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?”