Most countries use a real estate tax dependent on the value or size of buildings. These property taxes can be contrasted to a Land Value Tax (‘LVT’) system, in which only the value of land functions as tax base, not the improvements on it. Proponents of LVT argue that it could lead to a more sustainable urban development. In urban planning, sustainability is often believed to be achieved through dense, mixed-use towns, a well-planned urban fabric and the re-use of brownfields, among other factors. LVT, it is argued, could curb urban sprawl, lead to an efficient land use according to plan, and stimulate brownfield recycling.
A common justification for planning is the argument of social external costs in the case of conflicting land uses, e.g. for hazardous enterprises next to residential areas. Planning by use regulation, most Planners argue, can be successful in ameliorating these external effects.
In the last decades however, it became increasingly clear that also the under- or non-use, as opposed to the ‘wrong’ use of land, can have negative external effects. The compact city is – despite criticism –among the most advocated components of urban sustainability and a key planning paradigm, emphasizing the importance of infill housing and brownfield reuse. Furthermore, contaminated brownfields are not only suitable for re-densification, but their remediation is a sustainability goal per se.
Present planning approaches however have difficulties to address under-use, since new construction largely depends on the cooperation of landowners. Only in exceptional cases has urban planning the authority and have local governments the will and resources to directly enforce a certain land use. Planning, especially continental European planning by zoning or Master Planning, is usually an ‘offer’ to landowners, who can chose to either use their land according to plan or to keep the current state, which might mean leaving land in prime locations under- or unused.
At this point, it might be helpful to turn to a fiscal tool that could help planners to reflect the high external social cost of underused land in private land use decisions better – Land Value Taxation.
A Land Value Tax is a tax levied annually on every land plot amounting to a certain share of the independently assessed plot value. This is in contrast to property taxes in most legislations today, which are based on building size or value, not land value, where empty plots are taxed on a very low rate. As an example, under LVT conditions, the owners of two neighbouring plots of land with similar characteristics and building permissions pay the same amount of tax, regardless if one plot contains a four-storey office block while the other is undeveloped. This form of land taxation would have four main advantages over current systems of land taxation from an urban planning point of view:
- It creates incentives for landowners in cities to use their land efficiently instead of leaving it undeveloped. Denser cities could in turn reduce sprawl. This is perfectly compatible with any existing planning system, since planning restrictions lower both the land value and the payable tax. The role of planning as mediator between densification and protection of open spaces would be reinforced.
- It reduces land speculation: ‘Land hoarding’ for later use or sale, which is one reason for under-achieving housing targets in an increasingly strained housing market, becomes near prohibitively expensive in spite of possible appreciation of land value over time.
- Since land value largely depends on conditions beyond the influence of the actual property owner, such as population change, local economic situation, and infrastructure endowment, LVT is an appropriate means to partially tap gains in value that come to owners as windfall profits, and refinance public infrastructure projects (betterment tax).
- It is non-distortionary to the market outcome, given that land supply is fixed. While a tax on buildings will reduce their supply, since landowners will build less and smaller new buildings to avoid tax, a tax on land cannot. The entire tax is levied on the supplier.
It can also be said that Land Value Tax has a moral advantage over property tax: All land privately owned today has been (arbitrarily) appropriated and enclosed at some point in history. LVT absorbs parts of the profits resulting from this individual appropriation of a former ‘common property’ to the benefit of those who did not get a share, if used for redistributive purposes. Taxing away land rent as an unearned income is more justifiable than a tax on buildings, which are often attributable to individual labour and investment.
This comes on top of the benefits of every form of property taxation, whether land- or building-based, over other forms of taxation: near-impossibility of tax evasion, buoyancy (tax rises with general economic growth), progressivity, and local contingency.
Social injustices with LVT can arise in the case of asset-rich income-poor households (“the pensioner in a villa”). Solutions discussed here include the possibility for owner-occupiers to defer tax payments until the land is sold or inherited, to the maximum amount of the estimated land value. Gentrification, on the other hand, is not influenced by LVT. As opposed to current property tax systems, however, LVT would make sure that taxes rise according to rising land values, and a part of the value gain is recouped for the public good.
A number of countries has introduced an LVT-based system, among them especially several East Asian countries.
A mixed form of LVT and property tax has been introduced in the US state of Pennsylvania in the 1980s and extensively studied by economists. Two main questions were raised: If larger homes under LVT could offset the density effect and if premature development under LVT could occur that had adverse long-term outcomes. In fact, a densifying effect of the tax could later be confirmed, and premature development can be avoided by strategic master planning.
For my Master’s thesis, I analysed the effects of LVT introduction on urban form in Estonia, the only EU country that has adopted the tax (in 1993). The tax rate is set by the municipalities and the implementation is comparably strict, which makes it a good case study. In comparison with neighbouring Latvia, which kept a property-based tax, Estonia showed significantly more multi-family home constructions, more inner-city constructions, a growth of the inner city capital-to-land ratio and inner-city population stability. At the same time, however, urban sprawl was similarly strong in both capital cities, Tallinn and Riga. Plus, a site visit to Tallinn revealed that charged parking spaces were a competitive form of land use as opposed to development, even in high-value and high-tax areas.
Overall, positive effects of LVT could be identified in Estonia, but it was difficult to attribute these effects precisely to one influence. Land restitution procedures, contamination of sites, zoning and building laws, as well as the general economic and demographic circumstances played a role as well. The prevalence of parking lots and the intensity of sprawl also pointed at the importance of the actual tax configuration: In most municipalities, the tax rate is 1% – too low to exert the necessary incentives for landowners to reconsider their decisions.
Is the Land Value Tax a tool for urban planners against sprawl? Its theoretical merits are many, but its practical benefits depend on the circumstances in which it is used, and on the configuration of the tax itself. It cannot prevent sprawl alone, but has to be accompanied by planning, and its incentivising effect on land use decision is stronger the higher it is.
Compact cities can never be the sole ingredient of a strategy for sustainable urban development, but it often plays a major role in creating less polluting, more just, and more efficient cities. Where density is an aim, however, Land Value Taxation should be considered as a tool to achieve it.