Kevin Gillen’s Weak Arguments Against the Land Value Tax

Big ups to Ryan Briggs for covering Philly-based CSE’s successful push for a land value tax pilot program for Connecticut cities. Ryan explains what happened in Connecticut, and then gets into the question of why hasn’t LVT been passed yet in Philly.

He talks to Kevin Gillen, an economist at Penn, for some balance, but I think Kevin’s weak arguments against the land value tax really underscore how strong the case for LVT is.

Let’s take this point by point.

What the rise of LVT in struggling older cities is also uncertain: the tax structure is far from universally embraced by economists.

“[LVT] looks good on paper, but it’s difficult to actually implement honestly and accurately,” said Kevin Gillen, a senior research consultant at the Fels Institute of Government.

This is an argument that can be made about any subjective property assessment system, such as the actually existing system in Philadelphia. It’s not clear why LVT would suffer from worse accuracy problems.

Gillen said that instances where LVT had actually been adopted had resulted in corruption problems – appraisers have to decide what the highest and best use of land is in order to calculate its true value because actual improvements are not taken into account. He said in some instances appraisers had sought kickbacks by threatening to list, for instance, a single family home’s highest and best use as some sort of commercial or industrial structure with a punitively high tax rate.

This is a really weird argument. The “highest and best use” is clear – it is the maximum allowable density in each zoning district under the city’s zoning code. The highest and best use of land in Center City’s CMX-4 zone is the Comcast Center. That’s the tallest building in that zone. If Philly adopted a land value tax, porno king Richard Basciano would pay the same tax bill for his surface parking lots and undeveloped properties on Market Street as the Comcast Center pays for their huge tower. By indexing tax bills in the Center City district to the Comcast Center, Philly would push surface parking lot owners and the owners of short buildings in the CMX-4 district to build new buildings. To pay the higher tax bills on their prime Center City land, they would need to build properties that generate more revenue, or else sell their land to someone who wants to do that. The large citywide costs of wasting transit-adjacent Center City land on big surface parking lots (higher rent inflation outside Center City, depressed SEPTA ridership, etc) would be put squarely on the vacant land owners themselves, rather than spread across all city residents.

Back to Gillen:

Additionally, even when the system is run cleanly it’s difficult to get accurate values on something as speculative on what the best use of land could be. Gillen said the over-reliance and power vested in appraisers that make the tax system work – folks who, in places like Philadelphia, are typically older patronage employees who may not actually be experts in real estate – had led to wildly inaccurate valuations in places like Pittsburgh.

This is why you use prices for assessed value, rather than sending around a bunch of dudes to subjectively guess the value of properties. If you have a rowhome that has undergone no physical improvements in the past five years, but doubles in rent during that time, that’s all a change in land value. The building hasn’t gotten any better – the neighborhood has. In areas where there are still vacant parcels being sold on a regular basis, the land value from parcel to parcel isn’t going to be very different. Those selling prices for vacant lots are going to be your baseline for the neighborhood. In neighborhoods where there are no vacant parcels, it should be possible to create an index for land values based on rental price trends in different neighborhoods.

After all this, Kevin ends up recommending that Philly split their real estate tax out into land and buildings, and increase the millage rate on land. I agree with this, and think a 5-1 ratio for land to improvements would be appropriate:

The fact that the system was being sold as a panecea for places with an abundance of vacant land also raised questions.

“The argument to use the plan to fight blight only works if land has some potential for development,” said Gillen, noting that Detroit had the highest property tax rate in the nation – but also the most vacant land. He recommended cities like Philadelphia simply increase the rate that their current tax system values land versus improvements to discourage speculation on vacant parcels.

By Kevin’s own criteria, Center City Philadelphia and all the fast-gentrifying neighborhoods would be excellent candidates for a land value tax. Many very nice neighborhoods where rents have been rising still have a ton of vacant land (Northern Liberties and Fishtown come to mind), and there is definitely development interest. Raising the cost of *not-building* in these places, and crucially lowering the cost of building, would surely result in more mixed-use development. This is not really different from how Gillen’s own research says Philly’s 10-year tax abatement works, except that the cost of holding properties vacant would increase, pulling some more projects forward in time.

In closing, I have to tsk-tsk Ryan Briggs for using the “panacea” straw man to characterize LVT supporters’ case. While it’s true some people oversell the benefits of LVT, just as many other tax policy effects are oversold, nothing is a panacea. The land value tax merely creates a better set of incentives in the real estate market than the traditional property tax on improvements. That’s why it’s supported by the Philadelphia Realtors, that’s why it’s in the Philadelphia 2035 plan, and that’s why it’s supported by public figures as politically diverse as Joseph Stiglitz and Pat Toomey.

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