Alter housing taxes to incentivize supply: the case for taxing land instead of buildings

The United States is short an estimated 4–8 million homes. The shortage is the engineered result of decades of federal tax policy that treats real estate as a tax-favored storehouse of wealth rather than as shelter for a productive citizenry. By the partial accounting that exists today:

• $23 trillion in combined residential and commercial land value sitting on the US balance sheet — with near-zero federal revenue captured from that base, even as the federal tax system extends roughly $200B/yr in regressive subsidies (MID + Section 121 + investor preferences) to the top 10% of households that hold the most of it.
• Median US home price ~6× median income, against a historical baseline near 3× in 1980 (NEEDS_V10 #9). Homeownership at age 30 has fallen from 51% (1980) to 38% (2024). The wealth transfer from would-be first-time buyers to incumbent owners across that period is at population scale.
• Speculative sink. Capital that would otherwise flow into new technology, new businesses, or new housing supply is parked in real estate — particularly in secondary residences and short-term rentals — because the tax-favored appreciation outpaces every alternative productive use.
• NIMBY feedback loop. Homeowners are incentivized to lobby for restrictive zoning, height limits, parking mandates, and discretionary review precisely because scarcity protects the wealth-store function of their own holdings. The political defense of the carve-outs is funded by the carve-outs themselves — the same regulatory-capture pattern the Accord names elsewhere.
• Regional divergence. Coastal markets are structurally tight under regulatory barnacles; the Sunbelt/South faces the largest absolute deficits (~1.62M homes in the South alone) and is vulnerable to buy-strip-flip institutional speculation; the Midwest has blighted land sitting fallow because the carrying cost of an empty lot is lower than the lot's appreciation.

This is the legacy bill. The Mortgage Interest Deduction was enacted in 1913 (as part of the original federal income tax, when home ownership was rare); the Section 121 capital-gains exclusion in 1997 (to simplify a tax that had become unwieldy). Each was created for a genuine reason at the moment of enactment, and the compounding effect across a century is the structural failure the Accord names — a tax architecture no Congress has tended.

Two federal carve-outs compound to produce the asymmetry that drives the shortage:

• The Mortgage Interest Deduction (MID). A deduction of interest on home-mortgage debt up to $750K (post-TCJA). The benefit accrues overwhelmingly to the top 10% of households because the deduction is worthless below the standard-deduction threshold and scales with the size of the mortgage. The policy was originally intended to support broader homeownership; in current form it subsidizes expensive homes for households who would buy without it.
• The Section 121 capital-gains exclusion. Up to $500,000 of gain on the sale of a primary residence is excluded from capital-gains tax (joint filers). The exclusion converts owner-occupied housing from a consumption good into a tax-favored appreciating asset — the implicit message of the code is: buy a house, hold it, watch it appreciate, sell it tax-free. The behavioral effect is exactly what the policy describes.

Both carve-outs operate on the demand side of an inelastic-supply market. Land is finite; new lots near transit or jobs are effectively bounded by geography and regulation. When demand-side subsidies meet a fixed supply, the subsidy is capitalized into land prices rather than expanding the housing stock. The buyer subsidy becomes the seller's premium. The federal government spends roughly $200B/yr on housing subsidies that increase prices rather than units.

Three structural distortions compound on top of the demand- side subsidy capture:

• The NIMBY feedback loop. Restrictive zoning, height limits, parking mandates, and discretionary review processes exist because incumbent owners benefit from scarcity. The political incentive at the local level points away from new construction. State-level preemption of local zoning has begun in California, Oregon, and a few other jurisdictions, but the federal lever has not been deployed.
• Idle land as a tax shelter. In many jurisdictions, the property tax on an empty lot is lower than the appreciation that lot accrues per year. The economic signal points toward holding, not building. Whole blocks of urban land sit fallow in cities with the largest housing deficits.
• Short-term rental hotelization. National STR listings reached 2.4 million in 2023; research suggests STR growth has accounted for up to one-fifth of recent rent increases in affected markets. Each unit moved from the long-term rental pool to the Airbnb/VRBO inventory removes shelter from the local labor force; the regional effect is now well documented (Barron, Kung & Proserpio 2021; FHFA tract- level analyses).

The Accord proposes a federal Land-Value Surcharge (LVS) — a tax on the unimproved value of land, applied at source. The structure is an income-tax adjustment under the 16th Amendment (the “LAND Act” legal model), avoiding the constitutional pitfalls of state-by-state apportionment that would otherwise apply to a direct tax on land.

The subsidy swap. Concurrently, the MID and Section 121 carve-outs phase out on the same 10-year glide path. They are replaced by a flat First-Time Stability Credit available only to middle- and lower-income first-time buyers — restoring the original homeownership-promotion intent of the federal housing-tax architecture without the runaway capitalization of demand subsidies into land prices.

Federal grant integration. Federal transportation, infrastructure, and housing grants become conditional on locality-level reforms documented to reduce artificial scarcity: decoupling parking from development, applying vacancy multipliers to idle lots near transit, by-right approvals for compliant infill, and elimination of single-family-only zoning within transit- served areas. The grant lever is the federal government's existing constitutional power; the Accord routes it toward supply, not against it.

The Speculation Brake. When regional housing prices surge beyond a Housing-Finance-Board-defined threshold, the brake triggers automatically: a 0.25% transaction tax on non-primary-residence sales, paired with a reduction of the maximum loan-to-value ratio on non-primary residences to 60%. The 0.5% LVS applies to all non-primary residences without exception, including the STR inventory.

At the terminal 0.5% rate, the capitalization formula X = (a+b)L ÷ (a+b+c) — where a is the after-tax discount rate, b is the land-rent growth rate, L is the pre-LVS land value, and c is the LVS rate — yields a nominal land-price decline of approximately 5.9%. Five-and-change percent is small enough to avoid systemic mortgage default and large enough to break the wealth-storehouse spell.

The Vancouver precedent. Vancouver's municipal 3% vacancy tax produced a 54% reduction in vacant properties and returned over 5,000 units to active use in a single mid-sized city. Vancouver is not the United States, and the 0.5% LVS is not a 3% vacancy tax. But the directional evidence is clear: even modest carrying-cost pressure on idle property produces substantial supply restoration at the margin where it matters.

By taxing land instead of building improvements, the Accord flips the developer's incentive structure. Developers are no longer penalized for building high-density, accessible housing; speculators are penalized for holding land idle. The asset class that has absorbed a generation of household savings, choked off urban supply, and priced young workers out of the cities their work produced becomes, once again, what it was supposed to be: shelter for the people who live in it.

The closing thesis. An economy where wealth is a function of productive activity outperforms an economy where wealth is a function of land-hoarding — on every metric that matters for civilizational durability. The housing shortage is the most visible failure of the current framework. Fixing it does not require an act of will against homeowners. It requires realigning the price of holding land so that the next 8 million homes are built by a market that finally serves people over portfolios.