The issue of fairness is simple: a city raises taxes because it provides certain services and to support public infrastructure. Therefore, a city should make sure it raises its taxes on people who use these services most or that require more of it by design, to avoid subsidizing one lifestyle over others.
On an urban planning level, people, whether they be homeowners, speculators or developers, make economic decisions all the time. Whether to buy, whether to sell, renovate or not, etc... A city is the result of a vast number of economic decisions. Tax policies, by increasing the cost of some options over others, thus influence the final decision people will make, and will change how the city will evolve and look.
These effects shouldn't be considered necessary evils, they need to be analyzed so that tax policies can be fashioned to obtain desired results. Which is exactly what urban regulations usually seek to achieve, in fact, I think that well-thought-out tax policies can replace a lot of regulations, can achieve roughly the same objectives while requiring a lot less bureaucracy and red tape.
Let's do a simple thought experiment, there are two paths from A to B, one red path and one green path, though the red path is much more affordable than the green path for the user, the green path is preferable for the community.
So, let's take a few steps and analyze a few of the common practices and the result they may have on how cities grow and develop.
Property taxesBy far the most common municipal tax is a yearly tax on the value of one's property. This is often seen as a fairer way than a lump sum all have to pay because people who own richer, bigger buildings will pay more than people with smaller, cheaper housing, making it kind of a progressive tax.
Most cities tend to evaluate a property's value as the sum of the land value and the improvement value, then the same tax rate applies to both. (As an aside, I think this is not entirely correct, or at least calling it "land value" leads to confusion, because it supposes that this is the value of the land on its own, which it isn't. But that's for another day...)
Anyway, the big problem with this approach is that it rewards people who lower the value of their property and punishes people who invest in their property. Who would want to lower the value of their property? Well, speculators would, because they are holding the property to sell to a developer down the line, so they don't care about the improvement value, just the land value, which is what the developer will pay.
So speculators will pay very low taxes versus property owners who use their property either directly or by renting it out. This allows speculators to be more patient and keep their property off the market for longer, because as long as the value increases faster each year than they pay in property tax, they are better off waiting rather than selling.
|Inner suburb: expensive housing but affordable transport|
|Outer suburb: affordable housing but expensive transport|
This is one case where having a fragmented metro area can be useful, because if the two suburbs are split into separate cities, then property tax levels may vary between the two.
So, overall a property tax tends to be useful to tax wealthier households by using housing value as a proxy for wealth, but it tends to encourage speculation and it may result in punishing taxes on the more walkable areas of a city, where housing is more expensive because transport costs are lower.
There is also an issue of taxing different land uses at different tax rates. Frequently, non-residential uses tend to be taxed at much higher rates than residential uses, because residential property owners are much more numerous than commercial property owners, many of whom don't even live in the city and are not voters. In Montréal for instance, the central city's residential tax rate is 0,66% (0,68% for buildings with 6 units or more) but the commercial rate is 3,19%. This can hurt a city's economy, especially small businesses who struggle more to pay taxes or rents, and this can push commercial and industrial developments to suburbs.
Land value taxationThis is the tax that Monopoly was made to promote. I'm not kidding. The most famous promoter of this idea was Henry George, an economist who thought that communities prospered when the land is optimally used. It is very similar to a property tax, but in this case, rather than taxing both land and improvement at the same rate, land value is either taxed significantly higher or improvement is just not taxed at all.
Though this results in very similar tax rates for the average owner than the regular property tax, it impacts owners at the extremes. Notably, it falls with full strength on speculators and parking lot owners who keep the value of the improvement on their lots low, waiting for a good offer for their property, which forces them to sell off their lots much faster because the price of holding on to these unproductive vacant lots is much, much higher than it is with a simple property tax. In extreme cases, where there is no improvement tax, this would mean that a vacant lot downtown would pay as much in tax as the lot next door on which there is a 50-story skyscraper.
This tax doesn't punish people who improve their property either. Adding value to your property will not result in a much higher tax bill.
LVT have actually been used a lot in the State of Pennsylvania, where it is notably credited with encouraging the formation of dynamic downtown areas in many cities like Pittsburgh and Harrisburg, despite bad economic conditions.
|Harrisburg's downtown is notably densely built with few surface parking lots for a mid-size American city at the center of a half-million metro area|
|This is Lansing, Michigan, to provide a contrast|
A LVT may also create pressure for developers to build higher density in order to consume less land and thus lower the tax bill. This is not only a good idea for urbanists, but it is also a sign of fairness, as that way big properties that require a lot of public infrastructure to serve will pay more, so that people fund public services more proportionally to how they use them.
Frontage taxA frontage tax is a tax on the street-fronting width of the property, which is generally defined as a fixed amount to pay per year per meter or foot of frontage of a property.
This tax is mainly justified by an user-payer system, the street is where the public infrastructure is, including the street itself, the watermain and the sewers. The frontage of a property is thus almost directly proportional to the amount of public infrastructure the city has to build and maintain to service that property. So it stands to reason that the city should levy a tax that is proportional to the frontage of the property.
Think about it, if your property is 20 meters wide, that means you have 20 meters of street in front of it, 20 meters of watermain pipe, 20 meters of sewers, etc... These are things the city built to service your property, so it's fair to ask you to pay for them.
Some might say that this is independent of the wealth of the household who owns the lot, so the tax is regressive. But in reality, it's a tax that becomes progressive over time as owners and developers adapt to this new price signal and so attempt to conserve width as much as possible. It also rewards multi-family housing and townhouses, housing types that the poor live in more often than the rich.
Of course, this tax shouldn't be the only tax a city relies on, but it has an added advantage that it can actually be estimated in an objective manner as the cost required to replace the city's infrastructure every 30 to 50 years. For example, I've seen many cases here that indicates that reconstructing a street and its underground water pipes cost about 5 million dollars canadian per km, or 6 million dollars US per mile. If this is an accurate estimate, then you can estimate that every property which fronts a paved public street and connected to a public watermain and sewers should pay about 60 $ per linear meter of frontage per year, or 18$ per foot.
5 000 000$/km equals 5 000$ per meter, divided by 2 because there are properties on either side of the street means 2 500$ per meter per side, divided by 40 years (reconstruction of the infrastructure every 40 years), that is 62,50$ per meter per year.
If you have a regular single-family lot that is 15 to 20 meters wide (50 to 70 feet), that means paying 900 to 1200$ per year in taxes, 100$ per month, ONLY in order to rebuild the street at the end of its useful life expectancy. Not cheap, eh?
An added bonus to such a tax is a matter of fairness for certain developments that have private streets and infrastructure. For example, there was a condo cluster that was built in Boucherville a few years back:
This condo cluster actually had private streets as there was no public street in the middle of the lot, which would have precluded development of part of it. This also allowed them to make a street that was narrower than the city would allow, being only 20 feet wide. But right now, the condo owners are demanding that the city take over these private streets. Why? Because they know they will have to repair it someday, and that since they're private, the condo owners will be on hook for 100% of the cost... MEANWHILE, since Boucherville has no frontage tax and funds itself primarily through a property tax, the condo owners pay 100% of the taxes that every other owner in Boucherville who has a public-street-fronted lot pays.
This is evidently unfair, either the private streets' maintenance and reconstruction must be assumed by the city because the owners already pay for them through their taxes OR the city should lower the owners' taxes to take into account that they are not connected directly to a public street.
With a frontage tax, there is no issue, the condo owners in this case would have to collectively assume only the tax for the public street that fronts the condo cluster, and they would then have lower taxes which allows them to put money aside towards maintaining and rebuilding their own private streets. If they still don't... well, that's on them.
Development chargesDevelopment charges are often a big part of cities' budgets, despite their "once-in-a-lifetime" occurrence. These are charges levied on new developments, often justified because of the need to provide new infrastructure for new developments.
On the issue of fairness, it is reasonable to ask greenfield developments to pay for the new infrastructure needs they create. However, in many cases such development charges are often levied even on brownfield redevelopments that reuse existing infrastructure. Development charges, to be effectively fair, need to be modulated based on how much infrastructure new developments actually required. Redevelopment in existing areas should pay next to no charges, while greenfield developments should pay a lot.
With regards to the impacts on city developments, it really depends on how the charges are determined. If each new unit has to pay the same charges regardless of size or location, then of course this falls much more heavily on smaller units and affordable housing. A proper development charge should probably be mainly based on street frontage.
That being said, it is important for cities not to grow dependent on such taxes to fund their current budgets or repairs to their current infrastructure. When a city starts relying one one-time development charges to balance the books, it is setting itself up to fail in the future when development stops. Again, I highly recommend reading about the organization called "Strong Towns" which makes that argument over and over and argues for financial sustainability of cities.
Property transfer taxesThis is a tax that is a bit like development charges, but instead of being charged only once upon construction of a building, it is charged every time a property is sold. This is a widely used tax, but I honestly don't know why it is so popular. The most obvious effect of the tax would be to reduce the number of property transfers, which can hurt cities by locking down some lots that would be sold otherwise.
This tax is especially stupid when condos have started replacing apartments in certain housing markets. In the past, since job security was higher and housing options were basically apartments and single-family houses, the average citizen would probably pay it just once. He would rent apartments until meeting a spouse, then buy a house in which he would raise his family. Today, with jobs being less stable and the lack of recent apartments for the middle-class, the new generation may buy many condos before going into a house, and they may also move a few times even after buying a house. So the new generation is probably going to pay that tax more than once.
The thing with this tax however is that it is great politically. The people who pay the tax are newcomers without the right to vote, they become residents only after paying it, at which point they pay that tax only if they move. So that's a revenue for cities that they can levy without protest from long-term citizens who are more involved politically.
Overall, this is a stupid tax, there's no point to it and it should be abolished wherever it may be found. Considering the extraordinary growth in condos, which are often replacing middle-class and high-end apartments and the greater mobility of households due to the modern economy, this tax is nothing short of a disaster.
Conclusion: my take on taxes
Personally, I think that provincial/State governments should mandate cities levy a frontage tax on all properties, based upon the reconstruction cost of the infrastructure of the street that fronts a property, and the funds of that levy should be earmarked only for maintenance and construction of a city's public infrastructure. That way, we can make sure that all cities levy enough taxes for the long-term sustainability of its public infrastructure and avoid entire cities going to seed due to neglect and deferred maintenance. If this results in taxes increasing a lot on certain property types, that's a good thing, because the tax will signal how wasteful that type of development is and result in more financially sustainable developments from now on. It would also hurt speculators maintaining vacant lots or decrepit buildings.
As to funding the rest of municipal budgets, I think this should fall upon a land value tax and an improvement/building value tax, and the land tax should be much higher than the improvement tax in order to further discourage speculation. The tax on improvement is still there to modulate taxes based on one's wealth. However, it's important that this property tax is modulated on a relatively local area, so as to avoid having urban areas subsidize suburbs, where housing value is low but transport costs are high.