Property Taxes: Creating Incentives to Build Housing

A lot has been said about what needs to happen to incentivize the construction of new housing in Oregon, but less has been said about the fact that adjustments to existing systems and policies can incentivize new construction without over relying on financial subsidies, land grabs, or a loss of environmental protections. One way Oregon can incentivize housing construction is by reforming our property tax structure.

Consider your property tax bill. Currently, property taxes are assessed on two components of a property: The underlying land value, and the value of improvements on the property such as a house or office building. Both of those components are taxed at the same rate; that is to say, the assessed values of those components are added together to get the total assessed value of the property, and then a tax is imposed based on that total (the rate varies according to where the property is located).

This means that landowners in urban areas are incentivized to leave vacant lots vacant instead of building on them, since an improvement would drastically add to the assessed value and therefore tax liability.

Although the State Treasurer has no direct say over property tax policy, as Oregon’s Chief Financial Officer, the Treasurer, does have a “bully pulpit” through which they can propose and rally support for certain financial reforms.

The principle of a land tax has a long history. Over a century ago economist Henry George introduced the concept in his book “Progress and Poverty.” In it he argued the wealthy used land ownership to keep the wealth being created by progress and development elsewhere in cities. The hope was that taxing land would spur development, as landowners were incentivized to make the land profitable. It stands to reason that a land tax should incentivize properties inside urban growth boundaries for development. Progressive taxation is based on the premise that what is in the public interest should be taxed less and incentivized, whereas what is not desirable should be taxed more. This is the same principle as taxing cigarettes because they increase healthcare costs or providing a mortgage interest deduction in order to incentivize home purchases.

The current system of property taxation is biased toward holding raw land inside the urban growth boundary — in essence, land speculation — and rewards real estate investors who sit on a parcel of land with a low tax liability until they feel it has appreciated in value enough to re-sell or develop.

But with the State’s housing crunch making housing more and more expensive, we should not have a tax structure that rewards that kind of inaction. Instead, we should have a tax structure that incentivizes people to put those parcels to the highest and best use. In effect, it is a split rate property tax that does not impact the total tax bill for properties inside urban growth boundary’s that are developed. Through this system, land and buildings residing on the land are treated as separate units, taxed at different rates while leaving the total property tax unchanged.

This concept incentivizes revenue-generating property improvements, which will experience a lower tax rate while the underlying land will have a higher tax rate. But, and this is most important…the total tax is unchanged from the current system, and homeowners won’t see their rates go up since their property is already improved. As building intensity on land increases. local governments and school districts can capture more value which in turn can be used to invest in physical infrastructure.

This kind of split rate property tax also has the benefit of encouraging environmentally sustainable land use. A potential additional benefit to local jurisdictions is lower initial infrastructure costs as land inside urban growth boundaries generally have lower infrastructure costs to develop than land outside urban growth boundaries.

The State Treasurer, with its “bully pulpit” can urge the Legislature and Counties to reform the methodology of assessing urban property taxes by lowering the rate for improvement value and raising the rate for the underlying land value. And we can permit each city to decide how it wants to structure the change while leaving the total property tax unchanged. In this manner, individual homeowners or other landowners with existing improvements would not notice a change, as the respective raising and lowering of those rates would be designed to cancel out. However, urban property owners of un-improved lots or brownfields would see an uptick in their tax rate, and be incentivized to build improvements in order to get revenue against their tax liability.

Jeff Gudman is a former member of the Lake Oswego City Council and a candidate for state treasurer in 2024.
He can be reached at