Wednesday, February 20, 2013

Lower property taxes to the ground to save cities & nature

There are two big problems with our property taxes: they are too high, and too low.
How can that be? Well, it’s because in Ontario, as across Canada, property tax is actually two taxes: a tax on land, and a tax on buildings.
Taxing land value is fair, because a site’s value stems from the community around it; land rent is higher in the middle of a bustling city than in a quiet village, and higher in a town than in a remote wilderness. When realtors say the three most important things are location, location, and location they are right; the value of a site comes from what you can do there, determined by what is around it. Roads, services, and customers are all vital links for a business, so even though remote land is cheaper than land near a city, smart businesspeople pay more to be where they can easily access inputs and markets.
On the other hand, taxing the value of buildings is harmful, penalizing those who maintain or improve their properties while rewarding those who let them run down. Install new elevators in your apartment building and your taxes go up, but let the balconies rust and your taxes go down. It’s a perverse incentive.
Even worse, property taxes subsidize speculators who hold valuable land vacant. With no building, they get a tax break for as long as they want, waiting for a big payoff when someone else finally pays the inflated price to build. In the meantime, those willing to contribute to the local economy now are driven to the green spaces at the edge of the city, creating sprawl. Sprawl not only destroys natural habitat, it worsens traffic and costs more to service, so we all must pay higher taxes.
There’s an easy solution to these twin problems: split-rate taxation. Under this approach, buildings are taxed at a lower rate, land at a higher rate. The total tax stays the same, but how it is applied changes incentives for landowners. Those using land appropriately pay less, as their buildings get a break. Speculators pay more tax, encouraging them to either do something with the land or sell it to someone who will.
Under split rates, long-vacant downtown lots will come back on the market at reasonable prices, reducing the pressure to sprawl past the city’s edges. Downtown becomes a place to do business, not a place to gamble on land values. With urban land no longer held vacant and wasted, green spaces need not be paved over.
But does this really work, or is it just fantasy? Luckily, this approach has been tried in many places, and it works every time. Split-rate property tax leads to more building permits, more affordable housing, less sprawl, a higher rate of home ownership, and improved urban economies. It’s time for Ontario to allow cities to implement this tax reform to, at no cost to us, improve our local economies.
Published as my Root Issues column in the Barrie Examiner under the title "Tax reform badly needed in communities"

Erich Jacoby-Hawkins is a director of Living Green and the Robert Schalkenbach Foundation.


  1. I had this discussion (at length) with the former GPO leader some years ago and the problems with such a proposal are the same now as they were then. Briefly, property taxes pay for services, an apartment building housing hundreds of people uses more services that a house with 2 or 3 (both on site and other municipal services), failing to tax reflected upon this use would presumably raise the taxes of individual residences and would make home ownership just a dream for all but the wealthy. There is little doubt that efforts to discourage urban sprawl must be made but encouraging developers to jam as much residential accommodation into the smallest plot of land is not IMHO the answer. I simply do not understand how penalizing those individuals owning land and rewarding those developers with large residential complexes really helps with anything but creating more social problems from overcrowding.
    But then I do not live in the city and never would!

  2. Actually, none of those concerns hold out in the real world under actual split-rate taxation, as can be seen in the many cities that have tried it.

    Property taxes pay for cities to provide services to land, not to buildings. Residents already pay for usage of water, sewer, electricity, etc. and many pay for garbage removal, too. Plus, land that is zoned for multi-residential has higher value (per foot) than land zoned for single-family, so it will already be paying more tax based on the land value, simply on the assumption that it will have more density.

    This tax reform has been proven to make home ownership more affordable for all levels - especially those who live in condos or apartments. (You seem to be assuming that home-ownership only means single-family dwellings).

    This isn't a change to encourage developers to increase density of the lots that are already being developed, it encourages development of lots that have been left vacant or under-utilized. It's not at all about "jamming as much into the smallest plot". In fact, the current system which subsidizes vacant or under-used urban land is what creates that kind of jamming, because it restricts the amount of land available for downtown development. Keeping one lot vacant forces higher density into the next lot.

    This doesn't penalize owners of land, it penalizes those who buy urban land yet keep it vacant - because they are creating huge costs and externalities for others. People who purchase land to use it won't be penalized at all, just those who purchase land to speculate.

  3. Not being a city dweller or having investigated this to great depth I must defer to you expertise. However I cannot take the statement "Property taxes pay for cities to provide services to land, not to buildings." at face value. Property taxes also provide services to the population in general (and higher density populations require more services in these areas), policing and public transportation are two MAJOR expenditures that come to mind. As always the devil is in the details and the adjustment of the various tax rates for particular zones may well make it more equitable.

  4. Much to my surprise I find that the original conversation mentioned above took place 10 years ago! For your interest and that of your readers here is a link to one of those archives.

  5. It is far better if the property tax is shift 100% onto land rated each year by the land's value. It the value goes up so does the tax,. If it goes down, so down so does the tax.

  6. Thanks for joining in a sincere discussion, Rural. But while it may not be exactly correct to say that it is land that uses all municipal services in proportion to value, you can't say that about buildings, either. Yet that's how we tax - based on land value and building value. We don't assess municipal taxes on a per-capita rate, charging a flat head tax or poll tax or whatever. (And if we did, how would we assess non-residential uses?)

    We've already decided that municipal taxation should be progressive, in as much as a more valuable property pays more tax regardless of number of residents. Taxing land value (site value) accomplishes this more effectively than combining that with building value, because empty serviced land incurs a real cost on a city and its residents.

    Unlike what Frank asserted in the convo from a decade ago, switching to split-rate taxation would not raise the taxes on the average property with an average building. Instead, taxes would be higher on vacant or under-used lots, and lower on higher-density lots, than they are now. A downtown lot zoned for high density would still pay more tax than a further out lot zoned only for lower density.

    Another important consideration is that split-rate taxation doesn't get rid of zoning. To prevent over-crowding, over-development, or excessive density, a city can still use zoning and site plan controls. Cities have no lack of tools to prevent excess density. What they can't do with rules is mandate sufficient density - they can't force builders to build high density if they prefer low density (or vacant). Split-value tax does this through economic incentives.

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