What is it that has led many cities over the years to seek revenue stability through “economically sensitive taxes” - business, income, real estate transfer, sales, utility, and hotel taxes? There have been a multitude of responses and assumptions made over time relative to each jurisdiction’s leadership and public policy. Suggestions of extreme short sightedness and inertia are excuses not actionable explanations.
According to the US State Government Tax Collections Summary Report: 2010,the 2007 Census of Governments reported that 71.4 percent of local tax revenue was property tax. “Property taxes were one of the few categories that increased in 2010, up 10.0 percent to $14.3 billion.”
Clearly, local governments are dependent on property tax revenue. State by State across this nation, city officials have enacted legislation to increase property tax rates. Was that the best solution? Ignoring the political popularity of the issue and focusing on the core issue of tax policy, it may have been.
Unfortunately, the structure of most local government property tax policy is misguided. The most popular mechanics employed is applying the same percentage rate to tax land as well as buildings and improvements. On the surface, it appears to be a 50/50 split yet in reality, those taking the least care of their property or holding the land vacant are reaping the most benefit. Continuing to tax buildings at a higher rate than land will cause many local governments to experience short falls due to the adverse effects of declining property values, which comes with a considerable lag relative to real estate cycles.
Implementation of LVT (land value tax) –taxing land at a higher rate than buildings – takes the burden of the property tax off most home owners and places it back on the vacant lot owner whose neglect of the land is creating a higher demand on the community’s public services.