Guidebook to Funding Transportation Through Land Value Return and Recycling (2018)

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C-1 This Appendix provides a quick resource for those with specific questions related to land value return concepts and implementation. Click on the question below to be brought to the answer later in this appendix. General Land Value Return and Recycling Questions 1. How is the value of public goods and services reflected in land prices? 2. What are the benefits of land value return methods? 3. When does infrastructure worsen sprawl? 4. Why would people support land value return taxes and fees? 5. How can land assessments be accurate? 6. What is the role of zoning? 7. Can land value return be considered for all projects in every state? 8. Is land value return really a new source of revenue? 9. Are land value return fees passed on to the general public? 10. Can land value return generate significant revenue? 11. Which land value return and recycling methods are appropriate for different types of projects? 12. Which land value return methods are (or could be) used in my state? 13. When are land value return and land value return–like payments received? 14. Do land value return methods invoke the takings clause of the U.S. Constitution? What is the difference between takings and givings? What is the rational nexus test? 15. How are the geographic boundaries of benefits areas established? 16. When and how are land value return funding methods proposed? Land Value Tax and Split Rate Tax Questions 17. Would jurisdictions lose revenue by reducing the tax rate on improvements? 18. Are property taxes too insignificant to encourage development? 19. Won’t neighborhoods with large yards be penalized under a land value tax? 20. Can property owners appeal the division of assessed value between land and buildings? 21. If a community encouraged housing subdivisions to increase units, would a split rate tax prevent a jurisdiction from generating added revenue? 22. Would jurisdictions lose revenue from new construction under a land value tax? 23. How can we know the impact of a land value tax on different taxpayers? 24. Would a land value tax fail to compensate a jurisdiction for costs imposed by development? 25. Is a land value tax progressive? Will reducing taxes on improvements benefit those who own expensive houses and office buildings? 26. Will a land value tax promote affordable housing? A P P E N D I X C Common Questions and Answers

C-2 Guidebook to Funding Transportation Through Land Value Return and Recycling General Land Value Return Questions 1. How is the value of public goods and services reflected in land prices? Most of us have heard the saying, “The three most important factors in real estate invest- ment are location, location, location.” Access to infrastructure is a key component of the value of location. A per-gallon user fee is typically imposed on users of water and sewer services. What about the owner of a vacant parcel? The owner is not drinking any water or flushing any toilets at that site. Should the vacant parcel owner make any payment to the water and sewer authority? Imagine two vacant parcels that are identical in every respect except one. Parcel 1 has water and sewer pipes at the property boundary. Parcel 2 does not have any water or sewer pipes within one-half mile of the property boundary. Which parcel is more valuable? Parcel 1 is more valuable because the water and sewer authority built and maintains water and sewer pipes at the property line. The value of access to public goods and services is reflected in land prices. Likewise, some landowners might never travel on roads or transit that serve their parcels, but the parcels’ value reflects the value of access to the transportation network. 2. What are the benefits of land value return methods? The primary benefits of land value return methods include the following: • Taps overlooked source of revenue. User fees are common, as are general taxes to help pay for public goods and services that the payer of the tax may (or may not) consume. Rarely is a significant fee charged for the ability to access public goods and services. For every $100 in publicly created land value, owners typically pay taxes of about $1 or $2 per year. The net present value of this payment is about $10 to $30, depending upon interest rates and infla- tion. Thus, the public sector typically gives away between 70 percent and 90 percent of the value that it creates in land. At a time when funding for infrastructure is scarce, value return provides a justifiable source. • Encourages efficient and sustainable use of transportation system. Consumers generally seek to maximize benefits and minimize costs. When consumers of public goods and services make payments related to the benefits they receive or the costs that they impose, they adjust their behavior to conserve public resources and make more efficient use of them. For exam- ple, a per-gallon fee for drinking water encourages people to conserve water and to fix leaky faucets. If drinking water were paid for by sales tax revenues rather than by a per-gallon fee, there would be little or no economic incentive for people to avoid waste or to fix leaky pipes. Likewise, transportation fees that are related to distance traveled and to levels of congestion encourage people to make transportation decisions (when, where, and how to travel) and land use decisions (where to live, work, shop, and play) that minimize congestion and maxi- mize access to high-demand areas. Properly designed and implemented user fees and access fees (land value return) can reduce per-capita energy consumption and pollution, thereby enhancing a community’s sustainability. • Enhances land use efficiency. The underutilization of user fees and access fees promotes land speculation. Land speculation inflates land prices, which push businesses and residents to outlying locations (urban sprawl). When properly designed and implemented, user fees and access fees reduce the speculative demand for land and thus make land more affordable. User fees and access fees also encourage businesses and residents to locate closer to infrastructure facilities and to the activities that they engage in on a regular basis. Compact development reduces infrastructure requirements, thereby reducing the per-capita burden of taxes. Com- pact development makes walking, biking, and shared transportation more convenient and efficient. It also enhances employment opportunities while minimizing the environmental and energy consumption impacts of growth.

Common Questions and Answers C-3 • Supports equitable payments. User fees and access fees can be structured so that those who benefit from public goods and services—or those who impose costs on the provision or enjoy- ment of public goods and services—will make payments in proportion to the benefits that they receive or to the costs that they impose. 3. When does infrastructure worsen sprawl? A new transportation facility (a wider road or perhaps a new or improved transit service) provides a better connection from a suburban town to its nearby city. This new transportation facility makes it easier to access the jobs in the central city and creates an opportunity for more development in the nearby suburban town. New development begins and landowners quickly realize that their land is much more valu- able than it used to be. Some of them decide that it might be foolish to sell their land at its cur- rent market price when this land could be even more valuable in the future. So these landowners refuse to sell or try to sell land at prices they think will be realized in the future. Developers will only buy land at prices that can be supported by their potential tenants or buyers. So as land prices rise in excess of what actual users will pay, developers seek cheaper sites (Figure C-1). Although some development continues within the initial development opportunity area, a considerable amount of new growth is diverted to cheaper, more remote sites. As these remote sites develop, the existing infrastructure at these locations becomes inadequate. Residents and businesses at the remote sites petition politicians for an extension of the transportation facility or service to their area—even though excess capacity exists at the initial infrastructure location. Politicians would love to make everyone happy, but budget constraints prevent that. As a result, only some of the remote communities will receive infrastructure extensions. So, although there remains plenty of capacity for growth in the town where infrastructure was initially provided, infrastructure is extended, at great expense, to one of the more remote communities. When this happens, land prices there rise and the cycle begins again. Thus, infra- structure intended to facilitate development ends up chasing it away. Infrastructure is extended to more remote sites, but never catches up. The resulting sprawl impairs the environment due to excessive traffic and impervious surfaces. Agricultural, recreational, and conservation lands are lost or impaired as well. Sprawl is also very expensive. All the growth could easily have fit within the nearby sub- urban town. Instead, the same number of people will now need much more infrastructure. Thus, the per-capita tax burden required to support sprawl exceeds what would be needed for more compact growth. There are many causes of sprawl, but infrastructure-induced increases to land prices and subsequent land speculation are significant causes that are often overlooked. 4. Why would people support land value return taxes and fees? Taxes are payments made in exchange for general benefits. In other words, there is little or no relationship between what a taxpayer spends in taxes and the value of the public goods and Figure C-1. When does infrastructure worsen sprawl? Transportation facility equals growth opportunity Rising land costs impede growth Growth diverted to cheaper sites Cycle begins again

C-4 Guidebook to Funding Transportation Through Land Value Return and Recycling services that the taxpayer receives in return. Thus, taxes are unpopular, in part, because people do not know how their tax revenues are benefiting them. Land value return mechanisms are more like user fees, in that there is a closer relationship between what the taxpayer is paying and the public goods and services that he or she receives. People are more apt to support making payments when they understand what they are receiving in return. Further, returning and recycling publicly created land value can make it possible to reduce general taxes such as those on labor, sales, and property. The traditional property tax penalizes those who create and maintain housing and businesses while rewarding those who board up buildings or leave land vacant. The frequency with which developers seek property tax abate- ments or exemptions is a testimonial to the burden imposed by the traditional property tax on development. Pairing land value return and recycling with a reduction in taxes on buildings could be referred to as a “universal abatement” tax proposal. Historically, public goods and services that enhance land value have generated windfalls for private landowners. Certainly, many landowners will not willingly return publicly created land value that they customarily kept for themselves. In other words, public officials should not announce a new infrastructure project and expect landowners to volunteer to pay for it. Thus, implementing land value return and recycling may require a new outlook and approach on the part of public officials. Prior to committing to such infrastructure projects, public offi- cials should be clear that, absent an arrangement for land value return, the project will not be undertaken. Landowners will then be compelled to commit to land value return in exchange for receiving the value that the infrastructure will provide. 5. How can land assessments be accurate? Many jurisdictions use a computer-assisted mass appraisal (CAMA) system for determining assessments. CAMA systems typically include a multiple regression module that can be used for the purpose of establishing separate assessments for land and for buildings. Some cities are characterized by large numbers of buildings of similar type built at the same time. Yet identical structures in identical condition sell for different prices in different neighbor- hoods. Regression analysis and the cost-of-replacement approach to assessing building values are standard techniques that accurately determine, on the basis of total sales values, the amount of value attributable to the building and the amount attributable to the land. Assessors can utilize private real estate experts to double-check their findings. Periodically, the private experts can be asked to provide estimates of land value per square foot in certain areas. The same property, auctioned a few weeks apart, might fetch a slightly different price at each auction. So market value is not a single, exact price. It is a range of prices within which most of these sales will occur. Likewise, assessments should fall within a range. Most importantly, if the property owner adds new rooms to a building, the value of those new rooms should show up as an “improve- ment value” on the assessment. If improvement to transportation or schools makes a particular location more valuable, that additional value should show up as “land value” on the assessment. 6. What is the role of zoning? Zoning is a technique for reducing development that would otherwise occur. Zoning an Iowa corn field for skyscrapers will generally not result in the construction of skyscrapers. On the other hand, if market demand exists for 20-story buildings in downtown Washington, D.C., zoning that land for 12-story buildings will limit development. The unsatisfied demand will be displaced to alternative sites or will inflate the price of space within the 12-story buildings. If landowners choose not to develop their land according to present market demand, the effectiveness of planning and zoning will be reduced. For example, owners of vacant land in

Common Questions and Answers C-5 an area zoned for offices may not be willing to sell their land at the current price. Developers, therefore, may begin to develop less appropriate alternative sites, in contradiction to land use plans. In some cities, some residential areas may be zoned for commercial purposes. Where resi- dential land is zoned for commercial purposes, commercial uses will displace housing under the present tax system, assuming that a demand for commercial space exists there. Therefore, these jurisdictions should correct inappropriate zoning, regardless of the property tax structure. 7. Can land value return be considered for all projects in every state? Land value return and recycling requires that a project have an impact on land value. Not all transportation projects do this. To affect land value, a project must have the following characteristics: • Impacts must be different in different places. • Value to direct users must exceed any user fees; that is, places that have access to a facility or service that provides users with more value than is extracted by user fees will become more valuable to those who use (or might use) that facility or service. Thus, if user fees are reduced, land value will increase. Application of land value return techniques in a particular state depends on that state’s legal environment. Some states impose limitations on new taxes and fees. Land value return and recycling techniques must be able to operate within those limitations, which vary from state to state. Alternatively, legal limitations that inhibit or prohibit the utilization of land value return methods can be changed. There appears to be considerable public engagement in the debate about the value received for tax dollars expended. The public might be receptive to a proposal to charge infrastructure beneficiaries in proportion to the benefits received, such as with land value return and recycling. 8. Is land value return really a new source of revenue? To the extent that new land value return fees are imposed, the answer is yes. Under some of the methods discussed in this Guidebook, however, the answer may be no. For example, under tax increment financing (a land value return–like method), which redistributes the revenue from existing taxes and fees so that some of the revenue is dedicated to the new infrastructure, no new revenue is generated. 9. Are land value return fees passed on to the general public? No. Most taxes and fees are imposed on things that are produced (e.g., clothing, furniture, buildings). Any tax or fee on these things is a cost of production. Increasing the cost of produc- tion causes fewer things to be produced, and what is left over ends up costing more. Thus, when furniture is taxed, regardless of who pays the tax bill, consumers of furniture are the ultimate payers. Some land value return–like fees (e.g., exactions, development impact fees) are charges imposed on the size or value of buildings. Thus, these fees (and the costs associated with in-kind provisions of infrastructure) are passed on to the ultimate users of developments subject to these fees or conditions. Applying a tax or fee to land value, however, is different. Land is not produced. So the tax or fee applied to land value is not a cost of production. Instead, it is a cost of ownership. The price of land is based on the expected benefits of ownership. Increasing, the cost of ownership reduces those benefits and reduces the price that prospective purchasers are willing to pay for land. Thus, land value return taxes and the fees applied to land value are not passed along to the users. Instead, they result in lower land prices and rents. Land value return does not penalize owners for creating additional improvement values.

C-6 Guidebook to Funding Transportation Through Land Value Return and Recycling 10. Can land value return generate significant revenue? The answer comes in two parts: 1. How much land value is created by a project in relationship to its cost? This will vary from project to project. Successful transit projects in congested areas can create new land value that exceeds the cost of construction. On the other hand, building a subway in the middle of an isolated cornfield would likely destroy some perfectly good cropland while providing no off- setting benefit and would thereby reduce the land value. In some cases, a single infrastructure project might increase land values in some locations (e.g., near a highway interchange) while reducing land values in other places (e.g., where a new highway reduces access from one side of the highway to the other). 2. Assuming that a project produces a net increase in aggregate land values, how much of that infrastructure-created land value is returned? The answer depends on the value return method that is chosen and the robustness or intensity of its application. As mentioned in the Guidebook, different types of projects have different governmental funding sources. Funds may come from local government, state government, the federal government or some combination thereof. Value return methods might be implemented by one level of govern- ment but not by others. Therefore, intergovernmental agreements of various sorts may be negoti- ated to ensure that each level of government gets a fair return on its infrastructure investments. The actual revenue generation in any given context is an aspect that can be conducted by trained analysts in conjunction with experienced assessors. It can be done in house or by consultants. 11. Which land value return and recycling methods are appropriate for different types of projects? As mentioned above, land value return techniques are only applicable if an infrastructure project creates greater advantages or disadvantages in some places than in others. In such cases, these differences will be translated into increases or reductions in land value. Assuming that an infrastructure project affects land values, determining an appropriate land value return method is largely related to the geographic extensiveness of the affected area. If the affected area encompasses an entire jurisdiction, a jurisdiction-wide mechanism such as a land value tax or split rate tax might be most appropriate for returning the publicly created value. If the affected area is smaller, a special assessment district might be more appropriate. If the impact area is publicly owned land, a land lease or joint development agreement could be appropriate. A distinction should be made between areas where excess infrastructure capacity exists (and needs to be utilized for the sake of efficiency) and areas where infrastructure capacity is fully utilized (and new development would require costly capital expenditures in addition to normal operating expenses). If excess capacity exists, land value return methods will induce develop- ment where land values are high, near existing urban infrastructure amenities such as transit, schools, and parks. If infrastructure capacity is fully utilized, then land value return–like meth- ods (e.g., exactions or development impact fees) will compensate the jurisdiction for the capital costs of infrastructure expansion or redirect development to areas where excess capacity exists. Some methods will be more successful in areas with strong real estate markets. As a result, more methods are available for urban and suburban locations with strong real estate markets than for rural areas. As illustrated by select examples in the Guidebook, methods can be suc- cessful in rural areas, but the method implemented should be carefully considered in the real estate context and revenue generation expectations aligned accordingly. Checklists are useful to employ to understand which tools can be used in what contexts. Checklists can make the transi- tion to implementation smoother.

Common Questions and Answers C-7 12. Which land value return methods are (or could be) used in my state? Every state in the United States employs a property tax. To the extent that a traditional prop- erty tax includes a tax on land value, every state is currently employing this land value return method. Typically, however, a property tax only returns 10 percent to 20 percent of publicly created land value. The question, therefore, is not whether land value return should be used, but how robust the use should be. Similarly, many states (but not all) permit special taxing districts and tax increment financ- ing districts. An inquiry to your state’s attorney general could illuminate which land value return (and land value return–like) funding methods are currently authorized and which would require new legislation. A sample inquiry letter is provided in Appendix D, “Legisla- tive Aids.” 13. When are land value return and land value return–like payments received? Payment timing is determined by the particular method being used and is subject to modi- fication in the legislation or regulation used to implement it. Generally speaking, land sales, betterment levies, and impact fees are one-time events that generate a single payment (or the provision of infrastructure or the dedication of land in the case of exactions). Impact fees are paid (and exactions agreed to) prior to and as a condition of obtaining development permits. Some methods, such as special assessments and tax increment financing, are collected over a period of time—typically the time required to retire a bond or similar debt instrument used to pay for infrastructure construction. Some methods, like land leases, split rate property taxes, or transportation utility fees, are paid regularly for as long as the underlying lease, tax, or fee is in force. 14. Do land value return methods invoke the takings clause of the Constitution? What is the difference between takings and givings? What is the rational nexus test? The Fifth Amendment to the U.S. Constitution forbids the government from taking private property, except under two conditions: 1. The taking must be for a public purpose and 2. The property owner must receive “just compensation.” In jurisdictions where infrastructure capacity is fully utilized, it was recognized that if new development was allowed, the ordinary taxes paid by the owners–occupants of the new devel- opment would cover ordinary operating expenses, but not the extraordinary capital costs asso- ciated with infrastructure expansion. Thus, to prevent existing residents and businesses from subsidizing new development, some jurisdictions implemented exactions (requiring in-kind infrastructure contributions as a condition for development approval) or development impact fees (to compensate the jurisdiction for extraordinary infrastructure expansion costs). Property owners challenged exactions and development impact fees, claiming that they represented an unconstitutional taking of private property. The Supreme Court has considered many of these cases. The seminal cases in this regard for exactions include Nollan v. California Coastal Com- mission, 483 U.S. 825 (1987), and Dolan v. City of Tigard, 512 U.S. 374 (1994). The seminal cases in this regard for impact fees include Koontz v. St. Johns River Water Management District, 570 U.S. 133 S. Ct. 2586 (2013), and Contractors and Builders Association of Pinellas County et al. v. City of Dunedin, 329 So. 2d 314 (1976). Exactions and development impact fees are not takings if the following conditions are met: • The jurisdiction can show that a new development will require infrastructure expansion; • The infrastructure expansion being paid for (development impact fee) or required (exac- tion) is required by the new development according to the size and character of the new

C-8 Guidebook to Funding Transportation Through Land Value Return and Recycling development (e.g., a senior living complex could not be required to pay for the expansion of a nearby elementary school); and • The payment (or infrastructure contribution) is proportional to the requirement created by the new development (i.e., the new development is not paying for infrastructure that will be used by others; thus, if a proposed development requires a new school, but the development would utilize only 50 percent of the capacity of the new school, the proposed development can only be required to contribute 50 percent of the cost of the new school). More recently, this same test has been applied to the legality of transportation utility fees. Trans- portation utility fees may be used for either operating or capital infrastructure expenses but, historically, have only been used for operating. These conditions that connect development impact fees and exactions to the nature of pro- posed development are referred to as the “rational nexus test.” Meeting the rational nexus test is necessary for fees or exactions to be considered constitutional (American Planning Association Policy Guide on Impact Fees, 1997). As defined in this Guidebook, impact fees and exactions are land value return–like methods, not land value return methods. The reason for this distinction is that development impact fees and exactions are imposed on the value, size, or character of a proposed new development, which is privately created value. As discussed in the Guidebook, givings are the opposite of takings. A giving occurs when publicly provided goods or services enhance the value of privately owned land. Examples of giv- ings would include public improvements to transportation and schools. Increasing development permission (e.g., changes in zoning to allow six-story buildings in lieu of five-story buildings) could also enhance the value of privately owned land subject to this zoning change. The U.S. Constitution is silent about givings. Land value return methods do not entail takings because they return to the public sector land value that was publicly created in the first place. To avoid the appearance of a taking, however, land value return methods should be established before infrastructure is created, expanded, or improved. 15. How are the geographic boundaries of benefit areas established? Geographic boundaries of benefit areas are created for special assessments, betterment levies, tax increment financing, and transportation utility fees. These boundaries will be particular to the transportation investment being funded and to the land value return (or land value return– like) method being used. Transportation and real estate assessment or appraisal professionals can lend expertise regarding the location of district boundaries. Planning and zoning officials should be involved to the extent that the district boundaries may affect the location and density of development. Finally, any such district will be created as a legal document, so legal profes- sionals will be involved in the drafting of legislation or regulations to define and implement these districts. 16. When and how are land value return funding methods proposed? The use of land value return and recycling (or even land value return–like) methods should be developed as part of project planning and budgeting processes. Project and program planners will help determine what projects, programs, and policies are needed and desired. If a project or program is prioritized for inclusion in a state or metropolitan planning organization’s fiscally constrained Statewide Transportation Improvement Program or Transportation Improvement Program, funding must be identified to pay for implementation. If the project will increase land values, land value return and recycling may be an appropriate source of funding. Steps must be taken to show that land value return methods will be available for use when the proposed project is planned to be implemented.

Common Questions and Answers C-9 Land Value Tax and Split Rate Tax Questions 17. Would jurisdictions lose revenue by reducing the tax rate on improvements? Revenues are a function of the tax rates chosen by a jurisdiction’s legislative body. Reducing the tax rate on buildings will result in lower revenue only if there is no compensating increase in the tax rate applied to land values. 18. Are property taxes too insignificant to encourage development? Property taxes on improvements are paid not only in the year an improvement is made, but every year thereafter that the improvement adds to the value of the property. Thus, over time, the property tax on an improvement does add significantly to its cost. Typically, property taxes range from 1 percent to 2 percent of property value. A net present value calculation shows that these property taxes could have the economic impact of a one-time sales tax of between 10 per- cent and 20 percent on construction labor and materials. Tax increases on vacant land under a conversion from a traditional property tax to a land value tax could be substantial in percentage terms. Although many factors are important in development decisions, substantial property tax changes could be significant enough to prompt a change in plans for some absentee owners of vacant properties. The significance and impact of a land value tax approach will depend on the actual rates chosen to implement it. If the difference in tax rates applied to land and buildings is small, the impact will be small. To the extent that the difference is larger, the impact will be larger. 19. Won’t neighborhoods with large yards be penalized under a land value tax? It is not the absolute size of a parcel that determines its tax burden, but the amount of land value and the ratio of improvement value to land value. In many neighborhoods, even those with large yards, the improvement-to-land-value ratio may be higher than the citywide aver- age. In such cases, these neighborhoods will experience tax reductions. On the other hand, if a neighborhood has very high land values and large yards, it is possible that those with large yards would pay higher taxes under a land value tax. The only way to know for sure is to take the current assessment roll and then compare the results from applying the existing tax rate with hypothetical tax rates under a land value tax system. 20. Can property owners appeal the division of assessed value between land and buildings? The ability of property owners to appeal the division of assessed value between land and build- ings may vary from jurisdiction to jurisdiction. As long as the same tax rate is applied to both improvement and land values, contesting the building and land components of an assessment without contesting the total value will result in no change to tax liability. If a jurisdiction imple- ments a land value tax system, then the proportion of the total assessment identified as land value and the proportion identified as building value has an impact on tax liability, even if the total assessment is not contested. To meet due process requirements, jurisdictions that authorize a land value tax or split rate tax system should allow for the appeal of land and building assess- ments, even if the total assessment value is not contested. 21. If a community encouraged housing subdivisions to increase units, would a split rate tax prevent a jurisdiction from generating added revenue? No. The decision to allow the subdivision of structures into smaller units is a zoning decision. A decision to allow more units within a given zoning category increases the potential income from the land, increasing its value and providing a return to the jurisdiction through the tax on land values. Thus, whenever a jurisdiction acts to permit more intense development for an area than was previously allowed, it will receive more tax revenues as long as the tax rates remain constant.

C-10 Guidebook to Funding Transportation Through Land Value Return and Recycling Likewise, any down-zoning would reduce land values. As a result of reducing owners’ poten- tial for generating income from their sites, a jurisdiction would collect less tax. The fairness of a land value tax lies in its ability to return publicly created land values to the public sector and to compensate landowners through lower taxes when public decisions reduce land values. 22. Would jurisdictions lose revenue from new construction under a land value tax? A land value tax system does not necessarily eliminate new construction as a source of tax revenues. Typically, jurisdictions that employ a land value tax system retain a property tax rate on buildings, although a smaller one than under the traditional tax. Thus, new construction would continue to provide new revenue. Second, if new construction is widespread, this is typi- cally an indication of higher land values. Rising land values do not dictate either a rise or fall in tax revenues, absent a determination of tax rates. More importantly, boarded-up buildings and vacant parcels are now a financial drain on most jurisdictions. They often generate expenses related to crime and arson and they produce little in the way of property tax revenue. They produce no sales, income, or business taxes. By creating an artificial scarcity of housing, they drive up rents and thus drive out residents and businesses and increase the costs of rent subsidy programs. Higher taxes on vacant land will promote its development, reduce municipal expenditures, and generate income, sales, and business taxes where previously there were none. Thus, lower tax rates on buildings combined with somewhat higher tax rates on land should provide a positive fiscal impact on most jurisdictional budgets. 23. How can we know the impact of a land value tax on different taxpayers? For any jurisdiction, there will be a jurisdiction-wide ratio of improvement values to land values. If a property has the same improvement-to-land-value ratio as the entire jurisdiction, then the shift in taxes from building values to land values will not change the amount of tax due, assuming that the total tax revenue is the same under both systems. If an individual property has a lower improvement-to-land-value ratio, then the shift in taxes from building values to land values will result in a tax increase. An extreme example would be a vacant parcel that has no building value. The taxes on this property would rise when rates were lowered on building values and increased on land values. If an individual property has a higher improvement-to-land-value ratio, then the shift in taxes from building values to land values will result in a tax decrease. Examples would include well- maintained buildings that maximize the amount of development allowed by zoning. In most cities where studies have been done, most residential properties tend to exceed the jurisdictional improvement-to-land-value ratio. An expert consultant can work with your assessor and assist your jurisdiction in doing a comprehensive assessment of the tax impacts by neighborhood and by type of property. These consultants should be aware of techniques, such as a homestead deduction, that can make the results of this transition more politically palatable. A gradual phase-in of this tax shift can also help avoid creating windfalls and wipeouts. 24. Would a land value tax fail to compensate a jurisdiction for costs imposed by development? It is important to acknowledge that many costs of public infrastructure are related to distance and not to the existence of development. Streets, sewers, water mains, bus and subway lines, and utility lines must run past every property in their path, regardless of whether each property is developed or not. Potholes in the street cannot go unrepaired simply because the parcel that fronts on that portion of the street is vacant.

Common Questions and Answers C-11 Yet, under the traditional property tax, owners of boarded-up buildings and vacant parcels pay less for the maintenance of the infrastructure that imparts as much value to their land as it does to neighboring property that is developed. If development occurs on a vacant parcel, user charges related to the use of the property will kick in. A charge will be levied for the amount of water consumed and sewage discharged. Fares will be paid for riding transit. If the development is residential, new income taxes will be paid. If development is commercial, franchise taxes, sales taxes, employment taxes, and other fees will be paid. To the extent that a jurisdiction may wish to impose special user charges or impact fees on new development, such as a housing linkage fee, this can be accomplished regardless of the property tax structure. A higher tax on office parking, for example, could compensate for increased rush hour traffic management and street repair expenses. 25. Is a land value tax progressive? Will reducing taxes on improvements benefit those who own expensive houses and office buildings? Typically, the value of land under expensive structures tends to be proportionately much higher than the value of land under less expensive buildings. Thus, the primary beneficiaries of a universal abatement property tax (a reduced tax on building values) will be owners of property in neighborhoods where land values are low. The existing property tax does not bear any direct relationship to owner income. Likewise, shifting the property tax burden off buildings and onto land does not bear any direct relation- ship to an owner’s income. A tax on land values is similar to a user tax. It taxes the owner in proportion to the value received from the availability of public goods and services and from the collective effects of surrounding private activities. Studies show that the value of land is more closely related to an owner’s ability to pay than the value of improvements. Thus, shifting the property tax off improvements and onto land tends to be progressive. Under the traditional property tax, those who improve their property pay higher taxes. Some may say that this is progressive because those who improve their property can afford to do so. Those who cannot afford to improve their property leave it unimproved and thus avoid the tax. This scenario fails to mention that, under the present system, wealthy individuals and real estate partnerships owning boarded-up property may actually pay less property tax than an occupied property next door owned by low-income persons. Finally, there are legislative techniques for enhancing the progressivity of the property tax. These techniques could include the following: • Homestead deduction. Provides a greater benefit to owners of less valuable property than to owners of valuable property. • Circuit breaker provision. Limits property tax payments to a percentage of household income. • Senior citizen provision. Reduces property tax payments for qualifying seniors. These provisions could be added to a land value or split rate tax if they do not already exist. 26. Will a land value tax promote affordable housing? Studies have shown that residential properties in low- and middle-income neighborhoods pay lower taxes under a land value tax system. This should help maintain affordable housing in these neighborhoods. Lower real estate taxes increase the disposable income of residents. To the extent that the cash flow of rental properties can be improved without any increase in rents, this should reduce pressure to raise rents or to convert apartments to condominiums.

C-12 Guidebook to Funding Transportation Through Land Value Return and Recycling Where vacant land or boarded-up buildings exist in areas zoned for residential use, a land value tax system will create an incentive to develop residential buildings. The type of residen- tial development that occurs will depend on market demand, zoning, and the availability of financing. Property tax reform will not make it profitable to develop low-income housing in affluent neighborhoods. However, many neighborhoods characterized by boarded-up housing are not subject to gentrification pressure. In these neighborhoods, property tax reform could help expand the supply of affordable housing. Further, demand for luxury housing is finite. Even if tax reform prompts the development of new luxury housing in more affluent neighborhoods, this new housing will help soak up exist- ing luxury housing demand that, in the absence of this new housing, might have displaced less affluent households from presently occupied units. Finally, by reducing rental housing construction and operating costs and by reducing the mar- ket price for housing across all housing types, a land value tax should reduce the gap between the market price of housing and what low-income households can afford. Thus, this reform makes local and federal housing subsidy program dollars go further than they do today. Regardless of what actual rates are implemented, the following should be true of the land value tax: • Cost of living would be somewhat more affordable, particularly in middle- and low-income neighborhoods. • Property owners would find it less expensive to maintain and improve their property. • Higher taxes on owners of vacant land and boarded-up buildings would provide an incentive to bring these properties back into use. In contrast, the current system makes housing less affordable, makes it more expensive to main- tain property, and discourages owners of vacant properties from bringing them back into use.