Are Property-Related Taxes Effective Value Capture Instruments?

In examining the practicality of using property taxes to capture land value in the United States, Lawrence C. Walters found that the annual property tax is an effective value capture instrument. He found that a 1 percent increase in the property value estimated by the cash flow approach can lead to a 0.27 percent increase in property tax revenue three to five years later. More important, this captured value is sufficient to pay for public transportation investments during the study period of three to five years. These results were surprising to the author because there have been widespread efforts to restrain property tax assessments and to limit levy increases in almost all U.S. states. In addition, infrequent tax reassessments might have led to a severe underestimation of the property tax base.

Walters proposes three ways to refine and extend his method of evaluating the performance of the property tax as a value capture instrument. First, since one justification for value capture is that public investments and community actions enhance private land values, it is important to refine the cash flow approach to estimate just land value increases. This approach would also require the total property tax revenue to be disaggregated into revenue from taxing land and revenue from taxing improvements. Second, it is critical to distinguish between investments that result in net increases in value and those that simply move value around. In other words, a less aggregate (metropolitan) level of analysis is needed. Third, the cash flow approach should be tested in less developed countries where data are available.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2011 and is Chapter 8 of the book Value Capture and Land Policies.