Blessing Issues Statement on Resolution to Authorize Land Value Taxes in Ohio

COLUMBUS—Senator Louis W. Blessing, III (R-Colerain Township)  issued the following statement regarding Senate Joint Resolution 7 to authorize land value taxes in Ohio:

"A land value tax (LVT) is simply a tax on the land, while a property tax is a tax on land and structures. SJR 7 simply seeks to authorize, not mandate, LVTs in Ohio. They are currently prohibited as the Ohio Constitution specifically says, “Land and improvements thereon”, which means only property taxes may be levied.

Why are LVTs superior to property taxes? Quite simply, they don’t tax development. If you buy a plot of land, and build an apartment on it, you are never taxed on the improvement which, in this case, is the apartment. LVTs flip our current system on its head. Consider three equal plots of land: A is just land; B has a single-family home on it; and C has an apartment complex. With property taxation, tax bills are highest in the following order: C, B, and A. However, with a LVT, the tax bills are all the same.

This is powerful because the incentive under a LVT is to develop land as much possible. In the previous paragraph, LVTs for C are effectively spread amongst several people, meaning the lowest tax burden per person, and thus a significant tax cut. B would actually see a tax cut, given that the owner no longer has to pay taxes on the structure. A would see no difference. Obviously, this would bring in less revenue than the property tax. Suppose we increased the LVT such that the amount paid by B under a LVT is the same as it is under the property tax above.

In this case, C would still see a tax cut, though smaller, while A would see a tax increase. The value of a LVT becomes much more obvious: a premium is paid sitting on land in a high demand area, and not developing or using it, while an apartment, which uses land very efficiently, is rewarded with lower taxes. Rather than pay higher taxes, the owner of A is strongly incentivized to either sell or develop their land.

Since LVTs do not impede development, it avoids the problem inherent in property taxation: as an area develops it needs increasing housing density, but a property tax impedes such density. Moving to LVTs would spur housing development and spread the tax base amongst more people. A very likely outcome is that LVTs would bring in more money in the aggregate, while lowering tax bills for the individual, and reducing housing costs due to the added supply. Thus, real wages would increase, even if nominal wages did not, representing a boost for Ohioans and businesses alike.

Unlike other taxes, a LVT cannot be avoided. You cannot move land, nor can you hide it. These are features that do not apply to sales or income taxes. LVTs can, and do, go up over time. However, this occurs only as the land becomes more developed and more valuable – read: more demand for land in a particular area – as well as the local tax burden set by local governments. If you’re worried about local governments and schools overtaxing their jurisdictions, you shouldn’t. Under a property tax, improvements that don’t vote – think large businesses – pay an outsized portion. You see this effect in towns with power plants losing a ton of revenue when the plant closes, or gaining when one opens. With a LVT, the tax can only rise as high as the citizenry will tolerate. Unlike a property tax, you can’t force a high tax on businesses without doing the same to residents.

So how would SJR 7 operate in practice? If passed, not much would change right out of the gate. The General Assembly would have broad latitude to put guardrails in place. Moreover, no community would ever be forced to implement a LVT; it’s simply an option. Yet, if simplicity is of interest to you, consider the following illustrative example.

Suppose Ohio had no property taxes and only LVTs. In practice, having consulted with LSC that this would be possible, suppose a community levied a tax of $4,000/acre. Given the broad latitude in SJR 7, entirely elected boards could levy this tax by a simple majority vote.

Tax collection becomes incredibly simple. If you’re a homeowner, you know exactly what you’re paying. Since the board levied the tax directly by majority vote, the concept of a tax levy on the ballot is moot. All of this fighting over ballot language; types of levies; duration; etc. Gone. Inside millage? What’s the point? The board can directly levy a LVT, and this is how it’s done in Kentucky and Pennsylvania.

How about CRAs, TIFs, abatements, and other property tax exemptions? These are effectively moot. They really only exist due to the perverse incentive inherent to property taxation: increasing taxes on structures discourages development.

Do you hate having to defend valuation challenges from school boards? Are you worried about the drop-down LLC issue? Are you a homeowner that wants to challenge your valuation? These all become irrelevant. You’re paying per-acre, how does a valuation challenge work? Whether or not an LLC owns the property is irrelevant, the tax is paid on the land and there is nothing that the business can do to change or hide that fact, nor does an auditor care who, or what, owns the property. How does a homeowner justify challenging their LVT vs. their neighbor? I’m reasonably confident that it all goes away organically. Frankly, the only thing that I can think of that would stay is something like the 20 mill floor. It wouldn’t have to be 20 mills, but some threshold to maintain the state/local school funding partnership makes sense.

A bigger question is who would support this? I sincerely hope the entire business community would. Ditto for housing activists, since this is a pro-housing, pro-density tax. Other key constituencies are local governments and schools, as well as labor. How would SJR 7 achieve that?

The key is in allowing them to levy these taxes by majority vote. Again, this avoids the acrimony from levies and, if they go too far, the elected members of the boards are the democratic oversight: if the community doesn’t like them they can vote them out. However, given that the boards have much more certainty in their finances – they wouldn’t have to worry about going to the ballot – I think this flexibility is a winner for them. An added bonus is that their cash reserves would likely fall organically, something that the General Assembly attempted to do by force. Why? Their cash reserves are high because of the uncertainty of: state school funding support; federal support; and voters shooting down levies.

That said, here are some questions that I anticipate folks asking, with answers to the best of my ability and knowledge base.

• Why would farmers and the agriculture community support this?
  • Land values are typically lower in rural communities. Farmers also have many structures that they currently pay property tax on that would not be taxed with a LVT. I believe LVTs would also encourage much more high-tech operations. Selling land to pay for equipment and structures that allow for more efficient land use would mean lower taxes. The Netherlands is an example of what is likely to occur with a LVT; their agriculture sector is very high-tech, and manages to feed the world with a small footprint. Of course, if these communities didn’t want a LVT, they’d never have to levy one.

•  The locals should always go to the ballot. Why would we change that?
  • SJR 7 specifically states that the boards must be entirely elected. This is the democratic oversight. It’s also how the General Assembly operates. Could you imagine the disaster that Ohio would be if the state had to send tax changes to the statewide ballot? School boards in Kentucky and Pennsylvania, for example, levy their taxes this way. Kentucky’s property taxes are lower, while Pennsylvania’s are higher. There is no evidence that this would lead to higher taxes in general.
    The General Assembly still has broad latitude over this issue. They could legislate that LVTs must still go to the ballot. Though I’d disagree, this decision would be made in statute where it belongs, and not the Constitution, where it doesn’t belong.

•  How does this combat gentrification?
  • This is an anti-gentrification tax, far more so than property taxation. This is because as demand for land grows with population growth, the incentive to build denser housing grows stronger. Housing will scale with population growth far better than the status quo. This added supply ensures that housing won’t become prohibitively expensive.

• Isn’t this going to harm single-family homeowners with the bias towards density?
  • I do not believe so. Though land values rise with increasing demand on land, remember that this is a very pro-housing tax. It will push housing supply up, which will put downward pressure on housing costs to consumers generally. This will likely increase the tax base in the aggregate, while flattening or reducing the overall tax burden for the individual. A different way to say this is that if more people are paying a tax, the tax rate can be lower and bring in the same amount of money, or more, than a higher tax rate would on a smaller population.

• Isn’t this double taxation?
  • Perhaps in name only. All property taxes implicitly include land value taxes. If voters approved a property tax increase vs. a LVT increase for the same amount, the only difference would be that the overall tax burden would be higher on land and lower on improvements for the latter. However, I feel comfortable saying that the latter case is economically better as improvements are taxed less.

• Wouldn’t we end up with the same property tax burden and a new LVT burden?
  • No, but this is a much more nuanced and complicated question that requires examination of incentives. If SJR 7 passes and the General Assembly doesn’t prohibit boards from levying LVTs, I think the following occurs, and I’ll use school boards as an example. I think they are very likely to levy a LVT without touching their existing property tax levies, and I think that’s in response to the actual need for revenue. However, the board members are elected and will be responsive to the community in a couple of ways. First, districts have high cash reserves due to uncertainty. With the certainty that this brings, there is a strong incentive to reduce cash reserves on their own. I’m not sure how they would go about doing this – direct relief to taxpayers through phasing in the LVT is a possibility – but I’m confident it would be part of the discussion with the community before they took a vote. In the long run, there is a strong bias towards using LVTs. Why? Nobody likes going to the ballot. It’s expensive, and doesn’t always work. I think they’re likely to let a number of levies lapse because the tax reduction factors eat away at property tax levies over time. The net effect is that they’ll slowly move away from property tax levies toward LVTs. The end game would likely be property taxes for inside mills only – roughly 4-6 mills – with the remainder of their revenue coming from LVTs and school district income taxes. This affords a better mix of taxation while the tax base grows.

• Ok, I’m sold on LVTs, but I’d rather have similar limitations to property taxes, like forcing the locals to go to the ballot.
  • I would strongly caution against this. Part of the reason that property taxation is a mess is because the laws governing it are distributed between the Constitution and statute. Any amendment like this should be as clean as possible, allowing the General Assembly to govern in this space. The General Assembly could actually prohibit LVTs if SJR 7 passed. It could force LVTs to go to the ballot, limit the overall tax burden, and even dictate where the revenue should go. This flexibility for the General Assembly is a good thing.

• I can see how the business community would like this, but what about local government?
  • As mentioned above, local governments hate going to the ballot. Having the option to raise revenue through a majority vote would be a huge winner for them. It’s also better than allowing them to do this through sales tax, as has been pitched by the General Assembly, as a sales tax is regressive and harmful to businesses and consumers alike compared to a LVT. I see no scenario where they’d be opposed to this, as this is simply an option.

• How would the electorate feel about this? After all, they have to ratify it at the ballot.
  • It would take an education campaign, as voters tend to default to voting no if they don’t understand something, which is a perfectly natural and understandable response. However, if this resolution can get the support of the business, labor, and local government communities, as well as both major political parties, I think it stands a good chance at passing. I would caution that this is not a short-term fix in any sense. Effectively it’s a long term solution to high housing costs and property tax growth.

• Property taxes remain in the Constitution. What effect does this have on property taxes?
  • As mentioned above, the bias will be towards moving away from property taxes, but I agree that they won’t go away. However, since this is a very pro-housing tax, it significantly expands the property tax base. What this means is that local governments may very well see boosts in property tax revenue without the burden on individual taxpayers going up, while property tax rates go down. This is because the “pie” grew, and the remaining property taxes are spread out amongst more people. This is actually an excellent feature of moving towards LVTs.

• What does a practical example look like?
  • As I mentioned before, LSC confirmed that the tax could be as simple as a certain dollar amount per acre. Though I believe local governments would operate relatively efficiently, it’s worth ensuring in statute that the “rate” isn’t changed too often, say no more often than three years. Suppose a city like Cincinnati levies a tax of $1000/acre. This would be fixed for three years, though allowance could be made to lower it if need be but keep $1000 as the maximum for a three-year period. What’s nice about this is the interplay with Ohio’s appraisal and reappraisal cycle. In short, they won’t matter at all for a land value tax. Why? The tax is a dollar amount per acre, and not based in any way on valuation. Thus valuations could spike, but the land value tax would remain fixed, thus homeowners would not see increases in the land value tax with changes in valuation. This is a great feature of the LVT.
  • Though $1000/acre sounds like a lot, consider how this could operate in a more rural area. Though the average farm size is a shade under 200 acres, the median is likely far less. For this example, let’s look at a 100-acre farm. The LVT could be something like $10/acre. The tax burden for that farm would be $1,000 per year. Whether that is manageable or not for a very rural area, I do not know. What I do know is that $1,000 per year will not change until the local government changes. This is in stark contrast to CAUV, which can swing significantly based on commodity prices, as well as property taxation, which may spike if valuations increase significantly, more so if a farming community is in relative proximity to a high demand area (think Licking county and Intel). Even better, LVTs reduce urban sprawl – due to better incentives to use land efficiently – which is a major problem for farming communities. Thus, I’m hard pressed to think of a more stable and community-oriented tax than the LVT."

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