Getting to a Land Value Tax in Wisconsin

Even if Madison "sees the cat", there are hoops (imposed by the state) to jump through to implement a LVT that would help unlock revenue and housing.

Two of the three proposals for the Brayton Lot redevelopment - Credit Brink Development and Neutral

I previously wrote about my desire to implement a land value tax (LVT) in Madison. I discussed several vacant or underused lots near Downtown that I think would see rapid development if they were appropriately assessed and taxed.

LVTs are exciting for people like me who believe in growth; it’s a great tool to stop speculation and ensure everyone is providing more tangible value than the level the land is valued and taxed at. If you have a use case that isn’t productive (like a surface level parking lot two blocks away from the Capitol), you either pay for the privilege to maintain that use case or you sell your land to someone else who can make something better (like apartments or condos at the top of the article!).

The problem with exciting policies and government is that it often can’t be easily implemented. You will run into ordinances, constitutions, neighborhood associations, and numerous other veto points that prevent you from using your cool new system. Madison would immediately hit these veto points if Mayor Satya or Common Council were interested in a LVT.

The Constitution, Uniformity Clause, and other laws

Did you know Wisconsin has a constitution? And there’s an eighth article dedicated entirely to finance? The first sentence of this article defines the “uniformity clause”:

Rule of taxation uniform; income, privilege and occupation taxes. Section 1. [As amended Nov. 1908, April 1927, April 1941, April 1961 and April 1974] The rule of taxation shall be uniform but the legislature may empower cities, villages or towns to collect and return taxes on real estate located therein by optional methods.

There are a few more interesting clauses later on that we will come back to, but the constitution says that cities, villages, and towns can collect taxes as long as they are uniformly calculated and they are based on real estate. This is fairly opaque and requires ordinances to further define how these governmental bodies can tax. For cities, it is defined in the Common Council statute §62.11(5):

Powers. Except as elsewhere in the statutes specifically provided, the council shall have the management and control of the city property, finances, highways, navigable waters, and the public service, and shall have power to act for the government and good order of the city, for its commercial benefit, and for the health, safety, and welfare of the public, and may carry out its powers by license, regulation, suppression, borrowing of money, tax levy, appropriation, fine, imprisonment, confiscation, and other necessary or convenient means.

Statute §70.05(1) defines that cities, villages, and towns must assess property and specifically §70.32 defines how real property will be assessed. What is real property? Statute §70.03(1)’s got you covered¹:

(1) In chs. 70 to 76, 78, and 79, “real property,” “real estate,” and “land” include not only the land itself but all buildings and improvements thereon, and all fixtures and rights and privileges appertaining thereto

Which is Madison’s predicament. You could run a scenario like Allright Properties, Inc. v. City of Milwaukee where, due to a lack of recent “arms-length sales of the property” (tier 1) and no sales of “reasonably comparable” properties (tier 2), the Milwaukee Assessor used a cost and an income analysis (tier 3) to determine the value of a surface parking lot to be $10,115,000. This was much larger than the $3,300,000 value the owner of the property believed it to be worth (even though it sold in 2007 for $12,300,000 as the trial was ongoing), prompting the lawsuit. The Wisconsin Court of Appeals reversed a district court decision ruling that Milwaukee violated the Uniformity Clause, allowing the assessment but establishing that “taxes are levied on the value of the real property, not separately on the components of land, or improvements, or other rights or limitations of ownership.”

This allowed Milwaukee’s assessor to use income generated from the parking lot to help value the land and property². For Madison’s case though, it wouldn’t necessarily be beneficial to incorporate both land and property value into an assessment. Newer buildings would be penalized (because they would be worth more) even if vacant lots were forced into realizing the income potential of entities built on the land. And how do you define potential income? Do you take the most successful entity as your baseline for generating income? The median entity? Income varies dramatically between new apartment complexes, hotels, grocery stores, retail stores, concert venues, and office buildings. Ideally, you’d be agnostic about how entities generate income to pay the LVT and focus on assessing the land it’s on to ensure that’s uniform and fair.

What can Madison do about this?

With the existing interpretations of the law, Madison (or any entity in Wisconsin) faces an uphill battle for implementing a LVT. There seem to be two paths, and my lack of legal expertise has me concerned about either.

1. Ask the legislature to allow them a new “optional method”

2. Pass a constitutional amendment adopting language legalizing a LVT

Option 1 comes directly from the text of the WI Constitution stating “the rule of taxation shall be uniform but the legislature may empower cities, villages or towns to collect and return taxes on real estate located therein by optional methods.” If the Wisconsin state legislature passes a new ordinance that explicitly states the taxation levels of real estate can be different for the “components” (land, property, improvements, and machinery) provided each component is taxed uniformly within its category, I think this would be legal. Critically it “matrixes”³ past the uniformity clause as long as each component is taxed at the same rate across parcels. Land could be taxed at 2% (or whatever mill rate matches the required levy) of its assessed value and property could be taxed at 0%; we maintain uniformity across the property components. It would require a lot of staff resources and time to really ensure that every statute regarding the definition of real estate were covered and that nothing superseded the new law stating “you can’t tax solely based on land”, but it would be the easier path. If you want to read more about this, see Progress and Poverty:

Uniformity Does Not Preclude Land Value Taxes

Option 2 has happened before in Wisconsin. The remaining first clause of Article 8:

Taxes shall be levied upon such property with such classifications as to forests and minerals including or separate or severed from the land, as the legislature shall prescribe. Taxation of agricultural land and undeveloped land, both as defined by law, need not be uniform with the taxation of each other nor with the taxation of other real property. Taxation of merchants' stock-in-trade, manufacturers' materials and finished products, and livestock need not be uniform with the taxation of real property and other personal property, but the taxation of all such merchants' stock-in-trade, manufacturers' materials and finished products and livestock shall be uniform, except that the legislature may provide that the value thereof shall be determined on an average basis. Taxes may also be imposed on incomes, privileges and occupations, which taxes may be graduated and progressive, and reasonable exemptions may be provided.

These are all examples of exemptions made to assessing land or other property that has unique characteristics. We have cows⁴ and lots of farmland; legislatures back in 1974 made an amendment removing the uniformity clause for agricultural land (presumbably to lower assessed values and help farmers). If you live on a gold mine, the gold can be valued in addition to the land it resides in. The state (but not cities) can impose income taxes. This potentially eliminates option 1 , as the constitution explicitly states that agricultural land and undeveloped land don’t need to be uniform with the taxation of other real property. A judge might argue that other components of real property, like land, do not have the same distinction. A constitutional amendment is not unheard of, but considering how they work the easier path is certainly having the legislature authorize it and only looking at the second route if the courts decide to intervene⁵.

Posting is policy

My love of land value taxes comes from reading Progress and Poverty. They recently highlighted the “posting-to-policy” pipeline coined by Paul E Williams that helped a German occupied territory in China adopt a land value tax in the late 1800’s:

The curious case of Qingdao, China's land value tax

A periodical highlighting the effectiveness of a LVT wound up in the hands of the Navy Admiral in charge of governing the province. Will this article do the same thing? Almost certainly not⁶. That shouldn’t stop us from beginning the conversation with our alders, city staff, and state representatives who could work towards implementing this new system. So, for anyone that is looking to help move this towards reality, here are my talking points.

LVTs:

• Encourage development of valuable resources like housing, businesses, schools, and amenities

• Penalize land speculators and land owners who aren’t productively using their land

• Generally provide tax relief for homeowners, renters, and small businesses

• Incentivize people to continue to improve their homes or businesses without facing an additional tax burden

• Reduce sprawl and builds stronger communities

Talk about this with your family and friends, your co-workers, whoever might listen about how we can make Madison an even better place to live. Share examples of how it’s worked in Pennsylvania and places like Minnesota, Colorado, and Baltimore are considering their adoption. As more people hear about the virtues of taxing the land, I think there’s a decent shot we just might do it.

---

More on Madison and Land Value Taxes

More on Madison and Housing

1. Once again, I do not like lawyers. I can understand why we conceptually need all these rules, but how do you expect a normal Wisconsinite to interact with these statutes?

2. The parcel is located close to an airport and would have constant demand as long as the airport remains open

3. My new favorite pretend legal term

4. About 1.27 million dairy cows, which is second to California’s 1.7 million dairy cows

5. I expect wealthy families on large lots would sue cities if their land significantly increased in value and their taxes increased as a result. The status quo works really well for them and if they currently sue over small apartment buildings, this is actual money on the line.

6. Although I could take out ads on the Madison Metro, the Mayor-friendly commute option