Some people think property tax reform is an unbelievably boring subject. Usually, you would be right. But not today. The innovation in property taxes we’ll be covering below will melt your pants off. So get ready, because you’re about to dive right into it!

The problem with property taxes

Property taxes in the majority of the world are set in a fairly simple way: a flat tax on all residential and commercial properties, adjusted yearly for inflation, and in most cases multiplied by the market value of a property. For the most part, current property taxes work well and are fairly easy to understand. But while property taxes succeed in generating a basic level of income for their local municipality, they fail to incentivize the efficient growth of a city.

And what does efficient mean in this context?

Why you should care

Now, this might ruffle some feathers, but it’s far cheaper and more efficient for your local government to maintain infrastructure and provide public services to people who live in densely populated areas than it is to serve the same number of people spread out over sparser, suburban or rural areas. For example, think of all the extra city infrastructure needed to serve 1,000 homeowners living over three or four city blocks, instead of 1,000 people living in a single high-rise.

On a more personal level, consider this: a disproportionate amount of your federal, provincial/state and municipal tax dollars are spent maintaining basic and emergency services for people living in rural areas or the far suburbs of a city, than to the majority of people living in city centers. This is one of the factors leading to the debate or competition urbanites have against people who live in rural communities, as some feel that it isn’t fair for city dwellers to subsidize the lifestyles of those living in isolated city suburbs or distant rural areas.

In fact, studies have shown that people who live in multi-family housing complexes pay an average of 18 percent more in taxes than those living in single-family homes.

Introducing density-based property taxes

There is a way to rewrite property taxes in a way that incentivizes sustainable growth of a town or city, bring fairness to all taxpayers, while also helping the environment. Simply put, it’s through a density-based property tax system.

A density-based property tax basically provides a financial incentive for people who choose to live in more densely populated areas. Here’s how it works:

A city or town council decides the preferred population density inside one square kilometer within its municipal boundaries—we’ll call this the top density bracket. This top bracket can vary depending on the city’s aesthetics, existing infrastructure, and preferred lifestyle of its residents. For example, New York’s top bracket could be 25-30,000 people per square kilometer (based on its 2000 census), whereas for a city like Rome—where massive skyscrapers would appear wholly out of place—a density bracket of 2-3,000 may make more sense.

Whatever the top density bracket ends up being, a city resident who lives in a house or building where the population density one kilometer around their home meets or exceeds the top density bracket will end up paying the lowest possible property tax rate, possibly even paying no property tax at all.

The further outside this top density bracket you live (or the further outside the city/town core), the higher your property tax rate will become. As you’d assume, this will require city councils to decide on how many sub-brackets there should be and the density ranges contained within each bracket. However, those will be political and fiscal decisions unique to the needs of each city/town.

Benefits of density-based property taxes

City and town governments, building developers, businesses, and individual residents will all benefit from the density bracket system outlined above in a variety of interesting ways. Let’s take a look at each.

Residents

When this new property tax system comes into effect, those living in their city/town cores will likely see an immediate spike in their property value. Not only will this spike lead to increased buyout offers from large developers, but the tax savings these residents receive can be used or invested as they see fit.

Meanwhile, for those living outside the top density brackets—usually those living in the mid-to-far city suburbs—they will see an immediate spike in their property taxes, as well as a slight decline in their property value. This population segment will split three ways:

The 1% will continue living in their reclusive, upper-class suburbs, as their wealth will cushion their tax hike and their proximity to other rich people will maintain their property values. The upper middle class who can afford a big backyard but who would notice the sting of higher taxes will also stick to their suburban lives but will be the biggest advocates against the new density-based property tax system. Finally, those young professionals and young families who normally make up the lower half of the middle class will start looking for cheaper housing options in the city core.

Business

While not outlined above, the density brackets will also apply to commercial buildings. Over the past one to two decades, many large corporations have moved their office and manufacturing facilities outside of cities to lower their property tax costs. This shift is one of the major factors pulling people out of cities, fuelling the non-stop growth of nature destroying sprawl. The density-based property tax system will reverse that trend.

Businesses will now see a financial incentive to relocate near or inside city/town cores, and not only to keep property taxes low. These days, many businesses struggle to hire talented millennial workers, since not only are most not interested in the suburban lifestyle, but an increasing number are opting out of owning a car altogether. Relocating close to the city increases the talent pool they have access to, thereby leading to new business and growth opportunities. Also, as more large businesses concentrate near each other, there will be more opportunities for sales, for unique partnerships and for a cross-pollination of ideas (similar to Silicon Valley).

For smaller businesses (like storefronts and service providers), this tax system is like a financial incentive for success. If you own a business that requires floor space (like retail shops), you’re incentivized to relocate to areas where more and more customers are attracted to move to, leading to more foot traffic. If you’re a service provider (like a catering or delivery service), the greater concentration of businesses and people will allow you to cut your travel time/expenses and service more people per day.

Developers

For building developers, this tax system will be like printing cash. As more people are incentivized to buy or rent in the city core, city councilors will be under increased pressure to approve permits for new building projects. Moreover, financing new buildings will become easier as the increased demand will make it easier to sell out units before construction even begins.

(Yes, I realize this could create a housing bubble in the short term, but housing prices will stabilize over four to eight years once the supply of building units begins to match demand. This is especially true once the new construction technologies outlined in chapter three of this series hit the market, allowing developers to construct buildings in months instead of years.)

Another benefit of this density tax system is that it could promote the construction of new family-sized condominium units. Such units have gone out of fashion over the past decades, as families have moved out to the lower cost suburbs, leaving the cities to become playgrounds for the young and single. But with this new tax system, and the intervention of some basic, forward-thinking construction bylaws, it will be possible to make cities attractive to families again.

Governments

For municipal governments, this tax system will be a long-term boon to their economy. It will attract more people, more residential development, and more businesses to set up shop within their city boundaries. This greater density of people will increase city revenues, reduce city operating costs, and free up resources for new development projects.

For governments at the provincial/state and federal level, supporting this new tax structure will contribute to a gradual reduction in national carbon emissions through the reduction of unsustainable sprawl. Basically, this new tax will allow governments to address climate change by simply inverting a tax law and allowing the natural processes of capitalism to work their magic. This is (in part) a pro-business, pro-economy climate change tax.

(Also, read our thoughts on replacing the sales tax with a carbon tax.)

How density taxes will impact your lifestyle

If you’ve ever visited New York, London, Paris, Tokyo, or any of the other famous, densely populated cities of the world, then you’d have experienced the vibrancy and cultural richness they offer. It’s only natural—more people concentrated in a geographical area means more connections, more options, and more opportunities. Even if you’re not wealthy, living in these cities offers you a richness of experience you won’t get living in an isolated suburb. (A valid exception is the rural lifestyle that offers a far more nature-rich lifestyle than cities that can potentially offer an equally rich and vibrant lifestyle.)

The world is already in the process of urbanizing, so this tax system will only accelerate the process. As these density taxes take effect over a time range of decades, most people will move to cities, and most will experience their cities growing to greater heights and cultural complexity. New culture scenes, art forms, music styles, and forms of thought will emerge. It will be a whole new world in a very real sense of the phrase.

Early days of the implementation

So the trick with this density tax system is in implementing it. Switching from a flat to a density-based property tax system will need to be phased in over a number of years.

The first main challenge with this transition is that as suburb living becomes more expensive, it creates a rush of people trying to move to the city core. And if there’s a lack of housing supply to meet that sudden demand spike, then any savings benefits from lower taxes will be canceled out by higher rent or housing prices.

To address this, cities or towns considering a move to this tax system will need to prepare for the demand rush by approving construction permits for a glut of new, sustainably-designed condo and housing communities. They will have to pass bylaws ensuring that a larger percentage of all new condo developments are family-sized (instead of bachelor or one-bedroom units) to accommodate families moving back to the city. And they have to offer deep tax incentives for businesses to move back into the city core, prior to the new tax being put in place, so that the influx of people into the city core doesn’t turn into an influx of traffic out of the city core to commute to a suburban workplace.

The second challenge is voting this system in. While most people live in cities, most of those people still live in city suburbs, and they will have no financial incentive to vote in a tax system that will raise their taxes. But as cities and towns around the world naturally become denser, the number of people living in city cores will soon outnumber suburbanites. This will tip the voting power to the urbanites, who will have a financial incentive to vote in a system that gives them a tax break while ending the urban subsidies they pay to finance the suburban lifestyle.

The final big challenge is keeping track of population figures in near real-time to properly calculate the property taxes everyone will be required to pay. While this might be a challenge today, the big data world we’re entering will make collecting and crunching this data increasingly easy and cheap for municipalities to manage. This data is also what future property appraisers will use to better assess property value quantitatively.

In all, with density property taxation, cities and towns will gradually see their operating costs shrink year-over-year, freeing up and creating more revenue for local social services and big capital expenditures—making their cities an even more attractive destination for people to live, work and play.

Future of cities series

Our future is urban: Future of Cities P1

Planning the megacities of tomorrow: Future of Cities P2

Housing prices crash as 3D printing and maglevs revolutionize construction: Future of Cities P3

How driverless cars will reshape tomorrow’s megacities: Future of Cities P4