In many cities, a shortage of housing supply has led to high housing prices. One problem is that strict zoning rules have undermined the construction of multifamily housing.

Property taxes are another barrier to increased housing supply. The Wall Street Journal has an interesting piece suggesting that taxing buildings as much as, or more than, land induces landlords to hold onto land undeveloped, rather than pushing ahead with building projects.

The article highlights land in New York City near the U.N. that is zoned for construction of 1,500 apartments but has been empty for 17 years while the “owner has paid relatively little in taxes on the property because it doesn’t contain any buildings.” Apparently, “U.S. cities are littered with vacant or sparsely built sites like this one. New York City alone has more than 77,000 lots that are either vacant or have a building that is less than half the size of what zoning allows.”

All taxes distort, but the argument is that property taxes on land distort less than property taxes on buildings. The article continues:

Some economists and housing advocates say there is a common factor behind all this vacant land: a property tax system that combines low taxes on land with high taxes on buildings.

Lawmakers in Detroit, Philadelphia and Richmond, Va., have proposed reforms that would fundamentally change the way property taxes are calculated. When Andrew Yang ran for mayor of New York in 2021, he called for a higher tax on vacant land.

“There can be no doubt that if you shift the tax off of buildings and onto land, you will encourage buildings and discourage land speculation,” said Nicolaus Tideman, a professor of economics at Virginia Tech.

Perhaps shifting tax costs onto land and away from buildings would boost investment. But I would point to two other tax problems. First, many local governments—such as New York’s—are bloated and inefficient, thus requiring excessive taxes overall. Second, most governments impose higher taxes on apartment buildings than single-family homes, thus tilting investment toward lower-density housing development.

The Lincoln Institute of Land Policy publishes a comparison of effective property tax rates by property type in the largest city in each state. Across the cities, the institute finds that the effective property tax rate on apartment buildings is 36 percent higher, on average, than the rate on owner-occupied residences (p. 40). New York City has one of the largest gaps between its high taxes on apartments and lower taxes on owner-occupied residences.

I’m not an expert on urban issues, but I think we want lean local governments funded by uniform property tax rates on all residential, commercial, and industrial real property. There should be no carve-outs for particular industries or companies, and the single tax rate kept as low as possible.