Detroit’s Land Value Tax Experiment

The “land value tax” (LVT) is a property tax concept that holds that the value of land ought to be assessed and taxed rather than physical properties themselves. Long advocated by a committed but non-influential group known as “Georgists”, named after the 19th-century political economist Henry George, the policy has been adopted in various places. But it could soon gain its most significant and symbolic U.S. participant, as Detroit mulls adopting LVT.

Detroit’s property taxes (among America’s most expensive) have worsened the city’s decline. Where significant new construction happens, it gets tax abatements. “This limits development to a relatively small number of sophisticated and well-connected firms who can navigate the tax abatement system and opens the door to corruption of City officials with influence over abatements,” write Andrew Justus and Alex Armlovich from the Niskanen Center. 

Detroit Mayor Mike Duggan endorsed a proposal by the Lincoln Institute, a land policy think tank, to implement a “split rate” property taxation system. This would place a higher tax weight on land value, taxing physical structures at just 1/5th the rate of land. Doing so would presumably reduce foreclosures and overall tax bills, while encouraging land improvements. If the split rate plan is adopted, nearly all Detroit residents would get a property tax cut, with median savings estimated at 27%. 

Detroit’s high taxes on physical structures reduce investment and increase burdens on property owners, Georgists argue. 

Explains the Bipartisan Policy Center: “Most forms of taxation, such as income and capital gains taxes, are inefficient because they change the price of the taxed activity and, as a result, alter market behavior (usually by discouraging economic activity).” But because land is fixed, taxing it does not have the same disincentivizing effect as other taxes. Proponents further argue that LVT actively incentivizes improving or selling land, reducing monopolies in land ownership as well as the type of blight caused by leaving properties abandoned (ergo Detroit). 

While LVTs aren’t common, some U.S. jurisdictions have implemented them, notably in Pennsylvania. Pittsburgh, Allentown and Scranton used LVT after the state’s economic downturn caused by mid-20th-century deindustrialization. The results have been largely positive; by 2001, Harrisburg had just 500 vacant buildings compared to over 4,000 in the early 1980s.

But the more common success stories have come overseas. Taiwan has a split rate property value/land value tax scheme (though the minimum property value share is higher) and a “land value increment tax” on land sales, which either is assessed at “a special rate of 10%” or on a 20-40% progressive scale. Singapore and other good governance prototypes employ some variation of the land rent system.  

These benefits explain why LVT has attracted support from libertarians (Milton Friedman called it “the least bad tax”), along with urbanists and progressives. But there are potential downsides and disincentives. As Adam Ozimek notes, adopting a sole LVT (as opposed to the split rate measure that Detroit is pursuing) “would allow property owners a return on capital for the improvements they make, but no excess returns due to increases in the value of the land,” because there’d be no disincentive from fully taxing land since its supply doesn’t change. That could cool investment into a city.

Another LVT side effect is that it could incentivize rapid land sales, as owners would sell land before being taxed. In fact, this could reduce improvements further by reducing long-term ownership, which is often needed by developers who spend years navigating the approval process.  

Furthermore, if land values increase with aggregate improvements to a neighborhood, that will increase living costs. Smaller landowners could have higher tax bills for being in now-desirable neighborhoods. Others might be priced out from entering.

All this just boils down to how high the LVT is set. Even that is a point of contention among Georgists. To the libertarian faction, LVT is a bare-minimum tax—they even call it a “fee”—that should remain low and displace the worser forms of taxation. To the progressive wing, it’s a way to heavily tax land and use that to fund services, under some airy notion of “returning” the land to its rightful owners (the public). 

For Detroit, which has spent decades losing population to the suburbs and Sunbelt cities, the LVT must stay low—the city just doesn’t have much bargaining power. Long-term, moving away from broader taxes and towards user fees would create an even better setting for improvements. But LVT is already a move in that direction, and would be a welcome start in a place where traditional governance failed. 

This article featured additional reporting from Market Urbanist content staffer Ethan Finlan.

Cover image use authorized under the Creative Commons Attribution-ShareAlike 4.0 license.