A few weeks ago, my wife and I were looking at bigger homes. Both of our parents live far away, and we want to have more kids, so it would be nice to have somewhere with space to accommodate a growing family, visitors staying long term, and potentially grandparents moving in. We found an apartment we might be interested in and it would have been an uncomfortable financial stretch, was very barebones and would require a lot of sweat equity to turn into a home, but maybe we could have made it work. We were seriously entertaining the idea until we found out how much the property taxes would have been.
"$38,000 a year" the realtor said. On top of a $1,400/month building fee! Even once the mortgage was paid off, the apartment would forever cost $55,000 a year just to own it (not to mention actual home maintenance.) Would our daughter even be able to afford to hold on to it one day, if she inherited it from us?
I have never been one to complain of taxes, but with housing already ridiculously expensive, this is rubbing salt in the wound. I had a co-worker who lived in this area then moved to the suburbs because in 2017 Jersey City undertook a tax revaluation that significantly increased their property taxes. The current system penalizes families that want to stay by making it near-impossible for families that want something slightly larger than a two-bedroom apartment.
The apartment was in Jersey City, right next door to Hoboken, where I currently live. The property tax was so high because this apartment was big - it would need a lot of work to turn it into a home, and that is what made the sale price somewhat affordable, but according to the tax assessor, the property's tax value was assessed as if it were built out with a luxury interior. I find it crazy that this apartment was one of over 30 units in the same building. Property tax records in New Jersey are public, so I was able to see that all of the apartments in this building, which takes up slightly less than 1 acre of land, are going to pay nearly $900,000 in property taxes this year. How is it that several blocks away there are parking lots and single story stores taking up entire city blocks, while the homes have ridiculously high taxes? Downtown Jersey City is some of the most expensive land in the New Jersey. This does not make sense.
A dense, expensive, desirable neighborhood on the right. Empty lots and auto-oriented businesses on the left.
High-rise buildings (which implies very expensive land) next to parking lots (which implies very cheap land). This is unnatural.
Surely this is unsustainable and there should be a better tax system, one that incentivies empty and under-utilized land to be developed on, while not penalizing home-owners and families?
Let's dig into property taxes and the alternative - land value taxes.
Property taxes are an annual tax on the value of property (in this case, property means real estate: land and the buildings on them.) Cities have a tax assessor that assesses the market value of every parcel of land, and all of the "improvements" done to the land. Improvements typically means the building on the land. You end up with three values that are public record: the value of the land, the value of the building on top, and the total value the property (land and improvements) that is used for calculating property taxes.
The assessed value can lag behind the market and different jurisdictions have different rules on when property gets be reassessed. Typically a total reconstruction will trigger a reassessment, and sometimes a partial renovation will. In some jurisdictions, property gets reassessed any time the property changes owner, in others jurisdictions, it does not. Jersey City made headlines in 2018 when it undertook a city-wide reassessment. Many properties saw significant tax increases because the last city-wide reassessment was 30 years prior in 1988.
Every year, the city, county, and school district passes a budget. The city's taxation office then divides the total budget for the year by the value of all assessed properties - the calculated number is known as "millage." The millage gets multiplied by each property's assessed value, and that's how we calculate an individual property's tax bill. Some jurisdictions set limitations on how much property taxes can increase per year.
At the end of last year, Jersey City passed a 32% higher budget. This meant the apartment we were looking at had previously paid $29,000 in taxes the year prior (already ridiculously high), and saw a $9,000 increase to $38,000 with no way for a home owner to appeal. Renters are not off the hook either, because landlords will be forced to increase rent to cover the tax increases. New Jersey supposedly has a 2% property tax cap, but the main budget eaters such as capital expenditure, debt service, and pensions are exempt from the cap, so it effectively does nothing.
Because property taxes include the value of the building on top, property owners are penalized for developing their land, and this has been known to encourage land speculation. Remember how I said Jersey City has parking lots next to skyscrapers?
Downtown Jersey City.
Because there is nothing built on the land, the assessed value of the improvements is very low (or whatever the value of a parking lot is), so the annual property tax bill of a parking lot is very low, which removes any incentive to build anything in the near future. In times of rapidly rising real estate costs, low taxes can encourage land speculators to hold onto land for decades. This is land that could be used to help elevate our housing shortage, house businesses and amenities that attract street life and increase walkablility, yet because of the housing shortage is kept empty by speculators, exacerbating the problem. Take a watch of this video by Strong Towns:
One of the alternatives to property taxes being floated around is a land value tax. The implementation of a land value tax is very simple. When the tax assessor's office calculates the total value of all property for calculating the millage, all they have to do differently is use only the assessed value of the land, instead of the land and improvements. I am not a lawyer, but New Jersey is a home rule state, which gives cities a lot of power to govern themselves, including changing their taxation policy without state support. Because government passes a budget then calculates the millage rate, switching to a land value tax will not reduce revenue to the city. Instead, it would reweight how much each property owner would pay.
Let's have a look at what the land value tax would look like in Jersey City. Even though I live in Hoboken, I chose to look at Jersey City because the parcel data is easily available which makes it possible to calculate parcel sizes and visualize them on a map.
For this comparison, I am parsing the tax records to determine if a parcel of land is vacant, if it has a building on it, and if so, what the square footage of the property is (each apartment in a condominium, which are individually owned and have their own tax record, show up as a separate properties). The quality of the data is okay. There are a few instances where the property tax records do not align with the parcel data, so you will see missing holes in the visualizations below. I excluded parcels that did not pay tax - these were churches, schools, parks, etc. I excluded properties that had fishy data (e.g. there were many high-rise apartment buildings in downtown Jersey City with an improvement value of $0 when it is clearly occupied by a high-rise), where the developer must have received some kind of tax abatement This left me with around 54,000 tax paying parcels I could compare. I did not discriminate between residential or commercial.
Here are the number of properties and how the parcels are classified:
For a relatively dense urban area, I was surprised that vacant or underutilized land makes up a significant portion of the parcels. This is measured just by raw number of parcels, not land area.
Here are the combined values of all of the properties in each category, comparing just the land value (blue) and the total property value including land and improvements (red):
Surprisingly, vacant land often (but not always) had an "improvement" that on average was about 1.3x the value of the land. I guess parking lots, empty warehouses, and weeds are worth something to the assessor. Also, many of the vacant lots are huge consolidated parcels of land rather than individually empty lots. There may also be some bad data in the tax records where an actual building shows up a 0 square feet due to a technicality. Nonetheless, I do not have the free time to filter through 54,000 parcels to filter out a small amount of noise, so I am assuming the tax records are correct.
I added together all of the tax revenue produced by the measured properties and the total assessed land values to come up with a millage rate of ~5.3% on land that would raise the same revenue as property tax today if Jersey City switched to a pure land value tax. Here is how much each property type currently contributes to the tax revenue with property taxes (blue), and how much they would with land value taxes (red):
Vacant land is already contributes the largest share to the city's budget, and switching to a Land Value Tax, vacant land would contribute more. Small apartments (under 1,000 square feet) are already the smallest category of tax payers, and would pay an even lower share under a Land Value Tax.
Here's what the average tax bill currently looks like with property taxes (red) and what it would look like with land value taxes (blue):
On average, vacant land owners will pay more, but just about everyone will pay less. Let's bucket the number of parcels based on how much their tax bill change. We will start with vacant land first:
Suprisingly, some vacant land will see their tax bills decrease. The real dramatic ones with a $75,000 decrease are probably misclassified and not really vacant. Over 3,000 vacant parcels will see their tax bill go up by $1,000, which is not a huge increase. Over 1,000 will see $15,000 tax increases, which might be a very good incentive to sell the land to someone to develop it, rather than speculate and hold on to it for a few more decades.
Let's look at improved properties:
The largest bucket falls into "$0" which means their taxes would neither decreased nor increased by more than $1,000. The graph did skew towards tax decreases for improved properties, although many did see tax increases too.
Looking at graphs is too abstract, so let's actually visualize this on a map and explore a few examples. I did my best effort correlate tax data to parcel data, but there were a few holes in the data (missing parcels from the map.) The following maps have the parcels coloured by the difference in the tax bill from switching from property taxes to land value taxes. Black means there was no difference, and a fade towards red indicates a tax increase, and a fade towards green indicates tax decrease. Bright red means a significant tax increase, and bright green means a significant tax decrease. Gray means the property is tax exempt or is receiving some kind of abadement.
Here is a section of the Jersey City Heights:
Most is dark, with a little hint of green and red meaning most would pay more or less what they would under property taxes. Let's look at that big red block in at the bottom.
Now let's look at some of those green lots one block north.
The single story supermarket with the huge parking lot would see a massive $64,280 tax increase, while most of the buildings on the finer-grained block would see a tax decrease. One small single story building saw a tiny $863 increase, but I would consider the $33,273 and $13,802 tax decreases for the taller buildings significant. In this neighborhood, we can see that switching to a Land Value Tax penalizes a single story business occupying an entire width of a block (especially when half of the lot in parking), and encourages a walkable, multi-story, mixed-use pattern.
Would a land value tax encourage the entire city to turn into multi-story apartments? Let's look at the southern neighborhoods of Jersey City which are full of single family homes.
Let's look at a street of single family homes.
Many of these single family houses would see slight tax decreases. A Land Value Tax is going to lower the tax bill for most homeowners. Now let's look at one of the big red blobs:
The auto-oriented business with a huge parking lot would see a big increase tax increase.
Here's another street that has red and green side-by-side:
Under a land value tax, the two empty lots that are used for parking would be heavily penalized, while the houses next door would see a tax decrease, and the 3 story apartment building at the end of the block get a large decrease.
Let's look at the very expensive Hamilton Park neighborhood in downtown Jersey City, which strangely is right next to parking lots and auto-oriented businesses.
Overall, it is very red. Here are the dramatic contrasting side-by-side red/green lots at the top:
Those build buildings on the bottom left will see a huge tax decrease. I have no idea what that big building on the top left is, but that big building, the empty lots, and those auto-oriented businesses along the highway all will see their tax increase. We have a housing shortage, this is a very expensive and desirable neighborhood, so the land value tax is rewarding those that fill those lots with apartments rather than parking lots and auto-oriented businesses.
It is still concerning that there is a lot of red in a residential area. Let's zoom in and look at what is going on.
Some of these are solid parcels that cover the entire lot, while others are checkered (I have drawn in arrows pointing to some of the checkered pattern). For condominiums (a building divided into individually owned apartments), the parcel data I am using conveniently divides the land up into small non-overlapping rectangles to indicate that there are many owners. Let's look at this street:
A general pattern I have found poking around in these expensive areas is that single family homes would see a tax increase, while buildings divided into apartments would see a tax decrease. We can see that in downtown neighborhoods such as Hamilton Park, single family townhomes would see a slight increase in taxes, while condominium owners would see a significant decrease. This a desirable neighborhood facing a housing shortage, and a land value tax would encourage single family townhomes to divide into apartments, which seems like a natural way for the market to respond.
Let's look at a highrise neighborhood close to the waterfront:
The first thing I want to point out are the high-rise condominium buildings. I have circled them below.
Some of them are hard to see because they are nearly completely solid black, meaning the their taxes will barely change, while others drop as much as $26,000. A Land Value Tax rewards density in an urban core.
Let's look at some of the big solid chunks.
The parcels covered in buildings saw huge tax decreases. The parcels that are vacant, covered in parking lots, or some single story builings saw huge tax increases. A Land Value Tax would incentivize the owners of these red properties to put their land to productive use to cover these taxes, or to sell to someone who will. It will get rid of the incentive for speculators to keep very expensive land in an urban core empty.
Based on the above data and the individual cases I have highlighted, switching over to a land value tax would be better than a property tax system because:
- Land speculators holding onto vacant lots will be penalized by paying as much tax as their neighbor with a building on it. At minimum, speculators would be either forced to sell to someone willing to build, or build a taxpayer building to cover their taxes. We will see fewer vacant lots and parking lots.
- Strip malls, block-sized single story retail with large parking, and auto-oriented drive through businesses are discouraged.
- Tax is based on the land consumed rather than the property size, owners are incentivze to use less land, rewarding traditional fine-grained storefronts and housing.
- We will see more families stay and not move to the suburbs because although larger homes will fetch a higher market value, they will not have a higher tax burden.
- Tax abatements (e.g. not taxing the cost of an improvment for several years) become pointless because improvements are not taxed for anyone. The system will be uniform and fair for all.
- There is no disincentive for property owners and landlords to avoid renovating out of fear of being reassessed.
- Most home-owners (including single family homes outside of downtown Jersey City) and condominium owners everywhere will see a tax decrease.
- Single family home owners in downtown Jersey City would see a tax increase, but this would incentivize home owners in very expensive areas to subdivide their home into condominiums, which is a natural market response to an area being very expensive and desirable.
- Switching to a land value tax is revenue-neutral. The city, county, and school district do not lose any revenue switching over to a land value tax.
- We will end up with a more vibrant city with fewer vacant lots, more residents, larger homes, more businesses.
It's hard to see any benefit of sticking with property taxes.
What about that one condominium with the ridiculous $38,000 property tax? That's more than many townhomes, despite sharing the land with 30 other buildings. If we switched to a land value tax, the annual tax burden would be reduced to only $6,000.