To Revitalize Downtowns, Tax Land Speculation

Downtown Seattle holds some of the most valuable real estate west of Minneapolis and north of San Francisco. Yet a stroll through Seattle’s urban core reveals unwelcome surprises: rundown, decrepit buildings; empty land parcels; and surface parking lots on prime real estate, like the one below, just blocks away from high-rises worth tens or even hundreds of millions of dollars.

Is an underused (at midday), 63-spot parking lot the new normal for downtown Seattle? It shouldn’t be. Proximity to jobs, people, retail, and transportation should have made parcels like these ideal targets for new homes or office buildings. Yet a two-decade boom in downtown real estate has passed these properties by. For example, the Eitel Building is a historic building that is a stone’s throw from Pike Place Market, Seattle’s number one tourist attraction, and has been unoccupied above the ground floor since the 1970s. This marks four full decades of neglect and decay.

More striking is the juxtaposition with its immediate neighbor—a 38-floor glass and steel structure touted as “the West Coast’s most successful condominium high-rise.” Sorry, no vacancies, and resale prices begin at the low $1,000,000s!

These pictures present just a few examples. There are plenty of other badly underutilized properties dotting the landscape of downtown Seattle, and there are undoubtedly similar cases in other major cities throughout the Northwest and beyond.

So how is it that, even in the core of the Pacific Northwest’s largest metropolis, on some of the most valuable real estate within city limits, you can find so much land essentially still sitting idle?

One of the biggest reasons is also one of the most obscure: the structure of the property tax.

Under today’s tax rules, leaving a lot empty, or letting a building slowly rot, gives the property owner a light tax bill, thus allowing landowners to hold onto under-developed properties year after year after year. In essence, these land speculators become free-riders: their properties rise in value, sometimes dramatically, because of the hard-fought efforts by neighbors and city government to create vibrant and attractive downtowns. Yet many land speculators detract from the value of their neighborhood by leaving productive land derelict or by allowing buildings to disintegrate.

So what’s the solution to all this underutilized land? Perhaps the simplest one is an idea that’s been around since the late 1800s: changing the way we tax property to discourage speculation and encourage compact, infill development.

One of the best options is a land-value tax, or LVT. In its purest form, the LVT taxes only the value of land itself, while leaving buildings and other improvements tax-free. Shifting taxes from buildings to land would make downtown land speculators’ tax bills soar—making it harder for them to profit from leaving valuable land inactive, and creating powerful incentives to put high-value land to more productive uses. In a way, the LVT can be described as a tax on sprawl; when implemented well, the LVT encourages a more built-up, vibrant downtown, diverting growth from lower-value properties in the suburbs.

The greatest advocate for the tax was 19th century economist Henry George, whose seminal work Poverty and Progress (1879) argued for a “single tax” on land, which he thought was enough to fund the American government of his day. His idea has stayed alive ever since, guided along both by a loyal band of thoughtful proponents and through interesting community experiments in Arden, Delaware (1900), and Fairhope, Alabama (1894), which are extant, small Georgist single tax “colonies.” On a larger scale, Altoona, Pennsylvania in 2013 became the only US city that has a pure land-value tax.

These examples point to five key virtues of a land-value tax:

1. Land-value taxation discourages speculation and encourages development of high-value properties. By shifting taxes from buildings to land, LVT makes it more costly for speculators to hold onto underutilized or vacant sites. Taken together with a lower tax on land improvements, LVT encourages downtown landowners to develop vacant or underutilized properties, destroy decrepit or unoccupied structures, upgrade existing buildings, and build new places for people to live and work.
2. Land-value taxation is more economically efficient than most taxes. When you tax something, you get less of it. Taxing sales reduces sales, taxing income reduces income, taxing buildings reduces building. Such taxes subtly distort the decisions of consumers, households, and businesses. But a land-value tax mostly discourages land speculation, particularly on the highest-value land. Consequently, it creates fewer economic distortions than most taxes.
3. Land-value taxation is more progressive than other taxes. Compared with regressive property and sales taxes, the LVT is remarkably progressive. The tax burden falls on landowners, and land ownership rises with income.
4. Land-value taxation is fairer than many other taxes. Location, location, location—that’s what gives land its value. Land speculators benefit when their neighbors improve their land, and when their communities invest in infrastructure and livability. So in a way, the LVT puts a tax on benefits that a landowner didn’t earn—either through their own labor or their own investments.
5. Land-value taxation revenue is adequate and stable. How much revenue could an LVT generate? Well, it obviously depends on how it’s designed. If planned well, an LVT could be structured to provide every bit as much revenue as today’s property tax. Revenue from the LVT could even replace other regressive taxes, including the sales tax. And unlike the sales tax, which decreases as consumers purchase less, an LVT could provide a more stable revenue source. Finally, it would be possible to phase in, gradually ramping up the LVT while reducing other taxes. Call this a straightforward tax shift.

So with all these benefits, why aren’t land-value taxes more widely discussed in today’s political debates? After all, in Seattle we’re constantly discussing changes to the property tax rate to pay for schools, parks, and other amenities. So what stops us from also discussing changes to the structure of the tax itself?

One reason is that, for Washington and Oregon, there are a host of complicated legal questions that might impede LVT implementation. State constitutional language dealing with property tax might need revisiting. Structurally, the adoption of any type of land tax would be difficult—but not impossible. A second reason an LVT would be difficult to employ is that, for both lawmakers and laymen, the LVT can be confusing, even counter-intuitive. It takes some work to explain why taxing land rather than buildings can spur the sorts of compact development that make cities more livable and vibrant. And it takes even more work to describe the details of how the tax would be implemented, and how it would affect people’s actual tax bills.

Certainly, plenty of folks have a vested interest in the status quo. And land speculators will undoubtedly fight tooth and nail to keep from having to pay higher taxes on their underutilized land. But just because something is hard doesn’t mean it isn’t worthwhile. In the end, what’s really required to get the LVT moving are equal doses of legal and political daring from determined champions that are willing to make the case for a fairer, more effective tax system.