How to Refute Arguments for Reducing Real Estate Taxes
Herbert Barry, III
GroundSwell, July-August 2005]
Many politicians and their constituents are demanding reduction of
real estate taxes. These proposals fail to distinguish between
buildings and land. Buildings in a city should be exempted from
taxation to encourage desirable construction and improvements. The
tax revenues from real estate should be replaced by higher tax rates
on unimproved land. The higher tax on land value has the additional
beneficial effect of forcing owners of vacant and underdeveloped
lots to develop or sell their properties. Replacement of real
estate taxes by higher income or sales taxes would detract from the
desirable actions of earning money and commercial exchanges.
Land is a natural resource. Instead of depreciating during time,
its value increases due to inflation, which gradually depreciates
the currency. Land value is also increased by facilities and
prosperity of the community rather than by the owner's action. In a
valuable location, such as the center of a large city, the quantity
of land is limited. Prevalently insufficient tax on land causes high
purchase prices, ownership of most expensive and extensive land by
wealthy individuals and corporations, and vacant lots and
dilapidated buildings in expensive locations.
A building is constructed and maintained at the owner's expense.
Its rental and market values are increased by facilities and
prosperity of the community, but these beneficial effects are
counteracted by competition from other buildings. In a valuable
location, buildings can be taller, larger, and more numerous.
Depreciation of buildings is only partly counteracted by expensive
maintenance because of preference for newer buildings. It is
feasible to exempt buildings from taxation and replace the revenue
by a higher tax rate on land. Clairton, Pennsylvania has a
negligible tax rate on buildings. More than a dozen other
municipalities in Pennsylvania have higher tax rates on land than on
A frequent argument is that taxation should be based on ability
to pay. The owner of a building can obtain the needed income from
tenants or by occupying the building as a substitute for renting it.
The same argument supports taxation of a portion of income, sales,
and capital gains. The owner of vacant land receives from it no
income with which to pay the tax.
Taxation inhibits the desirable actions of constructing and
improving buildings, earning income, buying and selling, and
obtaining capital gains. Contrary to these detrimental effects,
taxation of unimproved land has desirable effects. Most owners of
expensive or extensive land are wealthy individuals or corporations.
Most homeowners benefit by a shift of taxation from buildings to
land. They inhabit a well maintained house on a small plot of land
in a residential area that is not one of the most valuable
Another argument against higher tax on unimproved land is that
some homeowners cannot afford the real estate tax in a location that
has become highly valuable. They can attain prosperity by selling
the property and moving to a more appropriate location.
A general argument against a high real estate tax rate is that it
decreases the sale price and therefore is a hardship for homeowners.
If an increase in the land value tax is accompanied by exemption of
the house from taxation, the higher sale value of the house
compensates for the lower sale value of the land.