The idea of taxing land instead of improvements on land -- buildings -- was foundational for 19th century political economist Henry George. But more than a century later, the land value tax could be worth a look for very different reasons: as a reliable source of revenue for strapped local governments struggling in the ongoing economic tumult. The land value tax is an efficient source of revenue that avoids the negative effects that can accompany other taxes, such as local wage or income taxes, according to Assessing the Theory and Practice of Land Value Taxation, the Lincoln Institute's latest Policy Focus Report, co-authored by Richard F. Dye and Richard W. England. “The bottom line is that land value taxation provides city officials with a revenue source that does not damage the urban economy. It allows the city to avoid reliance on other taxes that can undermine urban development, such as local wage and income taxes that encourage businesses to locate elsewhere,” says Joan Youngman, senior fellow and chair of the Department of Valuation and Taxation at the Lincoln Institute.
A land tax is an efficient tax, she says, because it can make the economy more productive and create wealth, because raising the tax rate on land has few undesirable effects, while lowering the rate on improvements has many benefits. A conventional property tax tends to discourage investment in new structures and maintenance of existing structures by reducing the return on such expenditures.
The report also notes that land is in fixed supply, so an increase in the tax rate on land value will raise revenue without distorting the incentives for owners to invest in and make use of their land. By contrast, the part of the property tax that falls on structures or other improvements discourages investment. The land value tax is neutral with respect to the choice of when to develop a parcel and the density of its development, whereas the taxation of improvements is likely to increase low density sprawl. Economic theory suggests that switching to a land value tax might result in a number of outcomes: lower house prices; more improvements per acre of land; higher population density; more employment and higher wages; and less sprawl.
Assessing the Theory and Practice of Land Value Taxation shows that a land value tax can raise the same revenue as a standard single-rate tax, changing the distribution of the tax but not the overall revenue collected. Because these changes will redistribute the tax burden, this report recommends a phase-in of dual tax rates, and inclusion of tax credits to ease the transition to a new tax system.
The tax has had a checkered history in the U.S.,but it can be more successfully implemented with a few simple adjustments such as better assessing techniques, more flexibility in rate setting, a gradual phasing-in process, and targeted tax credits for land-rich but income-poor property owners. "It can work, but needs to be implemented with care. The devil is in the details,” says Youngman. The land value tax can fail if assessments are not kept up to date, as in the case of Pittsburgh, and it cannot be asked to take the place of land use planning, as it was in Hawaii.
More than 30 countries around the world have implemented a land value tax. In the United States, land value taxation dates back to 1913, when the Pennsylvania legislature permitted Pittsburgh and Scranton to tax land values at a higher rate than building values. A 1951 statute gave smaller Pennsylvania cities the same option to enact a two-rate property tax, a variation of the land value tax. About 15 communities currently use this type of tax program, while others tried and rescinded it. The report also details Hawaii’s experience with two-rate taxation, as well as the recent authorization by Virginia and Connecticut for municipalities to implement a two-rate property tax.
There may be legal impediments to land value taxation. Since property taxation in the United States is within the purview of local governments as permitted by the laws of each state, implementation of land value taxation in most states would require new statutory authority, and in some cases a constitutional amendment. A land value tax also raises administrative issues. The land and improvements of each parcel need to be assigned a taxable value in a timely and accurate fashion. Special attention must be paid to best practices in assessment, in recording separate values for land and improvements. For a land value tax to be successful, accurate assessments need to be kept up to date, and tax rates need to be flexible in order to respond to changes in total assessed value.
The report can be downloaded at no cost here. More detail on theory and practice is in the volume Land Value Taxation: Theory, Evidence, and Practice, co-edited by professors Dye and England.