With so many cities grappling with rising rents, insufficient supply of new housing and widening inequality, many are starting to consider the ways in which these challenges could be mitigated by shifting the tax base onto land values. In a previous blog post, we explained the myriad ways in which land value taxes are efficient and equitable, can help to deter real estate speculation, reward landowners for supplying much-needed housing, encourage a compact urban form, fund social services, and reduce inequality between tenants and landowners.
In this article we get down to the brass tacks of land value tax in the real world. We will consider the case of a city pursuing a revenue-neutral land value tax (LVT) shift by adjusting property taxes to entirely exempt the value of homes and businesses from taxation, offsetting these tax cuts with higher mill rates on land values, ensuring that there is no loss of overall revenues available for spending on social services. For readers interested in understanding how a land value tax could be used at the national or state level to fund income tax cuts or a Universal Basic Income, we recommend this companion article which describes an LVT proposal by The Opportunities Party in New Zealand, and this primer on an LVT for North Carolina.
Drawing on our extensive experience working with city policymakers and assessor offices, we will walk you through the calculations required to implement an LV tax shift, how to measure the impact it will have on the tax bills faced by each property, and the key statistics and maps which can help summarize the implications of such a tax shift. Richmond, Virginia will serve as a helpful example. This guide assumes that your city already has reliable property assessments which separate the value of land from structures, but we will briefly discuss aspects of valuation towards the end of this article. Many policymakers considering a LV tax shift may be interested in a more comprehensive study of the effects such a policy would have on their city. In a later blog post we will describe the key elements that should be part of any good study of LVT.
How do Property Taxes Work?
Currently, most cities and counties across the U.S. collect property taxes by applying a tax rate called the mill rate or levy rate to the value of each property. An office of property assessors are tasked with determining the fair market value of every parcel within their jurisdiction. Often, a host of exemptions and abatements are used to reduce assessed values to a taxable value, for example for veterans or low-income homeowners. These taxable values are summed up to give the total taxable value of all properties within the city. Tax rates are then determined by city officials, either through a political process, by following a policy which advises annual changes in tax rates or by taking a tax revenue target and dividing it by the total taxable value in the city. This process produces a tax rate called a mill rate, which is typically expressed as a dollar value per $1,000 of property value. Each property’s tax obligation is then calculated by multiplying this mill rate by the property’s taxable value, producing the tax bill for that year.
Taking the city of Richmond VA as an example, the aggregate tax base of all non-exempt properties in the city was $36 billion for the 2023 tax year. With a property tax rate of $1.20 per $100 of property value, the city will generate close to $434 million in tax revenues this year.
To understand how this would apply to a specific property, let us consider 4229 Chamberlayne Ave., a single family home right on the cusp of the Bellevue neighborhood three miles north of Richmond’s historic Fan District. This property has an assessed value of $271,000 which is multiplied by the $1.20 tax rate per $100 of value, to produce an annual tax bill of $3,252 under the current property tax system. Most counties across the US levy property taxes in a similar manner to what we have just described, and if you search online for “property taxes + [the name of your county]” you will likely find a website describing a similar process.
How would a split-rate property tax work?
Now let us consider how this system can be adjusted to specifically tax land values at a higher rate than buildings, in what is commonly called a split-rate tax.
Many counties require their property assessor’s office to divide their valuations out into land values (LV) and improvement values (IV). LV represents the value of the land as if it were a vacant lot ready for development, sometimes described as the “unimproved” value of the lot. Conversely, IV captures the value of “improvements” such as buildings and other structures on top of the land. For our sample property above, we can see that the $271,000 of property value actually comprises a dwelling assessed at $216,000 built on top of land that is valued at $55,000. Land represents around 21% of the value of 4229 Chamberlayne Ave., a proportion which is slightly smaller than what is typical for Richmond as a whole. Indeed, the city’s $36 billion of total assessed taxable value actually comprises $26 billion of improvements and $10 billion of land value. Because the same mill rate is applied to both land and improvements, this corresponds to ($1.20 x $10 bn / 100 =) $118m of revenue from land, around one quarter of the total tax take, and ($1.20 x $26 bn / 100 =) $315m from improvements.
In counties where LV and IV are already assessed separately, it is administratively simple to implement a revenue-neutral split-rate tax which taxes land at a higher rate than buildings. Mill rates on land can be increased while taxes on buildings are reduced so as to leave overall revenues unchanged.
To return to the case of Richmond, the city could shift to capturing 80% of revenues from LVT by taxing land values at an adjusted tax rate of (100 x 80% x $434m / $10 bn =) $3.52 per $100 of land value. The tax rate for homes and other buildings would thus be reduced to (100 x 20% x $434m / $26 bn =) $0.33 per $100 of improvement value. Effectively, the tax rate on land values is nearly tripled, while the mill rate on houses is reduced to less than a third of its present value. With $347m of revenue now coming from land, and $87m from improvements, Richmond’s overall revenues would be unchanged. Under this policy, our example property at 4229 Chamberlayne Ave would face a tax bill of [($3.52 x $55,000 / 100) + ($0.33 x $216,000) / 100 = )] $2,647 per year, a tax cut of $605, or a 19% reduction from this property’s current tax obligation. Intuitively, because this property has a slightly higher ratio of improvements to land value than what is typical for other Richmond properties, is can be said to be being used more productively than equivalent properties which have built fewer improvements on more land, which is why this LVT shift provides a tax cut to 4229 Chamberlayne Ave.
Universal Building Exemption
While the previous section described a tax shift which taxes land at a higher rate than improvements, one extension of these ideas is to comprehensively make all buildings tax-exempt. Under such a scheme, people’s homes and businesses would be entirely free from taxation, leaving people free to build, redevelop and renovate their properties however they like without an increase in their tax obligations. With the mill rate on improvements reduced to zero, the taxing authority would need to increase taxes on the underlying land values, to ensure that revenue goals continued to be met. This approach would constitute a pure LVT, in the sense that only land values would be subject to taxation. Evidence suggests that this would encourage more productive use of high-value urban land, more responsive supply of housing, and more business starts.
For Richmond, a universal building exemption would lower taxes on improvements to $0, requiring the $434m revenue target to come from land values instead. This can be achieved by applying a tax rate of (100 x 100% x $434m / $10 bn =) $4.40 to land. 4229 Chamberlayne Ave. would therefore receive a tax bill of [($4.40 x $55,000 / 100) + ($0 x $216,000 / 100) =] $2,418. This is a saving of $834, or a 26% reduction relative to this property’s current tax obligations. Again we see that 4229 Chamberlayne Ave. enjoys significant tax savings as a reward for having made more improvements to their land than the typical property in Richmond. This is how LVT rewards investment in productive use of land, while shifting the relative tax burden onto less valuable land uses.
Analyzing Changes in Tax Bills
When considering options for property tax reform, policymakers and their constituents typically wish to know the impact on tax bills across a range of land uses and in different parts of their city. It can therefore be useful to conduct the above tax shift calculations for every property in the city, and then summarize changes in tax bills using a combination of maps, summary tables and sample properties as a case study of typical impacts. Our example of 4229 Chamberlayne Ave. above demonstrated that a LVT shift would reduce the property tax bill for this property, likely because it is a relatively productive land use: a two-storey house which is worth nearly four times as much as the land on which it is built.
Mapping the changes in tax obligations can also help indicate which parts of the city are likely to pay more or less taxes under the proposed LVT policy. For example, the map below depicts the dollar change in annual tax bills of single family homes in Richmond under a LVT shift which collects 80% of revenues from land. It shows that taxes tend to increase for properties downtown and in the Fan district, while there are clear tax savings for properties in the Southside and along Chamberlayne Ave in the North Side, including for our sample property at 4229 Chamberlayne.
Valuation
This article has proceeded on the assumption that your city already has property assessments which meet industry standards, with this value attributed to either land or buildings respectively. However, we acknowledge that many cities struggle with unreliable assessments, or somewhat arbitrary methods of isolating the contribution of land values. For example, in Philadelphia, total property value is simply split 20% to land and 80% to buildings for all properties. Clearly this will not be accurate, for example in the case of adjacent buildings with quite different ages or numbers of storeys. In such cases where land assessments are non-existent, outdated or unreliable, cities will need to conduct a ‘land study’ to get accurate land values before proceeding with their LVT. Clear communication with stakeholders will be necessary to avoid the ‘sticker shock’ of the separate implications of both the updated valuations alongside the LVT shift. Readers are invited to get in touch with us to discuss best practices for updating the land component of your city’s property assessments.
Conclusions
Land value tax is rapidly returning to the limelight as a progressive tool for urban policymakers to ease the tax burden on homes and businesses, shift the tax base onto vacant and underutilized land, and encourage more productive use of high-value locations within their cities. This article has explained that revenue-neutral shifts towards LVT can be achieved by raising the mill rates applied to land value, offset by reductions in the taxes levied on buildings and other improvements, leaving overall revenues unchanged. This split-rate tax becomes a pure LVT at the point where buildings are entirely exempt from taxation, such that all revenues come from taxes on land value alone. By applying the proposed tax rates to the assessed values of properties in their tax roll, municipalities considering an LVT shift can analyze the distribution of changes in tax bills across their city. Here at Resource Justice, analysis of LVT shifts is our bread and butter. If you are interested in the potential implications of a land value tax for your city, please send us an email at [email protected].
