Land value tax

Taxation
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Land value taxation (LVT) (or site value taxation) is an ad valorem tax where only the value of land itself is taxed. This ignores buildings, improvements, and personal property. Because of this, LVT is different from other property taxes on real estate—the combination of land, buildings, and improvements to land. Every jurisdiction that has a real estate property tax has an element of land value tax, because land value contributes to overall property value.

Economic effects

Efficiency

A supply and demand diagram showing the effects of land value taxation. Note that the burden of the tax falls entirely on the land owner, and there is no deadweight loss.

Most taxes distort economic decisions. If labor, buildings or machinery and plants are taxed, people are dissuaded from constructive and beneficial activities, and 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. Nobel Prize winner William Vickrey believed 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." A correlation between the use of LVT at the expense of traditional property taxes and greater market efficiency is predicted by economic theory, and has been observed in practice.

Proponents allege that 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 in the United States 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 an ecotax because it ostensibly discourages the waste of locations, which are a finite natural resource.

Real estate values

The selling price of land titles is proportional to the expected profits from rent or investment after taxes, so LVT would reduce the capital value of all real estate owners' holdings. Critics warn 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 stability of the whole financial system. However, the lending of money for real estate purchase and the use of land titles as collateral is itself a cause of instability in the financial system and was the primary factor in the rapid increase in real estate prices in the years from 2000 to 2007, and the subsequent collapse.^{[citation needed]}

Real estate bubbles direct savings towards rent seeking activities rather than other investments, and can contribute to recessions which damage the entire economy. Advocates of the land tax claim that it reduces the speculative element in land pricing, thereby leaving more money for productive capital investment and making the economy more stable.

If the value to landowners were reduced to zero or near zero by recovering effectively all its rent, total privately held asset values could decline as the land value element was stripped out, representing a shift in apparent private sector wealth but which is in fact a paper value only. Most LVT advocates support a gradual shift to avoid disrupting the economy, and argue that the reduction in private rent collection would result in increased net wages received from employment and asset growth from entrepreneurial activity.

Implementation

There are several practical issues involved in the implementation of a land value tax. Most notably, it needs to be:

• Calculated fairly and accurately,
• High enough to raise sufficient revenue without causing land abandonment, and
• Billed to the correct person.

Assessments

In theory, levying a Land Value Tax is straightforward, requiring only a valuation of the land and a register of the identities of the landholders. There is no need for the tax payers to deal with complicated forms or to give up personal information as with an income tax. Because land cannot be hidden, removed to a tax haven or concealed in an electronic data system, the tax can not be evaded.

However, critics point out that determining the value of land can be difficult in practice. In a 1796 United States Supreme Court opinion, Justice William Paterson noted that leaving the valuation process up to assessors would cause numerous bureaucratic complexities, as well as non-uniform assessments due to imperfect policies and their interpretations. Austrian School economist Murray Rothbard later raised similar concerns, stating that no government can fairly assess value, which can only be determined by a free market.

When compared to modern-day property tax evaluations, valuations of land involve fewer variables and have smoother gradients than valuations that include improvements. This is due to variation of building style, quality and size between lots. Modern computerization and statistical techniques have eased the process; in the 1960s and 1970s, multivariate analysis was introduced as a method of assessing land.

Land value for LVT purposes is assessed using market evidence. Such evidence may comprise both selling prices and rentals. Where development already exists on a site, the value of the site can be discovered by various means, of which the most easily understood is the residual method: the value of the site is the total value of the property minus the depreciated value of buildings and other structures.

The valuation process commences with a measurement of the most and least valuable land within the taxation area. A few sites of intermediate value are then identified and used as "landmark" values. Other values are filled-in between the landmark values. The data is then collated on a database and linked to a unique property reference number, "smoothed" and mapped using a geographical information system (GIS). The initial valuation is the most difficult; once the system is bedded-in, successive valuations become easier.

Sufficiency of revenue

In the context of land value taxation as a single tax (replacing all other taxes), some have argued that LVT alone cannot raise large enough revenues. However, this is based on the fallacious assumption that land values would not change as existing taxes were phased out. But the presence of existing taxes has the effect of depressing land values. Thus, the phasing out of these existing taxes would lead to an increase in land values, and in this way the tax base itself would grow. It has also been argued that increasing LVT at the expense of other taxes would reduce government expenditure on welfare.

In a study for the Institute of Economic Affairs, Harrison has calculated that the indirect (deadweight) cost of the UK tax system is about 12% of national wealth. Most modern LVT systems are alongside other taxes, and thus only reduce their impact without removing them completely.

In a case or event where a jurisdiction attempted to levy a land tax that was higher than the entire landowner surplus, it would result in the abandonment of property by those who would be paying and a sharp decline in tax revenue. Whilst this is obviously the case theoretically, it sets a natural ceiling on the amount of LVT that can be levied.

Requires clear ownership

In some countries, LVT is nearly impossible to implement because of lack of certainty regarding land titles and clearly established land ownership and tenure. If the government can not accurately define ownership boundaries and 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. In African countries with imperfect land registration, boundaries may be poorly surveyed, the landlord can be elusive and significantly more difficult to tax than occupants, but most governments require that tax collectors track owners down nonetheless so that the burden of the tax does not fall on the poor.

Ethics

In religious terms, it has been claimed that land is a common gift to all of mankind. For example, the Catholic Church as part of its "Universal Destination" principle asserts:

Everyone knows that the Fathers of the Church laid down the duty of the rich toward the poor in no uncertain terms. As St. Ambrose put it: "You are not making a gift of what is yours to the poor man, but you are giving him back what is his. You have been appropriating things that are meant to be for the common use of everyone. The earth belongs to everyone, not to the rich."

Pope Paul VI, Populorum Progressio

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.

LVT is also 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 - those whose land value went up most.

History

Pre-modern

{{#invoke:Message box|ambox}} Land value taxation has ancient roots, tracing back to after the introduction of agriculture. One of the oldest forms of taxation, it was originally based on crop yield. This early version of the tax required simply sharing the yield at the time of the harvest, akin to paying a yearly rent.

Physiocrats

Anne Robert Jacques Turgot, one of the leading physiocrats.

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. Physiocracy is considered one of the "early modern" schools of economics. Physiocrats called for the abolition of all existing taxes, completely free trade, and a single tax on land; they did not distinguish, however, between intrinsic value of land and ground rent. Their theories originated in France and were most popular during the second half of the 18th century. 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. The Physiocrats were also highly influential in the early history of land value taxation in the United States.

Thomas Paine contended in his Agrarian Justice pamphlet that all citizens should be paid 15 pounds at age 21 "as a compensation in part for the loss of his or her natural inheritance by the introduction of the system of landed property." This proposal was the origin of the citizen's dividend advocated by Geolibertarianism.

Henry George

Henry George in 1865.

Henry George (September 2, 1839 – October 29, 1897) was an American Journalist and political economist who advocated a "Single Tax" on land. In 1879 he authored Progress and Poverty, which significantly influenced land taxation in the United States.

Liberal and Labour Parties in the United Kingdom

In the United Kingdom, LVT was an important part of the platform of the 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. The modern Liberal Party (not to be confused with the Liberal Democrats, which are the larger heir to the earlier Liberal Party) remains committed to a local form of land value taxation, as do the Green Party of England and Wales and the Scottish Green Party.

From its early years, and until just after the Second World War, there was strong support for land value taxation within the Labour Party. The Member of Parliament Andrew MacLaren was a consistent and vocal advocate. The 1931 Labour budget included a land value tax, but before it came into force it was repealed by the Conservative-dominated National Government that followed shortly after.

An attempt at introducing site value taxation in the administrative County of London was made by the local authority under the leadership of Herbert Morrison in the 1938–9 Parliament, called the London Rating (Site Values) Bill. Although it failed, it sets out detailed legislation for the implementation of a system of land value taxation using annual value assessment.

After 1945, the Labour Party adopted the policy, against the opposition of a substantial body of MPs, of attempting to collect "development value": the increase in land price arising from planning consent. This was one of the provisions of the Town and Country Planning Act 1947 and it was repealed when the Labour government lost power in 1951.

Existing tax systems

United States

Land value taxes are used in various jurisdictions of the United States, particularly in the state of Pennsylvania.

Land value taxation in the United States has a long history dating back from Physiocrat influence on Thomas Jefferson and Benjamin Franklin, and continues to be used today, particularly in Pennsylvania.

Physiocrat influence in the United States came by Benjamin Franklin and Thomas Jefferson as Ambassadors to France, and Jefferson brought his friend Pierre du Pont to the United States to promote the idea. A statement in the 36th Federalist Paper reflects that influence, "A small land tax will answer the purpose of the States, and will be their most simple and most fit resource."

Henry George

Henry George in 1865.

Henry George (September 2, 1839 – October 29, 1897) was an American political economist who advocated a "Single Tax" on land. In 1879 he authored Progress and Poverty, which significantly influenced land taxation in the United States.

In 1926, progressive Democrats in Pittsburgh, Pennsylvania founded the Henry George Foundation of America, a 501(c)(4) non-profit foundation, with the intent of promoting land value taxes. Its national office is now located in Philadelphia, where Henry George was born. In 1980, the HGFA established the Center for the Study of Economics, a 501(c)(3) non-profit educational foundation as a sister organization. The CSE's 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.

The HGFA and CSE use 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, and were instrumental in providing technical assistance (how to calculate rates, etc.) to the Pennsylvania cities that adopted two-rate taxation in the 1970s-90s. They continue to provide technical assistance and do implementation studies across the United States.

Legality

There are two legal obstacles unique to land value taxation in the United States: uniformity clauses and Dillon's Rule. At the federal level, land value taxation is legal so long as it is apportioned among the states.

Uniformity clauses

The United States legal system includes "uniformity clauses," which require that all taxation is applied evenly within a jurisdiction. Although the federal Uniformity Clause has never been an issue, many state constitutions have their own uniformity clauses, and the wording and interpretation of these clauses varies from state to state. For example in 1898, prior to an amendment of the Maryland Declaration of Rights which now specifically allows for land value taxation, the Maryland Court of Appeals (the highest state appellate court) ruled that the use of land value taxation in Hyattsville was unconstitutional. However, the uniformity clause in Pennsylvania has been broadly construed, and land value taxation has been used since 1913.

Each state will have its own legal stance or lack of any 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 a general rule, as long as each type of property (land, improvements, personal) is taxed uniformly there is no constitutional obstacle. In addition, no court other than the 1898 case in Maryland has actually struck down an attempt to implement land value taxation on the basis of a state uniformity clause.

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 and have not adopted Dillon's Rule. While the uniformity clauses might be interpreted to prohibit state-wide action, local action may be legitimate.

Local authorization

Although uniformity clauses do not seem to be a major obstacle in most jurisdictions to land value taxation, control of local authority by the state legislature remains a real obstacle, requiring the need for local enabling authority or the abrogation of Dillon's Rule. The theory of state preeminence over local governments was expressed as Dillon's Rule in a 1868 case, where it was stated that "[m]unicipal corporations owe their origin to, and derive their powers and rights wholly from, the legislature. It breathes into them the breath of life, without which they cannot exist. As it creates, so may it destroy. If it may destroy, it may abridge and control." As opposed to Dillon's Rule, the Cooley Doctrine expressed the theory of an inherent right to local self determination. In a concurring opinion, Michigan Supreme Court Judge Thomas Cooley in 1871 stated: "[L]ocal government is a matter of absolute right; and the state cannot take it away." In Maryland, for example, municipal corporations have the right to implement land value taxation, but the counties, including Baltimore City which is treated as a county in Maryland for certain purposes, do not.

Usage

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. There are several cities that use LVT to varying degrees, but LVT in its purest form is not used on state or national levels. Land value taxation was tried in the South during Reconstruction as a way to promote land reform. There have also been several attempts throughout history to introduce land value taxation on a national level. In Hylton v. United States, the Supreme Court directly acknowledged that a Land Tax was constitutional, so long as it was apportioned equally among the states. Two of the associate justices explained in their summaries, stating:

[T]he Constitution declares, ... both in theory and practice, a tax on land is deemed to be a direct tax. ... I never entertained a doubt, that the principal, I will not say, the only, objects, that the framers of the Constitution contemplated as falling within the rule of apportionment, were a capitation tax and a tax on land.

Justice William Paterson

I am inclined to think, but of this I do not give a judicial opinion, that the direct taxes contemplated by the Constitution, are only two, to wit, a capitation, or poll tax, simply, without regard to property, profession, or any other circumstance; and a tax on land.

Justice Samuel Chase

There have also been attempts since then to introduce land value tax legislation, such as the Federal Property Tax Act of 1798, and HR 6026, a bill introduced to the United States House of Representatives on February 20, 1935 by Theodore L. Moritz of Pennsylvania. HR 6026 would have imposed a national 1% tax on the value of land in excess of $3,000.

Single tax

The first city in the United States to enact land value taxation was Hyattsville, Maryland 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. The towns of Fairhope, Alabama and Arden, Delaware were later founded as model Georgist communities or "single tax colonies."

Two-rate taxation

File:Market Square in Harrisburg.jpg

Market Square in Downtown Harrisburg, Pennsylvania

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.

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 a countywide property reassessment 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. The tax on land in Pittsburgh 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. In 2000, Florenz Plassmann and Nicolaus Tideman wrote that when comparing 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, the higher land value taxation leads to increased construction within the jurisdiction.

Other countries

{{#invoke:Message box|ambox}} Pure LVT, apart from real estate or generic property taxation, is used in Taiwan, Singapore, 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. Hong Kong is perhaps the best modern example of the successful implementation of a high LVT. The Hong Kong government generates more than 35% of its revenue from land taxes. Because of this, they can keep their other taxes rates low or non-existent and still generate a budget surplus. In 1990, several economists wrote to then President Mikhail Gorbachev suggesting that Russia use Land Value Taxation in its transition towards a free market economy.

Several cities around the world also use LVT, including Sydney, Canberra, and others in Australia. An in-depth study under the Chairmanship of Sir Gordon Chalk issued a report in 1986 on the subject of local taxation for the city of Brisbane, Queensland. The report, which examined many alternative means of local finance, sets out comprehensive and concise arguments for LVT. It has also been used in Mexicali, Mexico.

References

ISBN links support NWE through referral fees

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

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