Because property tax in the United States is almost entirely a state and local issue, the legal barriers to a land value tax vary widely between states.*

Economists, urbanists, and ecosocialists alike can all find something to love in the idea of a land value tax; it’s an efficient way to collect public revenue without burdening workers or investment, instead taxing a resource that no individual or business can claim they independently produced: land.

By sending a market signal to put valuable urban land to productive use, a land tax encourages denser, infill development. Building near existing roads and infrastructure benefits city economies by creating more jobs and housing while wasting less land, water, energy, and commuting time.

Policies for smarter land use are a 21st-century imperative to address housing affordability and unjust economic displacement, improve public health, and ultimately, save the planet.

screenshot from Maricopa County Assessor’s Office, showing zoning and parcel classifications/valuations in downtown Phoenix, AZ.

The Goal

Real estate, or real property, can comprise either raw, unimproved land, or land plus the buildings or other “improvements” constructed on it. Fundamentally, taxing the land component of a given piece of property at a higher rate than the improvements is the goal of a land tax.

Before we look at practical and legal barriers to meeting this policy goal, here’s a simplified way to understand the process of taxing real property.

Property Tax Assessment 101

First, “classify” different types of property (e.g. residential, commercial, or industrial) into groups based on the land use. Next, figure out the property’s value, usually the “fair market value” or what a rational buyer would pay on the open market. Finally, multiply the correct tax rate for the given class of property by the parcel’s value to find the amount of property tax owed. Straightforward enough!^

To an economist operating on paper, getting from our current property tax system to a land tax is just as easy; we can figure out the value of land and improvements separately, then apply the desired tax rate to each. So long as land is taxed relatively more than the buildings on it, all the benefits of a land tax should accrue to some degree in that community.

This process is theoretically even simpler because 29 states already mandate separate property valuation for land and improvements, and the vast majority of local authorities do so whether mandated to or not. Information on the relative value of land and the buildings on it already exists in most local tax jurisdictions.

The Legal Obstacles

Those who advocate implementing a land tax in their city or state will inevitably face the question of constitutionality: “Is this change even legal under the rules governing lawmakers around here?”

The US Supreme Court has effectively ruled out federal property taxes as far back as 1880 (Springer v. United States) based on Article I, section 9 of the US Constitution’s prohibition on so-called “direct taxes” that aren’t “in proportion to the Census.” The 50 state constitutions have a wide range of restrictions on property taxes and delegate different levels of power to cities to make their own tax policy. All this variation means the legality of a land tax depends on the specific laws of each city and state, leaving confusion as to the feasibility of implementing a land tax—but also opportunity to organize for better policy on the state and local level.

The main principle guiding questions of tax fairness is the idea of “horizontal equity,” that equals should be treated equally. State constitutions enforce this concept by requiring some combination of 1. uniformity, 2. equality, 3. universality, and 4. proportionality in taxation. These principles say that tax rules should 1. apply identically to all parties paying the tax, 2. properties with the same value should pay the same tax, 3. all property is subject to tax unless specifically exempted, and 4. taxes on different parcels are proportionate to the different values of the parcels.

State supreme courts usually defer to legislatures’ authority to craft and revise tax policy that doesn’t clearly conflict with the state’s constitution. The most straightforward approach to a land tax would simply classify land and improvements separately and tax the land at a higher rate.

So-called “differential classification” might be the most constitutionally sound form of a land tax because the uniformity principle only applies within a class of property, not between classes. Just as there are obvious policy reasons to allow different tax treatment of a mall vs. an apartment building vs. a farm, it makes sense to distinguish how land and improvements get taxed.

For example, Article IX, section 1 of the Arizona constitution allows the legislature to classify property “in proportion to use, productivity, and utility,” such as special rates for railroad property. Oregon requires “inherent, qualitative, genuine difference between the subjects” to classify property differently for taxation, and Pennsylvania requires a “concrete justification, a non-arbitrary and ‘reasonable and just’ basis” for different tax treatment.

For a 21st–century “Law and Economics”

In the past, economic arguments have been overwhelmingly deployed to uphold unjust legal and political structures, but this valuable field also has the potential to strengthen moral and policy arguments for progress and disruption of the status quo where it causes harm.

Generally accepted economic theory would say that land and buildings are distinctly different inputs in the production of goods and services. For one thing, land mostly draws its value from location and proximity to other valuable land, whereas improvements are valued based on size, age, and other production-related characteristics.

The nature of these two types of property are different in “inherent, qualitative, genuine” ways and assigning them to different classes for taxation is “rational” with the “concrete justification” of promoting economic growth while preventing sprawl.

Conclusion

An important final note to this discussion of constitutional barriers to land value taxation: it may ultimately prove theoretical and moot.

Pennsylvania appears to have prohibited dividing real estate into different classes for taxation since this 1967 case, even though a number of cities there have used a land tax since the state legislature authorized them to all the way back in 1913.

The lack of court challenges to the land tax in PA state court shows that what might look like constitutional hurdles might not trip up reform efforts after all. This fact demonstrates how the real political economy of state and local tax is sometimes at odds with constitutional ideals and existing legal precedent.

*This post draws broadly from Richard Coe’s writing in Land Value Taxation, a collection of essays published by the Lincoln Institute of Land Policy addressing multiple perspectives on the interdisciplinary study of a land tax.

^Note: Some states add extra steps of reducing the property’s taxable value by a certain percentage based on its class, called the “assessment ratio,” or allowing full exemptions from tax for different classes of property.