Land value tax

A land value tax (LVT) is a recurring tax on the value of land alone, excluding buildings and other improvements. The tax base is the site value: what a plot would sell for if it were empty, which depends on location, public infrastructure, zoning and the activity of the surrounding community rather than on the owner's own efforts. LVT can replace or partly replace conventional property taxes, which tax land and buildings together, or taxes on income and transactions.

Henry George's Progress and Poverty (1879) made LVT the centrepiece of a political movement, Georgism, with the "single tax" on land rent as its most radical version. The idea is much older: Adam Smith considered ground rents a particularly suitable object of taxation, and the physiocrats proposed a single tax on land.

LVT is unusual in that economists across ideological lines regard it as efficient.

• No deadweight loss. The supply of land is fixed. Taxing it cannot reduce the quantity of land, so the tax does not discourage productive activity. A tax on buildings, by contrast, discourages construction and maintenance.
• Capturing unearned increments. Rising land values largely reflect public investment and population growth. LVT returns part of that "economic rent" to the community that created it.
• Encouraging use. Because the tax is due whatever the owner does with the land, holding prime urban land vacant or underused becomes costly, which may reduce speculation and encourage development.
• Capitalisation. When an LVT is introduced, the expected future tax stream is capitalised into lower land prices. Current owners bear a one-off loss; future buyers pay less for land but more in tax.

The Mirrlees Review of the UK tax system (2011) concluded that the economic case for taxing land is very strong, while acknowledging practical problems with valuation and transition.

Design choices

• Denmark. A tax on the value of land alone (grundskyld) was introduced in 1926, separating land from buildings in the property tax system after decades of Georgist influence. Municipalities still levy it today, setting rates within limits set by national law, on the basis of periodic land valuations.
• Pittsburgh and Pennsylvania split-rate taxes. Pittsburgh used a graded tax that taxed land more heavily than buildings from 1913 until 2001. After its 1979–1980 reform raised the land rate to more than five times the rate on structures, building activity rose far more than in other cities in the region; Oates and Schwab attributed the boom mainly to a shortage of commercial space, with the heavier land tax playing an important supporting role by letting the city avoid raising other taxes. Several other Pennsylvania municipalities have used split rates.
• Taiwan. Article 143 of the Constitution of the Republic of China, reflecting Sun Yat-sen's Georgist-influenced principle of equalising land rights, provides for taxing land value and for taxing increases in land value not due to the owner's labour or capital, with the proceeds shared by the people. Taiwan levies a land value tax and a land value increment tax.
• Australia. Most Australian states levy annual land taxes on site value, though with large exemptions for owner-occupied homes. The Australian Capital Territory began a long transition in 2012 from stamp duty on property transfers towards broader land-based rates.
• Estonia and others. Estonia levies a land tax on land value, with buildings untaxed. Many countries, including Kenya, New Zealand historically and parts of the United States, have experimented with site-value rating at local level.

• Valuation. Separating land value from building value is difficult where there are few sales of vacant land. Errors can be large, and frequent revaluation is costly and politically contentious. Revaluations that raise bills trigger resistance.
• Liquidity. Owners whose land rises in value but whose income does not, such as pensioners in gentrifying neighbourhoods or farmers, may face tax bills they cannot pay. Deferral mechanisms help but add complexity.
• Transition losses. Because the tax is capitalised, introducing a high LVT imposes concentrated losses on current landowners, including many middle-class homeowners, which explains its political difficulty.
• Revenue adequacy. Georgists claimed a single tax could fund all government. Most economists doubt that land rent alone could replace modern tax systems, though it could fund a substantial share of local spending.
• Exemptions erode the base. In practice, LVTs often exempt homes and farmland, turning them into narrow taxes on commercial and investment land.
• Evidence on development. Studies of split-rate taxes, including Pennsylvania cases, find modest positive effects on construction and density, but results depend on local conditions and are not uniformly strong.

LVT is rare in pure form but widespread in partial forms: municipal land taxes in Denmark, state land taxes in Australia, land value taxes in Taiwan and Estonia, and split-rate property taxes in some American cities. Where implemented, it has generally functioned as a stable local revenue source, and evidence modestly supports its claimed efficiency advantages. Its main obstacles are political and administrative: valuation capacity, the visibility of the tax and the losses it imposes on existing owners. Interest has revived in housing-affordability debates and in proposals linking land rents to citizen dividends or community land trusts.

• Oates and Schwab (1997), "The Impact of Urban Land Taxation: The Pittsburgh Experience", National Tax Journal
• Institute for Fiscal Studies, Tax by Design: The Mirrlees Review (2011)
• Land Valuation in Denmark (historical account)
• Constitution of the Republic of China (Taiwan), Article 143
• Henry George, Progress and Poverty (1879)
• Richard F. Dye and Richard W. England, Assessing the Theory and Practice of Land Value Taxation (Lincoln Institute of Land Policy, 2010)