Alex Armlovich - Housing Shortages, Growth Controls, & Property Taxation

The housing affordability crisis isn't just about zoning. While we've rightfully focused on loosening growth controls and allowing more development, there's another lever that directly impacts whether new housing gets built: how we structure property taxes.

As Alex Armlovich from the Niskanen Center recently explained, once you're legally allowed to build housing, "everything that matters is the cost of construction and the taxes." Property taxes set the break-even level at which housing construction stops, they determine the minimum rent developers need to charge to make projects pencil out.

The Land Value Distinction That Actually Matters

Here's the critical insight that many assessors already understand but policymakers often miss: taxing improvements differently from land creates fundamentally different incentives for development.

When you tax the improvement value of a new building, you're directly increasing the operating costs that developers must cover through rents. As Armlovich puts it, "if you're taxing that improvement, rents are going to have to be high enough to cover...those property taxes. And if they're not able to, then you're not going to get the housing built."

But taxing land value? That's "not incident on rents and doesn't affect the break-even level of rents that let construction pencil."

This isn't just economic theory, it's the practical reality that shapes whether a 50-unit apartment building gets built or remains a surface parking lot. The distinction becomes even more important when you consider that developers care intensely about net operating income over their 30-year financing horizon. At a 7% discount rate, property tax burdens in those early years can kill a project before it starts.

New York's Mad Story of Assessment Classes

The complexity of New York City's property tax system offers a cautionary tale about what happens when political expedience trumps uniformity. After the 1970s Hellerstein case challenged the constitutionality of the city's chaotic assessment practices, the state legislature created a system of property tax classes that, as Armlovich describes, ensures "equitable [treatment] within classes but not between."

The result? "Saintly Class 1 homeowners, the most blessed of all possible constituents" receive preferential treatment, while large multifamily rentals face the highest effective rates. Programs like the 421-a tax abatement and the Section 581 discount for co-ops created carve-outs for politically connected groups, evolving the system into what Armlovich calls "a superbug, like an antimicrobial resistant superbug that everyone with political power in the system was able to achieve exemptional relief."

This patchwork approach may have survived constitutional challenges, but it creates exactly the wrong incentives for addressing housing supply shortages. When the tax system punishes new multifamily construction while protecting incumbent property owners, we shouldn't be surprised when housing production fails to keep pace with demand.

The Detroit Experiment and a Path Forward

More promising is Detroit's exploration of split-rate land value taxation. This approach offers what Armlovich calls "horizontal equity", ensuring "everyone gets the same kind of relief for investing in their property" rather than creating a system where political connections determine tax treatment.

For assessors, this represents both a challenge and an opportunity. Accurately separating land value from improvement value requires sophisticated modeling and consistent methodology. But the payoff, a tax system that encourages development rather than speculation, could be transformative for communities struggling with both housing shortages and vacant land.

The key insight is timing. New construction is "extremely tax elastic during its construction horizon," but older buildings become "land-like" in their response to taxation. This suggests targeted relief during the development period, like Philadelphia's 10-year abatement or permanent improvement exemptions, can unlock supply without sacrificing long-term revenue.

Beyond Zoning: The Five-Way Tension

Armlovich identifies five competing interests in housing development debates: labor (wanting prevailing wages), affordable housing advocates (demanding income-restricted units), NIMBYs (shrinking project size), municipalities (needing tax revenue), and the general YIMBY interest in getting housing built at all.

Property tax policy sits squarely in the middle of this tension. Municipalities need revenue, but if property taxes are structured to heavily burden new development, they become part of the coalition preventing new housing, even when zoning allows it.

The solution isn't to abandon property taxation but to structure it more intelligently. As more cities explore split-rate systems and targeted abatements for new construction, assessors have the opportunity to be part of the solution rather than an inadvertent barrier to housing production.

Key Takeaways

• Property taxes directly set the break-even rent level for new construction, they're not just a revenue tool but a development incentive system
• Taxing improvements creates deadweight loss by discouraging development; taxing land value captures public value without distorting construction decisions
• Political compromises that create complex assessment classes may survive legal challenges but create perverse incentives against new housing supply
• Split-rate taxation and time-limited improvement exemptions offer practical paths to encourage development while maintaining revenue
• Assessors play a critical role in housing affordability, accurate valuations and thoughtful policy implementation can unlock or constrain housing supply

The housing crisis demands we examine every policy lever, and property tax structure deserves as much attention as zoning reform. As Armlovich notes, even if "YIMBYs win tomorrow," it would take a decade to build out of our current hole. But getting the tax incentives right is essential to ensuring that when we can build, we actually do.