‘Everybody works but the empty lot’: Some Spokane leaders eye property tax reform to promote building

As Spokane city leaders look for new ways to boost development, some are leading the charge for a reform to the property tax system which would shift some of the tax burden off of homes and high rises and place it instead onto parking lots and empty fields.

Imagine two identically sized plots of land in downtown Spokane. On one, developers invest millions to build a 10-story high rise apartment building. On the other, someone builds a parking lot. Today, one of those properties has a much smaller tax bill, and it’s not the one officials consider as providing bigger benefits to the city.

On nearly any developed plot of land in the city, most of the taxes are coming from the value of the building, not the land underneath it. The value of the parking lot’s land increases with every new building that rises up around it, but its property taxes remain relatively low – low enough, some local leaders worry, that property owners can sit on under- or undeveloped land until surrounding development and the changing real estate market makes it sufficiently profitable to sell.

Land -value taxes flip that formula, putting all or at least much more of the tax burden on land prices and away from the value of buildings.

The concept has been floated for more than a century – though adopted almost nowhere in the country during that time – but some local leaders believe that stubbornly high urban housing costs have now created the conditions for land -value taxes to get a second look. Supporters believe the shift would encourage major development by significantly reducing the property taxes slapped onto large buildings like apartment complexes while discouraging land speculation by shifting those taxes onto people holding onto underdeveloped property who hope for a large return down the road.

“We have a housing shortage, that’s the root cause of why prices are so high,” said Dan Bertolet, senior director of the housing and cities program for the Sightline Institute, which has been working with local leaders to advance a land value tax system. “We also have cities with a lot of empty, vacant lots in them, sitting there, usually being speculated on … when you have people speculating on land and not building anything, it actually is contributing to the housing shortage.”

In a pure land -value tax system, property taxes would only be applied on the value of the land, and the owner of the high rise and the owner of the parking lot would be paying nearly identical property taxes. A split -rate tax system, on the other hand, is a middle ground, still taxing the value of buildings but at a lower rate than the land.

The state Constitution does not allow a land -value tax or split -rate property tax to be implemented directly, but local leaders spearheaded by Spokane Councilwoman Kitty Klitzke want the state Legislature to allow cities like Spokane to pilot a jerry-rigged land -value tax by expanding longstanding but currently limited tax exemption programs. Like all of the property tax exemption programs commonly used in the state today – incentives for developing multifamily housing or to preserve farmland, for instance – those taxes would still be paid, just by someone else.

Under the “Universal Building Exemption” pilot program the Spokane City Council is asking the state to allow cities to choose whether to opt in and how hard to pull the exemption levers. Klitzke, with analysis provided by Greg Miller of the Center for Land Economics, a land -value tax advocacy organization, is eyeing something like a “50+50” exemption: subtract $50,000 from the value of the building and then further cut that value in half, though the value can’t be lower than zero.

Consider a $250,000 property where the land is worth $50,000 and the building is worth $200,000. Under a 50+50 exemption, the building’s taxable value would be $75,000 and the total taxable property value would be $125,000.

It sounds more impactful than it necessarily would be, but the effect on most individual properties is minimized because the 50+50 exemption would apply to every property equally. Because those exemptions would apply universally, most single family homeowners would see their tax bill shift by less than 10%, Miller estimated. But for the properties with disproportionately high or low building value, the difference could be thousands of dollars a year or more.

Most homeowners would see a minor dip in their property tax bill, particularly in poorer areas with lower land values, while the owners of major buildings like the Davenport or bank towers in downtown Spokane could shave tens of thousands of dollars off their tax obligations – obligations which would shift instead onto the owners of parking lots, empty fields and rundown buildings in high value areas.

The proposal wouldn’t mean governments would collect less taxes. The burden would shift with an aim of encouraging speculators to develop.

In recent years, city and state leaders have allowed denser development in neighborhoods originally meant for single-family homes, a practice called upzoning.

“The YIMBYS are starting to realize that upzoning isn’t enough,” Miller said, using the acronym for Yes In My Backyard. “It doesn’t disrupt the mechanisms of speculating.”

This shift in the tax burden would not only benefit the owners of existing large buildings, but it would reduce the ongoing costs for the developers of new ones, potentially lowering housing costs not only by encouraging the development of new units but also by lowering the taxes getting passed on to renters.

Any area seeking greater development should adopt some form of land value taxes, Miller argued, but not every area fits that description.

Farmland, for example, should broadly be exempted from a split rate tax system, Miller added.

Klitzke and her land -value tax allies in Spokane aren’t alone in advocating for this major reform to property taxes.

Newly elected Seattle Mayor Katie Wilson advocated for a number of reforms to the tax system in Washington state during her campaign last year, including a land -value tax.

“Finally, under my leadership Seattle will join Spokane in advocating for a Land Value Tax as an alternative option to the property tax, that would also create an incentive to put rundown properties to better use,” she wrote on her campaign website.

Wilson’s transition committee did not respond to a request for comment.

A half dozen other states are also starting to openly flirt with adopting land -value taxes, Miller said in an interview.

“I think we’re in a moment right now,” Miller said. “The amount of legislation three years ago was zero. This year, seven states are considering it. … I think Spokane’s part of the leading edge there.”

But the concept is not without skeptics, opponents and complicating factors. Pennsylvania is the only state in the nation that has historically allowed for split -rate property taxes, and in some cases cities have reported development has been lackluster, blaming confusion among developers navigating jurisdictions with wildly different property tax systems. Pittsburgh abandoned split -rate property taxes in 2001, though Miller blames this on only loosely connected political considerations.

Spokane County Assessor Tom Konis, who has been active in conversations with Klitzke and other local leaders about a shift toward land -value taxes, is also skeptical.

“It’s crazy, in my opinion,” he said.

It’s an opinion shared by most assessors, who would be tasked with juggling the drastically different tax rolls for cities that decide to adopt a split -rate tax system and those that do not, Konis said.

“Do you know how big of a shift on residential taxes this would be?” he continued. “And if the top proposal right now is just to let the city of Spokane do it, then I have to carry two (tax) rolls. … When I brought this up to the Washington Association of County Assessors, they were all saying ‘no, no, no, no. …’ ”

“Everybody works but the vacant lot”

Land -value taxes are an old idea popularized by 19th -century economist Henry George, who believed that land should be the only thing taxed in America.

Unlike the income of the laborers building America or even the capitalists financing the country’s development, George argued that land speculators were uniquely profiting without contributing to the nation’s prosperity. As other people develop neighboring properties, the value of the vacant lot is driven up and the speculator profits without doing anything to contribute.

Activist Fay Lewis highlighted this in 1914 with a famous piece of political performance art: a billboard he placed on an empty plot of land in downtown Rockford, Illinois.

“I paid $3600 for this lot and will hold ’till I get $6000,” the billboard stated while urging people to read Henry George’s writings. “The profit is unearned increment made possible by the presence of this community and enterprise of its people. I take the profit without earning it.”

If it is a community’s efforts and investments that made land values go up, George believed that this increased value should be collected by that community via taxes to fund schools and other government services.

Today’s adopters of Georgism typically leave behind some of his more radical proposals – the man himself believed a land tax should replace literally every other tax in America – but agree that property taxes shouldn’t benefit the owners of empty fields and parking lots at the expense of homeowners and developers.

“These (Georgist) organizations have existed for a century and have accomplished little because they want to throw away the current system and implement a single tax,” Miller said. “You don’t have to sell people on the radical single tax – there is this tool to address these issues cities have right now.”