Leveraging Local Taxes to Spur Local Investment and Improve Housing Affordability

In economically distressed cities, housing stability is depressed by heavy local taxation, weak services, and subsidies to regional sprawl. In low-cost neighborhoods, housing disinvestment and abandonment are prevalent. In recovering areas, investors often hold valuable land out of its best possible use. Are there tools to reduce housing disinvestment in low-cost housing? Can these same tools limit the value of speculation and encourage more productive land use?

Last week, The New York Times detailed Detroit’s effort to secure these outcomes by pairing a land value tax with a reduced tax on existing structures, repairs, and building activity. The piece highlights a report and fiscal analysis co-authored by Nick Allen, a doctoral candidate in DUSP, and Professor John Anderson of the University of Nebraska–Lincoln. Their research with the Lincoln Institute of Land Policy and a team of public finance economists found a shift of city revenues to land would reduce housing foreclosures, accelerate business formation, and increase valuations of homes and businesses. The report finds substantially all occupied housing would see tax reductions. Compared to Detroit’s present system that heavily taxes investments, owners would be better incentivized to maintain and improve housing, put land to active use, and place new investments in Detroit.

In a recent poll, the University of Chicago’s Kent Clark Center asked senior economists if  Detroit’s Land Value Tax Plan would “give a substantial boost to local economic growth over a ten-year horizon.” Weighted by confidence, 83% of respondents agreed or strongly agreed. A research note from the Federal Reserve Bank of Chicago reviews evidence on the local economic impacts of land value taxes. “Shifting taxes to land has long been recommended by urban economists, community advocates, and city planners. Because these reforms are rare in practice, research has been limited. It’s been great to see the interest revived by Detroit’s leadership,” said Allen.

Allen has remained engaged in the City of Detroit’s policy evaluation and formulation. In the report, the study team found broadly positive effects of similar reforms in other cities, observing that a land value tax “provides increased efficiency; that is, less distortion in development timing and capital improvement decisions by property owners.” Compared to discretionary subsidies and exemptions widely used by local governments, the report advised that universal, permanent reductions in investment costs would broaden capital access. “This isn’t a policy that overcomes all economic disparities in the Detroit region, but it can ease household budgets, stabilize housing stock, and increase Detroit’s competitiveness for investment. Those are important steps towards regional equity and fiscal stability,” said Allen.

Allen’s three papers can be accessed via the Lincoln Institute of Land Policy.

Read more about Detroit’s proposal for land value taxation in the New York Times.

Learn more about Allen and his work on more efficient and equitable tax structures.