How Land Value Taxation Works
The property tax is actually two separate and distinct taxes with very different impacts.
One of the taxes is a tax on buildings and improvements. Most economists and most people would agree that a tax on buildings has a corroding effect on our urban areas. For example, it is considered good policy to exempt or abate a new building or big EconDev project. Why not, then, exempt all buildings from some or all of the property tax?
The second tax is a tax on land. At present land is woefully under-taxed which leads to speculation, private land banking and suburban sprawl. Land can be highly taxed and the supply remains fixed. Since government and community effort create land value, it is the right and duty of government to collect that which it creates.
Our Center demonstrates that the program works where tried and has led to increased development and - more importantly - private re-development where it is appropriate. This sheet demonstrates the impact of a land tax on a typical Baltimore, Maryland property: The Reisterstown Square apartments at Eberle and Patterson. It's nothing too fancy, but it's nice affordable housing. They have 490 units with an average rent of about $750 a month.
Right now, the city of Baltimore charges a tax rate of $2.328/$100. That mean this well-maintained property that provides an essential service (affordable housing) pays $326,000 a year in taxes.
If Baltimore enacted a land value tax, a 20% cut in the building portion of the property tax rate would mean a $26,000 annual reduction in taxes. Here how it works:
| Building Value | Land Value | Total Value |
|---|---|---|
| $11,715,000 | $2,284,700 | $13,999,700 |
| Tax Paid @ $2.328 | Tax Paid @ $2.328 | Total Tax |
| $272,725 | $53,188 | $325,913 |
| Tax Paid @ $1.8624 | Tax Paid @ $3.5819 | Total |
| $218,180 | $81,836 | $300,016 |
That lowered tax could go into building maintenance or reduced rents, making the property more attractive without sacrificing profit margins.
