This image shows a mostly undeveloped parking lot, occupying a full block of prime real estate in the heart of downtown Minneapolis. Why does this lot remain underdeveloped? The owner of the land could increase their income drastically if they developed the land to its fullest potential. Additionally, the city as a whole would gain significantly from a more productive use of the land.
For example, a new apartment building could help increase housing stock in a city in the midst of an affordable housing crisis. More office space would increase the tax base by bringing in new workers to downtown, while new commercial businesses could easily serve thousands of existing residents thanks to the lot’s central location and easy access to transit. Building a new park in this space would add more greenery to the city and give the 50,000 downtown residents a new place to relax. And if the owners thought that parking was the best usage of the plot, a new parking ramp would still be a better use than a flat lot.
So if the landowner and the city both stand to gain from new development, why doesn’t development happen? One of the biggest reasons is that our tax code actually discourages new construction from taking place, in the form of property tax. Just the threat alone of an increased tax burden can make it unprofitable to construct new and useful developments.
Fortunately, there is a better way — the land value tax. Popularized by the American economist and politician Henry George, the land value tax has been advocated for by Benjamin Franklin, Thomas Jefferson and Adam Smith, among others. It has support from across the political aisle. The conservative icon Milton Friedman famously called it the “least bad tax,” while Joesph Stiglitz wrote that a land value tax would “would reduce inequality and … enhance growth.” Mentions of an LVT date back even to ancient India!
What is a Land Value Tax?
To explain how a land value tax works, it’s easiest to compare it to property taxes. When properties are assessed for taxes, the total value of the property is taxed at a flat rate. To get the total value of the property, the value is split up into two amounts: the value of the land itself and the improvements that are built on top of the land.
For example, the IDS Center in downtown Minneapolis has a land value of $25,233,700, and an improvement (building) value of $278,971,300, giving us a total market value of $304,205,000. With a traditional property tax, both the land value and improvements value are taxed at equal rates. A 3.7 percent property tax would mean the IDS must pay about $11 million a year in taxes. However, using a land value tax means only the land value ($25,233,700) is taxed, and the value of the improvements ($278,971,300) is left untaxed.
Why do we want to leave the value of the improvements untaxed? Essentially, choosing not to tax improvements removes an extra cost associated with building improvements, and makes it much easier and more profitable to actually build new developments. Take the vacant lot pictured above. Because there isn’t much built here, the majority of the property value consists solely of the land value, and the property tax ends up being very light, under $500,000. However, what if the parking lot owner wants to redevelop into something better? Here’s a quote from the owner of the lot in question:
“There isn’t any, I believe, surface parking lot owner in the city of Minneapolis that would rather have a surface parking lot as opposed to having the next IDS Center built on his or her piece of real estate … If there is somebody who thought they could make money on an office building, there would be an office building under construction at this moment.”https://www.minnpost.com/politics-policy/2016/06/why-does-downtown-minneapolis-still-have-lot-surface-parking-lots-its-compli/
If any landowner wants to redevelop their property to increase usage, the city should welcome that idea with open arms. Instead our current tax code actually discourages it from happening. A hypothetical new office building at this space might project to bring in $5 million a year in increased profit, after accounting for construction and maintenance costs. However, if the amount of property tax goes up by $6 million (the amount that the office building across the street currently pays), then the developer would actually lose money on the new building, and it would be better for them not to build it at all.
To alleviate this issue, authorities may occasionally grant tax abatements, but it is more equitable and simple just to grant this tax reprieve in the form of eliminating property tax. With just a land value tax, no new costs would be associated with the office building, so it becomes viable for the lot owners. As a result, the lot owners gain by improving their income, other companies in downtown gain through the benefits of agglomeration, and the city’s economy grows thanks to the increased utilization of land overall. Everybody wins!
Although empty parking lots present the most obvious case of how removing the improvement tax rewards productive land use, this same shift in the cost-benefit analysis happens with development at all levels. In a city using land value taxes, building a residential duplex or triplex might be more viable than a single-family home, a proposal for a six-story apartment building could now become more profitable as an eight-story building, and businesses of all sizes will be free to redevelop extra, unneeded parking space. Even if we look at residential housing at the individual level, a land value tax removes disincentives for people to take better care of their property. With a land value tax, the owners of an unmaintained, run-down home would be encouraged to improve their home, since they would have no tax burden from any of the renovations.
Other than incentivizing development and good land use, land value taxes have a few other notable benefits:
- LVT is progressive. Because the supply of land is inelastic, it is impossible to pass on an LVT from landlords to renters or consumers, unlike property tax.
- LVT is difficult to evade. Companies and individuals might be able to shift all their income to the Cayman Islands, but they will have to leave their land behind.
- LVT minimizes the downsides of the economic boom/bust cycle, since it discourages land speculation.
How would a land value tax work in Minneapolis?
Here are a few options of the many ways to implement a land value tax in Minneapolis:
Option #1: Replacing Minneapolis Property Tax with Land Value Tax
The financials behind our property tax are messy since there isn’t a single flat rate. It varies from city to city, and even from neighborhood to neighborhood. Hennepin County collects the tax; the county keeps some of the money, and the rest is divided up among the cities. For simplicity’s sake, and to keep these proposals at the city level instead of the county level, I will consider only the share that Minneapolis counts toward its local city budget, about $462 Million in 2020.
In 2019, Hennepin County assessed the value of the land in Minneapolis as about $11 billion, and the improvements on that land as about $44 billion, giving us an effective average property tax rate of 0.85 percent. This ignores the share of property tax spent by Hennepin County. To raise the same amount of money by just taxing the land, this would give us a new LVT rate of 4.2 percent.
This idea could become more politically palatable by reducing the scope of the land value tax. Instead of applying the LVT to every single property in Minneapolis, we could apply it to commercial properties only, or the downtown neighborhoods only, or properties very close to transit nodes, for example.
Option #2: Replacing Minneapolis Property Tax with a Two-Tiered Rate
This option means that both land and improvements would be taxed, but at different rates. Several cities in Pennsylvania, such as Harrisburg and Pittsburgh, have taken this approach.
The ratio between the land and improvements varies from city to city, but a typical ratio would be 6 times, meaning that the tax rate on improvements is six times lower than the tax rate on land. To generate the same $462 billion in revenue using a 6 times split tax rate, this would give us a land tax rate of 2.52 percent, and an improvement tax rate of 0.42 percent (compared to a flat 0.85 percent before).
Option #3: Replacing Minneapolis Sales Tax with Land Value Tax
The land value taxes aren’t comparable only with property taxes. We can use them to replace other sources of revenue as well, such as sales tax. Getting rid of sales tax makes sense for two main reasons: First, sales tax is regressive. People at lower income levels generally have to pay a higher percentage of their income on sales tax than richer people.
Second, sales tax discourages consumption, as taxes on elastic goods decrease demand for those goods. The most famous example of this would be the “sin taxes” on alcohol and tobacco, where the explicit goal of the tax is to lower use of the products. The same effect, though unintentional, happens with sales tax as well. However, we don’t actually want to reduce consumption; it’s in the best interest of the city to have people spending money at our local restaurants and businesses.
In 2020, sales tax is projected to bring in about $94 million into the Minneapolis city budget. With a new LVT of 0.9 percent, we could eliminate the local sales tax. If we wanted to combine this with the first option to replace property tax, we would end up with a new LVT rate of 5.1 percent, allowing us to eliminate completely both sales tax and property tax at the city level.
Option #4: Using Land Value Tax for Value Recapture
In addition to replacing existing taxes, we can implement the land value tax as a way to recapture some of the value generated by various government programs. The value-capture model has been used to fund transit programs to great success in cities like Tokyo, Singapore and Hong Kong (though the method of recapture is different than LVT).
For example, let’s take a simple 1 percent LVT in Minneapolis, which would raise about $110 million. Here are some ways we could spend that money with the explicit goal of increasing land values in Minneapolis.
- We could upgrade the operations of every single local bus route in Minneapolis to a bus rapid transit (BRT) level for $72 million per year.
- We could double the operations budget for the Minneapolis park system for $89 million per year.
- We could implement the entire All Ages and Abilities Bike Network for a one-time cost of about $27 million.
- In 2014, the latest data I could find, Nice Ride cost about $3.3 million per year. We could allocate some of the LVT revenue toward buying more scooters and e-bikes, and building more stations. We could even make Nice Ride free to use for all Minneapolis residents!
Option #5: Land Value Dividend
It would also be possible to use the revenue from a land value tax to fund a universal dividend, payable to all residents of the city of Minneapolis, similar in concept to Alaska’s Oil Dividend. A 1 percent LVT would raise about $110 million, enough to give the 430,000 residents of Minneapolis about $250 per year. This approach would combine the appeal of using LVT to incentivize more efficient use of the land with the social and economic benefits of universal basic income. At a high enough LVT rate, this could entirely fund a universal basic income program above the poverty level (though this approach would probably be more effective at a higher scale).
Because this plan would be revenue-neutral, some people are bound to lose out when comparing the increased tax versus dividend amount, but most residents of Minneapolis would benefit greatly from the program. Renters make up 53 percent of the population, and they would all come out ahead, as they receive the dividend, but wouldn’t face any increase in living costs (since LVT is impossible to pass on to renters).
If we look at single-family homeowners, the breakeven point for the tax is about $25,000, as anybody who owns less than this much land would receive more from the dividend than they would pay in taxes. This number is multiplied for each member of the household, so the number would be $100,000 for a family of four. Considering that the median home value in Minneapolis is about $300,000, and land costs are usually 20 to 30 percent of the home price, a significant proportion of homeowners in general, and probably a majority of families, would come out ahead with the dividend.
Challenges to implementing a Land Value Tax
If Minneapolis actually wanted to start collecting a land value tax, they would face a number of roadblocks. The city would likely need to get permission to collect this type of tax at both the county and the state levels, which could be difficult. It’s also possible that land value taxes are actually illegal to implement under Minnesota state law, as it is in a few other states.
Even if the legal obstacles were overcome, passing a land value tax would face significant political opposition. There’s a reason why LVT is so rare around the world – most landowners would naturally block such a tax under the impression, rightly or wrongly, that they would be negatively affected by it. It doesn’t help that landowners tend to be wealthy and wield significant political power as a small minority.
However, even landowners may benefit from a transition to LVT if they are making efficient use of the land. This population would generally include condo owners, multifamily housing owners (like duplexes or townhomes), and even families living in single-family homes. Landowners who aren’t making efficient use of the land presently, but want to in the future, would also benefit since an LVT would significantly lower the cost of development.
For the past several years, the Twin Cities has been experiencing huge amounts of growth in population. However, it’s vital that this population growth is accompanied by a corresponding increase in new housing. If we don’t keep up with this exploding demand (and we haven’t), then the result will be skyrocketing rent, a loss of affordable housing and residents being pushed out of their own neighborhoods. Just compare Tokyo, a city that has managed to keep housing prices stable for decades, with San Francisco, where a lack of building has caused rent to increase 70 percent since 2010.
In light of this, it’s ridiculous that our current tax policy actually discourages new development and instead incentivizes wasteful land usage. It’s time to start spreading the word about land value taxes with local residents and politicians and demonstrate our commitment toward sustainably improving and growing our city. Implementing a land value tax is the single greatest step we can take to lower housing costs, encourage new housing and incentivize higher-quality development in Minneapolis.
Thanks to Kelvin Liu for his help in collaborating and editing this article.