A Tax That Boosts The Economy

By: Victor Ramirez

Like the iconic scene of Clint Eastwood in the Wild West facing two gunmen in a three-way duel and whoever shoots first is at a disadvantage, such is the nature of real estate construction. It is in each property owner’s interest that some neighbor faces the risk of being the first to build, in order to then follow in his footsteps and reap greater benefits. However, if everyone waits for their neighbor, no one builds and everyone loses as the entire neighborhood stagnates and begins to deteriorates.

Speculative disuse is like a party where no one wants to be the first to dance and consequently the dance floor stays empty all night. The next day, guests comment, without realizing the irony, that the party was rather boring.

Property owners are not the only ones that lose from this disuse. In Puerto Rico, there is a chronic housing problem. According to the Census, houses cost twice what they cost in the United States when you consider family income level. At the same time, one in five homes is vacant, a larger share than any state, except Maine.

Meanwhile our traditional urban centers, stewards of our historical heritage, are dying even with tax incentives. Families are increasingly forced to live in distant suburbs, burdened by congestion, often devoid of public services and infrastructure, or susceptible to landslides or floods.

There is a type of tax that breaks the vicious circle of speculative disuse – the real estate tax on the value of the land. It is very similar to the CRIM property tax, but buildings or other improvements are exempt. When an owner builds a house, they are not penalized in their tax bill. Similarly, whoever demolishes a building is not rewarded with a reduced bill. Applying a tax on buildings makes the same sense as if a condominium increased the maintenance due to the owner who remodeled his kitchen.

It should be noted that the tax rate would apply not to the acreage of land, but rather to its market value. A square foot of beachfront in Condado is worth more than an acre of rugged terrain in Maricao. Additionally, for the vast majority of property owners, buildings and improvements are worth more than their land, which means that  they would have to pay less than what is paid with a tax on the entire property.

In basketball rules, there is a countdown to prevent the team in advantage from running the clock. Similarly, a tax on land value makes disuse a costly liability and thus serves as a countdown to bite the bullet and make a real investment in a property. Owners would be obliged to use their properties to cover the tax liability or sell it to someone else who is will. In order to use properties, investment, construction, repairs, and therefore more jobs are needed.

In the late 1970s, the city of Pittsburgh, mired in a process of deindustrialization not unlike Puerto Rico, opted for this type of tax. The effect was a construction boom, evidenced by a 3-fold increase in construction permits. Even today, Pittsburgh can boast about having some the most affordable housing in the United States.

Beyond a possible construction boom, homeowners benefit from this type of tax because it serves as an insurance policy against the risk that a neighbor’s property will be disused and perhaps end up as an illegal dump.

A question to ponder: If there are taxes that drive the economy, why do we have taxes that depress it?

** The above article was original published in Spanish in the Puerto Rican newspaper, “El nuevo dia” on September 15, 2020.