Land-Value Tax: A Practical Step Towards Equitable Urban Growth

Cities and towns across America are dealing with either an abundance of underused land or a shortage of housing — or both.

Economists and policymakers are increasingly promoting a relatively simple policy that could go a long ways to addressing both of these crises, simultaneously bringing housing costs down in the most expensive places and boosting investments in struggling communities.

It all started in 1879 when the American political economist Henry George published a bestselling book: “Progress and Poverty.” The opus, decrying industrial capitalism and the oppression of the working class, made George a popular hero and, eventually, spawned a whole school of thought called Georgism.

The ideology is centered on the idea that natural resources should be shared by everybody, rather than monopolized by the wealthy elite. Fast-forward nearly 150 years, and a Georgist proposal — land-value taxation — is being promoted by urbanists and pro-development advocates as a solution to the housing affordability crisis and much more.

The idea is to tax landowners annually based on the value of their land and reduce or eliminate taxes on any developments made to it, such as apartments, office buildings, or retails stores.

The principle is: “tax what you take out of the natural world, not what you make,” said Stephen Hoskins, research director at Resource Justice and a self-described Georgist.

Land-value taxation has gotten some mainstream attention in recent years. “A land value tax would fix that” has become a popular, and sometimes comedic, Twitter response to a range of policy conundrums among urbanists and YIMBYs.

While the politics of any new tax are tricky, land value taxes have appeal across the political spectrum. Those on the left like that it’s a more progressive tax, while free-market conservatives and libertarians like how efficient and pro-development it is.

Just a handful of American cities — and countries around the world — are experimenting with it. More than a dozen cities in Pennsylvania have had success with land value taxes. Since the taxes were first levied, new construction has shot up in places like Pittsburgh, Harrisburg, and Allentown.

Lawmakers in Detroit and Minnesota have also proposed versions of the tax. Detroit Mayor Mike Duggan is a passionate advocate for raising taxes on land and lowering them on homeowners as a way to fight blight and encourage building. He wants to make it more expensive for investors to buy up and sit on scrapyards, parking lots, and vacant property in the city, just waiting for it to appreciate while actively hurting the neighborhood.

Raising more revenue in a fairer way

Land value taxes encourage investment and the most efficient use of land — fixing a problem created by property taxes, which tax the investments made to land. It would incentivize landowners to maximize the revenue from their property — building an apartment building instead of, for example, a parking lot.

The tax is both more efficient and more equitable than other kinds of taxes. While taxes on capital and labor penalize and reduce the amount of both, land isn’t going anywhere. And because rich individuals and corporations own most land in cities and towns, land taxes would disproportionately fall on the wealthiest.

“The main point is that the supply of land will not be reduced by the tax and so you’re not discouraging economic activities,” said Gregor Schwerhoff, an economist in the Structural and Climate Policies Division at the International Monetary Fund.

Pure Georgists advocate for abolishing all taxes besides land value taxes. But most proponents won’t go that far. Instead, they want to see more regressive levies — like sales taxes — or those that penalize investment — like property taxes — reduced.

People who don’t own land or whose land isn’t very valuable would benefit hugely under this scheme.

“If you could reduce your sales taxes to some extent, and replace them with land value taxes, that is a very big win for progressive causes or for equity because these taxes are disproportionately paid by the poorest households,” said Shane Phillips, a housing researcher at UCLA’s Lewis Center for Regional Policy Studies.

There’s another fairness element to it: Under our current tax scheme, even if you do nothing to improve a building, home, or any other kind of structure, the land it sits in will appreciate if it’s in desirable area. That means wealthy landowners can end up making money by doing nothing other than holding property in a hot location.

Land appreciates in value when demand for it increases. Demand rises when a neighborhood sees an influx of new residents or visitors, an investment in infrastructure, new jobs in the area, or new amenities, including restaurants, schools, and public spaces. This value isn’t created by the landowner, but instead by the community.

“People can end up getting very lucky just based on where they happen to own land and there’s, I think, a justified perspective that they oftentimes did not do much or anything to create that value,” Phillips said.

The challenges

Land value taxes are particularly attractive for cities facing either a shortage of housing or an abundance of underused or ill-used land.

But passing any kind of tax reform is notoriously difficult. And re-thinking how we value property gets to some fundamental dynamics in the American economy. Most Americans — and certainly most voters — own their homes and rely on those homes as their most valuable asset.

Doing something that could devalue some Americans’ biggest investment “sounds really scary and daunting,” Hoskins said.

“We are in a world where speculation on land or building your wealth through owning a piece of real estate that just rises and rises in value is the main mechanism to get into the American middle- and upper-middle class,” he added.

So the trickiest challenge is protecting those who own valuable property, but don’t have enough income to pay a land tax, including retired, low-income, and recent homeowners.

There are a few practical ways to address this. Land taxes could be deferred until a property is sold or the owner dies. The tax could be phased in at a certain land value, or exempt primary residences. The tax could also be paired with a universal basic income or a significant decrease in property, income, and other taxes that would help homeowners pay the new tax.

“In the real world, this is gonna happen in tiny increments anyway,” Hoskins said. “There’ll be little ones here and there and it’ll start at half a percent or 1% or whatever. Those make it a lot easier to slowly transition.”

FAQs

  1. How does land-value taxation differ from traditional property taxes?
    Land-value taxation focuses on taxing the value of the land itself, irrespective of the improvements made on it. Traditional property taxes consider both land and property value, potentially discouraging development.
  2. Can land-value taxation be applied universally?
    While the concept is adaptable, the universal application of land-value taxation requires careful consideration of local dynamics and regulatory frameworks. Tailoring the approach to specific contexts is crucial for success.
  3. What are the economic incentives for property owners under this system?
    Property owners benefit from land-value taxation by being encouraged to develop their land efficiently. With taxes tied to the unimproved land value, there’s a financial incentive to utilize the property productively.
  4. Are there any notable examples of successful land-value taxation?
    Several cities and regions have reported success with land-value taxation, including reduced housing costs and increased development. Notable examples include Harrisburg, Pennsylvania, and parts of Australia.
  5. How can policymakers address concerns about the impact on property values?
    Policymakers must communicate the nuanced benefits of land-value taxation, emphasizing the potential for increased development, reduced housing costs, and community revitalization. Transparency and education are key in addressing concerns.