Tax the Land, Share the Wealth

Spend long enough reading policy ideas for making cities work better and you’ll eventually come across the idea of a Land Value Tax.

It’s an old concept that has almost always been more popular with economists and others interested in theory than with the people making real decisions in our urban areas. Here’s my attempt to make the idea more accessible for non-experts interested in how state and local laws structure the built environment.

Introduction

Both in theory and practice, urban growth boundaries (UGB) can effectively slow unconstrained sprawl and foster more efficient and compact development. However, restricting the supply of land available for development can also limit housing construction and price people out of desirable urban areas.

The administration of an UGB also poses legal difficulties, since growth management authorities must continually adjust the boundaries to keep pace with development. Even in the three states (Oregon, Washington, and Tennessee) that require cities to draw UGB, it is a contentious process ripe for legal challenges and stakeholder conflict.

Passing an UGB regime is an especially difficult proposition in politically conservative states that tend to prefer market-based policies and resist changes to existing property rights. Land value taxation (LVT) is a more flexible tool for constructing real estate markets and encouraging compact, mixed–use urban development. A built environment that lets people choose housing closer to work and errands conserves resources like land, water, and energy, while also creating a stronger tax base that makes for more resilient communities over the long term.

Theory

Economists of all ideological stripes have historically supported the theory behind LVT because of the unique properties that land has as a natural resource. Land becomes valuable from its proximity to other developed land and public infrastructure like roads and irrigation districts that enable residents and business to locate there. When the price of land goes up, it’s rarely because of anything the individual landowner has done, but because of cooperative, public investment.

Instead, land value gains are a windfall benefit to whoever happens to own parcels in an increasingly desirable area. LVT is a preferable replacement, either in full or in part, for the traditional property tax that taxes land and the improvements to it at the same rate, which discourages more intensive land use. Shifting to land tax draws revenue from unearned gains rather than the fruits of labor or reinvestment. LVT is superior to all other taxes because it “imposes no marginal cost on additional income, sales, or personal property” and landowners cannot pass the burden on the renters or customers. This video discusses the equity argument for LVT with simplified numbers.

LVT helps prevent unsustainable edge growth from eating up valuable wilderness and farmland by freeing up more land for development in existing urban areas. LVT creates an incentive to use land and existing infrastructure to their fullest potential and discourages speculators from sitting on underdeveloped property they expect to eventually become more valuable. Cities across the country are grappling with a housing shortage and its accompanying miseries for the community; LVT would increase housing construction by sending a market signal to encourage productive use of land. It would motivate — but not force — people who own vacant properties or larger houses than they need to downsize.

Sustainability

Compact urban development is substantially more sustainable, both fiscally and environmentally. It is important to emphasize the overlapping benefits for city finances, local businesses, water and energy use, and carbon emissions stemming from even marginally denser and intermingled land use.

For a simple example, consider an average Arizona home: around 1,750 sq. ft. of living space on an 8,000 sq. ft. lot. Housing an average Phoenix household of 2.85 people who each use about 215 gallons of water a day (2008), this single family home uses about 613 gal/family/day. Because a substantial portion of residential water use goes to outdoor uses, converting the ranch into a duplex substantially cuts water usage per family. Housing two or three families on the same plot of land rewards the inhabitants with lower LVT payments as well compared to a single family using more land. The current property tax system would punish the multifamily conversion despite the many efficiencies and benefits of the improvement.

Most water efficiency gains are thanks to the simple math of sharing the same landscaping (and thus water) between a few more people, but density can cut per capita water use even more if the new living space replaces irrigated land. Gentle increases in density like the addition of duplexes, triplexes, or backyard accessory dwelling units (ADUs, all but banned in Phoenix since 1999) reduces water, energy, and land use per person without drastically changing the appearance of existing neighborhoods.

Gradually increasing land use intensity also ensures places stay productive enough to fund their own infrastructure over the long term. Density and mixed use multiplies the tax revenue generated from the same acreage of land. The benefits — and necessity — of continual, incremental development to increase residential and business space are especially pronounced in landlocked cities fully surrounded by other urban areas.

map of land values from Fat Pencil Studio showing the most valuable land in Portland: centrally-located and well-situated near public infrastructure

Because they don’t have a ready supply of rural land on the outskirts to convert into cheap, low density development (think Phoenix or Houston), cities with geographic limits and a fixed size (like SF, Seattle, or even smaller Tempe, AZ) inevitably face pressures to continue building upwards. Fortunately, this denser growth generates economic activity that can fund further investment in public spaces and efficient mobility.

Implementation

Since appraisers in most states already regularly separate a site’s land value and the improvement’s value for insurance or banking compliance, the administration of LVT would not be much more technically complicated than the current property tax. Modern geographic systems and digitized mapping make the task of valuing the land under buildings even simpler. In fact, some US jurisdictions like Pittsburgh, Harrisburg, and 19 other Pennsylvania cities already use split level taxation where land is taxed at a far higher rate than improvements. While changes to the status quo can always pose implementation costs and risk, the many benefits and theoretical ease of gradually adopting LVT weigh in favor of a tax shakeup.

In an age of increasingly global, mobile capital and labor, land remains the logical tax base to fund public amenities. Land is difficult to conceal and impossible to move, making collection easier. The 19th century economic writer who popularized a “single tax” on land Henry George even theorized that LVT that could cover all public spending, since that spending benefits cities and raises land values.

By taxing economic rents, the “price of monopoly, arising from the reduction to individual ownership of natural elements which human exertion can neither produce nor increase,” governments could reduce distortions that produce the shortage of affordable, productive urban areas we face today.

Implementing LVT could set off a virtuous cycle of sustainable development that raises more revenue while lowering or replacing taxes on labor or production. Trade–offs between space and taxable development mean that while residents often want low density, low taxes, and nice amenities, they can only have two out of three. By capturing the shared benefits of community growth, LVT helps align private action with the public interest.