Detroit, MI: A Case Study on Taxing Land Instead of Property

Detroit is poised to be the first major American city to experiment with a land value tax (LVT) on a meaningful scale, providing a unique opportunity to evaluate the efficacy of a tax policy that has largely gone untested in the United States despite its historical prominence. Detroit Mayor Mike Duggan has recently proposed a split-rate tax to be levied on all property to replace the current singular property tax. Land value taxation has a rich history in economic theory, and this experiment warrants a refresher on the concept.

Land value taxation finds its patriarch in 19^th century economist Henry George, whose magnum opus, Progress and Poverty, sold more copies than every book in America besides the Bible for several decades.^[1] George proposed a system where taxing the intrinsic value of land would be the primary form of government revenue, instead of a tax on the total value of a property (or any other taxes for that matter, such as income or capital gains taxes).^[2] Modern Georgists do not go that far, with most believing that the current system of singular property taxes should be replaced with a two-tiered LVT.^[3] LVTs work by taxing land in much greater proportion to the value of the buildings and property that sit on top of the land. In Detroit, which aims to keep its LVT system revenue-neutral with the current property tax regime, this means reducing the property tax on the assessed value of buildings from 2% to 0.6% and replacing the lost revenue with an 11.8% tax on land itself (hence the split-value tax).

LVTs have several theoretical benefits which make them appealing to economists and policymakers alike.^[4] Land value taxation is an especially efficient form of taxation because it is non-distortive, i.e., it does not affect consumer and producer decision-making.^[5] Most forms of taxation, such as income and capital gains taxes, are inefficient because they change the price of the taxed activity and, as a result, alter market behavior (usually by discouraging economic activity).^[6] In comparison, LVTs do not alter market behavior because the supply of land is fixed and taxes on its intrinsic value are allocatively neutral (cannot be passed along to consumers and the owners of land cannot simply produce more or less land as a result of an LVT).^[7]

Land value taxation also has the benefit of discouraging land speculation and limiting urban sprawl. Because taxes would be assessed largely on the value of the land itself, and not the improvements put atop the land, property owners would no longer be discouraged from developing their property to the full extent for risk of raising their tax bill.^[8] In theory, LVTs should make housing more affordable, as land value taxation encourages property owners to develop their land as the price of speculation becomes more costly, thus increasing the supply of housing where zoning permits.^[9]

While LVTs provide a lot for economists to like, the biggest issues come with the practical implementation. To have its desired effects, the LVT would have to be comparatively much higher than the level of property taxes assessed on real buildings. Increasing the relative cost of owning land has been historically unpopular, and the landowners have effectively lobbied against higher real property taxes. Additionally, land assessors do not have much experience delineating the value of a building from the value of the land underneath the building, and history shows that past land value assessments have not been especially accurate.^[10]

However great, these challenges are not insurmountable: LVTs provide a lot for both sides of the aisle to like. Taxing the value of land is progressive and may promote lower housing costs.^[11] Free market economists like Adam Smith and Milton Friedman were fans as well, with Friedman going as far as dub the tax “the least bad tax.”^[12]

If implemented, Detroit’s experiment with land value taxation will provide a useful case study on how taxing the intrinsic value of land may work in a modern, major American city. Past experiments with LVTs have been half-hearted attempts in much smaller jurisdictions.^[13] If Detroit is able to accurately assess the intrinsic value of land, then theory says that the economic gains could be substantive. Only time will tell how Henry George’s idea will play out in practice.

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[1]  See Alice Hackett, Fifty Years of Best Sellers, 1895 – 1945, R.R. Bowker Co. (1945); see also Jeffrey A. Tucker, Progress and Poverty, Then and Now, Fee Stories (May 8, 2015).

[2] See Fred E. Foldvary, Geo-Rent: A Plea to Public Economists, 2 Econ J. Watch 106, 107 (2005).

[3] See Richard F. Dye & Richard W. England, Assessing the Theory and Practice of Land Value Taxation, Lincoln Inst. of Land Pol’y 1, 2–4 (2010) (“In the United States, for example, local governments raised nearly 72 percent of their tax receipts via property taxation in fiscal year 2006.”).

[4] See Dye, supra note 3, at 7–11.

[5] See id. at 2–3.

[6] See id. at 7–8.

[7] See Dye, supra note 3, at 7–8.

[8] See Dye, supra note 3, at 8.

[9] See Richard F. Dye & Richard W. England, The Principles and Promises of Land Value Taxation, in LAND VALUE TAXATION: THEORY, EVIDENCE, AND PRACTICE 1, 1–4 (Richard F. Dye & Richard W. England eds., 2009).

[10] See Ozimek, supra (“The most common critiques of the tax are about the practical difficulty of measuring land value.”).

[11] See Dye, supra note 3, at 11.

[12] See Foldvary, supra note 2, at 106.

[13] See Dye, supra note 9, at 7.