Whether or not a LVT incentivizes land development depends largely on whether the value of land is assessed according to its "highest and best use" (HABU) or its existing use.

"The challenges associated with valuing land in its unimproved state are made potentially more complex if the valuation is to assume that the taxable asset (or land parcel) is assigned to its HABU rather than its existing use in cases where the two are different. Determining the value of land in its existing use would be a pragmatic solution, but this would not create any incentive to develop or sell land which is currently not developed to its potential. However, if land is to be valued based on its HABU then this brings with it technical issues associated with determining what actually is the HABU of the land parcel. Although these issues are not insurmountable, they can be difficult to address in a way that provides sufficient transparency or accountability. They are therefore open to challenge and appeal, which could undermine and discredit the tax."

theoretical