Over the past year, more than a dozen states have pursued plans to cut or even abolish their property taxes. Similar movements have percolated across the United States for decades, producing in their most extreme forms such public policy disasters as California’s Proposition 13. In the early 2000s, a lower-profile tax revolt broke out on the Hawaiian island of Kauai, where in response to rapidly rising land values, the county government passed a tax cut notable in its own way: Instead of imposing a uniform cut across aggregate property values, Kauai’s County Council reduced only the portion of the tax that fell on land. This created an unusual tax structure: an inverted land value tax.
Until the tax revolt, Kauai had taxed land more heavily than the structures built on it, a rare instance of a “split rate” tax. Land is widely considered to be an ideal source of tax revenue; unlike labor and investment, its supply cannot be reduced, no matter how much it is taxed. This means land taxes create no “deadweight loss” — they do not distort behavior. Land taxes have won near-unanimous support from economists across the political spectrum.
Today, several states are considering adopting their own split-rate taxes to shift more of their revenue generation from buildings to land. As these states move forward with these proposals, and as they address concurrent property tax revolts, they can learn from the case of Kauai, which inverted its split-rate tax in what proved to be an ill-considered move.
When executed carefully, a shift from conventional to split-rate property taxes can immediately reduce burdens for most homeowners while improving efficiency. But to preserve the durability of these shifts, policymakers must pair them with nondistortionary safeguards for vulnerable — and often vocal — homeowners in order to avoid repeating Kauai’s mistake.
Trouble in Hawaii
From the 19th century until after the Second World War, sugar plantations dominated Hawaii’s economy, and land was concentrated in the hands of a planter elite. In 1965, Hawaii’s legislature enacted a split-rate land value tax that was intended to break up large estates, broaden access to land, and spur economic growth and development.
While taxes on structure value penalize owners for improving their property, a land tax does not increase after construction or renovation, eliminating the disincentive for development. And by increasing the cost of holding valuable land out of production, land taxes tend to encourage development on valuable land in central areas, reducing sprawl.
Hawaii temporarily rescinded its state-level split-rate tax in 1977, when the authority to set property taxes devolved to the counties. Soon after, the Big Island of Hawai’i, as well as Oahu and Kauai, restored split rates. In the following decades, land values soared across the state, more than doubling in the first half of the 2000s alone. Property taxes followed. Saddled with a 16.5 percent tax increase in a single year, one resident described owning Hawaiian beachfront property as a “kiss of death.”
In 2004, Kauai voters overwhelmingly approved a charter amendment that would have reset assessments to 1998 levels and capped further increases at 2 percent per year. As with Proposition 13 in California a quarter of a century earlier, the Kauai plan would have distorted the relationship between home equity and tax obligations, transferring obligations from established homeowners to new, often younger buyers. The state’s Supreme Court ultimately rejected the measure as unconstitutional.
In 2005, the Kauai Council responded, cutting only the land portion of its split-rate tax but leaving the structure portion unchanged. In doing so, it biased the tax code against structures and toward low-investment sprawl. This inverted land value tax remained in effect for nearly a decade, until the island ultimately reverted to a single tax rate across land and structures, ending its experiment with split rates.
Property taxes and their discontents
Kauai’s experiment with split-rate taxation failed because the island failed to reckon with a dynamic inherent in both split- and single-rate property taxes. While structures tend to wear down and depreciate over time, land value tends to rise. The land portion of property taxes follows. This is by design: As schools, infrastructure, and other local services constitute a substantial share of what makes land valuable — and as the homeowners who pay for those services are also the direct beneficiaries — land taxation operates simultaneously as a fair recapture of publicly created value and as an optimal local revenue source. Both split- and single-rate property taxes are less distortionary and harder to game than income-based taxes.
Yet land and homes are highly illiquid. Even if a homeowner’s net worth is increasing on paper, rising levies can strain low or fixed incomes. Property taxes are also more salient than other taxes, as they are often paid in lump sums rather than hidden among employer withholdings or behind pretax prices. Taxpayers expect their rates to be predictable and stable — and not to jump, as on Kauai, because of factors beyond their control. When they do, resentment and revolt can follow.
This dynamic is exacerbated when land, the more volatile portion of a property’s value, bears more of the tax. But land taxes are not politically unworkable. Far from it: Revenue-neutral shifts to land taxation relieve homeowners by transferring communities’ obligations onto vacant land and speculators. Though it stalled in the Michigan legislature, a proposal from then-Mayor Mike Duggan of Detroit would have reduced taxes by an average of 17 percent for 97 percent of the city’s homeowners, with none seeing net tax increases. The shortfall would have been paid by owners of vacant land and parking lots.
In these cases, the electoral benefit is multiplied by the fact that owner-occupiers are often the most engaged voters, while many speculators reside outside of their parcels’ districts. An analysis of Baltimore’s assessments by the Center for Land Economics, for example, found that more than a quarter of the city’s vacant lots, and over half of those lots’ value, were held by out-of-state owners.
These are short-term benefits. Shifts to land taxes do not, on their own, solve the dynamic that led to Kauai’s inverted land value tax and to California’s Proposition 13. To stave off revolts, states and localities should pair land value shifts with policies that ensure that homeowners benefit from — and are not priced out by — rising real estate values.
Protecting homeowners
There are three categories of policy that jurisdictions should implement to make land and property taxes more durable:
- Ensuring that taxes are set by voters and elected officials rather than by market swings.
- Relieving homeowners from liquidity constraints, preventing people from being priced out of their homes.
- Helping homeowners benefit from neighborhood growth.
In some cases, as in Kauai, a real estate shock that spikes home values can boost tax revenues even absent public needs justifying the increase. County leaders did not vote to increase taxes; the market did. To prevent such an outcome, jurisdictions should establish automatic levy limits capping the revenue they can collect in a year, and issue rebates when they exceed the cap. Unlike crude measures such as Proposition 13, which distort assessments and constrain local fiscal autonomy, revenue limits prevent runaway taxation while preserving the valuations necessary for efficient land use.
Even when total levies are appropriate for local needs, homeowners may still face insolvency if their illiquid real estate appreciates while their incomes are low or fixed. To protect them without distorting revenue collection, states should consider establishing or expanding property tax deferments, which more than half of U.S. states and the District of Columbia have already done.
In these programs, homeowners can choose to postpone their taxes rather than pay every year. States take out liens against homes and pay local governments so that total revenue stays the same. The homeowner only pays, with interest, when the property is sold or passed on to their heirs — effectively borrowing at a rate lower than bank loans or reverse mortgages would allow. Deferment takes the financial pressure off homeowners and places it on states, which can better afford to wait. The policy eliminates liquidity constraints, ensuring that taxes never overwhelm incomes.
Participation in these programs is often limited through strict means testing, age minimums, and low public awareness. An expansion of these programs, accompanied by a public education campaign, could reassure anxious homeowners that they won’t be priced out of their homes. Notably, neither Ohio nor North Dakota, states in which there have been determined recent efforts to eliminate the property tax, has a deferral policy, though one is pending in the Ohio Senate.
Finally, although they may oppose the taxes that follow, homeowners are rarely unhappy about their assets increasing in value. Revenue limits and deferments are important, but ultimately, jurisdictions must ensure that homeowners are excited about, not wary of, growth. One way to align these incentives is to help owners access their growing equity without selling. Recently enacted laws in California legalizing Accessory Dwelling Unit construction have done just that, allowing homeowners to generate rental income on their property or even, in some jurisdictions, sell the unit as a condo. Legalizing and facilitating subdivisions and lot splits would have the same effect, helping owners monetize their land rather than simply pay taxes on it.
Conclusion
Tax revolts are gaining steam across the country. Anti-tax advocates are correct to argue that property taxes can be unfair — and policymakers can respond by abolishing the unfair portion levied on structures while preserving and expanding the more just and efficient tax on land. The New York State Legislature is considering bills to allow five municipalities to opt into a land tax pilot program. Other states, including Minnesota, Ohio, and Maryland, have similar study bills under consideration, and Virginia’s General Assembly overwhelmingly voted to permit four cities to enact split-rate taxes.
But as these bills progress, policymakers should keep in mind the political economy of land appreciation. They should provide safeguards to defuse the most disruptive effects, and ensure that homeowners and communities welcome, rather than fear, a rise in their net worth. A durable land tax can do more than shift tax incidence. It can cement a political foundation for pro-growth policy.
