Every property owner knows there are two costs to any improvement you build. First, there is the cost of construction itself, including any fees you need to pay to the city or county. Then there is the increase in property taxes when your assessment increases. It is, in effect, a disincentive to build and improve property.
But what if that weren’t the case? What if the government only assessed the value of your land—and not any improvements you put on it?
That approach is called a land tax, or land value tax (LVT). By separating land from improvements and taxing them differently, governments can encourage property development. In downtown areas, often dotted with parking lots or undeveloped parcels, owners would be incentivized to build or to sell to someone who will.
This need not be an increased cost to owners. Taxes on improvements and land could be set at different rates (ideally zero for improvements) to ensure there is no net increase.
Show-Me writers have argued in favor of this approach for years:
The legislature in Kentucky, our neighbor to the east, is considering a bill that would, among other things, allow cities to separate property taxes into land and improvements.
In Missouri, such an effort likely would require a change to the Constitution. Currently, Article X, Section 3 states, “Taxes may be levied and collected for public purposes only, and shall be uniform upon the same class or subclass of subjects within the territorial limits of the authority levying the tax.” Later, Article X Section 4 defines real property as a single class with limited subclasses.
This could easily be changed, perhaps by inserting into Section 4, “Land and improvements upon land may be classified as separate subclasses of real property for purposes of taxation.”
Every city wants to spur development. The structure of our taxing system often serves as a disincentive to build. A land tax is a way for cities to encourage building and development without increasing taxes and without offering taxpayer subsidies. And it’s simple to understand and explain.
As Missouri and its cities look to encourage population growth and development, adopting a land value tax is a simple and straightforward way to do so.
