Is the Land Value Tax Good for Morningsiders? Part II

You can expect to hear much more over the coming months as champions and critics of the Mayor’s proposed land value tax have their say. In last month’s newsletter, I laid out the basics of how a land value tax (LVT) would work - doubling taxes on all land and reducing taxes on buildings to incentivize vacant land owners to develop their holdings while giving homeowners a tax break. You can read that article here.

The major concern expressed by critics is that the LVT would create a devastating wave of property tax foreclosures. To address that concern, Alex Alsup, VP of Research & Development at Regrid, a nation-wide storehouse of property data and property tax expert, laid out a worst-case scenario in a Substack piece recently.

He looked at vacant residential land, which he sees as the most vulnerable to tax foreclosure. Because they have a lower market value than vacant commercial land, the owners are more likely to walk away in the face of higher taxes. (Keep in mind that up to four side lots owned by residents are not included in the LVT.)

For those who like data, here are some numbers to consider. Of the 56,000 privately owned parcels of vacant land in the city, about 20,000 (36%) of those are owned either by outside speculators, businesses, or investors. The total tax bill last year for those 20,000 properties was about $9 million. Under the LVT, owners of those parcels would owe almost twice as much ($17.5 million) under a land value tax. This $17.5 million represents only about 3.5% of the city’s total property tax levy of $500 million.

Alex says it’s highly unlikely that investors sitting on large contiguous tracts of land would just walk away from those properties and let them go into foreclosure. But for the sake of argument, let’s say that every owner of every one of those 20,000 parcels stops paying taxes. It would mean a loss of less than 4% of the city’s property tax revenue.

Many people believe, as I did, that property taxes make up a majority of the city budget; in fact, only about 10-15% of the city’s revenue comes from property taxes.

Another important consideration, according to Alex, is that “….tax decreases on occupied homes – which make up a far larger source of delinquency today than vacant land hypothetically could under the LVT – would offset hypothetical delinquency increases on vacant land.” In addition, he thinks it’s likely that with lower property taxes for 97% of homeowners, you’ll see fewer homeowners forced into foreclosure, more residents paying, and paying on time.

Another objection to the LVT raised in an article by Russ Bellant in the Metro Times in January is that the land value tax is allegedly unconstitutional. To address that issue I turned to John Mogk, Wayne State University law professor who has taught property law and urban land use. He’s also written extensively on tax reform in Detroit.

Prof. Mogk said that the constitutionality of the land value tax will depend upon the preferences and biases of the Michigan Supreme Court. “In my view,” he says, “ residents should not be concerned with the constitutionality of LTV, but whether it makes good policy at this time, as opposed to greater tax relief for homeowners. There can only be one bite out of the apple.

LTV is not a big enough bite to make a significant difference and it will not result in any significant development of vacant land. Vacant land is not being developed today, because the cost of development exceeds the market price in neighborhoods, as well as downtown, where enormous subsidies are being provided to make up the difference. Taxing vacant land will not increase market demand for developed projects.”

It you’d like to hear more of Professor Mogk’s proposals for fixing Detroit’s tax system, you can listen to Detroit Today host Stephen Henderson’s interview with him on WDET in November.

Alex Alsup also feels that the Mayor’s LVT plan doesn’t go far enough to really spur development of Detroit’s vast vacant landscape. Taxes on land would have to be much higher, he says, to adequately incentivize big developers to start doing something productive on their land. He says that there are other tools, like zoning reform, that could also be used to spur development.

On the other hand, he does see a real benefit of the LVT for individual homeowners, and so supports the LVT for that reason. “I don’t think I’ve ever agreed with (the Mayor) on a property tax issue before,” he says, “but I do think he’s right on this one.”

If you have thoughts on the LVT, we’re happy to print them in an upcoming issue of the newsletter. Just send them to morningsidecommunity2@gmail.com.