Tax New York City Land Rents

Hamilton Nolan is upset that rich people buy up apartments in New York City and do not really use them. He proposes putting an end to this practice by taxing owners of unoccupied apartments 20% of the apartment's market value. But there is a better way forward: tax NYC land rents.

As Nolan points out, one of the main reasons rich people buy up apartments in NYC (that they do not then live in) is for speculative investment reasons. They are hoping to increase their wealth by flipping the apartment in the future after the price of it has climbed up and up. If you can attack these speculative returns, you can blow up this entire game.

The easiest and most comprehensive way to attack these speculative returns is not a tax on unoccupied apartments. It is a complete tax on speculative housing returns, which is what taxing land rents would entail.

The price of an apartment roughly consists of two things: the value of the physical structure and the value of the location. Since the value of the physical structure does not generally increase over time (unless it is changed in some way), it is only an increase in the value of the location that causes apartment values in NYC to increase. Speculators are not banking on on the value of the aging physical structure of the apartment going up. They are banking on the value of the location going up.

We can conceptually distinguish, then, between the annual rental value of the physical structure of the apartment and the annual rental value of the land it sits on (it's location). When you rent or buy and apartment, these two things are squished together into one price, but they can be separated out. If you separate them out, you can tax the annual rental value of the land at very high rates (ideally 100%). This would operate just like a property tax, except it would be assessed only on the land value.

If you tax land rents in this manner, then increases in the value of the location of an apartment (aka the value of the land) does not translate into speculative returns for its owner. This is because, under such a land value tax regime, any increase in the rental value of the land is entirely captured by an identical increase in the land tax assessed to the owner. This means that when owners go to sell their apartments to a new buyer, that buyer will not be willing to pay the owner more money for it. Any gain in the value of the apartment (which would cause the buyer to be willing to pay more for it) is entirely offset by the tax liability that comes along with owning the place.

What this move essentially does is ensure that the public (through taxation) captures any of the speculative gains that come from the value of a location increasing. This would blow up the investment strategy of buying and holding NYC apartments, which should significantly cut down on the number of vacant units.

Comments