Tax on Vacant, Impervious Land

Tax on Vacant, Impervious Land

Incentivizes owners to build affordable housing on vacant lots.

Vacant lot in New York City (photo by authors)

What's the issue?

One reason cities might struggle to build enough housing is land speculation. As a neighborhood gentrifies and prices increase, owners of vacant land have an incentive to delay selling the land or building on it because they might be able to get a higher price on the land if they wait. Currently, there are few disincentives to this practice, so land remains unused even as housing shortages increase.

How does a tax on vacant land help?

This policy will disincentivize waiting to build on vacant land. If a property has enough land to construct a a building that matches that area's zoning and at least 75% of the property is covered with an impervious surface, such as a parking lot, then taxes on the property would increase by 15%. This tax rate would increase as the size of the lot increases because the larger the lot, the more potential housing is lost to land speculation. For instance, in Philadelphia's old city, row houses are built on 4,500 square foot plots of land. If one of these were vacant and this policy were in effect, the owner's taxes would increase by 15%. If the property were larger, then the tax rate would increase by 5% with each 1,500 square foot increase in the size of the lot (one third of the minimum lot size).

The policy would only apply to impervious surface such as parking lots because we do not want to disincentivize green spaces or community gardens. This aspect of the policy is inspired by the Philadelphia Water Department’s impervious surface fees.

To ensure that the land is used for at least some affordable housing in cities without mandatory inclusionary zoning, property taxes after construction (which would no longer be subject to an increase) could be reduced if the new construction includes affordable units. This would help ensure that the incentivized construction benefits long-time residents in gentrifying neighborhoods. Different tax deductions could apply when buildings have at least 25%, 50%, or more than 70% affordable units.These  units would be targeted to people earning 60% of area median income or less for larger properties that could apply for the Low Income Housing Tax Credit, and 80% of area median income for smaller projects. While such an incentive would be unnecessary in communities with mandatory inclusionary zoning, tax abatements might still be necessary if an owner can prove financial hardship of constructing any affordable units.

"Buying Sky: The Market for Transferable Development Rights in New York City," Furman Center for Real Estate & Urban Policy, New York University, 2013.

When and where does this policy work best?

This policy is only recommended for cities that are seeing rapid population growth yet struggling to build sufficient units to house newcomers. In a place like Philadelphia, some neighborhoods are gentrifying, but there were still some 25,000 vacant houses as of 2014. In the specific neighborhoods where there is enough housing to meet demand, this policy would impose an unnecessary burden on landowners because the city does not necessarily need new housing to be built on that land.

Works best for neighborhoods in mid-stage gentrification

Works best when neighborhoods are/have...

What are some possible problems and how can we address them?

This policy is likely to see push-back from small-scale property owners who do not have the means or ability to develop their properties. We do hope that limiting this policy to areas where demand for housing is increasing will ensure that there will be buyers for the property with the capacity to develop housing.

To ensure that the taxes do not make development more expensive, additional taxes on the property will stop as soon as developers begin the permitting process for new housing.

The biggest unintended consequence of this policy might be that it might reduce the power of local communities. The tax might incentivize increased property ownership by large scale, non-local developers in gentrifying areas. To abate this process, a city might consider giving tax breaks to property owners who sell to community land or property trusts. Additionally, this tax policy should not apply if the initial owner of the property is a community trust. Finally, if residents are concerned about lost parking and increased traffic in their neighborhood as it grows, the city should be prepared to negotiate and discuss alternatives to parking lots that might be lost through this tax policy.