Tax Refund

Detroit Mayor Mike Duggan (D) recently proposed raising the city’s tax on vacant or undeveloped land while reducing taxes on buildings by 30 percent. The hope is his proposed land value tax (LVT) — that is, a tax on the value of land instead of what’s built on it — can help address some of the city’s economic woes, such as deteriorating neighborhoods and high property taxes.

“Blight is rewarded and building is punished”

Because typical property tax regimes apply equally to the parcel of land and any improvements on it, there is evidence the tax can discourage investment. This is because construction, repair, and maintenance all contribute to higher property values, and subsequently, higher property taxes. This may prompt some landowners to keep their land vacant or let buildings deteriorate.

This is especially problematic in Detroit, where land speculation is rampant: by some estimates, speculators (mostly non-Detroit residents) own almost 20 percent of parcels in the city. And many would rather sit on low-taxed property — some potentially owe less than $30 a year in property taxes — than build new homes or business property.

To make up that lost revenue, the city must shift a relatively large share of its tax burden onto homeowners. In fact, homeowning residents can face tax bills that equal up to 15 percent of their household income, in turn leading to high rates of tax-induced foreclosure and abandonment. By some estimates, Detroit’s tax-related foreclosures affect one in four properties.

That further fuels speculation by nonresidents, who account for the vast majority of purchases at the tax auctions where foreclosed homes are sold. 

In the words of Mayor Duggan, “Blight is rewarded and building is punished.” Thus, the mayor hopes to force the hands of vacant property owners by taxing their land, and to use the revenue to lower the burden for many homeowners and businesses.

The city estimates that the LVT plan would reduce property taxes for 97 percent of Detroit homeowners and 70 percent of small businesses, with a typical multifamily housing unit saving 20 percent on their tax bills. By contrast, owners of vacant lots or scrap yards could see their tax bills rise by over 100 percent.

Pros and cons of LVTs

Like many other US cities, Detroit has historically undervalued and over-assessed its lowest-value homes, disproportionately impacting its Black residents. After years of over-taxing Black homeowners, an LVT might help alleviate excessive tax burdens, with greater savings in lower land-value neighborhoods, which have larger Black communities due to historical disinvestments from redlining.

LVTs could also help solve a (nationwide) affordable housing shortage. By removing disincentives for construction, LVTs promote greater development. This could support building more housing, especially multifamily housing. Increased housing supply, paired with lower taxes on landlords, could reduce rents for tenants. And more construction can help increase density in cities, which has added benefits for the environment and public health.

However, the empirical evidence on LVTs so far is mixed, with some studies finding LVTs stimulate more development but others finding no significant impact. This is in part because restrictive land use policies can limit development no matter the tax system. And although LVTs can incentivize construction, they do not guarantee more affordable housing. To succeed, any LVT probably needs to be a part of a larger strategy that includes inclusionary zoning policies, social housing mandates, or public housing renovations.

There are also political challenges. Owners of parking lots, car dealerships, and golf courses tend to oppose a policy that raises taxes for low-density land. And without attention to equity, LVT proposals can have repercussions for farmers or low-income homeowners on large lots. Currently, no major local government in the US uses an LVT, and Detroit’s must be approved both by the city and the state government.

But that doesn’t mean LVTs are politically infeasible. Implementing any new tax system can generate backlash, but LVTs have been successfully implemented in some Pennsylvania cities, as well as Hong Kong, Australia, South Africa, and other places across the world. An LVT that applies equally to all might be perceived as more fair than the current regime, in which governments give large tax breaks to developers to subsidize housing construction.

While every tax has pros and cons, LVTs have the capacity to improve access to affordable housing, encourage development, and deter blight — all issues central to Detroit’s broader goals for economic growth and equitable tax policy.

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