If the Land Tax Is Such A Good Idea, Why Isn’t It Being Implemented?

Why is a piece of urban land worth something?

The answer is mostly, "Because of what is nearby." The value of land is collectively, publicly created. But private landowners can appropriate this publicly-created value regardless of whether or not they put it to productive use.  In other words, they don’t have to contribute to the good party going on around them.

Speculation inflates land prices near existing infrastructure, thereby pushing development to cheaper (but more remote and less productive) sites. This destroys farmland, and it requires the wasteful duplication of expensive infrastructure, increasing tax burdens.

Image: Steven Vance via  Flickr

Image: Steven Vance via Flickr

In the late 1800s, there was a growing movement to tax land values, led by the economist Henry George, because these gains were “unearned” income. Land speculators endowed economics departments at key universities. Over time, “neo-classical” economics developed, under which “land” and “natural resources” disappeared as separate factors of production. Instead, they are lumped together with “capital.” This too often conceals and obscures discussion of the role that unearned income from rising land and resource values plays in the economy.

This is a major reason the land tax hasn’t caught on politically: land is unlike all other things you can own, buy, and/or sell, but that fact is often poorly understood.

Land speculation, for example, is often referred to as “real estate investment.”  But “investment” is the creation of something new that enhances future production.  Buying and selling land creates nothing; it’s what you do on the land that creates value. Land speculation in itself is just gambling. It is betting that the work of the community will enhance land values, without contributing to that enhancement.

Reining in Speculation

Strong Towns advocates that local communities be given the option of taxing land value separately from building ("improvement") value. A land value tax (LVT) returns the value of land to the communities that created it—and recycles that value to fund public needs like infrastructure creation, operation and maintenance. The benefits are several:

  • LVT makes land speculation less profitable and reduces the incentive for fringe suburban development.

  • Shifting the property tax off of building values and onto land values can make both buildings and land less expensive, thereby making housing more affordable while fostering business growth and employment.

  • Communities that have implemented this reform have outperformed comparable communities using the traditional property tax.

Most things that we’re familiar with are produced.  If we tax them, production falls and prices rise.  Therefore, many assume that if we tax land, its price will rise.  But land taxes don’t reduce the amount of land.  Taxing land values reduces the benefits of land ownership. This reduces land prices.

LVT enjoys broad support among economists. Yet few places are implementing it, which raises the question: Why hasn't land value taxation been implemented more widely?

Land Taxes Are Widespread... Sort Of

In one sense, land value taxation is widely practiced. Almost every community has a property tax that is levied against the combined value of buildings and land.

The problem is that the land tax component of a traditional property tax is too small to deter land speculation. Although property taxes vary from place to place, they are typically between 1% and 2% of the property's total value paid annually. If inflation is low, then for longtime property owners, this amounts to roughly the same cost as if they paid a one-time sales tax on the property of between 10% and 20%. Thus, the property tax applied to building values inflates their price by between 10% and 20%. And the property tax applied to land value allows 80% to 90% of publicly-created land value to accrue as a windfall to landowners.

Thus, typical land taxes are too weak to discourage land speculation.  And this problem is compounded by the negative impacts of the property tax applied to buildings, which especially in weaker real-estate markets can make it unprofitable to do renovations or even basic maintenance on a building. Fortunately, as Joshua Vincent wrote earlier in this series, some communities (especially in Pennsylvania) have shifted property taxes off of buildings and onto land, improving their economic performance.

How About a Universal Tax Abatement on Buildings? 

If you go to a public hearing and declare , “There’s a good tax that could help our community,” nobody will hear a word you say after that. In most people’s minds, all taxes are bad.

Instead, we/you should emphasize how harmful it is to tax building values: 

“We need more housing and more jobs. So why do we penalize owners with higher taxes when they construct, improve or maintain buildings?” 

Restoring a historic house (via  Flickr )

Restoring a historic house (via Flickr)

Under the traditional property tax, the responsible owner of a well-maintained home pays more tax than the owner of an adjacent vacant lot or boarded-up building. Yet, the cost of maintaining streets, sidewalks and utility pipes adjacent to these properties is the same. The snowplow doesn't lift its blade as it passes the vacant lot. All these properties are receiving the same infrastructure benefits. Why punish the responsible homeowners while rewarding speculators?

An article by Daniel Herriges discussed how developers, especially in weak real-estate markets, often receive a property tax “abatement” as an inducement to develop. Instead of such abatements being the norm for a favored few, why not abatements for everybody? A “universal property tax abatement” would reduce the tax rate applied to all privately-created building values.  This should be well-received by almost everybody. This would benefit existing homeowners and businesses as well as newcomers.  The message fits with widespread anti-tax sentiment.

Becoming a Champion for Change 

Changing the tax system is hard.  As much as people hate it, they are familiar with it.  And people are nervous about change.  As with most things, the devils (and the angels) are in the details.  Therefore, if you want to push for this reform in your community, before going public with it, it would be wise to: 

  • Find a public official to be its champion.  The Champion can arrange for you to work with the local tax department to chart out the details: how assessments and appeals would work, and how existing benefits like widespread "homestead" exemptions would be applied.

  • Look into what classes of property and/or which neighborhoods are paying the most under the status quo. What about owners of surface parking lots, vacant lots and boarded-up buildings?  Are there strategically-located parking lots, vacant lots and/or boarded-up buildings that are thwarting economic development? A universal property tax abatement would encourage development of such properties in prime locations.

  • How can rates be shifted off of buildings and onto land gradually over a 5-year period?  This avoids creating windfalls and wipeouts.  After all, speculators are simply playing by the rules.  A gradual shift allows those who would be disadvantaged to change their approach to land management to take advantage of the new incentives without significant hardship.

  • Be aware that tax departments may oppose this change because it draws attention to assessments (which might not be up to par). They won’t admit this. Instead they will claim (falsely) that total property assessments can’t be separated into separate components for land and buildings. You and your Champion need to be aware of this in advance.

  • Identify state laws that permit or prohibit different rates of taxation applied to buildings and land.  In some cases, state laws will need to be changed before this reform can be implemented by a city, town or county.  A single jurisdiction could lobby the state legislature for permissive legislation, but a coalition of communities would be better.

  • Identify key stakeholders, both groups and individuals.  Who are the key public officials whose votes will be needed? Who contributes to their campaigns? What constituencies do they listen to?

  • Identify potentially supportive organizations and unions that care about homelessness, poverty, and affordable housing. Could they become allies for making housing more affordable and jobs more plentiful?

  • Understand your opponents. The owners of “prime sites” in our downtowns are relatively few.  Often, they don’t even live in the communities where they own land. But they tend to make large campaign contributions. Once a tax reform idea becomes public, you can count on them to spread rumors and make false claims. Make sure that key constituencies are prepared and inoculated against them.

  • Identify members of the media who report on tax issues.  Have informal conversations with them about this “interesting idea for prosperity, sustainability and equity.” When speculators start trashing your proposal, educated reporters might place false claims in their proper context.  Develop graphics to illustrate your points. (See my article “Financing Infrastructure With Value Capture: The Good, The Bad, & The Ugly” for some examples.)

  • Some constituencies could be allies or opponents.  To get them on your side, it might be helpful to have a consultant who knows how to communicate these ideas to different groups and how to use assessment data to model possible results.

Strong Towns members have an opportunity to advocate incremental change that will make fundamental improvements in housing affordability, employment, sustainability and equity.

(Cover Image by naobim on Pixabay)

This week, Strong Towns is taking an in-depth look at the land tax and how it can incentivize a healthier, more resilient pattern of growth and reinvestment in cities.

You Get What You Tax For | What’s With That Empty Lot? | The Pennsylvania Experiment | Rewarding Neglect

This series is sponsored by the generous support of the Robert Schalkenbach Foundation (RSF).

About the Author

Rick Rybeck is the Director of Just Economics, a firm that helps communities harmonize economic incentives with public policy objectives to build better places. Rybeck is an attorney with a master's degree in real estate and urban development. He has worked on issues related to state and local government for over 35 years.

In 2009, Rybeck established Just Economics, LLC to assist communities in promoting job creation, affordable housing, transportation efficiency and sustainable economic development.