At the dawn of 2024, Colorado residents have property taxes on their minds. That’s because county assessors across the state have increased property values significantly — around 40% in El Paso and Pueblo counties, between 35% and 45% in metro Denver counties, and from 40% to 70% in the ski resort towns. Statewide, the average Colorado home gained 37% in value over just two years, according to Colorado Public Radio. As Pueblo County Assessor Frank Beltran told KRDO News. “I’ve been in the assessor’s office since 1980 and I’ve never seen increases like this.”
With bills hanging over the heads of millions of Colorado residents, a land value tax is getting another look, especially after previous efforts to regulate property tax rates failed — as with the passed and subsequently repealed Gallagher Amendment. Significantly, the major proponent of a land value tax in the state is Governor Jared Polis, who encouraged the newly formed Commission on Property Tax to study its potential.
“Taxing land — not the buildings on top of it — also has the benefit of reducing land speculation and promoting environmentally sound development,” Polis wrote to the commission. “In contrast, taxing buildings discourages investing in your home…”
On January 5, 2024, the Commission watched a presentation on land value tax by Steve Hoskins, an economist with the Robert Schalkenbach Foundation and Luke Teater, former chief economist for Polis’ budget office and now principal of Thrive Economics. Together, the two made the case for land value tax by focusing on three key areas of impact:
Impact on housing development
“Taxing improvements means you get less improvements,” Teater told the commission, and that rings particularly true amid Colorado’s ongoing struggle for housing, with Denver scoring among the worst shortages in the nation in a report by Zillow.
Part of the reason for this is that Colorado’s current laws increase property tax bills when owners invest in new buildings, businesses and renovations properties. This effectively penalizes them for development, inhibiting the growth of housing stock at all levels, Hoskins and Teater explained.
Land value tax, on the other hand, removes this penalty by shifting the tax burden onto the land itself, incentivizing housing development. That’s particularly true for vacant and underutilized land in urban areas, which owners in the current system pay little on, allowing them to horde it until a profitable buyout — as seen in Detroit, which is also considering a land value tax to address the issue. By shifting the tax burden to these less and non-productive land, a land value tax would reduce land speculation and incentivize productivity, especially in high-demand locations near transit, achieved by owners either building on the land or offloading it to those who will.
Therefore, adopting some form of land value tax helps to achieve Colorado’s strategic growth goals of building efficient housing in urban communities and job centers and discouraging suburban sprawl.
Impact on residential tax bills
Rather than experience the huge increases in property taxes this year, Colorado property owners could maintain or reduce current rates under a land value tax, which is revenue-neutral. However, the type of residential property does influence that outcome, the presenters pointed out. Shared and multifamily residential properties like apartments and multiplexes might see more dramatic reductions, as the costs are shared among those living there. That, in turn, promotes more development of those kinds of housing, spurring the infill development Colorado seeks and discouraging single, small buildings on high-value land.
For examples, Hoskins and Teater compared two 1.2-acre lots in Denver, one hosting a surface parking lot and the other an apartment complex of about 350 units. Under a “small” LVT shift, the parking lot would see an increase of 4% while the apartment block would see a 1% decrease. A moderate shift toward LVT would grow that gap, with a 133% rise on the parking lot and 27% decrease on the apartment block.
Impact on renters
Often forgotten in the conversation about property tax rates is renters, who may bear the brunt of tax hikes in rent increases but don’t share in the savings the landlord receives if tax rates go down or other abatements apply.
Here, again, a land value tax policy can pay dividends to all and help keep increases from being passed on to renters. That’s primarily because land has a finite supply and higher land taxes do not change that, and therefore do not impact rent levels as a market value system does. In fact, the housing developments spurred by shifting the tax base from improvements to land would increase supply and reduce rents, according to Hoskins and Teater.
Empirical evidence is backing this up, too. Hoskins and Teater point to studies in Europe, one in Denmark and another in Germany, that show a land tax “does not distort economic decisions because it does not distort the user cost of land” in the former and no impact of land taxes on rents in the latter. Conversely, existing property tax systems, such as the one in Colorado, are more likely to keep limiting supply and thereby push up rents.
Tailoring Land Value Tax
As with any progressive tax system, one size does not fit all. In other words, while land value tax can work well for many situations, particularly in urban areas, it may be less useful in rural and agricultural areas. For land value tax to gain in popularity and credibility, it needs to account for these specific state conditions and adjust accordingly.
As a result, Hoskins and Teater point to several options for Colorado, starting with choosing a modest shift and a significant one. The first would create new property subtypes for residential land and non-residential land that would be distinct from residential improvements and non-residential improvements. Assessment rates for the land categories could then be raised to their current legal maximums —7.15% and 29% respectively — offsetting reductions to the assessment rates applied to buildings, and leaving overall revenues unchanged. The benefits would be slight for property owners, but nonetheless, it would signal a positive step forward that could lay the groundwork for a significant shift later.
A significant shift would have far greater impact, increasing assessment rates of land for residential and non-residential properties, so that land values equal existing total values of land and improvements together. This means that assessment rates for improvements would be reduced to zero. Looking at Denver, for example, Hoskins and Teater estimate a tax rate of 70% for non-residential land and 23% for residential land to eliminate all other taxes on improvements and personal property.
Ultimately, “Our recommendation is that the state implement a split-rate property tax system,” Hoskins and Teater told the Commission, whereby new subtypes or assessment classes for land and improvement would be created with separate assessment rates.
As Hoskins and Teater pointed out in their presentation, they are not the only supporters of a land value tax. In fact, there’s a long history of support by A-list economists like Paul Krugman, Milton Freedman, and Daryl Fairweather, chief economist of real estate brokerage firm, Redfin, who called it “the tax policy that can fix housing.” Recent coverage by The New York Times has also sharpened attention on it, as has Detroit Mayor Duggan’s ongoing efforts to institute it.
“The thing that economists love about land value tax is that land is fixed,” explained Teater in the presentation. “It’s immobile; you can’t move it around; you can’t make more downtown land…”In other words, as The Economist explained in a 2014 article, “It does not distort decision making.” However, it concedes, “Economists will continue to advocate LVTs, and politicians will continue to ignore them.” Thanks to politically-backed efforts in Michigan, Colorado, and elsewhere, the tide may finally be turning.
You can find our LVT primer for Colorado here.