Change Property Tax to Land Tax

Tax policies change people’s behaviors. Hence sin taxes are used to discourage certain economic activity. A property tax is a de facto sin tax. When you decide to add a deck to your home, the municipality will tax that deck until you take it down. You want to convert your attic or basement to usable living space? The municipality will tax that space until you make it unusable. But home improvement is not a sin and should not be taxed as such.

Property taxes are determined Ad Valorem, Latin for “according to the value”. Each municipality sets a tax rate and taxes the property according to its assessment. So, if your neighbors work to make your neighborhood more desirable, your taxes go up. If you work to make your home more desirable, your taxes go up. If you do absolutely nothing but happen to be in proximity to a desirable location, your taxes go up.

Meanwhile, the converse is true as well. As neighborhoods become less desirable, their taxes go down. Why would a neighborhood allow itself to deteriorate? Homes require constant investment to maintain their value but many of these “improvements” are punished by taxes so people are often disinclined to make the necessary upgrades.

Furthermore, developers, who are crucial to a community’s growth, are discouraged from any new construction that will incur higher taxes and thereby diminish the property’s value.

For example, the four (slated to become five) Ciaglia homes on Cambridge Rd have been unoccupied for over a year. Each is priced about $650,000 and have estimated property taxes of $15,000. Similar homes that are about a decade old have property taxes around $11,000. Does the town truly believe a new house is worth 35% more than a decade-old house? Apparently so.

(Property assessments have a legal range of +/- 15% of the market value. If two properties each have a market value of $100,000, the municipality could assess one house at $85,000 and the other at $115,000. The second home’s assessment would be 35% higher despite the fact the two homes are worth the same.)

Obviously, Ciaglia knew the risks prior to developing the property and is not entitled to any assistance. But is it in the town’s best interest to make it prohibitively expensive to own a new home?

Another example is the high number of modest 3-bedroom ranches and capes sitting on lots over 15,000 sq. ft. Were it not for the property reassessment, developers could knock down these houses and build attractive modern housing. Nicer homes create a nicer neighborhood and benefit the entire community.

I would suggest the following: While the county continues to tax according to property values, the town could petition for an exemption, allowing it to set tax rates according to the assessed land value. (Disclaimer: I live in a 4-bedroom house on an 18,500 sq. ft lot in a cul-de-sac.)

Since this would aversely affect many homeowners, I would implement the plan over a twenty-five year period. During this period, the town would assess both the land and the “improvements” (i.e. buildings) but reduce the assessment on the “improvements” in 4% increments until it reached zero. Also, to encourage new development, I would cap the assessed value on all “improvements” for single type residences at $300,000 (assuming 100% ratio of assessment to market value).

For commercial properties or multiple dwellings, I would implement similar programs.

Not only would this significantly increase the level of home improvements and benefit the local economy, it would also be an immediate boon to the property values of all homeowners. Owners with high assessments would see their taxes gradually go down. Owners with low assessments would see their taxes gradually go up but would also see an immediate jump in their property values as they become more attractive to developers. The newfound equity would actually reduce the overall tax rate.

The entire community would benefit from increasing property values, new development, and higher living standards. Let’s move from a property tax to a land tax. >>> Read more!