Shift Priority Tax Emphasis to Land

Commentary, Frontier Centre, Taxation, Uncategorized

The means to revitalize a downtown continue to befuddle many Canadian cities. Winnipeg is no exception, with a decidedly mixed outcome despite a potpourri of subsidies and other interventions to boost the central city. The Filmon Government explored a more coordinated plan for the Capital Region, which includes the 16 municipalities around Winnipeg. Avoiding the difficult politics and recognizing the failure of grandiose regional schemes elsewhere, it reluctantly accepted a “hands off” posture.

With a different government, of course, chances are better for a return to the planning paradigm. As before, efforts to curtail growth beyond the Perimeter will fail for the simple reason that they ignore the prime mover of Winnipeg’s relative stagnation, namely the city’s over-reliance on damagingly high property taxes. While lifestyle considerations drive much of capital region housing market: larger lots, bigger houses, more privacy and perceived safety, taxes do make a big difference. In many cases, exurban levies are thousands of dollars less than those on comparable city properties. A clumsy regional scheme with more regulations and bureaucrats therefore makes less sense than an intelligent plan to reduce Winnipeg property taxes sharply.

Creative leadership could accomplish that. Funding could be shifted to user fees wherever possible, and competition introduced into all services where feasible. Long overdue education reforms would end school funding from property taxes. Finally, in one bold stroke, the property tax itself could be dramatically simplified and its administration costs slashed.

We currently base property taxes on the combined market value of land and the buildings on it, a constantly shifting and highly subjective process that encourages constant revision. Endless arguments about relative justice deplete the energies of the taxers and the taxed. More importantly, the system discourages owners from developing or improving their holdings, because these actions invite higher taxation. In some cases, owners let their buildings deteriorate just to reduce taxes. This holding pattern may extend for decades or whenever gravity causes the building to collapse. Speculators benefit from the system because vacant land is taxed least of all.

For example, at 370 Hargrave Street sits a gravelled commercial parking lot, usually empty. The lot once held a large, fairly modern building housing the Young Men’s Hebrew Association, a social and recreational club which decided to cease operations at that location. Instead of converting the building to another high-valued use, it made sense for the owner to raze it and turn the asset towards a low-valued use. The search for a lower tax overhead may have been only one reason for this loss of utility, but it clearly factored into the mix. To mitigate this disincentive, perhaps we should move to a property tax that emphasizes the value of the land, not what it contains.

Solid evidence suggests that property taxes levied only or primarily on the land component bring greater benefits than one levied on the total value of land and buildings. Nobel Prize Laureate Herbert Simon put forth the modern theoretical argument for land-only taxation in 1980, a revival of a concept promoted by John Stuart Mill, David Ricardo and Henry George. This type of tax discourages speculation by raising the holding cost of vacant land and encourages the likelihood that prudent owners would build something on it to generate revenue. It also induces owners to improve decrepit buildings, because such activity is not penalized with additional tax.

Property taxes in Israel have tilted in this direction for many years, with lower rates on land that generates business taxes. Landowners who build residences are exempt from property taxes for 30 months. Rapid urban development has been a predictable consequence. Closer to home, two cities in Pennsylvania have moved to a property tax formula that emphasizes the value of land instead of buildings, with salutary effects.

In 1974, the state’s capital city, Harrisburg, started taxing land values at a higher rate than buildings. The change in emphasis confirmed the strong theoretical case. Between 1987 and 2000, Harrisburg doubled the ratio of the tax on land to the tax on buildings. The number of building permits nearly doubled, and the value of new construction nearly tripled. In 20 years, the city also reduced its stock of vacant buildings from 4,000 to 500, a drop of nearly 90 percent.

Allentown, a rust-belt city, adopted a land-value tax system by popular vote in 1996. Previously, new construction had been in a rapid decline. The value of newly built business premises rose from less than a million dollars in 1995 to almost $18 million in 2000, while the volume of new housing went up fourfold, from $2.8 million to $11.4 million.

Winnipeg’s downtown is riddled with vacant parcels of land and deteriorating buildings, similar to the situation in the two Pennsylvania communities before they changed the focus of their property taxes. Shedding the long, cumbersome process of assessing the value of buildings would dramatically shrink Winnipeg’s troubled assessment department, significantly overstaffed compared to other cities, and allow it to concentrate on the market value of land, a simpler and more objective task.

A land-tax approach moves the property tax burden away from penalizing investment and towards the development of unproductive or under-utilized property. It will motivate the owners of such property to re-evaluate their assets and to convert property to its best and highest use.

Two cities in Pennsylvania have proven that taxing land instead of buildings works. It’s a dramatic policy reform the Province and Winnipeg should seriously consider if they want to get serious about revitalizing the inner city.