Land value taxes could cut homeowners’ costs. Why haven’t Virginia localities enacted them?

Perhaps the biggest hurdle to implementing land value taxes is making such wonky proposals digestible to the average voter.

May 3, 2023 12:02 am

Dominion Energy’s headquarters behind their proposed parking lot. (Wyatt Gordon)

Republicans rarely encounter a tax cut they don’t like. But this year, a bill which could have lowered homeowners’ property taxes in one locality was killed on a party-line vote. HB 2112 from Del. Sally Hudson, D-Charlottesville would have enabled the city to become only the fifth locality in Virginia to progress from a reliance on property taxes towards a land value tax.

Beloved by economists and Georgists, land value taxes in their purest form assess how much property owners pay based on the “unimproved” value of their land rather than the value of what, if anything, is built upon it. While our current tax system punishes property owners for putting their parcels to higher use and disincentivizes development, a land value tax is designed to encourage growth in city centers while lowering the tax burden on the average homeowner.

If land value taxes are a practical, pro-growth policy, then why hasn’t a single Virginia locality made the switch?

Richmond the role model?

Under Virginia’s current code, only the Cities of Fairfax, Poquoson, Richmond and Roanoke are allowed to enact a land value tax. Although none of the four has even come close to passing the required local ordinance to make it the law of the land, Richmond is the most recent jurisdiction to ask for the authority.

In 2020, then-Sen. Jennifer McClellan, D-Richmond, shepherded SB 725 through the General Assembly at the behest of the City Council she represented, in order to authorize the city to “impose a tax rate on improvements to real property that is different than the City’s tax rate on the land upon which the improvements are located.”

With such wonky wording, it’s no surprise the change went largely unnoticed by all except 1st District representative Andreas Addison, who had requested McClellan carry the bill.

“Since we are a landlocked city, we have to be smart about how we use our land,” Addison said on a recent call. “We’ve been leaning on market demand for home values to get more revenue, but a land value tax would put the focus on new development and growth and not on the backs of our current residents. We can’t just zone for the growth we want, we need to tax for it.”

To Addison, Dominion Energy’s recently announced electric vehicle parking lot is a perfect example of why Virginia’s capital needs a land value tax. The corporation’s initial redevelopment plans for the parcel envisioned a second tower identical to the freshly finished skyscraper the City of Richmond assesses at a value of more than $307 million. The planned parking lot with EV chargers won’t be worth much more than the $10 million value of the land and will net the city just a fraction of the tax revenue.

“It’s zoned for a use that is worth a lot more than parking EVs,” Addison said. “That land is a waste of an opportunity that should have been more hotels or housing. A land value tax could put some pressure on people sitting on valuable downtown land to finally develop it.”

Until Richmond is done with its zoning code overhaul next year, introducing a land value tax wouldn’t make much sense, admitted Addison, although he is advocating for an ongoing study of the proposal to be fast-tracked. 

Currently, the city taxes the combined value of the land and any built structures at $1.20 on every $100 of value. Addison said that a preliminary analysis by the Center for Property Tax Reform, however, found that taxing the land at two dollars and the built structures at just two cents would minimally lower taxes on homeowners and quadruple the cost of sitting on vacant land and asphalt parking lots in the city.

Pay on the parcel

In Charlottesville, where a sea of surface lots encircles the city’s downtown, a similar analysis found that most homeowners would get a break under a land value tax while city center parking lots would pay more. Following the passage of an updated Future Land Use Map and Affordable Housing Plan, a land value tax was intended to be another tool to help realize Charlottesville’s grand visions.

“We only have 10 square miles of land in the city, so the question is, how can we make the best use of that?” said Lyle-Solla Yates, vice chair of the Charlottesville Planning Commission. “Right now our current tax structure encourages people financially to leave their land as parking lots, even though its value has gone up tremendously in recent years. We could develop this land better, if Richmond would only allow us.”

Such sentiments should come as no surprise from the home of Thomas Jefferson, who famously asserted the importance of land taxes to the sovereignty and prosperity of our young nation. Land value taxes were standard in the commonwealth up until the 1920s when personal income taxes supplanted them.

To this day, Virginia’s localities are still legally required to assess land and buildings separately. Built structures make up 70% of tax assessment in Charlottesville and Richmond, while land value represents the other 30% of how much property owners pay.

“We’re in a good position to do this programmatically,” said Solla-Yates. “The challenge is just making it legal.”

Nationwide movement

Virginia is not alone in chronically undervaluing its land. Some cities across America such as Philadelphia assess land to be as little as 20% of a parcel’s value. The push to lower taxes on buildings in favor of the parcels beneath them is similarly widespread.

Pennsylvania allows land value taxes statewide, and an experiment with the policy in Allentown saw 90% of homes’ tax liability lessened. California just started studying the proposal. Detroit could have a land value tax by the end of the year. Minnesota may set one up in specific districts. Even the country of Denmark relies upon land value taxes. Capturing the land value around stations is how Japan finances its extensive train and public transit systems.

After the dawn of the internet, some economists believed the world would become flat, meaning land and location would become irrelevant. Although remote work has recently become more common, wealth is still overwhelmingly concentrated in urban centers where creatives gather and intellectual cross-pollination leads to innovation.

“America’s total land value lies between 2.2 and 3.5 trillion dollars,” said Lars Doucet, author of “Land is a Big Deal.” “70% of that value derives from the United States’ urban areas, but we are kind of squandering it. Undervalued millions of dollars of property are stuck as parking lots in the center of our cities where there could be thousands of residents and businesses.”

After the pandemic sent home prices soaring without homeowners having to make any improvements to their property, land values have become an increasingly costly part of any home’s valuation. A land value tax could ironically reverse that trend by pushing the demand for development out of the suburbs and back toward city centers.

“It’s a better actual tax policy and conveniently gives a tax break to homeowners,” Doucet said. “A land value tax shifts the tax base to incentivize density in inner cities and provides tax relief to people in medium-built areas. It’s not that when your home value goes up your taxes would automatically go up, like now.” 

Perhaps the biggest hurdle to implementing land value taxes is making such wonky proposals digestible to the average voter. Policies don’t pass state legislatures or city councils simply because intellectuals believe in them, but it may be a start.

“You can get almost any economist from left to right to either enthusiastically or begrudgingly admit that it’s the perfect tax,” said Doucet. “It’s one of the few things where you can get Paul Krugman, Karl Marx, and Milton Friedman to agree.”

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Wyatt Gordon
Wyatt Gordon

Wyatt Gordon covers transportation, housing, and land use for the Mercury through a grant from the Piedmont Environmental Council and the Coalition for Smarter Growth. The Mercury retains full editorial control. Previously he’s written for the Times of India, Nairobi News, Honolulu Civil Beat, Style Weekly and RVA Magazine. He also works as a policy manager for land use and transportation at the Virginia Conservation Network.