Tax the buildings or just the land? Ohio economists debate the benefits

It’s a hot topic in the economics world: Would it be fairer and better public policy if we were to tax just the land on which buildings sit instead of the land and all the improvements as well?

Proponents of the land-value tax argue for what they see as its obvious benefits:

• A land tax would be fairer to lower-income property owners because they pay a greater percentage of their income for housing. 
• By taxing land and not buildings you’d encourage development of vacant, blighted properties not by taxing their development, but instead by creating a disincentive to leave them dormant.
• Overall real estate values are prone to bubbles and other heavy swings due to market inefficiencies, while land values are more stable. Therefore, taxing only land would give government officials greater predictability when they budget.

In real-world Detroit, the city government is asking the state legislature to allow it to put a partial land value tax to a vote next year. It would cut taxes on buildings by $14 for every $1,000 of assessed value, while more than doubling land taxes. 

“The average Detroit homeowner will get a 17% permanent property tax cut in 2025,” the city government said in a fact sheet released in October. “Ninety seven percent of all Detroit homeowners will get a tax cut. The legislation guarantees no Detroit homeowner gets a tax increase from the Land Value Tax plan.”

Meanwhile, a panel of Ohio economists that was recently surveyed seemed to believe that the concept of completely replacing real estate taxes with a land value tax has potential. Of the 12 surveyed by Scioto Analysis, nine believed such a replacement would incentivize development. The rest were uncertain or had no opinion.

“Theory is quite clear that land taxes are more efficient than property taxes, so switching to land taxes should increase property development,” Curtis Reynolds of Kent State University said in the comment section of the survey. “How much that will happen is unclear.”

Asked whether it would be better for less-wealthy property owners to completely replace real estate taxes with those just on land, the economists were more skeptical. Four agreed that it would, five said it would not and three were uncertain or had no opinion.

“The devil is in the details and I don’t have all the details, but for urban taxes it seems hard to engineer a land value tax to be less progressive than a real estate tax because poorer people spend a larger percent of their income on housing (which is taxed less) whereas richer people own most of the land (which is taxed more),” said Jonathan Andreas of Bluffton University, who agreed that a land value tax would be more progressive.

But Reynolds didn’t see it that way.

“Taxing land instead of property would likely be more beneficial to property developers and wealthier individuals with the resources to develop property,” he said. “In the long run, however, it may be helpful to lower income individuals if it allows for more wealth accumulation that can be passed through the generations. Given that property taxes are currently only applied to approximately one third of assessed value, it is not clear how much they are really distorting homeowners from investing in their own properties.”