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What Would Land Value Tax Look Like in Minnesota?

Cities, try this one weird trick to encourage efficient land use! We sit down with Michael Krantz from Metro Transit to dig into a study his office did on what the effects of allowing LVT in Minnesota could be.

Episode summary

00:00 | Intro
01:26 | Overview of LVT
03:58 | Encouraging better land use
09:44 | Background on the bill and study
12:44 | Outcomes of the study
16:05 | Levers of control
22:08 | Affordable housing
28:48 | How budgets and taxes are set
35:46 | LVT throughout the world
38:23 | Climate benefits
41:22 | Final thoughts
43:37 | Outro

Further resources

A chart by Metro Transit to help understand LVT. Lots 1 and 2 are empty, and their taxes increase under LVT; whereas Lots 3 and 4 have buildings, and their taxes decrease under LVT.

The current bill that would make Land Value Taxation possible in Minnesota.

Attributions

Our theme song is Tanz den Dobberstein, and our interstitial song is Puck’s Blues. Both tracks used by permission of their creator, Erik Brandt. Find out more about his band The Urban Hillbilly Quartet on their website.

This episode was hosted and edited by Ian R Buck, with transcript by Mike Allen, first of his name. Christy Marsden is our awesome guest booker, and technical assistance is provided by the super professional Brian Mitchell. If you’re able to help make sure this team gets paid for the hard work they do, please consider donating. We really appreciate it!

Copyright

The Streets.mn Podcast is released under a Creative Commons Attribution-NonCommercial-NoDerivatives license. Feel free to republish the episode as long as you don’t alter it and you aren’t profiting from it.

Transcript

Michael: [00:00:00] It’s a really efficient tax system because you can’t run away from it, essentially. So you can’t pick up that land and move it somewhere else so you can push development out if you have a higher property tax on buildings, but you can’t push land out if you have a higher property tax on land. 

Ian: [00:00:18] Right. [music]

Ian: [00:00:22] Welcome to the Streets.mn Podcast, the show where we use transportation and land use to make our communities better places. Coming to you from beautiful Frogtown St Paul, Minnesota. I’m your host, Ian R. Buck. Today we’re going to be chatting with Michael Krantz, who’s the acting program manager of transit oriented development at Metro Transit. His office recently completed a study of land value tax and what the effects would be if it were implemented in various different ways and scenarios here in Minnesota. Now of course, Metro Transit does not take a position on any existing or proposed legislation, but this case study is being used as a tool by our legislators to figure out if and how we want to implement land value tax in Minnesota. A little bit later in the episode we’ll talk about a bill that is being proposed right now for a land value tax in Minnesota, but first let’s ask Michael what is land value tax in the first place.

Michael: [00:01:04] Yeah. So I’ll start by just describing what the existing tax system looks like and then compare that to a land value tax. So today with property taxes, we look at a lot. We look at the building value and the land value. We apply a property tax rate to that to generate property tax revenue. So in a land value tax system.

Ian: [00:01:25] And so and by we you mean like, like cities and counties?.

Michael: [00:01:28] Cities and counties and the state and the council ultimately all collect some amount of properties, collect some portion of that property tax revenue. Right.

Ian: [00:01:37] And it’s a system that like makes sense from the consumer side as well because like when I bought this house, this property, you know, what I’m thinking about is, oh, how much money did I pay for everything all together. Yeah. And so I understand, like, oh, when that value goes up, my taxes go up.

Michael: [00:01:55] Yes. Yeah. And it’s a really common system, not just within the United States, but across the world. A lot of places do it this way. They they look at both the building and the land value. So like you said, it’s a really common way of taxing property values in a land value tax system. The tax is derived entirely from the value of land, and the basis for that is that we have a finite amount of land and we want to encourage responsible use of that land, encourage efficient development on that land. So rather than taxing the building value, we just look at the land value and ultimately generate the same amount of revenue from that land that would have been generated from both the building and the land in the the current tax system that we have today.

Ian: [00:02:39] And so so like basically we have to like make believe like, okay, how much would Ian be able to sell his land for if there were no building on it.

Michael: [00:02:49] Yeah. Yeah. I mean, even even today assessors develop estimates of what the land value is. They’re not necessarily employing sophisticated techniques for determining how much of that value goes to land and how much of it goes to buildings. There are certainly ways that folks can accomplish that. There are some areas that spend a lot of time trying to determine how much of value on a lot goes to the building and how much of it is is related to the land. But that’s that’s essentially what would happen. They would develop an estimate for how much of the value when you buy. So when you buy a house, you’re paying for the land and for the building. Yes. And an assessor would determine how much of that goes to land.

Ian: [00:03:30] Yeah. Yeah.

[00:03:37] [music]

Ian: [00:03:37] At its core, it’s a very simple concept to understand. Yeah, like we’re just taxing the value of the land itself.

Michael: [00:03:43] Exactly.

Ian: [00:03:44] But you. But you, you did kind of peek us behind the curtain a little bit when you said that it’s trying to encourage better uses of that land. Yeah. So, like. Like, what does that mean? Why does this system achieve that goal?

Michael: [00:03:59] Sure. So I think I think a good way to look at this is to imagine a single city block.

Ian: [00:04:05] Sure.

Michael: [00:04:06] So you’ve got a…

Ian: [00:04:07] We can literally just think about my city block here because it is a good example.

Michael: [00:04:10] Yeah. Yeah. So, yeah, you look at a city block today and maybe some of those lots have a building on them and some of them are vacant. Yeah, Yeah.

Ian: [00:04:20] In today’s system, vast majority of my neighbors lots are single family homes. Almost all of them are the same size, like one third of an acre or whatever.

Michael: [00:04:28] Yeah,

Ian: [00:04:28] But there’s a couple that are like, right next door to me that are just empty lots.

Michael: [00:04:32] Yes.

Ian: [00:04:32] So what what happens then?

Michael: [00:04:34] So in that case, the properties that have buildings on them end up paying quite a bit more in property taxes than those vacant lots.

Ian: [00:04:40] Right. In the current system.

Michael: [00:04:41] In the current system, even though the same streets serve those lots, even though they have access to the same infrastructure that a lot of that the the other lots do. Ultimately, the vacant lots end up paying quite a bit less. 

Ian: [00:04:55] Right. 

Michael: [00:04:56] In a land value taxed again if they have that, if they’re the same size, the same value from a land perspective, they would end up paying the same property taxes in a land value tax system. So the way that that encourages development is today those vacant lots are paying, as I mentioned, quite a bit less in property taxes. And maybe it makes sense for them to just sit on that property as the value of that land continues to increase over time. Maybe it’s increasing faster than what they’re paying in property taxes on a year to year basis. So it’s it’s in effect land speculation. They’re they’re banking on that future value and they’re just going to sit on it. And that doesn’t that really doesn’t do any of us any good because it’s not generating housing is not generating jobs or providing additional access to services.

Ian: [00:05:42] Right, in fact, it’s it’s really a drain on like my neighborhood because, you know, the person who owns those two properties like lives way out in Maple Grove and isn’t really on top of like, oh, making sure that the sidewalk gets shoveled in front of those vacant lots isn’t really on top of like making sure that trash gets picked up when somebody decides to just come by and, like, dump a bunch of garbage in the vacant lots. So yeah.

Michael: [00:06:06] Yeah. So that’s, that’s, that’s one way the land value tax might encourage development there is or the existing system discourages that development because the property taxes are so low right on the other side it might discourage somebody from developing that lot because if they do develop that lot, property taxes are going to go quite a bit higher.

Ian: [00:06:24] Yes.

Michael: [00:06:25] So whatever development happens, there needs to be able to cover those additional property taxes. So those are two ways that the existing system discourages development and encourages people to sit on it maybe for longer than they would otherwise. And it discourages developers from coming in and developing that lot.

Ian: [00:06:40] Right.

Michael: [00:06:40] Not always, but to an extent.

Ian: [00:06:42] Especially in in a neighborhood like Frogtown, where, you know, the property values are increasing very, very quickly because a lot more people are wanting to move into this neighborhood.

Michael: [00:06:52] Yeah, Yeah. So that’s where it encourages land speculators to sit there if they anticipate that value continuing to climb over time, there’s not a huge incentive for them to sell that property today.

Ian: [00:07:03] Right.

Michael: [00:07:04] So but you flip the script in a land value tax system because the land on that vacant those vacant lots would the tax in a land value tax system would ultimately be the same across the board. So it would climb pretty significantly for those vacant lots, which would strongly discourage folks from just sitting on that property because suddenly they they have to pay a lot more property tax on that property as a vacant lot. They’re not generating any revenue from that site. Suddenly they’re going to start thinking, I don’t want to sit on this property anymore. I want to try to find somebody who can develop it and make some sort of productive use of that lot. At the same time, from the developer perspective, they know that property taxes on that lot are going to be lower than they would have been in a conventional system. So what the rents that they need to generate from housing or for from commercial development are less in a land value tax system. So it becomes the owner of the lot, becomes more interested in selling it, but also the developer, it becomes more attractive from a developers perspective as well. It’s a really efficient tax system because you can’t run away from it essentially, so you can’t pick up that land and move it somewhere else. So the person who owns that land either has to accept that tax and accept that they’re going to pay more even if it’s vacant or they’re going to develop some productive use on that land, depending on what I mean, what’s needed there, housing, some sort of commercial development or whatever the case may be. I’m not going to pretend I know what is is needed on any particular site. But that’s that’s why it’s so efficient. Whereas in in the conventional system somebody could say, okay, I want to build a large multifamily development and I’m going to look at a variety of sites where I can do that. You can move that building, you can choose the building based on the tax situation in those particular locations. And often what happens is folks will run away from sites where the property taxes are going to be higher by putting that development on to a jurisdiction where the property taxes might be lower. So you can you can push development out if you have a higher property tax on buildings, but you can’t push land out if you have a higher property tax on land.

Ian: [00:09:15] Right. 

[00:09:35] [music]

Ian: [00:09:45] So, let’s talk about the current context. Right now there is a bill in the state house of representatives that if it passes, it would allow cities to create land value tax districts. The bill doesn’t prescribe where those would be, it doesn’t immediately jump us into land value taxes statewide or anything like that, it just allows cities, you know, municipalities, to determine whether they want to start land value taxes and what parts of their cities they want to do that in.

Michael: [00:10:20] Because currently we can’t do that. We’re constrained about we have the statute defines how cities collect property taxes today.

Ian: [00:10:20] Okay.

Michael: [00:10:21] So we don’t have the luxury of creating land value tax district. They could, in theory, create a land value tax district that covers an entire city. But obviously they have no power to create that outside of the city.

Ian: [00:10:40] Right.

Michael: [00:10:41] They can also choose not to do anything right.

Ian: [00:10:42] We could still end up with a scenario where a developer might look at like, Oh, all of Minneapolis has land value tax enabled, but St Louis Park does not. In which case. Oh, I guess then then the incentive would be let’s build in Minneapolis.

Michael: [00:10:59] That’s right.

Ian: [00:10:59] Oh good. Okay, cool. Yeah.

Michael: [00:11:02] Because again, it’s going to create some development pressure where the land value tax district is enabled.

Ian: [00:11:09] Yes.

Michael: [00:11:09] It doesn’t necessarily do anything outside of that district. So if there are areas where you want to see development, that would be a good area to create a land value tax district. So we I mean, when we were looking at this, when we developed some case studies, we weren’t necessarily trying to say this is where land value tax districts should go. We were just interested in exploring how does it what sort of impacts would we see if we did create them? And because we’re interested in transit oriented development and development along transit in general, the case studies that we focused on were near high frequency transit. Yes. So we looked at a bunch of transit station areas throughout the region and then we did developed one much larger case study strictly within the city of Minneapolis, just looking at areas served by high frequency transit. So I think we looked at half mile corridors along high frequency transit, both local routes, arterial BRT and light rail throughout the city and just developed one large corridor, assuming that we would want to guide development to those corridors. So that was that was one of the the case studies that we looked at. But again, I mean, ultimately one of the goals here is to support economic development and create more efficient development. So that that’s kind of a guiding principle for where you would want to implement a land value tax district. But there are some who would just, I mean, suggest that you just want to do a wholesale, but that’s the bill that we were exploring provides much more discretion than that.

Ian: [00:12:33] Right? Right, Right at the discretion at the local level,

Michael: [00:12:35] Yes.

Ian: [00:12:35] Yep.

[00:12:42] [music]

Ian: [00:12:42] Okay. So so we talked a little bit about the study that your office conducted. Right. So like, what did we find? What are the interesting outcomes of that of that study?

Michael: [00:12:53] Yeah. So I think what we saw is kind of it corroborates kind of that broader story about land value tax districts, which is that they can support economic development. We already talked about that by increasing property taxes on vacant land and lowering them for development. You’re creating development incentives that didn’t exist beforehand. So we saw that from our case studies. We saw vacant lots. So, I mean, you look at downtown Minneapolis, you look at a vacant lot in downtown Minneapolis, property taxes on those lots are going to go up pretty dramatically, whereas property taxes on the well developed lots are going to go down. So we saw that that impact.

Ian: [00:13:32] And even like if you implemented land value tax throughout the entire city, a vacant lot in downtown Minneapolis is going to feel that pressure a lot more than a vacant lot somewhere way in south Minneapolis.

Michael: [00:13:44] That’s right. And that’s because the land value for those downtown lots is going to be quite a bit higher.

Ian: [00:13:49] Right. Right.

Michael: [00:13:50]  Has access to better infrastructure, access to more services, all of that. It all translates into higher land value.

Ian: [00:13:55] Yeah. Yeah. It’s very it’s very interesting to think about this in, in the like in the context of okay, we’ve got this built environment already and that is a large part of what shapes the land values as they are like, if I were like building a city from scratch, right? And I decided like, okay, we’re going to do land value tax right from the get-go. I don’t have quite the same prediction of like, okay, where exactly is like downtown going to end up being like, where’s that hub? What’s going? How?

Michael: [00:14:30] Yeah, no, it’s a really good point. And I think it kind of it gets to the heart of how and when it works well. So if you think about a land value tax district in an agricultural area where there’s almost no development value across the board, just assume virtually no building value, almost all the values in the land, but it’s all evenly distributed. It’s not like you have some development on some lots and none on others. It’s all just farmland. You’re not going to see a change in property taxes if you were to implement it there. And I’m not necessarily suggesting we should, but it just stays the same. There’s no no change from a property tax perspective. Yeah. Even if you’re collecting it all from land.

Ian: [00:15:07] Because it’s all it’s all like relative you’re comparing, you end up comparing the different properties to each other, all of the ones that are within the same land value tax district.

Michael: [00:15:19] Yep, that’s right. So say we look at the inverse of that situation. Say we look at a in theory a downtown where all lots have are efficient, equally well developed so they’re all the land has maybe ten times its value in building value on it across the board. Similarly in that situation you would not see a change in development pressure across the board if it’s all evenly developed.

Ian: [00:15:45] Right, right, right.

Michael: [00:15:45] It’s not going to change. Where it really matters is when you have some lots that are well developed and some lots that are completely underdeveloped. That’s really where a land value tax district shines.

Ian: [00:15:56] Yeah. 

[00:15:57] [music]

Ian: [00:16:03] One thing that did cross my mind is this kind of feels like it’s it puts all the property owners into like it pits them against each other in terms of like it puts us all into an arms race of like, okay, who can who can make like the best, most efficient use of our land? Because, you know, the land value is largely based on like what’s around it, you know, So like, if my neighbor builds a nice corner store, then like my property tax is going to go up because my property is more valuable because I’m near a store.

Michael: [00:16:39] Yeah.

Ian: [00:16:39] Which means like, oh, now I’m incentivized to do something new with my, you know, with the built environment on my property.

Michael: [00:16:48] Yeah.

Ian: [00:16:48] Which is like on the one hand, you know, it, it kind of feels icky to like, you know, put a bunch of homeowners into that like rat race, you know, but also so I don’t know, I am a homeowner and I also don’t have a whole lot of like, patience for just like, yeah, you know, for like homeowners have it so easy in our society. Like, why do we need to care? Yeah, no.

Michael: [00:17:16] That raises some really interesting points. And I think there are some other ways. I mean, those are all things that can be explored when you’re when cities are evaluating if and when and where to create a land value tax district. And I mean, a couple of provisions of that bill that I was talking about previously that I didn’t talk I haven’t mentioned yet is that it gives cities discretion as to what land uses would be included.

Ian: [00:17:38] Right.

Michael: [00:17:38] So maybe you want to preserve single family homes. You could exclude single family homes from a land value tax district. I’m not saying we should or should not do that. I’m just saying that we have the discretion to do that.

Ian: [00:17:49] Yeah.

Michael: [00:17:49] I’ll also mention that there’s there’s a big impact on land use controls as to what you can do with your property and how much value that might contribute to your land. So if you’re in an area, say this neighborhoods, all single family homes, you can only have single family homes there.

Ian: [00:18:08] There’s one empty lot, you know, a couple of blocks down that is zoned for commercial use.

Michael: [00:18:13] Exactly.

Ian: [00:18:14] And because of that, the empty land is worth like, way, way more than I would have expected.

Michael: [00:18:21] Yeah.

Ian: [00:18:21] For a lot that size.

Michael: [00:18:22] And that’s that’s absolutely that’s a perfect example of that distinction. So if you can only have a single family home on this lot, the land value is going to be quite a bit less than that.

Ian: [00:18:33] Right. 

Michael: [00:18:33] So the development. So if they were to build some sort of commercial development there, that’s not necessarily going to translate to pressure on your lot because you can’t put commercial development here.

Ian: [00:18:43] True. True, true, true.

Michael: [00:18:43] So it depends on those. I mean, cities have a lot of control both through I mean, what is proposed for this land value tax district, but also through land use controls on where that pressure happens and where development would occur and what type of development occurs? So I want to I think it’s important to emphasizing that there’s still there are still a lot of levers that cities would retain in terms of how and where development occurs.

Ian: [00:19:07] Yeah. And in I mean, one of my goals, of course, is like we want to be building like fifteen minute walkable neighborhoods that are complete and easy to live in without a car. And yeah, so, so land value tax definitely is one tool in the toolbox for achieving that. But obviously we can’t use that and ignore the fact that like, well, single family zoning just like kills any possibility of doing that.

Michael: [00:19:37] Yeah.

Ian: [00:19:38] So…

Michael: [00:19:38] Yeah. So you could implement a land value tax district and everything, still single family zoning and there’s really no intent to change that. It’s not I mean, ultimately you might see single family homes pop up in those vacant lots, but that’s really all that’s going to happen.

Ian: [00:19:50] Right. Which which would be good, you know. Yeah. Yeah.

Michael: [00:19:54] But and it goes to where where do you want to see growth? And that’s that’s ultimately something that cities would want to decide. But this is this is a tool that they could implement to further guide growth in those corridors and also determine through their land use controls the type of growth that they want to see there. Yeah, it’s just another another layer that contributes to that.

Ian: [00:20:14] Right. Right. Yeah. So it’s it’s not as magical a silver bullet as as one might initially think.

Michael: [00:20:25] Yeah.

Ian: [00:20:25] You know, because it’s like yeah we, it doesn’t magically free us from like the possibility of just having like oh, exurban sprawl spreading out in every direction around the Twin Cities.

Michael: [00:20:39] Yeah. 

Ian: [00:20:39] It’s… 

Michael: [00:20:40] No that’s, I think that’s a really helpful point. I think it is, it is a tool, but it’s like you said, it’s one that needs to be would need to be paired with a variety of other tools to really achieve outcomes.

Ian: [00:20:52] Right.

Michael: [00:20:52] So when we talk about this with [transit-oriented development], they’re often they’re essentially four different things that we look at when we’re determine whether an area is right for TOD. I mean, market is part of that. What sort of rents are there? I think a land value tax district influences the market, so it would essentially fall in that bucket. Then we look at the land use controls, what sort of zoning is there. So you need to have the market and you need to have supportive zoning for that development. If you want to see development in a particular area, then we look at the kind of infrastructure that exists in that area. Do you have walkable, bikeable, pedestrian-friendly streets in an area? And then the final one that we always look at is the quality of that high end, high frequency transit infrastructure. So we look at all four of those things when we’re considering TOD. I mean, those contribute in various ways to development across the board. But you can’t just look at that market piece. You can’t just look at the land value tax piece to determine if you’re going to get the development you want to see.

Ian: [00:21:49] Right. Yeah. Yeah. Gosh, it’s all so complex.

Michael: [00:21:53] Yeah.

Ian: [00:21:55] Why Why did I choose to care about this kind of thing?

Michael: [00:21:59] Yeah. 

[00:22:00] [music]

Ian: [00:22:06] Here’s a here’s kind of a weird question that you may have never heard before, but like I am a little bit obsessed with, like nontraditional ownership models, especially for housing. Right? So like co-ops, you know, the residents all owning collectively owning a multifamily building.

Michael: [00:22:26] Yeah.

Ian: [00:22:26] Or like, like land trusts. You know, we have the Rondo Land Trust here in Frogtown. That one especially. I’m like, how does a land value tax interact with a land trust system? Because in that system, like the non profit organization owns the land and when somebody wants to move into that house, what they’re buying from the old owner is just the building itself. They’re not buying the land. And so like the theory behind a land trust is that that’s going to help keep housing costs low because the thing that increases in cost is the land. You know, in most in most cases of like gentrification and etc.. And so I’m wondering like, yeah, like did this did your study explore like what? Like what kinds of effects that would have on, you know, a land trust organization that’s trying to to run that kind of model?

Michael: [00:23:29] So that’s a really interesting question. I don’t know if I have a really strong answer on how it relates to to land trusts. It is something that we look at and it’s a it’s a helpful tool for supporting affordable housing and preserving land for affordable housing. So I’m going to pivot a little bit and talk about one of the other benefits that we saw from that study, which is related to affordable housing. One of the I think we saw two different things. The first one that when we looked at that district, that case study along high frequency transit, it included some some traditionally low income neighborhoods in Minneapolis, both in North and south Minneapolis. And one of the things that we saw was that that district would, for the most part, lower property taxes in those neighborhoods. And the reason for that is essentially that a lot of the properties in those neighborhoods make far more efficient use of land then than other neighborhoods do. Do you see more development, more housing on less land? Right. So as a result of that, they tended to see a decline in property taxes, which is an important outcome.

Ian: [00:24:34] Right.

Michael: [00:24:35] The other thing that we wanted to take a look at was what it would mean for affordable housing. So in the case study, we wanted to take a look at a specific apartment building that was built in northeast Minneapolis. It was a it’s a luxury apartment building. And look at what the impact would be from a rent perspective if some of those units were affordable. And then compare that to the property tax impact of a land value tax district if it were implemented in that area. So just to see what the difference was. So we this particular apartment building was charging pretty high rents back in 2019, which is when we did this analysis and we just compared those rents to the rents that they would be able to charge if they were there were some affordable units and we applied that to 8% of the units, which was based on Minneapolis’s inclusionary housing policy.

Ian: [00:25:28] Gotcha.

Michael: [00:25:28] And what we saw is that that building would collect on average about 250,000 less per year in rent if 8% of those units just evenly distributed became affordable units and again, affordable at 60% of area median income. Yeah, that same property, if it were implemented in this case study that we were looking at, would see a reduction in property taxes of 400,000.

Ian: [00:25:54] Okay. Yeah.

Michael: [00:25:55] So essentially a land value. 

Ian: [00:25:57] And that was assuming… So that’s assuming it’s part of a land value tax district of like just along the high frequency transit corridors. Right? That’s what you’re doing.

Michael: [00:26:07] Case study one was looking at all high frequency transit area. So all properties within a half mile or quarter mile of high frequency transit.

Ian: [00:26:15] Yeah.

Michael: [00:26:15] So it was a pretty large case study in that case. And yeah, in that case it would see a property tax reduction of 400,000 in a land value tax system. So it ultimately pairing an inclusionary housing policy with an affordable with land value tax district would be a powerful way of encouraging new affordable housing without necessarily requiring additional city subsidy, in these cases. You could pair those two. Ultimately, that property would still see a net benefit from a land value tax district, even if it were required to have 8% of those.

Ian: [00:26:50] Now say that property. You mean the property owners?

Michael: [00:26:53] The property owners? Yes. Not not the residents. The property owners in that case.

Ian: [00:26:58] Yeah.

Michael: [00:26:58] Yeah, that’s true. Yeah.

Ian: [00:27:02] Yeah, that’s. I mean, I think that. That is the best outcome, you know, from from that study. Yeah. Is yeah. Honestly like like being able to reduce the housing costs that people are facing when they’re trying to move into our high density, uh, high transit frequency corridors.

Michael: [00:27:26] Yeah.

Ian: [00:27:26] For sure. For sure.

Michael: [00:27:27] Yeah, absolutely. And ultimately, by encouraging that development near where we have existing infrastructure, we’re able to defray, I mean, cities and counties, us as a community, we’re able to defray the cost of that infrastructure investment more evenly across an area. So, I mean, just thinking about something like the Green line extension, the light rail system, it does have an impact on land values. It increases land values. But in a land value tax district, you would see more development along that corridor. And ultimately that development along the corridor would better be able to support that investment. It makes more efficient use of that investment.

Ian: [00:28:05] That I just had, like a glimpse of a possible future where we suddenly have people who are like opposing transit infrastructure developments near their property, not because they fear that it’s going to reduce their property value, but because they fear that it’s going to increase the land value.

Michael: [00:28:28] Yeah. Yeah, it’s an interesting. It’s an interesting thought. But I think there’s there’s.

Ian: [00:28:34] Another I mean, people are going to oppose what they’re going to oppose. They’ll find reasons to no matter what.

Michael: [00:28:39] That’s absolutely true.

[00:28:46] [music]

Michael: [00:28:47] Something that I’ll just mention on that front. In Minnesota, we have kind of a unique property tax system, not from the perspective that we’re taxing buildings and land, but from the perspective that cities establish their budgets and then they determine what they need to tax property within the city to meet that budget. So in a lot of areas, you’ve got your your value, you’ve got your tax rate, and then that generates revenue and that’s what drives the budget. It’s kind of flipped around in Minnesota, which is a unique system, but it also has some really unique impact. So in Minneapolis, I live in Minneapolis. Over the past few years, we’ve seen an enormous amount of development Over the past ten years, I would say we’ve seen an enormous amount of development and and we’ve seen an enormous increase in property values over that time.

Ian: [00:29:35] Right.

Michael: [00:29:35] And but because of the way we budget in Minnesota, the fact that we’ve seen so much development, even though my property is increasing in value, there have been years that my property taxes have actually declined or held been much lower than my increase in in property values. And that’s because a lot of this new development has been absorbing increases in the city’s budget. They’re able to cover that that net increase. And that’s something that could happen in these corridors. You see an increase in land value, but that doesn’t necessarily mean that city budgets are increasing at the same rate. So what it could mean is that it’s just a lower tax rate.

Ian: [00:30:16] Right.

Michael: [00:30:16] And that’s one reason people might want to see a land value tax district, because it’s encouraging development that might reduce property tax pressure on their property.

Ian: [00:30:26] Yeah. Yeah, right.

Michael: [00:30:28] So cities set the budget. They determine what they need to pay for services or infrastructure investments. And ultimately then they look at property tax capacity is what they look at. So they’re looking at all of the taxable property across the city of Saint Paul or the city of Minnesota or whatever city we’re looking at. And then they determine what rate they need to apply to all of those properties to generate that revenue and meet the budget. That’s that’s a simplistic way of describing it, but that’s essentially.

Ian: [00:30:55] Yeah.

Michael: [00:30:56] My understanding of how it works.

Ian: [00:30:57] It’s interesting that like, like so so in Minnesota, the way that we do it kind of puts a risk on okay, they might decide that they want to provide more services than like than people can really then than the people who are living in the city can afford. And you might accidentally price out some people from living in your city because your property taxes are too high.

Michael: [00:31:25] Yes.

Ian: [00:31:25] But on the flip side, like in other states, you might end up I can imagine that you could easily end up with a city where it’s like, well, we can’t increase the property taxes more than X amount. And so therefore we cannot afford the basic services that the citizens of the city need. And I don’t know which is worse.

Michael: [00:31:47] Yeah, yeah. Now that’s a yeah, it’s a really interesting point. And I don’t know if there is an ideal here. I think that there are some I mean, from a city administration perspective, I think this is a pretty elegant system for meeting those needs and for determining how it works.

Ian: [00:32:04] It does at least give like city leaders.

Michael: [00:32:08] Yes.

Ian: [00:32:09] You know, the ability to kind of keep an eye on both of those things.

Michael: [00:32:14] Absolutely. It gives them stability.

Ian: [00:32:15] Right, right.

Michael: [00:32:16] In terms of how they provide those services from year to year. But even if I mean, ultimately they are still developing that budget based on what I mean, they’re always thinking about what sort of revenue is capable of being generated within their city. So it’s not necessarily they’re just developing that without any consideration of how much people can pay. But it’s an important consideration because if.

Ian: [00:32:35] You say, you know, as an elected official, if you increase the property taxes like more than people can handle, people are just going to vote you out.

Michael: [00:32:41] Oh, yeah, exactly. Exactly. So it’s always part of the consideration.

Ian: [00:32:45] Yeah.

Michael: [00:32:46] But it raises a really interesting point. And we’re getting a little bit away from land value tax districts, but Urban3 has done some really interesting analysis. I don’t know if you’re familiar with. 

Ian: [00:32:57] Who’s that?

Michael: [00:32:57] The Urban3 is an economics firm out of Nashville, but they do work all all across the country. Okay. They’ve done some work on things related to land value tax, property tax in general, and where cities are generating their revenue within a city. So the type of development that generates the most revenue, how how efficiently they’re developing revenue on land. So property tax per acre. But I think the most interesting analysis they’ve done is related to that property revenue generation relative to tax consumption. So the infrastructure that’s necessary to support that development and then trying to allocate the costs of that infrastructure to parcels and then comparing it to how much they’re generating is the revenue that they’re generating enough to cover the streets, the sewers and the services that are being provided to that property.

Ian: [00:33:49] Right, Right.

Michael: [00:33:49] So they’ve done that across the board. And this is I mean, part of the reason I’m really interested in this is because TOD shines in this example. And what you ultimately see is these dense, walkable neighborhoods where you see really efficient use of land tend to generate far more revenue from a property tax perspective than they consume.

Ian: [00:34:08] Yeah.

Michael: [00:34:09] And you tend to see lower density more sprawled and spread out development. So less efficient use of land tends to generate far less revenue than it consumes in property taxes, which is probably not a surprising story, but I think it’s a really important piece. When you look back at land value tax districts, it’s generally encouraging the type of development that helps create solvent cities and helps cities fill their budgets. And they’ve looked at cities throughout the country that are essentially that aren’t generating enough revenue to to cover the expenses that they’re incurring to provide the services that they want to provide.

Ian: [00:34:48] Yeah.

Michael: [00:34:49] And the land tax district is a way to encourage development that more efficiently meets those needs.

Ian: [00:34:54] Yeah, yeah. Funnily enough, that’s a lesson that I learned as a kid while playing Civilization V.

Michael: [00:35:02] Yeah.

Ian: [00:35:03] Because in Civ4, if you, if you were like extracting a resource from some part of your empire, you needed to build a road to it in order to get that resource. But like in Civ5, they got rid of that and like roads cost a lot more in upkeep, you know, and I didn’t know that. And so my, my civilizations kept going bankrupt. I never had any money because I was building roads everywhere.

Michael: [00:35:27] Yeah. I mean, that’s the basic lesson here too, right? Yeah. And they’ve, they’ve done some really interesting case studies across the country that really illustrate that point well. 

[00:35:37] [music]

Ian: [00:35:44] Okay, So, so speaking of like across the country, we mentioned that like LVT is not used in very it’s not very common in the United States.

Michael: [00:35:53] That’s right.

Ian: [00:35:53] We are exploring passing a bill that will allow local municipalities to decide if they want to live like what’s what’s the state of things in other states. Does anybody else allow LVT or?

Michael: [00:36:09] Yeah. So there’s one state that has passed similar enabling legislation that’s similar to what is being considered here, and that’s Pennsylvania. And they’ve had it for I’m not sure exactly how long ago they adopted it, but they have had that for quite some time now and several cities have implemented it. And they I mean, one of the characteristics of that enabling legislation is that it allows hybrid taxes. So they’re not necessarily implementing true land value tax districts. They might have another not necessarily called a hybrid, but a split rate tax where you tax the land at a higher rate than you tax the buildings.

Ian: [00:36:50] Ah! Okay.

Michael: [00:36:51] So not necessarily zero on buildings and all of it coming from land. That might be some some distribution between the two, but ultimately higher on land. So Pennsylvania has had that for a while. There are many cities that have implemented land value tax districts, either split rate or full land value taxes. And there’s been quite a bit of study in those areas on whether whether we’re seeing the economic development benefits that we expect to see from a theoretical perspective. And and what they see is they look at cities, peer cities that are have a lot of similar economic conditions, development conditions, and the cities that implemented a land value tax district generally see more development where that district was implemented than those that didn’t. In some cases, those the city that didn’t was seeing was generally contracting. They were seeing a decline in property values and less development, whereas the cities that implemented it were were seeing more development occur.

Ian: [00:37:51] Right. Nice.

Michael: [00:37:52] Yeah. Outside of the country, I believe New Zealand has implemented land value tax districts and I think that there may be a European example as well.

Ian: [00:38:04] Sure. Yeah. New Zealand is doing a lot of interesting things, aren’t they?

Michael: [00:38:09] They are.

Ian: [00:38:10] Just, you know, I kind of hear I hear about them a lot more than you might you would expect from a country that size.

Michael: [00:38:14] Yeah. 

[00:38:14] [music]

Michael: [00:38:21] One of the benefits that I have not mentioned. So we talked about the economic development benefit. We talked about the affordable housing benefit. We talked about guiding development to infrastructure investment. Yeah, the one that I haven’t talked about, which I think is really relevant, is the climate benefits of the land value tax district. And I think this really comes down to the fact that the land value tax district encourages infill development. There’s been some great research from the University of California at Berkeley looking at how various municipal policies might impact climate emissions, and they’ve done this for cities throughout the city or throughout the state of California. And one of the pieces that they identified is that infill development, especially in cities that have robust transit infrastructure, infill development, so development in areas that’s already developed where you have transit infrastructure, walkable, bikeable streets that is where you’re going to see by far the greatest impact from a climate perspective, where you’re going to see the greatest reduction in emissions.

Ian: [00:39:26] Right

Michael: [00:39:26] And that doesn’t include the reductions in VMT that come from infill development, which I think is a really. 

Ian: [00:39:33] Oh.

Michael: [00:39:33] Yeah.

Ian: [00:39:34] That’s a huge piece as well.

Michael: [00:39:35] It’s a huge piece as well. So you look at these charts that they’ve developed in urban infill, just stands, stands apart from everything else. We often talk about electrification as our salve for climate change and it’s it is an important part of the conversation. It needs to be part of the conversation. But urban infill and VMT reduction in all of these, I mean, they you just get a lot more bang for your buck. And land value tax is again, another tool that can be used to help address and reduce our our greenhouse gas emissions.

Ian: [00:40:04] Yeah, as long as you again pair it with zoning that allows for that infill development, right? 

Michael: [00:40:09] Absolutely.

Ian: [00:40:09] Yeah.

Michael: [00:40:10] Absolutely. That’s always part of it. Yeah.

Ian: [00:40:13] Yeah. Cause like, I mean, here in my neighborhood, I think the only thing that I would be able to do with this property differently would be adding an [accesory dwelling unit], because St Paul has not done anything quite as interesting as as Minneapolis in terms of like allowing duplexes and fourplexes on any lot. Yeah, but, but ADUs we’re allowed to do those.

Michael: [00:40:37] Yeah. Yeah. But I think there, there has been, if I’m not mistaken, quite a bit of rezoning along the Green Line. Yes, quite a bit of rezoning along the A line BRT and those are great corridors for supporting and encouraging infill development and you can accommodate a lot of development in those corridors. And again, layering that zoning with a land value tax district would create kind of a virtuous cycle in that regard.

Ian: [00:41:01] Yeah, yeah, yeah. Now let’s, you know, let’s replicate that by taking out I 94 and replacing it with a transit and bike oriented boulevard. Oh, man.

[00:41:20] [music]

[00:41:20] Do you have any other final thoughts before we say goodbye?

Michael: [00:41:24] I think just kind of the final thought, when I when I think about the the bill, again, the enabling legislation that would allow this to occur, I think I think the most important point is, again, it’s just another tool that cities can implement and it doesn’t require anybody to do anything. It’s just it’s a tool that could be used to advance a variety of city goals. And it really does create quite a bit of discretion for cities to determine how they want to implement that. So I think there would be a lot of interest in having as many tools in your tool chest as possible. And this would just be another one. Again, as you were mentioning, it’s not really a silver bullet, but it can be a way to encourage development where cities want to do that.

Ian: [00:42:02] Yeah.

Michael: [00:42:03] I think I think a lot of people get a little bit intimidated about it, not understanding how it works or necessarily how you would use it to encourage development. But I think it ultimately it’s a fairly simple concept that that could have quite a few benefits if implemented the right way.

Ian: [00:42:22] I suppose the the one the one sticking point is you have to also like be able to communicate to the property owners, like, hey, by the way, this is what this new tax system does and like how it like how you can take advantage of that in order to you know, because like, if I’m just somebody who like, well, you know, Ramsey County just sends me a thing that says that I owe this much money and like so I send it to them. And if I’m not paying super close attention.

Michael: [00:42:52] Yeah. And that’s yeah, that’s a that’s a good point in there is I think there’s some provisions that require notification of all properties that would be included in a property tax district. And if a city decides they want to implement that, there’s a, there’s some sort of gap between announcing that you want to implement that and actually doing so.

Ian: [00:43:11] Sure.

Michael: [00:43:11] Which gives, I think, vacant property owners, owners of vacant property, plenty of time to decide if and how they want to move forward before they actually start experiencing the impacts of it. It gives them plenty of time to identify developers who may be interested…

Ian: [00:43:24] Right.

Michael: [00:43:24] Or somebody else who just wants to own the property if they don’t want to sit on it anymore.

Ian: [00:43:28] Yeah. Yeah. It’s. Yeah, the devil’s in the details isn’t it. Always.

Michael: [00:43:33] Yeah. Yeah.

Ian: [00:43:35] All right, Michael, thanks for joining us.

Michael: [00:43:38] Thanks for having me. 

[00:43:38] [music]

Ian: [00:43:40] Thanks for joining us for this episode of The Streets.mn Podcast. The show is released under a Creative Commons attribution non-commercial non-derivative license, so feel free to republish the episode as long as you’re not altering it and you are not profiting from it. The music in this episode is by Eric Brandt and the Urban Hillbilly Quartet. This episode was hosted and edited by me Ian R. Buck, with transcript by Mike Allen first of his name. Christy Marsden is our awesome guest-booker, and technical assistance is provided by the super professional, Brian Mitchell. If you’re able to help make sure this team gets paid for the hard work that they do, please consider donating at [https://streets.mn/donate]. We really appreciate it. If you have feedback or ideas for future episodes, drop us a line at [podcast@streets.mn]. Until next time. Take care!

About Ian R Buck

Pronouns: he/him

Ian is a podcaster and teacher. He grew up in Saint Paul, and currently lives in Minneapolis. Ian gets around via bike and public transportation, and wants to make it possible for more people to do so as well! "You don't need a parachute to skydive; you just need a parachute to skydive twice!"