Dusting Off a Successful Tax Strategy

by Neil Munro
June 1, 2010

Detroit Free Press columnist Mitch Albom recently demanded, “In my Detroit, you cannot sit on vacant property in major development zones. Either you can develop it, or get fined so badly you’ll sell it to someone who will.”

Among other things, the Motor City clearly is a frustrating and frustrated victim of landowners who have no intention of building anything. Instead, they often wait for years for someone with those intentions to come along. Then they sell the land, for which they typically paid little, to that developer at a huge profit.

Such speculators mean no harm. They’re only “following the money.”

But Albom and the many others who are aggravated by this typically time-consuming practice will be glad to discover there’s a way to speed it to a happier ending.

Here’s how it works. Typically, the land and the value added by any buildings are taxed at the same rate. But under a concept called “land-value taxation,” the land itself is taxed at a rate about four times higher than would be applied to any existing or future buildings on the site.

You probably get the picture already: that higher cost of owning or “sitting on” idle property is great enough under that split tax rate to make the owner decide to develop it sooner rather than later.

The government doesn’t have to tell him, or her, to get going on a project. Economic self-interest demands it. The high rate on land makes it very costly to own, while the low tax on buildings make them more profitable to construct.

Investors follow the money.

Interestingly enough, one of the noted modern-day demonstrations of this fact took place in Oakland County in the 1960s. The fledgling city of Southfield was developing more slowly than expected when Mayor James Clarkson and Assessor Ted Gwartney shifted most of the property tax from buildings to land.

The rest is history. Southfield became a boomtown.

Gwartney has gone on to promote this approach to encourage development in many cities and foreign countries — including Russia! He now is assessor in Greenwich, Connecticut, just 29 miles from Times Square. That a sophisticated New York City suburb sought him out is impressive testimony to the increasingly recognized value of concentrating property taxes on land rather than buildings.

Over the years, some 15 Pennsylvania cities have adopted the land-value taxation concept. It also can be found in Virigina.

Neither Gwartney nor Clarkson invented this effective concept.

The idea was that of Henry George, an American political economist in the 19th Century. By 1910 a young Winston Churchill was praising George’s idea before the House of Commons.

But in the decades since, support via the media has been scant. And critics seem mainly to complain that it encourages more concentrated development — i.e. less urban sprawl — and less speculative and lucrative holding of vacant land.

Nonetheless, the concept has been used to some degree over the years in more than 30 nations, Australia and New Zealand among them.

That it isn’t seen in action more frequently here or abroad may be because to encourage development most effectively, the concept demands that officialdom pay attention. Timely and accurate property assessment is very important, along with effective land use planning (zoning) and public education (how it works and why it’s a good idea).

The first two of those ought to be in place for any property development law to work as intended. But the education aspect obviously has been lacking, or land-value taxation wouldn’t be the virtual secret it seems to be.

In any event, the concept works. Harrisburg, Pennsylvania, is an example often cited by its supporters. The portion of the local property tax on the land itself in the seriously depressed city was increased to a jolting six times that of the tax on buildings. It took three decades, but the number of empty lots or buildings in the depressed city declined from about 4,200 to 500.

So the land-value tax system can work in tired industrial cities, though more slowly than in attractive suburbs.

Repopulating Detroit by that means, even over the next 30 years, would be greeted as a miracle!

The land-value tax concept can be as simple as splitting the existing tax rate at, say, 75 percent on land and 25 percent on buildings, instead of the typical 50/50. That obviously would discourage holding land alone off the market by making it more costly to own while waiting for a developer, and reduce the cost of building on the site, thereby encouraging construction.

Perhaps, just perhaps, word of the land-value tax concept will be heard, understood and used again in the region, this time to raise a near-dead Detroit.

Neil Munro is the retired editor of the Oakland Press in Pontiac.