Best Use, Worst Zoning

Andrew Kane

Finance PhD, Duke University

Property Taxes

• Property taxes: % of the potential value of property.
• Chapel Hill: 1.6% of property value per year
• https://tonyhallassociates.com/buyers_chtaxes.php
• Property value assessments reward single family homeowners and punish denser housing.
• Regressive: richer people taxed at lower rates.

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Best Use

• Value of property depends on the HIGHEST AND BEST USE of the land.
• Property is taxed at the most profitable/valuable use the land could be put to.
• Best use determined by location and zoning.

Zoning

• Zoning determines what type of building can be built on land.
• Commercial (retail, restaurants)
• Multifamily (duplexes, fourplexes)
• Single Family Zoning—Only one house can be built per plot of land.
• Restricts housing supply
• https://www.cnn.com/2023/08/05/business/single-family-zoning-laws/index.html
• Worsens the environment:
• https://nysba.org/how-eliminating-single-family-zoning-can-help-in-the-fight-against-climate-change/

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Best use incentivizes bad land use policy.

• SFH zoned
• SFH average price: $750k
• Best use value: $750
• Property tax: $12039

• Fourplex zoned
• Fourplex price: $1.2 million
• Best use value: $1.2 million
• Property tax: $19263

• >$7,000 difference in property tax!

Best Use Encourages Bad Zoning

• Living in a single family zoned house reduces best use of the land.
• Best use valuation rewards bad zoning policy.
• Want to lower your property tax bill? Downzone!
• “Contact Assessment Technologies if you are concerned about the zoning of your property. It may be that having the parcel zoned for a different use may lower your property tax liability.”
• https://atechltd.com/commercial/zoning-and-property-taxes/

Who Benefits? Wealthy Homeowners

• Property taxes rewards owners of single family zoned land and punish everyone else with lower tax revenue.
• Who lives in single family zoned areas?
• Wealthy
• Less diverse
• https://www.nar.realtor/blogs/economists-outlook/single-family-homeowners-typically-accumulated-225K-in-housing-wealth-over-10-years
• Best use valuation lowers taxes for wealthiest residents of community.

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Alternative

• Property/land should be taxed without regard to zoning.
• Modified best use: if the land was not zoned the way it is, what would its value be?
• Fourplex zoned land and SFH zoned land taxed the same.
• Benefits:
• Removes incentive of property owners to downzone.
• Raises property taxes on wealthier homeowners in SFH neighborhoods.