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The results of a five-year experiment with multi-tier property taxation in the city of Washington, DC, offer some do's and don't's for Cleveland. The District's legislature had intended to discourage vacant lots by taxing them at the highest of five possible rates, but they got hung up on the definition of "vacant" (see what happens when lawyers get involved?) and ended up barely enforcing the new high rate. We in Cleveland can do this better and more simply by switching to a one-tier rate system... and applying it only to land values.
[In May 1998, the D.C. Tax Revision Commission reported unfavorably on the five-tier system and recommended the two-tier system used in most US cities, in which rates distinguish only between business and residential uses. Given the high profile of most of the Commission members, it seems likely that the recommendation will be implemented soon.]
A June 1998 article from the Washington Business Journal explains the situation.
The failure of the five-tier system in Washington is unfortunate, because it really did attempt to solve the vacant-lot problem. At the same time we can learn the results of doing the wrong things for the right reasons.
The Washington system rates upwards from "residential" at the low end to "vacant" at the top. Expressed in terms of dollars per $100 of valuation, the rates go like this:
In theory, while the Washington system is nothing like the ideal, at least it has the merit of making it very expensive to hold on to an empty lot. All other things being equal, it's better to let landowners think that they need to do something useful with a lot or find someone who will; high taxes will accomplish that nicely. It's what I call the use-it-or-lose-it tax.
The problem is that Washington had a hard time defining what constituted a "vacant" parcel and enforcing its distinction. A DC tax official stated that "As long as an owner is making a good-faith effort to fix things, or to improve the property, we can't penalize them." So, bizarrely, you can get a tax break in the District simply by telling officials that you have great plans for the property and are working on getting tenants or funding.
As a result, in the Washington case, what started as an excellent intention--to turn each empty lot into financial hot potato--failed in execution because the DC Council didn't understand how the tax would be implemented in reality. Even if it had worked as intended, though, the plan is still needlessley bureaucratic. What about a hotel with a live-in owner? What about any mixed use? Is a parking lot "vacant"? What if the parking lot is just not very successful? The categorizations are going to have to come out of a combination of judgement, influence, and luck, not good economics.
Furthermore, it is wrong to charge someone more or less taxes based on how they use a lot. Why should DC renters pay more taxes (Class 2 rates, rolled into their landlords' rent requirements) than people who own their own houses? Why should I pay more (or less) in taxes on a site because I choose to run a small hardware store there instead of a household? Tiered property taxation, as attractive as it may be to homeowners, is still another form of government intrusion. It treats people differently depending on how they choose to use their own resources.
"Property" tax arbitrarily mixes the elements of land value, which exists only on the basis of the community around it, and is fixed regardless of actual use; and improvement value, which is the creation of current and previous owners, and is totally dependent on use. These are really two quite different things. Land value should be taxed more than improvement value, because it's stable with use and represents a value that exists because of the surrounding city. As much as improvement values are taxed, the local government is forced to make unnecessary and intrusive value judgements about people's personal choices with regard to family and work.
Ideally, both Washington and Cleveland should go to a one-tier property tax system in which only the land-value portion of an assessment is counted. The one-tier tax would not only get the assessors out of our homes and businesses completely, it would also invoke the "Class 5 effect" of jacking up rates on vacant land that the DC Council had intended--this way as a natural consquence, not the result of a bureaucratic nightmare.
Implementing the one-tier land tax in Cleveland would get government out of our personal lives, encourage growth by taking the load off buildings and business equipment, and create the use-it-or-lose-it effect that Washington's Class 5 never really achieved.
The guy who founded Hough Bakeries came to Cleveland from Barbados.
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