The Overhead Wire points to this at the ULI blog:
How about restructuring the property tax across America to install a two-tiered system? More tax on those horizontal pieces of empty land and asphalt, less on the buildings. That is, reduce the tax rate on homes and other improvements, and substantially increase the rate on the site value. I think such a system would induce more compact development and more infill work.
I've floated this before for downtown property in order to discourage surface parking lots. One commenter kindly pointed to this institute devoted to promoting this idea. I haven't had time to study those materials yet.
Obiously, I like the idea, but, thinking it through, I envision one problem. In order for the tax to be revenue neutral, the tax must be equal to the tax on a fully-developed property. Suppose a $95 million office building is built on a $5 million dollar lot. Annual taxes are assessed at 2.5% (for simplicity's sake), so the total tax is $2.5 million.
A revenue-neutral tax would require that a $2.5 million tax be levied on the vacant $5 million lot. But how do we determine the value of the improvement before it is built? I.e., how do we determine that the value of the "appropriate" capital improvement is $50 million, $100 million or $200 million?
The tax system has to be consistent. The only solution that comes to mind is to assume a build-out to the maximum zoning entitlements. That would incentivize property owners of vacant or under-developed properties to campaign for lower entitlements. In other words, they would seek a cap on the permitted density. This is the opposite of their incetive today.
Perhaps that wouldn't be a disaster -- it would lead to development at a uniform scale, which would be an aesthetic improvement of what we have today. But I'm not sure the trade-off for lower density (and thus higher prices for existing space) is worth it.
Perhaps Pittsburgh or other jurisdictions that have implemented this type of taxation have come up with a better solution.
