Land value tax

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Land value taxation (LVT) (or site value taxation) is a tax that charges landholders a portion of the unimproved value of a site or parcel of land.

The land value tax is an ad valorem tax where only the value of land itself is taxed. This ignores buildings, improvements, and personal property. LVT is different from other property taxes which generally tend to fall on real estate - the combination of land and improvements to land.

Implementation

Historical

According to the Encyclopaedia of the Social Sciences, land value taxation is ancient. In discussing "Land Taxation" it says "The land tax is probably the oldest form of taxation. Essentially a tax on the yield of land, in its primitive form it was assessed on the basis of area. In its more developed form it is a tax on the annual yield." As a tax, it required simply sharing the yield at the time of the harvest, akin to paying a yearly rent.

In reality, every jurisdiction that has a real estate property tax has a land value tax, because part of the ad valorem basis for real estate is, in fact, the locational or land value in addition to the improvement value. So, for example, every single state in the United States has some form of property tax on real estate and hence, in part, a tax on land value.

United States

National level

There have been several attempts throughout history to introduce land value taxation on a national level in the United States, such as:

The earliest known legislation was the Federal Property Tax Act of 1798.
In 1894, a bill was introduced by Representative James G. Maguire of California that would have introduced a Georgist taxation policy.
On February 20, 1935, Theodore L. Moritz of Pennsylvania introduced HR 6026, which would have implemented a national land value tax. It would have imposed a 1% tax on the value of land in excess of $3,000. LVT was intended to be a resource for State and Local levels of government but was denied at the National level by the Constitution.

Cities

Single tax

The first city in the United States to enact land value taxation was Hyattsville, MD in 1898, through the efforts of Judge Jackson H. Ralston. The Maryland Courts subsequently found it to be barred by the Maryland Constitution. Judge Ralston and his supporters commenced a campaign to amend the state Constitution which culminated in the Art. 15 of the Declaration of Rights (which remains today part of the Maryland State Constitution). In addition, he helped see that enabling legislation for towns be passed in 1916, which also remains in effect today.. In addition, the towns of Fairhope, Alabama and Arden, Delaware were founded as model Georgist communities or "single tax colonies".

Two-rate taxation

Nearly 20 Pennsylvania cities in the USA employ a two-rate or split-rate property tax: taxing the value of land at a higher rate and the value of the buildings and improvements at a lower one. This can be seen as a compromise between pure LVT and an ordinary property tax falling on real estate (land value plus improvement value). Alternatively, two-rate taxation may be seen as a form that allows gradual transformation of the traditional real estate property tax into a pure land value tax.

Primarily as a result of technical assistance from the Henry George Foundation of America and the Center for the Study of Economics, nearly two dozen local Pennsylvania jurisdictions (such as Harrisburg) use two-rate property taxation in which the tax on land value is higher and the tax on improvement value is lower. Pittsburgh used the two-rate system from 1913 to 2001 when an ineffective property assessment system led to a drastic increase in assessed land values during 2001 after years of underassessment, and the system was abandoned in favor of the traditional single-rate property tax. Pittsburgh's tax on land was about 5.77 times the tax on improvements. Notwithstanding the change in 2001, the Pittsburgh Improvement District still employs a pure land value taxation as a surcharge on the regular property tax.

Other countries

Pure LVT, apart from real estate or generic property taxation, is used in Taiwan, Singapore, Hong Kong and Estonia. It is currently being introduced in Namibia, and there are campaigns for its introduction to South Korea and Scotland. Many more countries have used it in the past, particularly Denmark and Japan. Many pre-modern societies used land tax systems that were not based on the land's value, but nevertheless approximated a limited LVT by taxing agricultural land according to its yield or expected yield.

Several cities around the world also use LVT, including Sydney, Canberra, and many other Australian cities. It has also been used in Mexicali, Mexico.

Claimed advantages

Leads to increased economic activity

A correlation between high LVT and growing economic prosperity is predicted by Georgist economic theory, and has consistently been observed in practice. For example, the effect of Land Value Taxation has been studied by Plassmann and Tideman. In their article, they compared Pennsylvania cities using a higher tax rate on land value and a lower rate on improvements with similar sized Pennsylvania cities using the same rate on land and improvements and concluded that the increase in land value taxation and decrease in improvement taxation leads to increased construction within the jurisdiction.

Donna Kish-Goodling studied on entrepreneurship in Pennsylvania, 1976-1980. Using a proxy variable for those communities with a two rate property tax, along with sixteen independent variables, she looked at the birth of firms in Pennsylvania communities as a dependent variable. Since economic studies have found that the two rate tax leads to more building permits, she hypothesized that the two rate tax could also lead to higher births of firms. The empirical results support the hypothesis that the two rate tax encourages the development of new firms.

Produces few if any distortions

Most taxes distort economic decisions. If labor, buildings or machinery and plants are taxed, people are dissuaded from constructive and beneficial activities. Enterprise and efficiency are penalized due to the excess burden of taxation. This does not apply to LVT, which is payable regardless of whether or how well the land is actually used, because the supply of land is inelastic market land rents depend on what tenants are prepared to pay rather than on the expenses of landlords, and so LVT cannot be passed on to tenants. The only alleged direct effect of LVT on prices is to lower the market price of land. Put another way, LVT is often said to be justified for economic reasons because if it is implemented properly, it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do.

Efficient use of land

The necessity to pay the tax encourages landowners to develop vacant and under-used land properly or to make way for others who will. The claim is that because LVT deters speculative land holding, dilapidated inner-city areas are returned to productive use, reducing the pressure to build on green-field sites and so reducing urban sprawl. For example Harrisburg, Pennsylvania has taxed land at a rate six times that on improvements since 1975, and this policy has been credited by its long time mayor, Stephen R. Reed with reducing the number of vacant structures in downtown Harrisburg from about 4,200 in 1982 to less than 500. LVT is a Green tax because it ostensible discourages the waste of locations, which are finite natural resource.

Simplicity and certainty

Proponents claim that levying a Land Value Tax is straightforward, requiring only a valuation of the land and the identity of the landholder. There is no need for the tax payers to deal with complicated forms or intrusive demands for information as with an income tax. Because land cannot be hidden, removed to a tax haven or concealed in an electronic data system, proponents suggest that the tax can not be evaded.

Notwithstanding claims to the contrary regarding difficulty with valuation, it has long been argued that there are several statistical methods which make the valuation of land much more simply than the valuation of improvements. For example, in the 1960 and 70s, Paul Downing among others investigated the use multivariate analysis which, today, is quite commonly and routinely used by assessment offices across the county.

Less speculation

Speculative bubbles in land price direct savings into rent seeking activities rather than productive investment, and usually end in corrective slumps which damage the entire economy. Land Value Taxation reduces the speculative element in land pricing, thereby leaving more money for productive capital investment and making the economy more stable.

Land Value Taxation is a "value capture tax"

LVT is purported to act as "value capture tax".A new public works project may make adjacent land go up considerably in value, and thus, with a tax on land values, the tax on adjacent land goes up. Thus, the new public improvements would be paid for by those most benefited by the new public improvements -- i.e., those whose land value went up most.

Fairness and justice

Land (unlike goods and services) has no cost of production. If an ample supply of land of equal desirability were available everywhere, there would be nothing to pay for its use. In reality land acquires a scarcity value owing to the competing needs of the community for living, working and leisure space. According to proponents, the unimproved value of land owes nothing to the individual efforts of the landowner and everything to the community at large. These supporters suggest that the value of land belongs justly and uniquely to the community. Conversely, they argue that the reward for individual effort can belong only to the one who earns it, to spend, save, or give away as he or she may see fit. LVT is also justified by some with the philosophical premise that the natural world was originally the common resource of all persons, and therefore LVT is not really a tax, but simply the collection of rent on behalf of those who waive their right of access to the resources they would otherwise have been free to use. In religious terms, it has been claimed that land is a common gift to all of mankind.

Land value also has been alleged to be much maldistributed than income. While sizeable numbers of households own no land, few have no income. For example, 10% of land owners (all corporations) in Baltimore, Maryland own 58% of the taxable land value. The bottom 10% of those who own any land own less than 1% of the total land value.

Claimed disadvantages or problems

Cannot raise sufficient revenue

Some have argued that a land value tax cannot raise large enough revenues. It is further argued that if large enough revenues could be raised, for example, by simply calculating the necessary rate times assessed value to achieve the result, the tax would rise above the rate of return on land and owners would simply abandon it rather than pay the tax. In this case, it is claimed that insufficient revenues would result from hypothesized delinquencies.

Legal obstacles in some jurisdictions

In the United States, many state constitutions have uniformity clauses, but the wording and interpretation of these clauses varies from state to state. For example in 1898, prior to Maryland's addition of Article 15 of its Declaration of Rights which specifically allowed for land value taxation, Maryland's highest court ruled that Hyattsville's use of land value taxation was unconstitutional. Pennsylvania's uniformity clause has been broadly construed, and land value taxation has been used since 1913. Each state has its own legal stance on LVT; some uniformity clauses explicitly allow some types of classifications of property, some have no uniformity clause, and some do not specifically discuss land qua land at all.

Except for the Maryland case of Hyattsville, no state courts have squarely ruled that land and improvements are actually "classes" of property such that uniformity clauses are applicable. As long as each type of property (land, improvements, personal) is taxed uniformly there is no constitutional obstacle. In addition, no court other that in Maryland over a 100 years ago has actually struck down land value taxation. Even in rather strict uniformity clause states, it is unclear whether the uniformity clause actually prohibits separate land value taxation. Some states have other constitutional provisions - for example in New Jersey, which gives localities maximum home rule authority: the abrogation or refusal to adopt Dillon's Rule. Hence, while the uniformity clauses might be interpreted to prohibit state-wide action, local action may be perfectly legitimate.

Although uniformity clauses are no longer a major obstacle to land value taxation, control of local authority by the legislature remains an real obstacle, such as the need for local enabling authority or the abrogation of Dillon's Rule. So for, example in Maryland, municipal corporations have the right institute land value taxation, but the counties, including Baltimore City which is treated as a county in Maryland for certain purposes, do not.

In other countries, LVT is nearly impossible to implement where there are no certain land titles and clearly established and recognized ownership. If the government can not ascertain the proper owner, it cannot know from whom to collect the tax. The phenomena of lack of clear titles is found world-wide in developing countries and is in part the subject of the work of the Peruvian economist Hernando de Soto.

Loss of asset value

Land value is the discounted present value of expected future after-tax rents; so LVT, by increasing the taxation of those rents, would ostensibly reduce the value of all real estate owners' holdings. Critics suggest that a rapid reduction of real estate values could have profoundly negative effects on banks and other financial institutions whose asset portfolios are dominated by real estate mortgage debt, and could thus threaten the soundness of the whole financial system. If land's value were reduced to zero or near zero by recovering effectively all its rent, as some LVT economists suggest is possible, total privately held asset value could decline by as much as 1/4 or even more, a massive reduction of private sector wealth. On the other hand, Georgist theory suggests that the reduction in private rent collection should result in a correspondence increase in net wages held by laborers and net interest from capital (non-land) held by investors.

Focus on land obscures monopoly of capital

Karl Marx's criticism of land tax (as anything more than one of the measures to be imposed during a transition to communism) was relatively influential. He argued that

"The whole thing is...simply an attempt, decked out with socialism, to save capitalist domination and indeed to establish it afresh on an even wider basis than its present one."

Marx also criticized the way land value tax theory emphasizes the value of land - arguing that

"Theoretically the man [Henry George] is utterly backward! He understands nothing about the nature of surplus value and so wanders about in speculations which follow the English model but have now been superseded even among the English, about the different portions of surplus value to which independent existence is attributed--about the relations of profit, rent, interest, etc. His fundamental dogma is that everything would be all right if ground rent were paid to the state."

Advocates

Laissez Faire

The physiocrats were a group of economists who believed that the wealth of nations was derived solely from the value of land agriculture or land development. Their use of the term laissez faire meant that the only legitimate form of government revenue derived from the value of land. Their theories originated in France and were most popular during the second half of the 18th century. Physiocracy is perhaps the first well developed theory of economics. The movement was particularly dominated by Anne-Robert-Jacques Turgot (1727–1781) and François Quesnay (1694–1774). It immediately preceded the first modern school, classical economics, which began with the publication of Adam Smith's The Wealth of Nations in 1776.

U.S. Constitution

A land tax was advocated by the Framers of the U.S. Constitution in 1789. Hamilton writing in the Federalist Papers No.36 gives the argument calling it the "most simple and most fit resource" for the several States. It was probably known to Franklin and certainly known by Jefferson as they were ambassadors to France from whence it sprang via the physiocrats, Quesnay and Turgot. Jefferson brought his friend Pierre du Pont to the United States to promote the idea.

Henry George

The most influential advocate of LVT was Henry George. George (September 2, 1839 – October 29, 1897) was an American political economist and proponent of the "Single Tax" on land. He was the author of Progress and Poverty, written in 1879.

Liberal Party in the UK

In the United Kingdom, LVT was an important part of the platform of the British Liberal Party during the early part of the twentieth century - David Lloyd George and H. H. Asquith proposed "to free the land that from this very hour is shackled with the chains of feudalism". It was also advocated by Winston Churchill early in his career. Labour's 1931 Budget included an LVT, but before it came into force it was repealed by the Conservative-dominated National Government that followed shortly after.

The Henry George Foundation of America and the Center for the Study of Economics

The Henry George Foundation of America, a 501 (c) 4 non-profit foundation, was founded in 1926 by some of the leading progressive Democrats in Pittsburgh, Pennsylvania: Pittsburgh Mayors Scully and McNair, City Assessor Percy Williams, State Senator and Allegheny County Democratic Chairman Bernard B. McGinnis, and Councilman George Evans (driving force behind Buhl Planetarium). Its national office is now located in Philadelphia, where Henry George was born.

The Center for the Study of Economics, a 501 (c) 3 non-profit educational foundation, was established in 1980 as the sister organization of the Henry George Foundation of America. Its mission is to research land value taxation, to assist governments in implementation and to study the effect of land based property taxation where used. It suggests implementation where appropriate but does not support political candidates or become involved in the electoral process. The Center also gathers and disseminates articles, studies and monographs on the subject of land based taxation.

HGFA and CSE use actual assessment data and have tax calculators to illustrate how "two-rate" taxation (lower on improvements and higher on land value) might actually be implemented and the effect on parcel by parcel basis in a variety of jurisdictions. They also sponsor the land value tax projects in Maryland, New York, Indiana, Washington, Pennsylvania and New Jersey.

The HGFA and CSE were instrumentally in providing technical assistance (e.g. how to calculate rates, etc.) to the Pennsylvania cities that adopted two-rate taxation in the 70s, 80s and 90s. They continue to provide technical assistance and do implementation studies across the country.

Contemporary economists

Nobel Prize Winner, William Vickrey noted that "removing almost all business taxes, including property taxes on improvements, excepting only taxes reflecting the marginal social cost of public services rendered to specific activities, and replacing them with takes on site values, would substantially improve the economic efficiency of the jurisdiction.

In 1990, several leading economists – including 4 Nobel Prize winners – wrote to then President Mikhail Gorbachev suggesting that Russia use Land Value Taxation in its transition towards a free market economy.

Notes

References

Coughlin, J. Anthony. "Land Value Taxation and Constitutional Uniformity", Geo. Mason L. Rev., Winter 1999, Vol. 7, No. 2

Bibliography

Cord, Steven. 2003. “Invited Comment on Warren Samuel’s ‘Speculative Memorandum’.” American Journal of Economic and Sociology. (July 2003).
England, Richard W. 2004. “An Essay on the Political Economy of Two-Rate Property Taxation.” Working Paper WP04RE1, Lincoln Institute of Land Policy.
Gaffney, Mason. 2001. The Role of Ground Rent in Urban Decay and Revival. American Journal of Economic and Sociology. (December 2003).
Harriss, Lowell. 2003. “Getting Results---or Not.” American Journal of Economic and Sociology. (July 2003).
Kuntsler, James Howard. 1996. Geography of Nowhere. New York: Simon & Schuster.
Netzer, Dick. 1984. “On Modernizing Local Public Finance.” American Journal of Economic and Sociology. 43(4):497-501.
Netzer, Dick. 2001. “What Do We Need to Know About Land Value Taxation.” American Journal of Economic and Sociology. (December 2001).
Oates, Wallace E. and Robert M. Schwab. 1997. “The Impact of Urban Land Taxation: The Pittsburgh Experience.” National Tax Journal. 50(1):1-21.
Joseph William Singer. 2000. Entitlement: The Paradoxes of Property (New Haven and London: Yale U Press).
Tideman, T. Nicolaus. 1995. “A Tax on Land is Neutral.” National Tax Journal. 35(1):109-111.
Youngman, Joan M. 1997. “Henry George, Property Rights, and Taxation” in H. James Brown (ed.) Land Use and Taxation (Cambridge MA: Lincoln Institute of Land Policy) pp. 90-102.

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