Land Value Tax: An Alternative to the Property Tax

An alternative to the local property tax, the land value tax offers certain benefits over the economically inefficient property tax. However, its novelty and legal and political challenges continue to make it an elusive option at this time.

According to numerous polls, the most hated tax is the local property tax. Economists Marika Cabral and Caroline Hoxby argue that Americans are averse to the property tax because it is the most noticeable and important major tax. In addition, many economists agree the property tax is economically inefficient because it taxes the value of improvements, which acts as a tax on economic development. A tax is said to be inefficient if another system could raise the same revenue while increasing economic growth.

One proposed alternative to the property tax is the land value tax. The land value tax would allow state and local governments to maintain control over a significant source of tax revenue while addressing issues of efficiency.

Although not used extensively, the land value tax is more than a theoretical abstraction. Local governments in New York, Pennsylvania and Hawaii have used it. In addition, twenty-five nations use some form of the land value tax.

The land value tax has been implemented in two forms. In a pure land value tax system, the tax is applied to the value of the land with no tax applied on improvements. In a split-rate tax system, land value is taxed at a higher rate than improvements. For example, in Harrisburg, the 2008 tax on the value of land was 28.67 while the tax on improvements was 4.78, a ratio of 6 to 1.

In addition to being more economically efficient, proponents argue that the land value tax provides an incentive for development. The evidence to support this conclusion is limited by the availability of data within the United States. Economists Oates and Schwab in a 1997 paper find a positive association between adoption of land value taxation and building activity in Pittsburgh. In a 2000 paper, economists Plassmann and Tidemann use data from 15 Pennsylvania municipalities and find a direct, positive relationship between the tax differential between land and improvements and the number of building permits. In other words, under a split-rate system, Plassmann and Tideman find evidence that the higher the land tax in relation to the improvements tax, the more building activity occurs.

Elimination of the inefficient property tax system in the U.S. would be challenging because of the importance of the tax revenue to state and local governments. Property taxes are the largest single source of revenue for state and local governments, accounting for over one-third of all revenue. Opponents of the land value tax also argue that it encourages overdevelopment. The land value tax was largely blamed for the overdevelopment of Waikiki. Although unwanted higher density was most likely the result of poor planning rather than the land value tax, the county of Hawaii abolished the land value tax in 2002.

A recent study, Assessing the Theory and Practice of Land Value Taxation, lays out a framework for implementing the land tax. Another study, Land Value Taxation – Theory, Evidence, and Practice, includes an exhaustive discussion of legal issues that need to be overcome in each state in order to implement the land value tax. The legal and political challenges of changing the current property tax system are daunting.

In spite of these challenges, Connecticut signed into law this June a pilot program allowing three municipalities the option of implementing a land value tax. The success or failure of the program will likely determine the programs expansion within the state.

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13 Responses to Land Value Tax: An Alternative to the Property Tax

  1. Walter Rybeck says:

    The conventional property tax penalizes good land use and good housing while rewarding poor use (or no use) of potentially ideal housing sites. NAHB does a service for homebuilders, home owners and renters by calling attention to ways to greatly reduce the tax on homes: shifting the tax to community-created land values. The more than a dozen Pennsylvania cities using this land value tax system gain the same or more revenue while eliminating the harmful disincentives of the typical property tax that induce blight and urban decay. My 2011 book, RE-SOLVING THE ECONOMIC PUZZLE, describes these success stories. Walter Rybeck

  2. Rick Rybeck says:

    Good article. Changing the status quo is always challenging. But the successful implementation of this reform in US cities and abroad indicates that the payoff can be worth the effort. For additional info, see “Break the Boom and Bust Cycle” at http://webapps.icma.org/pm/9407/public/cover.cfm?author=Rick%20Rybeck%20and%20Walt%20Rybeck&title=Break%20the%20Boom%20and%20Bust%20Cycle&subtitle=
    and “Using Value Capture to Finance Infrastructure and Encourage Compact Development” at https://www.mwcog.org/uploads/committee-documents/k15fVl1f20080424150651.pdf

  3. […] president for tax policy issues at the National Association of Home Builders (NAHB), recalls that 2013 tax benefits for homeowners were ultimately extended, but only for a year. Whether that's possible again in late December […]

  4. […] president for tax policy issues at the National Association of Home Builders (NAHB), recalls that 2013 tax benefits for homeowners were ultimately extended, but only for a year. Whether that’s possible again in late December […]

  5. […] NAHB economists examined alternatives to property taxes, how long it takes to build multifamily properties, and the makeup of the rental housing stock, of […]

  6. Real builders should like a tax shift that stimulates construction. It’s those who’re speculating in land, withholding prime sites from beneficial use, are the ones who may be opposed. For everyone else, a tax or fee or dues on land could increase how much the landowner must pay. But to assuage that, the collecting government could return a hefty portion of the raised revenue to residents as a monthly dividend. It’s their money, any way. It’s the presence of society as a whole, not the ownership of individuals, that generates the value of land. Thus, locational value is a common wealth; we should treat it as such. Then builders would get more business and, more importantly, they’d be building in a better society, where more people prosper and enjoy life as it’s meant to be lived. More on the movement at Progress.org.

  7. […] president for tax policy issues at the National Association of Home Builders (NAHB), recalls that 2013 tax benefits for homeowners were ultimately extended, but only for a year. Whether that’s possible again in late December […]

  8. […] president for tax policy issues at the National Association of Home Builders (NAHB), recalls that 2013 tax benefits for homeowners were ultimately extended, but only for a year. Whether that’s possible again in late December […]

  9. […] president for tax policy issues at the National Association of Home Builders (NAHB), recalls that 2013 tax benefits for homeowners were ultimately extended, but only for a year. Whether that’s possible again in late December […]

  10. […] president for tax policy issues at the National Association of Home Builders (NAHB), recalls that 2013 tax benefits for homeowners were ultimately extended, but only for a year. Whether that’s possible again in late December […]

  11. […] president for tax policy issues at the National Association of Home Builders (NAHB), recalls that 2013 tax benefits for homeowners were ultimately extended, but only for a year. Whether that’s possible again in late December […]

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