How a Tax Shift Would Affect Low-income and Elderly Homeowners
As previously stated, land value taxation has different effects on different demographics. So, what about low-income homeowners, or elderly homeowners? The effects of LVT on these groups specifically is not well studied, but we can glean insight from research into the traditional property tax. Public finance economists have viewed the property tax as a progressive tax for half a century, but this view has been slow to seep into urban politics and the popular understanding. There are several simple explanations for why the property tax is progressive. The two most obvious are 1) that higher income households own more expensive homes, and 2) that they are more likely to own homes at all. Lower income homeowners will tend to pay less tax on the lower value homes that they own, or be unable to afford to buy a home. In New York City, 81% of households earning less than $50,000 are renters.
This is not to say that we shouldn’t be concerned about low-income homeowners. But we need to keep in mind that keeping property taxes low does nothing to help the much larger group of low-income households who are renters, and does a great deal to help upper income households who own property, own higher value properties, or even own multiple properties. Any property tax break intended to aid low-income homeowners should be very carefully and tightly targeted.
How can low and middle-income homeowners be kept in their homes in a way that doesn’t undercut the property tax as a viable revenue source, and doesn’t compromise the fairness of the tax? Many states already have a homestead exemption, reducing the property tax for owner-occupied residential property. Dick Netzer, a public finance economist who advised NYC on how to reform its property tax in the 1970s, opposed the creation of the four-class system, and instead proposed a generous homestead exemption—suggestions which were not adopted. Such a homestead exemption must be flat or means-tested, so that it has the greatest value for low-income households. Another option to protect low and middle-income homeowners is a circuit breaker—which reduces the property tax liability based on household income. New York State has circuit breakers, but the legislation has not kept up with rising property values, and the benefit is tiny.
In addition, many states have programs to reduce property taxes for elderly homeowners. Some of these programs are means-tested, not all are. Since income and wealth go up with age, these programs may actually be regressive, providing a benefit primarily to higher income households. In New York State, which has a school tax rebate program (STAR) that all households can participate in, benefits to elderly homeowners primarily take the form of a higher rebate and lower income thresholds to qualify. New York City may be a special case, as skyrocketing property values do pose a greater threat to households living on a fixed income. Allowing forbearance of tax collection while still requiring the tax bill to be settled at sale or inheritance of the property will maintain fairness.
What about the impact on gentrifying neighborhoods? Overall, a land value tax should have progressive impacts for the reasons already discussed—a greater share of the tax burden will be shifted from renters to homeowners, from lower income homeowners to higher income homeowners, and from residential property to commercial property. But this tells us nothing about how it will impact specific neighborhoods.
There are two reasons to think that the impact on gentrifying neighborhoods will be neutral or even positive. One of the only studies to investigate the impact of gentrification on homeowners, focusing on Philadelphia after a long-needed assessment reform in 2013, did find higher tax delinquencies, but also found that relief measures targeting homeowners in gentrifying neighborhoods were effective. There was no evidence of displacement among elderly and long-term resident homeowners in those neighborhoods (“Effects of gentrification on homeowners: Evidence from a natural experiment”, Ding & Hwang 2020).
Another consideration is that NYC’s Map PLUTO property tax database shows that many low-income neighborhoods—the ones most likely to face gentrification pressure—have very low land value ratios, the share of assessed property value in land. This can be attributed to decades of disinvestment that preceded, and set the stage for, potential gentrification. A shift of the property tax from structure to land will also shift taxes from Bedford-Stuyvesant and the South Bronx to neighborhoods with higher land value ratios such as Midtown and the Upper East and Upper West Side.
Many options for reforming the four-class system are being discussed, including eliminating it entirely. A less radical option is to add a fifth class for vacant land, which would be taxed at a higher rate than the existing four classes. Due to the previously mentioned 421-a program, most new residential construction is already tax abated, ameliorating the disincentive of the traditional property tax. But, like all major cities, New York still has vacant lots and derelict buildings on valuable land. How can this land be pushed into productive use? Introducing a higher tax on vacant land would discourage speculation by increasing the cost of warehousing vacant land. The proposal is essentially the same as two rate taxation, with a higher tax on land than structure achieved by using different property classes.
Another option being discussed is a pied-à-terre tax, which would fall on second homes valued at $5 million or more. This is not a full reform, but a way to capture additional revenue from high-value properties. The pied-à-terre tax is a workaround to the problem (mentioned in Part 1) of properly valuing high-end Class 2 condos/co-ops. It would technically apply to second homes with assessed value of $300,000 or more, but due to the complexity of the tax system, that translates to properties with a market value of $5 million and up. The pied-à-terre tax is better than nothing, but adds complexity to an already complex and nontransparent tax system. A better way to achieve this would be to value Class 2 properties correctly (by combining Class 1 and Class 2, or using the comparable sales method already used by Class 1) and giving a generous homestead exemption to owner-occupied properties. There is not really a difference between a discount for primary residences and a surcharge for pied-à-terres. Either way would be an improvement in terms of capturing untaxed land value without burdening low and moderate-income households.
Urban land is the most productive land in the modern economy, and New York City land values are among the highest in the world. New Yorkers are right to be concerned about the impact of skyrocketing property values on long-term residents of the city, and on its most vulnerable populations. Concerns for the impact of property taxes on low-income households has contributed to general opposition to the tax, but the primary beneficiaries of low property taxes are the corporations and wealthy households who hold the most valuable urban land. Contrary to common wisdom, the property tax is already a progressive tax, but shifting to LVT or two-rate taxation will do even more to shift the tax onto commercial landowners and high-income neighborhoods, to the benefit of all New Yorkers.