Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Stagflation Is Reshaping How Cities Tax Vacant Land
Transcript
- Lucas: So the April CPI came in at 332.4, up again. Core inflation at 3.3 percent annualized, right in line with expectations. And the unemployment rate is still at 4.3 percent. That classic stagflation combo — prices rising, growth stalling. Luna: Yeah, and when you look at what that does to local government budgets, it's brutal. Property tax revenue is supposed to be the stable backbone, but commercial valuations are tanking. Lucas: Exactly. And that's driving a really interesting policy experiment that's gaining steam quietly. Cities are starting to tax vacant land more aggressively. Not just empty lots, but underutilized commercial properties too. Luna: I've seen this pop up in a few places. San Francisco has a vacancy tax on the ballot again. Detroit has had a land value tax in discussion for years. What's changed now? Lucas: The math shifted. When interest rates are high and construction financing is scarce, holding vacant land becomes a speculative bet. But cities can't afford to let that land sit idle when they need tax revenue and housing. So they're raising the carrying cost. Luna: Raising the carrying cost — meaning higher taxes on the land itself, separate from the buildings? Lucas: Right. Traditional property tax lumps land and improvements together. A land value tax, or LVT, taxes only the unimproved value of the land. The idea is you discourage land banking and encourage development. Henry George popularized it in the 1800s, but it's having a moment now. Luna: And the moment is because commercial real estate values have dropped something like 18 percent in some metros since 2023. That cratered the tax base. Lucas: Exactly. So cities are desperate. They're looking at vacant lots and thinking, 'That's potential revenue and potential housing, and we're getting neither.' So they're proposing vacancy taxes — a penalty on properties that sit empty for more than a year. Luna: San Francisco's proposal is interesting. It's a tax on commercial units that are vacant for more than 182 days. They estimate it could bring in $30 million a year. But the opposition says it'll just push small businesses out. Lucas: And that's the tension. A blunt vacancy tax might punish a landlord who can't find a tenant because the neighborhood is struggling. But a well-designed land value tax — where the tax is on the land, not the building — actually encourages improvement. You can lower the tax on the building itself. Luna: So it's like, 'Tax the dirt, not the structure.' Lucas: Exactly. And some cities are blending both. Detroit has a proposal to shift to a split-rate tax: higher rate on land, lower on buildings. Studies suggest it could increase development by 10 to 15 percent over a decade. Luna: But in a stagflation environment, doesn't that risk making landowners sell into a weak market? You could get forced sales at low prices. Lucas: That's the risk. If you hike the tax on land values too fast, you could trigger a fire sale. But proponents argue that's exactly what you want — get land into the hands of people who will actually develop it. And with land cheaper, development becomes more feasible. Luna: But development still requires financing. And financing is expensive right now. So even if land is cheaper, building costs are high. Lucas: True. That's why some economists argue for pairing land value tax with public financing or tax abatements for construction. It's not a silver bullet, but it can shift incentives. Luna: What about cities that aren't San Francisco or Detroit? Is this just a coastal, big-city thing? Lucas: Not anymore. Smaller cities like Reading, Pennsylvania, and Gary, Indiana, are looking at it. The common thread is they all have high vacancy rates and shrinking tax bases. Stagflation accelerates that — businesses close, people move, land sits. Luna: And the political angle? Land value tax sounds like a wonk's dream, but it can be a hard sell. People hear 'new tax' and freak out. Lucas: It is a tough sell. But some cities frame it as a tax cut on homeowners. If you shift the burden from buildings to land, most homeowners — who have relatively small land values compared to their house value — could see a lower bill. Commercial landowners with big lots pay more. Luna: So it's almost like a wealth tax on land speculators. Lucas: In effect, yes. And in a period when the Fed is keeping rates high to fight inflation, this is one of the few tools cities have to stimulate development without spending money they don't have. Luna: Speaking of not spending money they don't have — that's actually a good segue into something I wanted to mention. Lucas: Sure, go ahead. Luna: We do these episodes every weekday, and we deliberately don't run ads. No sponsors, no commercials. That's a choice we make because we think the conversation flows better. Lucas: Absolutely. And the way we keep that possible is through listener support. If you've gotten value from these deep dives — maybe the land value tax episode made something click — there's a link. It's buy me a coffee dot com slash fexingo. That's it. Luna: No pressure, just if you want to help keep the show ad-free. We appreciate everyone who listens. Lucas: Okay, back to the land tax. So we've got cities experimenting, but there's a bigger question: does this actually work in a stagflation? Is there any historical precedent? Luna: There is. Pittsburgh used a split-rate tax from 1913 to 2001. Studies found it correlated with increased building permits compared to other Pennsylvania cities. And it survived the 1970s stagflation. Lucas: Right, that's the classic example. But Pittsburgh's economy was different — heavy industrial, not today's service-oriented cities. Still, it shows the mechanism isn't just theoretical. Luna: What about the legal challenges? Taxing land differently than buildings — that's going to get challenged as unfair or discriminatory. Lucas: It already has. Courts have generally upheld it as long as the tax is uniform within each class. So you can have a different rate for land and buildings, as long as all land is treated the same. But it's a legal minefield. Luna: And then there's the assessment challenge. How do you accurately value just the land, especially in a market where transactions are thin? Lucas: That's the practical hurdle. Assessors typically use the 'sales comparison approach' or the 'land residual method.' But with fewer sales, valuations get squishy. If you over-assess, landowners sue. If you under-assess, you don't raise enough revenue. Luna: So it's a policy that works beautifully in a textbook but gets messy in the real world. Lucas: Pretty much. But the reason it's getting attention now is that the alternative — doing nothing — is also painful. Cities are facing budget gaps. The April CPI shows inflation isn't going away. And with commercial real estate in a funk, the old tax base is eroding. Luna: So land value tax is one of those ideas that keeps bubbling up during economic stress. And stagflation is exactly that kind of stress. Lucas: Exactly. It's not a cure-all, but it's a tool. And it'll be interesting to see which cities actually pull the trigger in the next year.