Land Value Tax

It takes a community to raise land values, but property owners capture most of the benefit. No other policy has so much bipartisan support in theory, with so little uptake in practice as land value taxation. As new technologies ease administrative burdens, might it finally be time for a land value tax?

Last updated June 3, 2022

What Is Land Value Tax?

It takes a community to raise land values, but the financial rewards are captured by the private owners of land, siphoning away value from the communities who collectively create it.

Income generated from rising land values on privately owned land has variably been called inefficient, rent-seeking, monopolistic, parasitic, and even the root of all inequality. From classical economists like Adam Smith and Henry George, to moderns like Milton Friedman and Joseph Stiglitz, economists of all stripes generally agree that of all things to tax, land is best.

As land values rise, the value created by public services, community development, and private industry is captured by property owners, who can charge higher rents despite no contribution of their own. As a result, the gains of economic progress are largely captured by those who do not contribute to it.

A land value tax (LVT) is a shift in the burden of property taxation away from taxing the combined value of land, buildings, and improvements, towards taxing only the underlying value of the land itself.

No other idea in economic history has so much bipartisan support in theory, with so little uptake in practice. Where it presently exists, land value taxation has taken a much more modest form than as originally proposed by Henry George. Today, it offers municipalities a source of revenue that incentivizes compact urban development, discouraging land speculation and urban sprawl while promoting building activity.

The reasons land value tax is so scarcely taken up are largely administrative. Measuring the value of land alone requires strong land valuation practices and teams of assessors, supported by high-quality data availability. But as statistical methods make valuation easier, might it finally be time to consider land value taxation?

Proposals differ on:

  • Whether to shift the full property tax burden onto land alone, or retain a “split-rate tax”, where tax rates on land value are raised while a lesser rate remains on capital and improvements.

  • What rate land value should be taxed at.

  • What other taxes, if any, a LVT should replace.

Depending on its design, advocates argue a LVT could:

  • Foster a more equitable distribution of the value created by rising land values.

  • Discourage land speculation.

  • Encourage urban development while reducing sprawl.

  • Provide a more efficient source of municipal tax revenue than any other tax.

Skeptics argue that a LVT:

  • Would be too difficult to administer in practice, especially in regards to valuing land.

  • Would fail due to complexity and confusion from such a change in property tax procedures.

  • Cause overdevelopment.

  • Reduce inefficiency by biasing land-use decisions.

What does the evidence say?

Land Value Tax on Growth

Economists of all stripes agree that the present system of property taxation, with low tax rates on land value that allow property owners to capture most of the value of rising land prices, keeps the U.S. economy from being as prosperous as it might be with higher land taxation.

Econometric models predict that replacing some portion of existing taxes with land value taxation would increase GDP (and social welfare).

A land value tax would reduce the incentive for land speculation.

Land value taxation promotes city growth while reducing urban sprawl. But urban development is not without costs, and LVT may not always be the best tool to promote development.

Land value taxation is the most efficient of all taxes. Or, as Milton Friedman put it, the “least bad tax”.

Economists of all stripes agree that the present system of property taxation, with low tax rates on land value that allow property owners to capture most of the value of rising land prices, keeps the U.S. economy from being as prosperous as it might be with higher land taxation.

In general, land values arise from three sources : the combination of land’s productivity and scarcity, the growth of communities, and the provision of public services. With low tax rates on land, property owners privately capture most of this collectively produced value.

Advocates argue that value created by nature, by public services, or by the growth of communities should be enjoyed by all, not captured by property owners alone. The higher the rate of land taxation, the greater the proportion of value created by the community that goes back to the public.

In 1990, a group of 30 economists, including four Nobel Laureates (Franco Modigliani, Robert Solow, James Tobin, and William Vickrey), sent an open letter to Mikhail Gorbachev, urging the young Soviet capitalist economy of the “danger” in following the Western developed countries in allowing land rents to be privately collected.

Instead, they urged land value taxation - or the social collection of land rents - as a stable basis to support the new economy.

Support for land value taxation bridges political divides. Milton Friedman famously called LVT the “least bad tax”, since the fixed supply of land means taxes don’t create deadweight loss .

But ideas for how the revenue from LVT should be used does differ across perspectives. LVT revenues can replace other tax revenues, reducing or eliminating taxes on both labor and capital. It can be used to offset the costs of large, existing public programs, like Medicaid or Social Security . Or, the revenues can fund additional programs, from public transportation , to basic income .

Econometric models predict that replacing some portion of existing taxes with land value taxation would increase GDP (and social welfare).

Some advocates see LVT as a potential source of additional public revenue to existing taxes. However, even revenue-neutral strategies that simply replace existing taxes with higher land tax rates that raise the same amount of revenue are predicted to benefit the economy .

One model of the US economy finds that raising the tax rate on land by 5%, balanced by reducing taxes on capital and labor by 28% and 10% respectively, would increase economic output by 15%, and social welfare by 3.4% . Going further, replacing all current taxes with a 20% LVT and a 12.2% consumption tax would maintain current levels of government revenue, while raising output by 26%, and welfare by 5.2% .

A model of New York City, where all its taxes are swapped out for an equivalent 21.7% land value tax, is simulated to increase output by 91% and wages by 4%, while decreasing poverty by 34% and land prices by 28% .

In the same vein, a simulation study that models replacing New Hampshire’s statewide property tax with a land value tax yielding the same revenue would raise economic output by 0.36%, employment by 0.35% , and these effects are found to persist in the long-term .

A land value tax would reduce the incentive for land speculation.

Land speculation is an investment strategy where vacant land is bought and held, with no building or development, in the belief that surrounding land values will rise, raising the value of the vacant land, which can later be sold off at a profit. Doing so benefits the landowner despite making no valuable contribution, and withholds land from development for the community.

By raising the tax rate on land values, it becomes more costly to hold vacant land, thereby reducing the incentive to speculate without making improvements that generate some revenue to offset the high tax rate.

Both real-world experience and model simulations bears this out. In Harrisburg, Pennsylvania, the number of vacant lots dropped by 80% after raising land tax rates. And in simulations for Multnomah County, Oregon bear this out, suggesting that a LVT implemented in the Portland region would reduce land speculation by raising holding costs .

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Land value taxation promotes city growth while reducing urban sprawl. But urban development is not without costs, and LVT may not always be the best tool to promote development.

By incentivizing new developments on and around existing developments , LVT incentivizes compact city growth , while also constraining that growth from consuming more land. 78% of Americans favor the mitigation of such “urban sprawl” in land use planning.

Evidence from real-world experiments generally supports the assertion that LVT promotes urban development. In Pennsylvania, cities that adopted split-rate LVT (a form of LVT where tax rates on land are raised while those on capital improvements are retained, but lowered) enjoyed higher levels of construction activity than they would have with single-rate property taxes . Similarly, split-rate taxation is shown to increase the number of building permits awarded .

In Pittsburgh, shifting towards higher land taxation led to a 70.4% increase in their average annual building permit values. 15 other Eastern cities, over the same time period, experienced a 14.4% decrease . Their City Council President stated : “I’m not going to say the land tax is the only reason a second renaissance occurred, but it’s been a big help.”

Econometric simulations for both Oregon and New York City also predict that land value taxation would promote development and spur growth.

However, depending on context, LVT may not always be a good tool for encouraging development of vacant land, especially in developing countries . LVT is most effective when there exists viable land that is under-developed. But in cases where there is little viable land available, LVT may not be helpful .

In some contexts, LVT may prove undesirable. Rapid land development is associated with loss of farmland and open space, higher costs of infrastructure, roadway congestion, and poverty . LVT may also cause over-development. For example, Hawaii abandoned its land value taxation in the 1970’s as it was seen as a cause of over-development in Waikiki .

Land value taxation is the most efficient of all taxes. Or, as Milton Friedman put it, the “least bad tax”.

Standard economic theory suggests that when you tax something, supply decreases. But since the supply of land is fixed, taxes cannot distort the supply, and are thus the most efficient taxes possible.

Even Adam Smith, writing in the 1700’s, supported taxing land values . He wrote that taxing unimproved land would not harm economic activity, would not raise land rents, and would place the tax burden on owners of “ground-rent”, who necessarily act as monopolists .

The appeal of land-value taxation is its basic neutrality: it does not create the adverse fiscal incentives that accompany other revenue measures.

Wallace Oates & Robert Schwab, The Impact of Urban Land Taxation: The Pittsburgh Experience (1997)

However, theoretical efficiency concerns also exist. Taxing land values may bias the decision between earlier and later development of land in favor of projects that promise earlier revenues in order to offset the higher taxes . This bias may distort the efficiency of such decisions.

In practice, Pittsburgh’s experience with land value taxation suggests that LVT offers a unique strategy for municipalities to raise revenue without resorting to other taxes that may distort business decisions .

Evidence from a large natural experiment in Denmark also finds that taxing land doesn’t distort economic decisions , as the tax is fully capitalized into land price and doesn’t affect the user cost of land.

Ultimately, land-based property tax systems...do what they are designed to do—place more of the tax burden on wealthier land-owners, and encourage the highest and best use of land…a LVT would provide a more equitable tax structure, incentivize structure upgrading and development of underutilized properties, and discourage “holding” land for speculative purposes. Furthermore, the potential downsides of the tax policy—such as increasing taxes on low-income homeowners—can be mitigated with carefully crafted legislation.

Hulseman, Rovang, Bales, & Nguyen, Land Value Tax Analysis: Simulating the Tax in Multnomah County (2019)

Land Value Tax on Stability

Rising housing prices capture much of the gains of economic progress, rewarding the private owners of land with unearned income. Land value taxation could return this unearned private capture back to the public who generates it, reducing inequality while improving efficiency.

Land value taxation helps ensure that those responsible for raising land values share in the financial rewards, redistributing from landowners to communities, and progressively shifting the tax burden onto wealthier landowners and city districts.

Land value taxation can be made more progressive by using the revenue it raises to finance programs that benefit all, including citizen’s dividends, basic income, or public services like transportation.

According to both theory and real-world evidence, landlord’s cannot, and do not, pass higher land value taxes onto tenants in the form of higher rents.

Rising housing prices capture much of the gains of economic progress, rewarding the private owners of land with unearned income. Land value taxation would return much of this unearned private capture back to the public who generates it, reducing inequality while improving efficiency.

One factor driving inequality is that returns on capital are claiming an increasing share of national income, while labor’s share declines. Recent research suggests that the rise in capital’s share is driven entirely by increasing returns on housing . In other words, rising land values.

Thus, property owners privately capture a significant portion of economic progress by charging higher land rents . This reduces economic efficiency by exercising monopoly power , and increases inequality by granting unearned income to the already wealthy.

A land value tax, especially where the revenue is used for public benefit, would divert this value capture from property owners back towards the public. Doing so could simultaneously reduce inequality while improving efficiency.

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Land value taxation helps ensure that those responsible for raising land values share in the financial rewards, redistributing from landowners to communities, and progressively shifting the tax burden onto wealthier landowners and city districts.

A tax on land value redistributes the unearned gains enjoyed by landlords back to the communities and governments largely responsible for driving land prices up .

It also shifts the burden of taxation onto those parts of a city that benefit most from community investments - from public sector provisions like transportation and safety, to private sector factors like job centers - so that those who benefit most also return more of that benefit back to the community .

In practice, we find that land value taxation does make the overall burden of taxation more progressive, though not always, and there are important exceptions. In Oregon, a simulation predicts that implementing a 90/10 LVT (90% tax on land value, 10% on capital improvements) would shift the overall tax burden in Multnomah county from regressive to mildly progressive .

In a Texas municipality, replacing the uniform property tax with a land value tax would similarly shift the overall burden of taxation from regressive to mildly progressive . The average single-family property would experience a tax liability decrease of about 30% . In particular, the burden shifts from single-family, residential homes to commercial and industrial property classes . Over a 10-year period, the LVT would decrease taxes for 85.5% of residential homeowners.

In Pennsylvania, 85% of homeowners pay less under split-rate land value taxation than they did under uniform property taxation .

However, there are important exceptions to these trends , where some of the least wealthy may be most likely to face tax increases . These may include farmers who have large plots of land with little development, or more broadly, people who are ‘land rich but income poor’. Strategies for mitigating such cases are discussed in the Implementation section.

Meanwhile, a study of LVT in the UK finds that the tax alone may have a mildly regressive effect, increasing the Gini inequality index by 0.08% .

Land value taxation can be made more progressive by using the revenue it raises to finance programs that benefit all, including citizen’s dividends, basic income, or public services like transportation.

To ensure that land value taxation has an equitable outcome that benefits the least well-off, the revenue raised can be paired with universal dividends or public programs, which together with the tax ensure a progressive outcome.

To illustrate the farther limits, even conservative estimates of a full LVT applied across the entire U.S. could raise enough revenue to provide every adult citizen with a citizen’s dividend, or UBI, of roughly $5,750 per year . Doing so would provide a net benefit to all two-adult households with property values up to $500,000 .

In the UK, a 1% LVT on its own would be mildly regressive , raising inequality by 0.08%. But using the revenue to fund a UBI would provide a universal payment of £64 per month, reducing poverty by 20% and providing a net benefit to 70% of the population .

A case study of Chicago concluded that land value taxation offers a viable option for financing mass public transportation , while placing the burden of taxation on those areas that benefit most from such public services.

According to both theory and real-world evidence, landlord’s cannot, and do not, pass higher land value taxes onto tenants in the form of higher rents.

A common concern regarding raising taxes on land is that landlords will simply charge tenants higher rents to compensate. However, both theory and practice contradict this concern.

In short, with a LVT in place, the more rent a landlord charges, the more taxes they pay. Since land values are commonly assessed based on the rent they can charge, raising rents simultaneously raises land values, increasing their total tax liability by 100% of the increase in rent.

In practice, however, where LVT rates will not likely reach 100% in the short-term, and land valuations do not immediately update in response to changes in rent, we might still expect some pass through of higher tax burdens onto tenants.

Nevertheless, an extensive and growing body of research finds that land rent taxes are fully “capitalized” into land and property prices, rather than passed onto tenants as increased rent. The largest natural experiment occurred in Denmark in 2007, where a variety of land tax rates were changed overnight. The resulting increases in land tax owed by landlords were fully capitalized into land prices, rather than passed onto tenants .

A study of 675 German municipalities finds the same - land taxes are absorbed into land values, rather than rent levels .

Implementation

Despite high theoretical appeal and some real-world success stories, land value taxation is hardly taken up. Challenges in valuing and revaluing land, educating taxpayers, patchwork data collection practices, and general bureaucratic friction have all played a hand in preventing implementation.

Measuring the value of land alone is difficult, and prone to measurement error, but far from insurmountable. New statistical methods of land appraisal may ease these burdens.

Land value tax and repealing restrictive zoning policies are mutually beneficial. Restrictive zoning policies inhibit the potential benefits of land value taxation, while conversely, a land value tax could raise incentives to repeal such zoning policies.

Switching to LVT, while progressive overall, would place undue tax burdens on certain demographics, such as ‘land rich, income poor’ people and farms. Strategies to mitigate these burdens include gradual implementation of LVT rates, grandfathering existing households in under previous arrangements until death or sale of property, exemptions, and direct relief.

Originally proposed as a ‘single tax’ at nearly 100% of land value, the higher end of recent implementations reaches up to 39.6% in Altoona City, Pennsylvania (where it was later repealed). At a national level, recent estimates suggest a politically viable LVT rate of 5.55% would increase output and welfare, while a 20% rate would be optimal.

LVT may come ‘from above’, as a federal mandate, or ‘from below’, since any municipality can implement LVT on their own.

Despite high theoretical appeal and some real-world success stories, land value taxation is hardly taken up. Challenges in valuing and revaluing land, educating taxpayers, patchwork data collection practices, and general bureaucratic friction have all played a hand in preventing implementation.

A successful land value tax depends on our administrative capacity to assess the value of land, separate from any buildings or improvements upon it. Turns out, this is rather difficult to do. Especially when existing data collection practices haven’t been geared to do so. Despite LVT’s strong theoretical appeal, these administrative obstacles, plus political factors, have generally been sufficient to discourage it .

Nevertheless, various forms of LVT are, or have been, practiced in parts of Denmark, Australia, Estonia, Pennsylvania, Hong Kong, Hungary, Kenya, Mexico, Namibia, Singapore, South Korea, Taiwan, and Thailand.

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In Altoona, Pennsylvania, a switch to land value taxation was attempted, but abandoned, ultimately due to lack of effectiveness, and general confusion . In Pittsburgh, their nearly century-long practice of split-rate land value taxation was repealed due to poor assessment practices , despite evidence that it encouraged building activity.

In Minnesota, county and city assessors are skeptical of transitioning to even a moderate form of LVT. Only 9% believed LVT was an idea worth pursuing, and 40% strongly opposed .

In Australia, lack of transparency and inconsistency in land valuation methods has led their LVT to become one of the more disliked, and least understood taxes .

The technical difficulty of how to value unimproved land, while not insurmountable, is considerable and prone to generating confusion and a lack of transparency. There needs to be a good understanding regarding what LVT is and what it is supposed to achieve and sufficient resource put behind the valuation exercise.

Hughes, Sayce, Shepherd, & Wyatt, Implementing a Land Value Tax: Considerations on Moving from Theory to Practice (2020)

As such, a case study for implementing LVT in Washington D.C. comments that any reallocation of valuation between land and improvements will require resources earmarked for taxpayer education.

But perhaps the one of the most well-credentialed assessments of the administrative barriers to implementing land value taxation comes from an open letter to Mikhail Gorbachev. Written in 1990, well before we had the statistical methods and digitized data practices we have today (which offer new, simpler ways of assessing land value), a group of 30 economists, including four Nobel Laureates, noted the technical issues impeding land value taxation, and wrote : ”While these issues need to be addressed, none of them present any insoluble problems.”

Measuring the value of land alone is difficult, and prone to measurement error, but far from insurmountable. New statistical methods of land appraisal may ease these burdens.

Land valuation is tricky, and increasing the tax burden on land would raise the importance of land valuation practices.

Current methods for distinguishing land value from property value are prone to error . However, even accounting for the higher ranges of potential error, land value taxes are found, at worst, to carry equivalent distortion effects as current property tax practices . Even with current practices, the majority of today’s complains over property value assessments take issue with buildings and improvements, not land value .

While methods of determining land value ‘by hand’ have long been in place, reaching as far back as a short-lived LVT in 1911 implemented by Houston’s first Hispanic mayor, J.J. Pasoriza , newly developing statistical methods are already found to be cheaper, faster, and no less accurate than conventional property assessment methods .

New methods of land valuation are diverse , from various forms of regression analysis, to machine learning algorithms and neural networks.

Land value tax and repealing restrictive zoning policies are mutually beneficial. Restrictive zoning policies inhibit the potential benefits of land value taxation, while conversely, a land value tax could raise incentives to repeal such zoning policies.

In areas where zoning laws prevent urban development and densification, a land value tax may have limited effect . For example, in Washington D.C., a primary barrier to residential densification is the large number of lots (95,835) zoned for single-family residential housing, 71% of which face significant zoning barriers to raising density .

Even with LVT in place, the development effects would be significantly limited by such barriers. However, by raising the incentives to maximize land value (and thereby maximize the tax base for the city), LVT raises the opportunity cost of maintaining such restrictive zoning practices, as they are primary sources of depressing land value. Thus, passing a LVT could strengthen the case to repeal restrictive zoning, while repealing restrictive zoning could empower the full effects of a LVT.

Additional zoning reforms to complement LVT include supporting the development of Accessory Dwelling Units, and expanding mixed use zoning .

Switching to LVT, while progressive overall, would place undue tax burdens on certain demographics, such as ‘land rich, income poor’ people and farms. Strategies to mitigate these burdens include gradual implementation of LVT rates, grandfathering existing households in under previous arrangements until death or sale of property, exemptions, and direct relief.

Overall, a land value tax in the U.S. would decrease the tax bill for most residential properties , shifting the burden onto wealthier land-owners and commercial or industrial property classes .

However, there are important exceptions, where some of the least wealthy are most likely to face tax increases under LVT. In particular, ‘land rich, income poor’ groups such as farmers , or long-time residents may face higher tax burdens.

In most cases, these undue tax burdens are one-time scenarios, experienced only by the owner at the time of the tax change. For future owners, the higher rates are factored into the land’s price .

As stated in the open letter signed by 30 economists, including four Nobel Laureates , these obstacles must be addressed, but not are insoluble. Strategies to mitigate these obstacles include exempting particular types of land (as Estonia does with nature reserves and public water bodies, or Australia does for agriculture ), grandfathering in long-term residents until death or sale of property , gradually phasing in the LVT rate rather than a sudden spike all at once, or direct relief .

Originally proposed as a ‘single tax’ at nearly 100% of land value, the higher end of recent implementations reaches up to 39.6% in Altoona City, Pennsylvania (where it was later repealed). At a national level, recent estimates suggest a politically viable LVT rate of 5.55% would increase output and welfare, while a 20% rate would be optimal.

When first proposed by Henry George, LVT was proposed as a ‘single tax’ near 100% on land, and would replace all other taxation. However, the tax landscape of the 1800’s was significantly different from today’s , and the benefits of LVT remain even if it does not replace all other taxation.

A national, 100% LVT in 2019 was estimated (using simple assumptions) to hypothetically raise anywhere from $1.1 trillion to $3.36 trillion per year , or between 25 - 76% of total government spending. In practice, in American cities where LVT has been tried, it generally remains revenue-neutral, only raising rates on land high enough to offset the decrease in taxes elsewhere.

In New York City, one estimate found that such a revenue-neutral LVT that replaced all income, property, and corporate taxes would need to be set at 21.6% . Across jurisdictions in Pennsylvania that used split-tax rates in 2013, tax rates on land range from 0.4% in the Pittsburgh Business District to 36.9% in Altoona City. During Pittsburgh’s used of the split-rate tax from 1913 - 2001, the tax on land was roughly 5.77 times that on improvements.

Turning to the prospects of a national land value tax, a recent comprehensive study suggests that land value taxation offers a promising path forward to finance current levels of expenditure and debt, while decreasing tax rates on both capital and labor. Specifically, they find that the marginal benefits per 1% increase in land tax rates remain large until around 10%, after which the predicted gains in output and welfare taper off.

Their suggestion for short-term action is to raise the current tax rate on the asset value of land from 0.55% to 5.55%, allowing for a revenue-neutral decrease in taxes on capital by 28% and labor by 10%. Doing so, their model predicts, would raise welfare by 3.4%, and increase output by 15%.

In their optimal model, they find that all current tax revenue could be replaced by a 20% land value tax and a 12.2% consumption tax. Doing so would raise welfare by 5.2%, and output by 26% .

LVT may come ‘from above’, as a federal mandate, or ‘from below’, since any municipality can implement LVT on their own.

In practice, we see both local and national LVT’s in place. Denmark , Finland , Estonia , and Taiwan (where LVT revenue accounts for 8.4% of total government revenue) offer examples of national LVT’s ‘from above’.

A great example of LVT ‘from below’ is right in the U.S., in Pennsylvania. In particular, Harrisburg’s experience offers a positive example . After implementing LVT in 1975, Harrisburg’s tax base rose from $212 million to $1.6 billion, the number of vacant lots fell by 80%, crime fell by 46%, over 40,000 new building permits were issued, and the number of residential units significantly increased .

In contrast, the Pennsylvanian city of Altoona adopted a LVT in 2002, but repealed it in 2016 following confusion and its relative inefficiency .

With land value tax, as with all policy design, the details are everything.

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Land Value Tax Library