(Under)taxing Us Out of House and Home?

The WSJ has a short, sweet video piece summarizing the purported role of property tax assessments in discouraging urban development, even where demand is strong. Essentially, the argument goes, the focus of valuation on improvements, rather than potential land values, encourages owners to hold vacant lots or underused properties, rather than developing prime land to its potential. In theory, the aggregation of such decisions across a land market hardens into another form of resistance to the new development that cities need to address the chronic shortage of metropolitan housing units.

This rings true. Several years ago, I worked on some property valuation appeals in New Jersey. To make the case that a client’s property was overvalued by the town assessor, and should have a lower tax bill, one had to show that comparable properties had recently sold for less. Defining comparability was more art than science, but, generally, one sought examples of sales in the same town, with similar floor space, on a similar lot, and with the same use. Other factors, like condition or construction materials, or unique qualities, could be raised — but unless they were remarkable these tended to play a lesser role.

At the time, I was struck by the outsized role of improvements (i.e., actual houses or other structures) in the supposed assessment values, as opposed to land. Proximity to Manhattan, and good public schools, have been the key drivers of suburban New Jersey property values since at least the 1950s, and both are land-dependent factors. Others, like the culture or desirability or overall aesthetics of a community, are also embedded in a property’s location (i.e., the land), rather than the individual structure. This is why even a cheaply-built eyesore in a smart commuter suburb is quite valuable, while an architectural gem in a distant country town with no train and bad schools is not.

Within a suburban municipality, where zoning limits potential development by design, the sloppy allocation of value between land and improvements may not have a great impact on what gets built or how it is taxed. But in a growing, vital city — and especially in a mixed-use business distrct — the omission of potential land value from the taxing formula seems like something that could very much discourage some much-needed multifamily development, while making it easy for people to operate parking lots on prime real estate.

It will be interesting to see what happens in Pittsburgh and Detroit.