Land Value Taxation and MPAC's property tax assessment problems

There are many problems with our current municipal tax system and resulting MPAC assessments. Moving Ontario to Land Value Taxation (LVT) would be a step in the right direction by removing some of the distortions in our current property tax regime. I'm about to get a ~9% tax increase as a penalty for living in a neighbourhood that other people want to move into, though I'm not consuming 10% more water, roads, or garbage collection as I do it.

LVT addresses this distortion. We should only tax each property's land and not what's on top.

Imagine two identically sized properties on the same block. One is a parking lot and the other is a condo tower. For arguments sake the value of the parking lot is $400,000 (just the land) while the total purchase price of the condo tower would be $400,000 plus $250,000 for each of the 10 condo units. These numbers are imperfect of course but they will help illustrate my point.

According to the City of Ottawa's property tax estimator our fictional parking lot will pay $4900 in property taxes and the residential condo will pay $29,000 despite the fact the two cost the city the same for roads and sewers (our largest budget line item by far). The condo will push more water in and out of the system but usage based billing takes care of that. Inversely, the parking lot probably uses the road more than the condo residents, yet still pays less tax.

The condo building is paying many times its fair share for the same road and same sewer lines. That land is being much better utilized; many residents are re-using the same 200 feet of street frontage and better utilizing the shared water/sewer connections. Nonetheless, they are paying much more in property taxes because the assessment includes the value of the building they put on the land.

The parking lot has no building on top so it's assessment value is lower.

Land Value Taxation addresses this by taxing only the land. The ying/yang benefits are:

• an incentive to under-utilize land is removed and property owners have a reason to develop land to meet it's potential.
• properly utilized land pays less tax, per-capita, because the value of the building isn't factored in. Each additional floor of new condos lowers the total taxes paid by each resident and downtown living is rewarded.

LVT encourages medium-density intensification too

Now imagine two identical single-family homes anywhere in Ottawa on the same street. The city has already paid for infrastructure to support these homes. They are relatively small, in established neighbourhoods, and are both worth $250,000. They pay an estimated $2,600 in taxes.

The next year one of them is knocked down, the lot is severed, and two attached semis go in. Built to the maximum zoning allowed they are both larger than the original house was in the first place. Each is valued at $350,000. Combined they will now pay $7,100 in taxes - or 2.7 times more than their neighbour.

This is a distortion because it doesn't cost the city anymore than it used to. The road is still the same road. The sewer pipe is still the same sewer pipe and unless biker gangs are dominating in-fill developments the Ottawa Police won't be out any more often than they were before.

LVT would reward, instead of penalize, the incoming medium-density residents. Having severed the lot each would pay only one-half the taxes of the original house. Areas of Ottawa that intensify, either greatly like downtown, or somewhat, like Kitchissippi, would have lower property taxes per-capita.

Perhaps more importantly, LVT would not penalize the exisiting residents (or at least not as much). The price the developer paid to buy the land is not as strongly attached to the price the new residents are willing to pay for the completed houses. Intensification doesn't inflate exising property owner's tax bills as quickly as our current system.

LVT discourages sprawl. Also known as Location! Location! Location!

If you want to spot land that is not being used to it's full potential, visit this mashup-tool and pick "10 minutes by bus" from any mass transit station. Shown on the right is everything that is 10 minutes from South Keys. Suffice to say, this land is still dominated by low density sprawl.

Under LVT this poor development pattern would be addressed much more quickly. 

• Mall owners would have an incentive to charge for parking to afford the property taxes, instead of letting it go for free.
• Homeowners would have an incentive to add apartment suites - they would not have to pay more taxes.
• After the city invests heavily in twinning the O-Train tracks, all the land around South Keys get's more valuable again (it's effectively closer to downtown now)
• Land values go up and property owners have an incentive to realign there land use from the initial sprawl to higher rent uses.
• As dentity goes up per-capita property taxes go down.

The ultimate benefit is the City of Ottawa becomes more efficient. Under LVT we would waste less money maintaining roads in low-density areas. As soon as areas are serviced there is an automatic benefit to begin intensification. Intensification would be more even.

Odds and Ends

A few more benefits that I don't have time to expand on:

• LVT eliminates inaccurate or arbitrary assessments. It's hard to assess the value of a property, sight unseen, which is why thousands of MPAC assessments are appealed. Many more thousands deserve an appeal but the owners don't know they can do that. Land is much easier to assess: it's land. Two properties that abut, anywhere in Ottawa, will always have rational assessmnets when compared to eachother. Removing the chaos of land+building assessments makes all land use planning much easier
• LVT reduces land speculation and abandoned lots. We've all seen plots of land right in the middle of the city that are empty and thought why? LVT would get rid of that in a hurry. If you're going to pay taxes on the land as if there was a economically valuable business on top of it anyway, you may as well build something and put an economically valuable business on it. This is good for the city since we've already put roads and sewers down next to the vacant lot.

I should have opened with it, but I'll close with it instead: Land Value Taxation is Green Party policy.

(... and oi, LVT was the wrong topic to start writing about at this late at night -ed)