Would this “perfect tax” really solve our housing crisis?
By: Hannah Gable, Director of Strategy and Operations
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We’re trying something new at Ivory Innovations – sharing a perspective about a recent trend or issue area we’ve seen in the housing world. But we don’t just focus on issues at Ivory; we focus on solutions. So in each post you’ll hear about some of the innovators we’re meeting through the Ivory Prize and how they’re changing the industry.
This is a perspective. We’d love to hear your thoughts.
Understanding the Land Value Tax System
Lauded by many economists as an idea that could “fix just about everything”, the land value tax is gaining traction in the U.S. While it has recently garnered national attention, the land value tax is not new. Economists as far back as the 18th century have referred to the land value tax as “the perfect tax”.
The land tax is an alternative to the property tax system. While property taxes are levied based on both the value of the underlying land and the physical property, a land value tax only considers the land itself. A parking lot owner would pay the same in taxes as the owner of a newly-constructed fourplex on the adjacent parcel. In theory, this should incentivize landowners to build for the highest and best use of their plot. Investors sitting on empty, abandoned lots would build. Neighborhoods overrun with blighted properties would be revitalized. Sounds great, right?
Challenges in Implementing the Land Value Tax
There are a myriad of political and legal obstacles that make passing a land value tax difficult, and in some cases, impossible. Not to mention the challenges that come with accurately assessing the value of a plot of land. We haven’t exactly excelled with appraisals in real estate – a 2022 Brookings study finds that “homes in Black neighborhoods are valued roughly 21% to 23% below what their valuations would be in non-Black neighborhoods”.
Two efforts – the City of Detroit’s Land Value Tax Plan and ValueBase – signal the land value tax might not be so impossible after all.
The city of detroit’s land value tax plan
If approved by voters and city council, Detroit would become the largest U.S. city to adopt a land value tax. Detroit has some of the highest property taxes in the country and with this land tax, proponents claim it would cut homeowners’ taxes by an average of 17%. Detroit voters will vote on the new tax plan in November.
2. Valuebase
ValueBase, a software startup founded in 2022, utilizes an automated valuation model (AVM) to estimate the value of a parcel. There are other startups using AVMs but ValueBase is one of the few taking a “land-first” approach in assessing a property’s value. As ValueBase and similar companies grow, there will be more data-driven tools available to assess land value, in addition to property value.
So, would this “perfect tax” really solve our housing crisis?
My perspective is: It could, if we nail the transition. In any tax system, there are winners and losers, and it’s likely that some families living in modest homes in expensive neighborhoods would see their taxes rise significantly under a land value tax regime. The same can happen with upzoning, the process of changing zoning code to allow for additional density on single family-zoned lots. Some even argue upzoning contributes to displacement and gentrification. This rationale is used across the country to stall or halt upzoning policies, “driving a wedge between those fighting for supply-side solutions and tenant advocates”.
To address these same concerns that would likely arise when discussing the implementation of a land value tax in high-cost, coastal markets, we need neighborhood models in place to support the transition.
Existing Neighborhood Models Addressing Housing Affordability
Two organizations – Frolic and Trust Neighborhoods – demonstrate the potential to do so.
Frolic
Frolic is a Seattle-based cooperative ownership model that helps existing homeowners build additional units – structured as a co-op – on an existing single-family lot. Frolic is able to support both homeowners facing displacement and provide affordable housing options to residents looking to move into that neighborhood. This could help homeowners whose land value was high, but property value was low, transition under a new land value tax.
2. Trust Neighborhoods
Trust Neighborhoods, based in Kansas City, creates community-controlled real estate where gentrification threatens displacement. Trust Neighborhoods has designed and piloted a new, innovative approach to tackle affordable housing: the mixed-income neighborhood trust, or MINT, which owns and operates a portfolio of rental housing under community control to maintain permanent affordability. Holding properties in a trust could provide greater financial security to residents and their communities under a new tax system.
The Role of Models Like Frolic and Trust Neighborhoods
We can all agree we need more housing and it’s clear a land value tax could play a role in addressing this shortage. It has the potential to encourage development, increase density, and discourage speculative land investment. Whatever happens in Detroit and in other cities across the country, we should think critically about who will benefit, who will struggle, and how to provide meaningful support in that transition. Integrating more models like Frolic and Trust Neighborhoods into our communities could help us do so.
The perspective above is my own, and does not represent a viewpoint of Ivory Innovations.