Testimony given May 19, 2014 to Strategic Advisory Committee on the West Quadrant Plan
Neighbors in the West End portion of downtown Portland are tired of walking by block-long stretches of surface parking lots while some of our historic buildings are razed for redevelopment. One solution to this problem that the City of Portland should seriously consider is taxing land at a higher rate than buildings.
Taxing land and buildings at the same rate per square foot means that as long as you don’t put any buildings on your land, your tax bill is going to remain relatively low. If you’re a speculator, this means that you only need a modest amount of revenue from people driving into the city for work or to go shopping in order to sit on that land indefinitely. Or you might hold out until someone comes along offering your “pie-in-the-sky” price. Either way, the effect is to keep the land out of the hands of many of those with genuine interest in putting it to productive use.
By taxing land at or near its development potential, however, owners of land being used at less than maximum productivity would be paying a disproportionate amount in taxes in order to keep it that way.
Aside from the obvious goal of raising money to pay for public services, we levy taxes
- to discourage a particular behavior in favor of another (taxes on cigarettes and alcohol discourage consumption and thus promote lower health care costs), or
- because a given resource is scarce while demand for it is high (i.e., the gasoline tax).
But if the city is trying to encourage development—and to attract the 70,000 more downtown residents it seeks by 2030—it hardly makes sense to place the greater tax on development behavior.
A Good Illustration: The block between SW 11th & 12th and SW Taylor and Yamhill that the
Parking Lot at Rear of Medical Dental Building pays 5x less taxes/sf than the building.
Medical Dental Building at 833 SW 11th Avenue (built 1928) sits on provides a good illustration. It is a block with a 10 story commercial building, a 2 story parking garage and a surface parking lot.
When you look closely at the property tax bill for each, it becomes clear that the conventional property tax deters development and risk-taking.
- The surface parking lot spans 20,000 sf, and its owner pays $1.33 per-square-foot of land in annual property taxes to the city.
- The 1928 parking garage on the same block spans roughly half the area (10,000 sf), and despite the lot’s structural improvements, pays only a bit more than the surface lot in property tax —$1.37 per-square-foot of land.
- The Medical Dental Building (which occupies 10,000 sf of the block), however, pays $6.13 per-square-foot of land—a rate almost 5 times higher than the surface parking lot.
12 West pays 42-45x more than the parking lot diagonal from it.
An illustration that takes into account newer construction is the corner of SW 12th & Washington where 1227 SW Washington, aka 12 West (2009), is assessed $59.90 per sf of land compared to the surface parking lot diagonally across from it that is assessed only $1.42 per sf of land occupied[i]. 12 West has a tax liability that is 42x that of the surface lot.
Parking Lot Diagonal to 12West pays 42-45x less than 12West
This is completely backwards. From the city’s perspective, the Medical Dental building and 12 West are the best and most preferable uses of land in their respective locations, while the surface lot is the least. And yet, looking at the tax figures one would think exactly the opposite. By simply taxing land at a higher rate than improvements, owners would be motivated to maximize the productivity of land. Parking lots would still exist of course, but they would be condensed into above- or underground garages rather than surface parking lots. In this way, by removing the penalty for development, two-rate taxation is actually a form of economic stimulus.
But two-rate taxation is about more than encouraging dense urban development and reducing sprawl. As Rick and Walt Rybeck note in Break the Boom and Bust Cycle http://bit.ly/R1CPVm, two-rate taxation also addresses the root cause of the boom-and-bust cycle of the real estate market:
Higher land taxes discourage land speculation by making it less profitable. Prior to the Great Depression, there was a nationwide real estate boom and bust. Not surprisingly, land values in major U.S. cities declined drastically. Between 1930 and 1940, land values declined in New York, 21 percent; Milwaukee, 25 percent; Cincinnati, 26 percent; New Orleans, 27 percent; Cleveland, 46 percent; Los Angeles, 50 percent, and Detroit, 58 percent. But Pittsburgh adopted a two-rate property tax in 1914. As evidence that this reform reduces speculation, Pittsburgh’s decline in total land values was only 11 percent between 1930 and 1940.
After increasing the tax differential between land and building taxes in the late 1970s (land was taxed at a rate 5.77 times higher than buildings), Pittsburgh also saw significantly increased development activity at a time when most cities its size were experiencing declines.
There are obstacles to implementation. Current law requires state enabling legislation for the two-tier land tax that I am suggesting, but there are indications that Gov. Kitzhaber would favor that.
Appendix – from Portland Maps
833 SW 11th Ave. – Medical Building
$61,291.51 taxes on 78,148 square feet on 10,000 sf of land or $6.13 sf of land
| Market Value | $4,976,640.00 |
| Assessed Value | $2,542,330.00 |
837 SW 11th Ave. – structured parking lot
$13,751.20 taxes on 20,000 sf on 10,000 sf of land or $1.38 sf of land
| Market Value | $1,251,810.00 |
| Assessed Value | $570,390.00 |
804 SW 12th Ave – City Center Parking on SW 12th between SW Yamhill & Taylor
$26,664.86 taxes on 20,000 sf or $1.33 sf of land
[i] I was not able to easily find the taxes paid on the 3 parcels that make up this corner where a City Center Parking lot operates because Portland Maps just said “No address is avaialble.” So I used the tax figure for the grassy lot next to it at SW 11th & Washington which is $1.42 per sf. This figure is higher than that for the City Center Parking lot at SW 12th & Yamhill which is $1.33 per sf. If $1.33 per sf is used, then 12West is assessed 45 times more per sf than the parking lot.
I have been a friend of Rick Rybeck (cited above) and admired his work for a long time. But, I want to acknowledge that I borrowed the approach of looking at individual parcels and some of the language above from the Streets MN blog Tax Land, Not Buildings by Chris Keimig. Thanks, Chris!
I understand the impetus for this idea, and to some degree, it makes sense. However, it is necessary to provide some kind of economic analysis to your article if we are to evaluate it for practical application. For example, how will tax revenue change as a result of such a policy? Will there be negative effects not immediately apparent?
David,
Rick Rybeck’s comment above may clarify the tax revenue impact. I agree about the need for further economic analysis–perhaps done in that feasibility study that Rick would like to bid on. I’ll see what I can do about getting the city to take an interest the City in that.
A very thoughtful and well-written article. (And thank you for incorporating a reference to an article written by my father and me on this topic.)
The proposal, as I understand it, is to shift the property tax off of privately-created building values and onto publicly-created land values. The purpose is to provide economic incentives that are more harmonious with public policy objectives for compact and affordable development. This shift could be “revenue-neutral,” meaning that the total property tax revenue would stay the same. However, the title for this article is “A Land Tax for Downtown.” This sounds as if a new tax is being proposed — and that is often the “kiss of death” in the world of politics.
First, Portland is already taxing both land and buildings. So you are not proposing a new tax. The proposal is to tax less of one and more of the other. Because it’s easier to sell a tax reduction than a new tax or a tax increase, I would change your headline to “A Universal Abatement For Portland” and emphasize the reduction in the tax rate on privately-created building values.
Second, it’s rather common for developers to demand a tax abatement for a major new project. And, these developers are correct that the property tax (on buildings) can be detrimental to such projects. But why should only a select few get an abatement? And why should everyone else subsidize the well-connected developers of big projects? This proposal will give every property owner, both large and small, a tax break on the value of their improvements. This will encourage new construction, property improvement and building maintenance. These activities will enhance the community. They also create jobs that cannot be outsourced.
In addition to the article you referenced, there’s another article, “Using Value Capture to Finance Infrastructure and Encourage Compact Development” that your readers might find useful. It can be found at https://www.mwcog.org/uploads/committee-documents/k15fVl1f20080424150651.pdf
So call this proposal the “universal abatement” proposal and I think you’ll get more interest and buy-in. If citizens or officials are willing to pay for a feasibility study, I would be happy to submit a proposal.
I’m so glad to get your thoughtful comments and references, Rick! Maybe you know, you are my mentor on this topic and I will make the changes that you suggest–though Universal Abatement does sound kind of nerdy. This was a testimony before the advisory committee on the West Quadrant Plan. At least one of the people on that committee was an owner of downtown parking lots. And there was a developer who had suggested a parking lot tax at an earlier meeting on the WQP that I didn’t attend. His proposal was not so compelling as mine and I understand that it was not well-received. Frankly, that planning process is not necessarily the correct venue for this discussion. But, I will look for that opportunity–maybe in the upcoming City Budget process.
If you think that “Universal Tax Abatement” sounds too nerdy, you could try a different slogan like “Untax Erections.” That would get people’s attention.
Rick,
That only works for tall buildings. What about Apple that tore down a two story building downtown to put up a single story building? But your second title would certainly bring me more readers. Hmmm!
Perhaps there was a misunderstanding. “Untaxing erections” applies to buildings of all sizes and to existing buildings as well as to new construction. “Erection” is simply another word for “building.”
For example, think about a single-family homeowner who wants to install a solar system or add insulation. They have to pay money today for these improvements. They will recoup that money, over time, through reduced utility bills until they reach a “pay-off” point in the future. But, under the status quo, the homeowner has to recoup more than just the cost of labor and materials. These improvements make their home more valuable. So now they must recoup the additional property tax that they will pay each and every year that the solar system and the insulation add value to their home. An annual 1% or 2% property tax on buildings can have the economic impact of a one-time sales tax of between 10% and 20% on construction labor and materials. That’s a huge cost barrier that may make many such improvements (even to modest buildings) uneconomical.
Thus, the “universal tax abatement” or “untaxing erections” works for all buildings, regardless of size. The size of a building will be determined by the intersection between the demand for development in a given location and whatever the zoning regulations allow.
I’m not sure that I understand your point about the Apple Store. I don’t know the specifics, but my hunch is that if we shifted taxes off of buildings and onto land, and assuming that the site of the Apple Store is downtown, the higher land tax would make it more costly to build only a single-story building and the lower building tax would make it cheaper to build up. So if the “universal abatement” were in place, it is more likely that Apple would have built a bigger building and perhaps leased out a portion of it if it didn’t need all that space for itself.
I like the phrase “universal abatement” as well. The point he tries to make is that an abatement is being offered to every structure in a city or a district in the city, without favor or targeted subsidy. Essentially, it sounds more democratic.
Rick Rybeck certainly knows the subject, and would be a great member of any team exploring this idea.
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