The case for increasing property taxes… on vacant land

I would love for this to start a conversation about vacant land. Any and all criticism is welcome.

By simply tweaking the ‘assessment level’ on vacant land, we can: 

  1. Reduce investor speculation.
  2. Build middle class housing.
  3. Encourage property development.
  4. Increase the land controlled by the city.
  5. Preserve old buildings.

So, what is ‘assessment level’ and how can the city adjust it in order to produce these outcomes? 

First, let’s review how property taxes are calculated. This is from the Cook County assessor’s website:

This is the formula determining property tax bills. There are a lot of steps, but let’s focus on line 2: Assessment Level. 

The current property tax assessment level is 10% for residential properties and 25% for commercial properties. This functionally increases property taxes for commercial properties relative to residential properties. It means that if two properties have the same fair market value, the commercial property will pay 2.5 times as much in taxes as the residential property. 

Chicago’s municipal code refers to vacant land as unimproved real estate and its current assessment level is 10%. Vacant land should be assessed at 25%, the same rate as commercial property, because vacant land that is not developed is inherently a speculative investment. The business of land speculation is a commercial enterprise and should thus be assessed at the higher commercial rate. 

By making this one change, here is what you achieve: 

  1. Lower the price of vacant land through reduced investor speculation. Increasing the vacant lot property tax to 25% lowers the return on investment for speculators. As ROI becomes smaller, speculators invest less money and the price of vacant land would fall. 
  2. Build middle class housing. Cheaper vacant land makes it easier for developers to build more affordable homes. The current price of land is so expensive in Chicago that only very nice homes can be built. In Aurora, IL, where land is cheap, you can purchase a new construction, 1,750 square foot home for $200K. By contrast, a similar home on a smaller lot in the city of Chicago would cost more than $450K. Increasing the assessment value on vacant land won’t cut the price of newly constructed homes in half, but it will help. 
  3. Encourage property development. The increased tax rate on vacant land would lead investors who already own land to develop it sooner rather than later. 
  4. Increase the land controlled by the city. Conversely, some investors would abandon their land and it would fall under control of the Cook County Land Bank Authority. This would be a win for the city. The Land Bank promotes redevelopment of vacant land and sells affordable homes at a discount to help families build wealth. Furthermore, the new revenue generated by the vacant land tax could be earmarked for the Land Bank and go toward building affordable homes. 
  5. Preserve old buildings. There is an assumption in real estate that a vacant lot is easier to sell than an older building that needs improvements. This leads some property owners to demolish old buildings so they can sell a vacant property. Increasing the assessment level for vacant land shifts this incentive structure and results in increased building preservation.

I’ll close with an argument against increasing the property tax assessment level on vacant land:

If an analysis shows that most vacant land is owned by Black Chicagoans it would be cruel to institute another housing policy that would reduce Black wealth.

Jacob Peters (@ArchiJake) provided some early feedback that side lots should not be taxed at this higher rate, which I am on board with. 

He also called out:

“If a vacant lot is included in a Land Trust then it should also be assessed at the 10% value so that a tragedy like a fire does not lead to an increase in the tax burden carried by the land trust. This would also encourage landowners who are not speculating (but just have found themselves as owners of vacant property through inheritance or other means) to enter into agreements with Land Trusts that could lower the impact of property value inflation on displacing residents in the decade before development based gentrification occurs. (this is the phenomenon where a neighborhood will see escalating vacancy rates as landlords aim for higher rents, before the market establishes the new luxury price point that supports new construction development).”

Jacob Peters final point: 

“In neighborhoods that are suffering from disinvestment the incremental increase in tax collection because of this assessment should be put into a fund specifically targeted at supporting neighborhood services that are the basis on whether residents remain in their community, or leave. Have it only be available for schools, transit, health, & parks spending.”

Finally, we each wanted to call out  that this idea isn’t a firmly held belief that we are advocating for. Rather it’s something we would appreciate other vet and provide insights. We are especially concerned for any concerns about equity that this change to the tax code would cause. So please provide thoughts or ideas that challenge this or could improve upon this idea.

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