 to anyone who can find any city in the US (I wonder if counties or other municipalities count?) that “has amore[sic.] regressive minimum water and sewer rate than Richmond’s.”

Read the original post and excellent discussion here.
Follow-up post and discussion here.

I wholeheartedly endorse the Green Party’s call to reduce the minimum water and sewer rates in the city. This is both an environmental issue and a social justice issue; our current fees discourage conservation and place an undue burden on our poorer residents.