You've seen them. Maybe in Denver. Or Austin. Or Seattle. Or Nashville. Right in the centers of some of America's most booming cities. Everywhere you look it's steel and glass and construction cranes, and then you turn a corner and find yourself looking at a familiar vacant lot that's been that way for a decade or more. Or, more often, a sparsely used, potholed parking lot with a forlorn-looking automated pay station, surrounded by gleaming high-rises.

Maybe you've wondered, "Why hasn't anyone developed this yet?"

Housing prices in these cities, as in much of urban America, soared over the course of the 2010s. Maybe you've thought to yourself, "If we have a housing crisis and there's all this talk about how we need to build more, how come we have all this land sitting right here that could be providing homes for people?"

The surprising truth is that sitting on a piece of land like this can be immensely profitable. The owners may be in no hurry to develop or sell. And a key reason for that has to do with the backwards incentives created by the way we tax property in almost every city in America.

Taxing Building Improvements is a Gift to Speculators

A parking lot in a bustling downtown is the classic example of a property where nearly all of the value is in the land itself, not the asphalt on top of it. In a rising market, you can hold onto the land and watch its value go steadily up (thanks to all the things your neighbors are doing to make the place more productive and successful). You can collect enough in parking fees to cover the taxes, and cash out when you're ready to cash out. Your property tax bill will be relatively low, because it's based on the sum of land value and improvements. The land may be in a central, prized location, but the "improvements" on the property (that's tax-assessor speak for any sort of structure built on the land) are worth next to zero.