Flutterby™! : On taxing land and buildings separately 2012-01-06 18:49:33.447918+00

On taxing land and buildings separately

2012-01-06 18:49:33.447918+00 by Dan Lyke 4 comments

Earth Rights Institute — A Mercifully Brief Chapter on a Frightening, Tedious, But Important Subject, in which James Howard Kunstler suggests that we make a mistake by taxing buildings at the same rate which we tax land:

Under our current system, a vacant downtown city lot is taxed much lower than a lot with a thirty-eight-story office tower on it. The owner can afford to pay lower taxes year after year, perhaps even for decades. This is called the holding cost. It is in the interest of such a speculator to allow whatever buildings that exist on his property to decay. Not only do his property taxes stay low, but he can enjoy the added benefits of depreciation on his income taxes as well. (Buildings depreciate, land does not.)

I got here via the "Friday News Digest" on the Strong Towns blog, which praised it, but I have to wonder: If you discount the value of the building, then aren't you just encouraging mini-mansions with no lots? Seems like this sort of tax encourages greenfield development of exactly the sorts of oversized buildings on no lot suburbia that those praising these sorts of policies want to avoid.

The change Kunstler suggested would encourage people to build larger and higher quality buildings that would otherwise be constructed. That's a pretty straight Econ101 conclusion.

The second effect he's anticipating is higher densities in urban areas. Rural areas would become less dense. Suburbs would necessarily then shrink in size.

But your questions is apt -- which of those effects will dominate in the remaining suburban areas?

A tax regime may punish or reward certain behavior, but the behaviors do not exist in isolation. The land banker may be barely maintaining a slum on downtown property awaiting a future windfall, but the outgo to pay the taxes or even minimum maintanence eventually should get burdensome of itself. The possible windfall is only one factor to be reviewed. At some point it should make more economic sense to utilize the land more intensly. I might also suggest that whether running a McDonalds with a parking lot downtown is the best use of the land depends on how hungry you are. As to tax rates based not on the buildings but the desireability of the neighborhood adds a new level of subjectivity to the process. which is more wanted, proximity to the House of Blues or to the Art Museum?

dexev, larger buildings: yes. Higher quality? I've looked at some of the "high end" subdivisions around here, and I'm not sure that higher price translates to "lasting longer" or "lower TCO".

Petronius, I think that one of Kunstler's fallacies is that "slum lords" speculate on land in low income neighborhoods. Simply put, the rent premium on low income properties is higher, and if you can keep expenses down and work to keep turnover low that makes properties in income neighborhoods generate more cash than nicer places. My sister and her husband have a number of properties in the Toledo areas, and they made the mistake on some of their earlier houses of refurbishing them beyond the neighborhood's capacity to maintain a nice house.

Sure, there's some land speculation, especially if you can then get the city to build a stadium on your land, but I don't think the "I'm going to buy cheap land in the middle of urban slums and sit on it" is nearly as high as he proposes.

On the other hand, anything that can help evolve building technologies and materials and build longer-lived structures seems like a good thing.

Here is a story from the other side. Lou Wolf owned dozens of distressed property all over Chicago, and he let them rot until somebody would meet his price. He once began building a 5 story building in an area zoned for only 2 stories, and when he got the steel frame up the city told him to stop. So, he did, and let the rusting steel sit there for 5 years. Then there was his conviction for arson. The man could singlehandedly ruin entire neighborhoods. So perhaps he is the exception that proves the rule. BTW, the multiplex listed in the link was never built.