You Get What You Tax For
Trulli in Italy. Image: Wikimedia Commons
It was in Alberobello, a small town in southern Italy, that I first learned about the Trulli. They are medieval homes erected without the use of mortar, a unique construction approach used to avoid taxes. When officials from Naples were on their way to extract the kingdom’s share of wealth, inhabitants of the Trulli would simply disassemble their homes. No home, no tax. When the tax collectors moved on, the house was reassembled, and life resumed.
I have a model Trullo on my desk, a humble reminder that humans—including myself—respond to incentives, often in ways that are unintended.
The Mansard roof is another example. In France, property owners were taxed based on the number of floors below the roofline. By putting two slopes into the roof and adding some dormers, the Mansard roof allows a building owner to have a tax-free floor. Paris is filled with them.
American cities are also shaped by the taxing approach we have chosen to use. Most cities have a property tax, which is a tax on the value of land plus the value of the improvements that have been made on that land. During suburbanization, governments favored property taxes because they put most of the tax burden on newly-developed properties. Cities that grew horizontally collected a lot of taxes very quickly.
As the post-war development pattern matured, as shopping malls and big box stores began to appear, the sales tax grew in popularity. For the lucky city that could capture a regional retail hub, a sales tax shifted more of the burden to outsiders. The sales tax is also popular because it raises lots of revenue in ways generally imperceptible to the payer.
Cities continue to mature, and the tax systems they are allowed to use need to be updated to reflect an evolving set of challenges. Today’s cities are burdened with maintenance expenses from prior investments; they have too much infrastructure and do not make very good use of it. The number of neighborhoods trapped in decline is growing. And in those neighborhoods that do receive private investment, it tends to cause displacement of the residents who have lived there the longest. It’s an all-or-nothing bargain; the trickle or the fire hose.
There are many causes of the stress our communities are experiencing, but a major factor—and one we can address—is the incentives that come with our current approaches to local taxation.
The property tax punishes modest improvements and rewards steady decline. People who take steps to add value to their property pay more taxes, while those who allow their property to diminish in value pay less. The property tax makes slumlords possible, allowing them to buy distressed properties and ride the cash flow down a slope of decline, paying minimal taxes the entire way.
By taxing building improvements, property taxes encourage landlords to sit on vacant and/or decrepit properties, rather than fix them up and face an increased tax bill. (Photo: Paul Hohmann / vanishingstl via Flickr)
And property taxes encourage idleness. Buying a vacant lot or a decrepit building in an otherwise improving area, then waiting for other properties to improve, all while paying low taxes, is an easy way to have large investment gains with minimal risk. The investor who refuses to improve but also refuses to sell their property is a common frustration within neighborhoods. It’s a direct byproduct of the property tax.
The distortions of the sales tax are in some ways subtler, but equally pernicious. There is a winner-take-all aspect to the sales tax, where the only city that can capture the big retailers get the tax. This is true even though a collection of smaller retailers often produces more revenue. Cities that don’t play the incentive game and don’t give the retailers subsidies lose out to ones that do, ultimately making a loser out of every local government.
Cities that are funded disproportionately by the sales tax have an incentive to pursue regional-scale retail, but a disincentive to accommodate residents, especially those who are high-cost or have limited value as consumers. Put another way: the optimal sales tax city would have the regional mall, the big box stores, and the auto dealerships, but no residents. All the people who shop there and pay the tax would actually live someplace else.
What is needed most today is an approach to taxation that allows cities to grow financially strong and resilient when property owners invest incrementally in their own neighborhoods. We need a taxing system that rewards neighborhood investments, discourages idleness, and closely aligns private gain with the public good. And a modern approach to taxation must encourage increasingly productive use of all the existing infrastructure, parks, and amenities local governments struggle to maintain.
Fortunately, there is such an approach. It’s called the land tax.
Why the Land Value Tax?
A land value tax is like a property tax, but where a property tax is based on the value of the land plus the value of the improvements, the land tax considers only the value of the land. The most consequential impact of this is that someone who improves their property will not automatically have a tax increase. If a landlord fixes their leaky roof, a homeowner adds an accessory apartment, or a shop owner expands their building, they are not punished with more taxes.
“We need a taxing system that rewards neighborhood investments, discourages idleness, and closely aligns private gain with the public good.”
Enacting a land tax shifts the burden from financially-productive properties to vacant and under-utilized properties. From the community’s standpoint, this realignment makes a lot of sense. The street in front of the vacant lot, the pipe that leads to the neighbor’s house, the sidewalk, the fire-fighters, the police force… they all must be there whether someone builds on the property or leaves it vacant. Why increase taxes on those investing in the community while giving absentee landowners and slumlords a free ride?
There are a lot of reasons for cities to switch to a land tax, but few are allowed to make that change. Only a handful of state governments have given cities the authority to make this choice. Even though such a reform would lower local taxes for most families and businesses, it would raise them on some major retailers, developers and land speculators, all of which are influential constituencies.
States that want their municipalities to grow into strong towns should give them the choice to switch to a land tax. Cities given that option should use it. This is a key reform for building stronger, healthier, more prosperous communities.
(Cover photo: morisius cosmonaut via Flickr)
This week, Strong Towns is taking an in-depth look at the land tax and how it can incentivize a healthier, more resilient pattern of growth and reinvestment in cities.
What’s With That Empty Lot? | The Pennsylvania Experiment | Rewarding Neglect | Why Isn’t This Being Implemented?
This series is sponsored by the generous support of the Robert Schalkenbach Foundation (RSF).
Charles Marohn—known as “Chuck” to friends and colleagues—is the founder and president of Strong Towns. He is a land use planner and civil engineer with decades of experience. He holds a bachelor’s degree in civil engineering and a Master of Urban and Regional Planning, both from the University of Minnesota.
Marohn is the author of Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity (Wiley, 2019) and Confessions of a Recovering Engineer: Transportation for a Strong Town (Wiley 2021). He hosts the Strong Towns Podcast and is a primary writer for Strong Towns’ web content. He has presented Strong Towns concepts in hundreds of cities and towns across North America.