Some of the land in the heart of the city of Saint Louis’ fashionable Central West End is worthless. Don’t believe me? Do you insist that the land upon which mansions, high-rise condos, and world-class hospitals sit must have some value? Well, it does not, and I can prove it. Check out 4256 Lindell on the city assessor’s online database. The land is valued at $0. That is right, $0 for the entire parcel of land. However, at 4512 West Pine (our offices), the parcel of land is appraised at $79,800. How does that happen for two similar parcels? It happens via inconsistent (and occasionally incomprehensible) land assessment procedures, and is a problem around the state.
At least the City of Saint Louis attempts to value its land (as does Saint Louis County). Many Missouri counties do not make any distinction between the land and the building or home on a piece of property. They should. Land and improvements are separate assets with different values and should be measured independently. Valuing the land and the improvement separately makes for both better assessments and a more fair and consistent tax system.
There is often a disconnect between good economics and smart politics. That is a prime reason why land taxes — property taxes on the value of land only — are so rare in the United States. Economists almost universally support land taxes because land is immobile and non-distortionary. You cannot move it and somebody is always going to own it. Furthermore, if you tax the land and not the improvement, you encourage people to invest in their property. If you add on to your home and expand your business, you are not punished with higher taxes under a land tax.
But land taxes made for bad politics. Missouri, like most states, established its tax system when it was (and, in our case, still is) an agrarian state. Guess who dislikes taxing land instead of buildings or homes? Farmers, not surprisingly. But now beneficiaries include urban condo owners who are often not assessed anything for the very valuable land they sit upon. This can be particularly troublesome when combined with tax subsidies. Some subsidy programs only apply to the building and not the land. Cities or counties that utilize those programs but do not assess the land separately risk turning what is supposed to be a partial abatement into a full abatement. That could reduce the tax base even more than intended, with corresponding higher marginal taxes on everyone else.
Land taxation has worked elsewhere, most notably in Pittsburgh. Unfortunately, the only city in Missouri that had it, Kansas City, recently eliminated it. Lawyers and politicians, not economists, recommended that terrible decision. Nevertheless, Missouri can obtain some of the benefits of land taxation simply by requiring counties to judge the value of the land in assessments. Having more taxable value in the land will encourage investment in your property, because the value of the land will not change if you, for example, build an addition. Missouri needs greater consistency in appraisals and assessments. All county assessors should be required to break out the land and improvement values. Furthermore, they should be required to accurately reflect the difference, as opposed to haphazardly guessing. We should not have situations where one valuable urban parcel is set at $0, and another a short distance away is set at $79,800. If we are going to rely on a system of property taxes to fund local governments, we need to make it a more accurate system.
David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.