In the wake of Hurricane Sandy, investors and government agencies will pour millions of dollars into the Rockaways, Howard Beach, Coney Island and elsewhere. Homes will be rebuilt. Parks, utilities and infrastructure will be restored.The public commitment to revitalizing these neighborhoods should comfort Sandy’s victims. Regrettably, it will also encourage another, potentially hazardous, constituency: real-estate speculators.
As a result of the storm, property values have plummeted. The vulnerability of these neighborhoods was exposed, and rising insurance costs will discourage potential homeowners. Not so, speculators. Vacant lots are cheaper to insure; overflowing tides don’t inflict damage on mounds of dirt.
Speculators will sit on their land, incurring little cost and waiting for public investment to revitalize the area. Meanwhile, the accumulation of empty plots will blight the neighborhood, delay recovery and undermine government efforts at restoration.
This behavior is not unique to storm-ravaged sections of the city. “Up-and-coming” neighborhoods too often fall prey. Above 125th Street, speculators have patiently (and cheaply) awaited the lower-Harlem renaissance to creep northward. The area is left pockmarked with vacant lots. Renewal is delayed, if not thwarted altogether.
How can we temper these undesirable practices? With a two-tier property tax — a revenue-neutral shift to encourage development rather than land speculation.
Property assessments are divided into two parts: one for the value of the land itself, the other for the value of buildings (“improvements”). Under two-tier taxation, land is taxed at a significantly higher rate than are improvements. The lower rate for buildings provides an incentive for owners to maintain and restore properties. The higher rate for land discourages speculation. Developers cannot sit on undeveloped or underdeveloped land without suffering steep costs.
How might two-tiered taxation work? In New York, land and improvements in residential areas are subject to an 18.6 percent property tax.Thus, land with a taxable value of $10,000 would be taxed $1,860, and improvements with a similar taxable value of $10,000 would owe another $1,860, a total of $3,720. Under a two-tier system, the tax rate for land could jump by, say, 50 percent, while the rate for improvement could be halved.In that case, the owner would pay $2,790 in land taxes and $930 for improvements — keeping the total to $3,720.
But here’s the payoff: The owner’s tax bill under that scheme would climb another $2,790 if he purchased a second lot with a taxable value of $10,000 — but by only $930 if he used that money toward building.Thus, hoarding would be discouraged; development encouraged.
The two-tier property tax has a proven record of success. In 1979, Pittsburgh began taxing land at a rate six times higher than improvements. In the ensuing decade, building permits increased by 70.4 percent. This expansion occurred while its core industry, steel, was faltering. In the same period, the number of building permits fell by 14.4 percent in similar Northeastern and Midwestern cities.
Harrisburg, Penn., also experienced a boost. From 1950 to 1977, the city lost nearly half its population. According to federal criteria, it was the second most distressed city in America. Following the introduction of two-tier property taxation, along with other revitalization policies, Harrisburg made an impressive comeback. In the ensuing decade, the number of vacant sites fell by nearly 90 percent, and the number of businesses more than doubled. (The city’s recent financial problems are unrelated.)
Besides stimulating urban renewal, two-tier taxation has another virtue: transparency. New York has experimented with a variety of abatements to incentivize development. Too often, these exemptions are issued quietly and selectively — targeted at specific projects or well-heeled interest groups. Two-tier taxation, on the other hand, creates a simple and uniform code to stimulate property investment. If a more customized approachispreferred, it should be geared not toward individuals but neighborhoods — in commercial corridors and where public investment is being targeted.
In the wake of Hurricane Sandy, and for the good of all renewal efforts, a two-tier property tax is vital in New York. And as a revenue-neutral idea, it’s perfectly consistent with the goals of of Gov. Cuomo’s Tax Reform and Fairness Commission.
By discouraging speculation, it would guard against undesirable fluctuations in the real-estate market. And by encouraging building in areas suitable for redevelopment, such a tax would stimulate the city’s economy and discourage sprawl.
City pols often fight over the amount of taxation. But a top priority should besmartertaxes. The two-tier property tax would be a brilliant first step.
Adam Forman is a former tax consultant and a policy researcher specializing in economic development and urban planning.
adambatlan@gmail.com