May 08, 2009 11:11 PM UTC

Patrick's Plan for Property Taxes

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• by: Patrick Sean Byrne

I need to let you in on a secret:

There is a flaw in the Gallagher Amendment that causes most of you to pay too much in property taxes (or rent), to the benefit of wealthy people whose lifestyle choices are subsidized through your property, sales, and income taxes.

When you pay your property tax bill, you are really paying two taxes: one based on the value of your house, and the other on the value of the land underneath your house.

Taxes on land value are close to being the most perfect, economically efficient, and radically egalitarian tax imaginable. Think about it: The value of your land is not something that you can affect. If you live near good schools, parks, libraries, fire & police stations, and highways (but not too close to the highways), your land values will be high. If you don’t, they will be low.

What is the common element underlying the amenities that affect your land values?

They are all provided by government.

Taxing land value is very justifiable. Those who benefit financially by having property near good public amenities have to pay the most.

On the other hand, taxes on the value of the improvements to land are unfair and regressive. It makes no sense to tax someone more because they improved their house. We should be encouraging people to improve the housing stock, not taxing them.

In addition, taxing the value of improvements to land reduces urban density compared to what would have been the case without the tax. Think about it: If you are a developer and the property tax your clients pay is based only on land value, the tax would not enter into your decision as to how many stories to build because the value of the land is not directly affected by what you do with the land. So, you’d build as many stories as you would have if there were no tax at all.

However, if your clients have to pay taxes based on the value of the improvements to the land, you won’t build as many stories as you would have otherwise, because every story is more expensive to build than the one below it.

Eventually, you’ll hit a point where you won’t be able to profitably develop that top floor, because the property taxes associated with the top floor depress how much your clients would be willing to pay for the units. At that point, it would make more sense to develop a different parcel of land than to keep building vertically.

Because property taxes reduce urban densities, there is less affordable housing in the downtown core and everywhere else. Combined with artificially low gasoline taxes, these two policies encourage the exurban sprawl that is blighting Colorado’s natural, beautiful open spaces.

In addition, because we don’t actively manage demand for our transportation network, the combined effects of property taxes and low gasoline taxes create congestion, which costs Coloradans billions of dollars annually in wasted gasoline and time.

Furthermore, congestion causes a stunning amount of pollution and greenhouse gas (GHG) emissions, which itself is subsidized because we do not (yet) have a carbon tax or a cap & trade system for pollution or GHG emissions.

The moral of this story is that land value taxation is good for rank & file Coloradans, but property taxation is very, very bad.

Another thought experiment:

Say there are only two (identical) houses in the Denver metro area: yours, and your neighbor who lives in Hilltop or Cherry Creek North. Say the government needs to collect $10,000 to pay for fire, police, parks, libraries and roads, and they’re going to get it from you and your wealthy neighbor through a land value tax.

Now, suppose both houses are worth $100,000, but the land under your house is worth $100,000 and the land under your neighbor’s house is worth $900,000. With land value taxation, your tax bill would be $1,000 and your neighbor’s bill would be $9,000.

However, with property taxation your tax bill would be $1,667, and your neighbor’s would be $8,333. Maybe your neighbor would feel bad and pay you back the $667 difference. I doubt it.

Unfortunately for you, the latter scenario is the real one here in Colorado.  We lack affordable urban housing, sprawl blights our landscape, and congestion lays waste to our time, our money, and our environment.  To add insult to injury, your property tax bills are subsidizing people who don’t need the money.

At this point, you should be rather upset with how your tax bills are calculated. Unfortunately for you, the story only gets worse.

Because of how TABOR interacts with Gallagher and the Colorado School Finance Act, property tax rates in areas with oil & gas development and in places like Aspen and Vail were ratcheted lower every other year, for sixteen years, not because of a rational public policy decision, but because of how these arbitrary, meaningless fiscal formulas interact with each other.  The mill levy freeze only prevented it from getting worse.

And guess who gets to pick up the slack?

You, of course, through your income taxes and sales taxes.  Instead of paying taxes to provide public services in your neighborhood, you are subsidizing the lifestyle choices of people in ski towns and oil & gas boom towns who don’t need the money.

Patrick’s Plan for Property Tax Reform

I propose a constitutional amendment to reform how property taxes are paid in Colorado. It’s time to shift the property tax burden off of the value of buildings, and onto the value of land.

This has already been done in Pennsylvania, and is the prevailing practice in world-class cities like Hong Kong and Sydney, Australia. Shifting tax burdens to those with the most valuable land will reduce taxes (and raise land values) for rank & file Coloradans, and will end the irrational subsidies enjoyed by those who should rightfully pay full-price for the amenities provided by their government.

Even more importantly, shifting to land value taxation will increase the stock of affordable housing, reduce sprawl, and reduce congestion. I will go into more detail about how this would affect oil & gas-impacted communities in my next post.

If this has all been a bit too abstract for you, I apologize. Here’s a concrete example:

Those ugly surface parking lots in downtown Denver will be the first thing to disappear under land value taxation.  Rather than allowing property owners to sit on their land and wait for other people (and government) to make it valuable, land value taxation will force them to develop their property to its highest and best use.

This will help the greening of Denver, because downtown parking would become more expensive and harder to come by, and would send a message to people to do the environmentally responsible thing and take the RTD get downtown.