Could this obscure tax idea reshape American housing?

Over the last six months, an obscure housing policy idea has emerged as one of the most talked about proposals to revive Detroit, Michigan — an idea that could potentially spur development on the city’s vast amount of vacant property as well as lower the city’s punishingly high taxes on homeowners. Economists are buzzing with interest, and the city’s mayor, Mike Duggan, is all in.

Meet the land-value tax, a form of taxation rarely tried in the United States despite being popularized globally by an American political economist in the 19th century. Versions of the tax have been implemented in countries all over the world, including Mexico, Denmark, Singapore, Russia, and Taiwan.

For nearly all of US history, American property taxes have taken a pretty standard form. Individuals pay a tax based on the assessed value of their land, buildings, and any other improvements to their property combined. If you renovate your house and make it nicer, for example, your overall property tax could go up. The proposed land-value tax in Detroit, by contrast, would effectively tax land at a higher rate than any buildings or amenities on the property.

Mayor Duggan, who is spearheading the effort, hopes this land-value tax idea will incentivize development on blighted property as well as offer some tax relief to homeowners, who bear some of the highest rates in the country. The Duggan administration estimates that under his proposal 97 percent of Detroit homeowners will see an average decrease of 17 percent in property tax. The proposal is not about lowering taxes generally, but about increasing taxes on those who own vacant land (a big problem in the city) and decreasing future taxes on people who develop their land.

“I think it is an important idea for any place where people are holding onto valuable land that could be used for more productive purposes,” James Hohman, the director of fiscal policy at the Mackinac Center for Public Policy in Michigan, told Vox.

Duggan had hoped to put the idea before Detroit voters in February, during Michigan’s presidential primary, but proponents say their best hope at this point is the November ballot, after constituents have had more time to learn about what exactly they’re voting on. First, the Michigan legislature must pass a law permitting Detroit to levy a “split-rate” property tax at all. While a Detroit state representative introduced a bill to do just that in September, other Democratic lawmakers felt the whole thing was moving too fast. “I believe in proper process. I believe in democracy, and quite frankly, not enough of us are voting on primaries,” said Detroit City Council Member Gabriela Santiago-Romero, in October.

The Duggan administration still hopes to implement the land-value tax in 2025. “Ultimately it will be the voters who decide for themselves,” John Roach, a mayoral spokesperson, told Vox.

If it passes, Detroit would become the largest American city to enact a land-value tax, a fact that could spur other communities in the US to follow suit. A land-value tax could help address the nation’s housing crisis by encouraging more housing development — like building new accessory dwelling units in backyards or brand-new multistory apartment buildings on vacant property. A land-value tax could also help other communities reverse their declining fortunes through more equitable growth. It’s a lot of ifs, but policymakers, researchers, and housing activists say the chance to test the theory has never been closer in reach.

Why now?

Property taxes have long been a critical source of local public funding in the US, making up 48 percent of local government self-sourced revenue across the country in 2021. While many communities factor the value of land into their overall property tax rate, only a handful have had taxes on land specifically.

“Property taxes are [some of] the oldest taxes levied by state and local governments and there’s a lot of protections for property tax in state constitutions,” said Hohman. “Because it’s been a reliable source of local revenue most governments haven’t felt the need to experiment.”

But a number of factors in Detroit, in addition to the city’s steep property tax rate on homeowners, have helped make the city a more ripe candidate for a land-value tax. Detroit has had a declining population for decades — peaking in the 1950s at 1.85 million — and has been grappling with large amounts of vacant land under private, public, and nonprofit ownership. (About 17 percent of Detroit’s 138 square miles is vacant.) Advocates say a land-value tax could also offer something of a fiscal buffer to Detroit, which continues to see the strength of its once more powerful auto and manufacturing industries decline.

Though the land-value tax idea is not new, it reemerged back in 2019 when a Detroit development group and a local philanthropy commissioned a study by the Cambridge-based Lincoln Institute of Land Policy to see how the idea might work in their city. The report was issued in April 2022. (The research was discussed at a conference the Lincoln Institute hosted in November for 30 housing journalists, which I attended.)

The mayor threw his backing behind the concept this past May, and though the specific details have changed somewhat in recent months, the basic idea of taxing land at a higher rate than buildings remains intact. According to the Detroit Free Press, those who would be hit the hardest under the proposal are land speculators who own vacant lots, owners of empty and decrepit buildings, owners of scrap yards and auto salvage yards, and parking lot owners. Owners of urban farms, community gardens, and side lots would be protected. Some supporters of the land-value tax idea think the Duggan administration’s proposal doesn’t even go far enough.

Economists are in support of the idea. In November, the University of Chicago’s Kent A. Clark Center for Global Markets published a poll of 41 leading economists around the world, including four Nobel laureates, and 83 percent agreed or strongly agreed that the land-value tax would boost Detroit’s local growth over the next decade. Fifty-three percent agreed or strongly agreed that Detroit’s proposal would enhance incentives for owners to develop land.

One reason Detroit may be able to take a more radical-seeming step on land taxation is that Detroit’s status quo is not working very well for the city government. The study conducted by the Lincoln Institute of Land Policy found that in 1959, Detroit’s property tax raised over $1 billion, when adjusted for inflation. Sixty years later, that number was just $119 million. “If this was 80% of our revenues, we’d be a lot more nervous,” Jay Rising, Detroit’s chief financial officer, told the Economist.

Despite raising less overall from property taxes compared to the past, the city’s high rate has been brutal on low-income homeowners, who also often suffer from inaccurate assessments of their property’s value. One study published in 2019 found that 1 in 4 city properties went into tax foreclosure between 2011 and 2015 due to owners falling behind on their bills. The land-value tax would in theory offer relief to homeowners, and reduce the amount of foreclosures in the city.

Advocates point to the experience in Pittsburgh as the strongest evidence in the US that this is worth trying. Pennsylvania broadly has the longest history of implementing split-rate land-value taxes with more than a dozen Pennsylvania cities and school districts having adopted it. Pittsburgh, however, which had a split-rate tax from 1913 until 2001, is the most prominent example. One study from 1997 found the land-value tax played a significant role in boosting investment in downtown Pittsburgh, and helped the city avoid tax increases overall. Other research found that split-rate taxes in Pennsylvania encouraged denser housing development and influenced business formation decisions.

Pittsburgh abandoned its split-rate tax in 2001 following a countywide reassessment that dramatically increased land values, prompting a voter backlash. Pittsburgh had failed to keep up with accurate and routine tax assessments for decades, so then when they finally did one, homeowners were not pleased to see a massive spike in their property tax liabilities.

“The policy was seen as unfair because it went up all of a sudden, and policymakers abandoned it and used the split-rate tax as a scapegoat for bad execution,” said Andrew Justus, a housing policy analyst at the Niskanen Center. “Pittsburgh’s experience shows the importance of administrative competence in implementing good ideas.”

Some Democratic lawmakers in Michigan say they’re concerned about taking a policy gamble on a majority-Black city. Other Detroit constituents have expressed general distrust of the city’s mayor and ideas he’s enthusiastic about, arguing there are other reforms needed to stave off eviction and foreclosure.

Roach, Duggan’s spokesperson, said Michigan’s Democratic House Speaker Joe Tate indicated he will bring up the Detroit land-value tax idea for a vote in January. The next step after that would be for the Detroit City Council to approve language for the proposal to be on the November 2024 ballot.

Detroit has more problems than just one tax can solve

Given the experience in Pittsburgh and other Pennsylvania municipalities, few think a land-value tax will be some sort of silver bullet for Detroit. Yet most experts believe it will still be ultimately a smart move for the city, and make Detroit more enticing to business, investors, and new residents.

Alex Alsup, the vice president of research and development at Regrid, a land parcel data company, said it’s possible that speculators absorb the higher taxes and continue to leave their land vacant — an outcome that would be relatively disappointing. A better outcome would be for the owner to either invest in their land or sell the lot to someone else who wants to. It’s also possible, Alsup said, that the speculator gives up on paying their higher tax and the lot ends up in foreclosure.

“Tax foreclosure may not be the worst thing for speculator-owned vacant homes and land, so long as the city is prepared to exercise its right to take control of these properties before they actually reach the annual tax foreclosure auction,” Alsup wrote recently in the Detroit Free Press. “The next job would be a more thoughtful approach to getting properties into the hands of people who will put them into productive use.”

Some Detroit activists argue that a land-value tax will fail if not paired with fixing the city’s notoriously broken property assessment process, which often undervalues expensive homes and over-values less valuable ones. “Like a lot of American cities Detroit has historically struggled with accurate and frequent assessments and particularly at the low-end of the value spectrum,” said Justus, of the Niskanen Center. “I think critics have a legitimate concern that the city will need to keep up with accurate and fair assessments, but it’s not insurmountable.”

Though a land-value tax might prove to be a political winner in Detroit, advocates acknowledge the political calculus might not be so optimistic everywhere. In some cases, it could seem very unfair to people who budgeted and invested under certain assumptions, and not every city will be able to tout a solid tax break to more than 95 percent of homeowners.

“There are some places where the political cost may be too high, making it not worth it to incite backlash,” said Hohman, of the Mackinac Center. Still land-value tax proponents have their eyes on more than just Detroit, and the Motor City might just be the proof point they need.