In the United States, the Department of Housing and Urban Development (HUD) administers federal public housing assistance programs and distributes funding to local housing agencies. These programs aid approximately 5 million households in finding affordable housing, yet 3 out of 4 eligible households do not receive HUD assistance due to lack of funding. The lack of affordable housing in the United States is also due in part to limited housing supply. A land value tax could help address these challenges by encouraging developers to build more housing while also creating revenue for local governments to spend on affordable housing programs.
Benefits of the Land Value Tax
Originally suggested by journalist Henry George in the 19th century, a land value tax requires landowners to pay taxes on the value of their land, not including the value of any buildings or structures on the property. While most current property taxes in the United States tax the value of land and the structures built on the land equally, some researchers have suggested that a land value tax could be implemented in a split rate system, which would charge a higher tax rate on land and a lower tax rate on structures. Proponents of this system argue that it is a way to encourage higher density development and generate revenue that could be used to fund affordable housing.
When a split rate tax is implemented, landowners can offset the burden of higher land taxes by maximizing the use of the land through development. Lowering taxes on structures and raising taxes on land encourages landlords and developers to build in such a way that would result in individuals living on smaller portions of land. In addition, it discourages landowners from keeping land undeveloped or underdeveloped because their tax burden, the ratio between taxes paid and the property’s fair market value, falls as more improvements to the land are made. For example, owners of single family homes might choose to build a duplex or triplex instead because they can increase the value of their property without significantly increasing their tax rate, thus reducing the average tax on the property.
In addition to incentivizing higher density development, split rate taxes also encourage economic activity in lower valued areas. Land that is close to amenities such as transportation, safe neighborhoods, or job centers is valued higher and experiences higher taxes. Since there is no significant tax penalty for adding structures, developers may have more interest in areas with low property values where they can add housing units or make other improvements without experiencing major tax increases. The split rate tax also shifts the tax burden to areas with higher amenities, returning some of the property value to the local government for use in affordable housing programs or investments in under-resourced parts of the city.
Arguments For the Land Value Tax
Proponents of the split rate tax argue that it stimulates construction and beneficial land uses in lower income areas, helping to address issues of housing supply. Since landowners will be encouraged to increase density and use their land more efficiently, the tax could also help to reduce urban sprawl. Others argue that a land value tax automatically compensates property that is devalued by unwanted development. If land loses value because of new projects, such as nearby train tracks which generate unwanted noise, the property will pay a lower land tax bill. In an op-ed for the Los Angeles Times, three UCLA professors argued that, since housing scarcity creates wealth for homeowners and burdens for those who do not own homes, the government should tax that wealth and use it to lessen the burdens of housing scarcity. They contend that even a small land tax would raise millions of dollars each year that local governments could use to fund affordable housing. For example, a 2% tax on real estate transactions over $1 million in Los Angeles could generate $200 million each year.
Pennsylvania is one of the states that allows its local governments to implement a split rate tax system.
16 localities in Pennsylvania currently levy a split rate tax, 5 have rescinded split rate taxes, and 12 have considered, but never implemented, a split rate tax. While it is difficult to isolate the impact of land value taxes on development among other economic influences, many Pennsylvania cities experienced development increases and tax cuts for at-risk communities after implementing a split rate system. In the city of Allentown, where the land tax rate is nearly 5 times the building tax rate, the split rate tax was beneficial for at-risk neighborhoods, where more than 90% of homes had their tax liability reduced. It also helped make housing more affordable for many senior residents on fixed incomes by lowering their property taxes. In 2000, local politicians wrote that building permits in Allentown had increased by 32% since the land tax was passed, and the city’s Fairgrounds, an undeveloped parcel of land, experienced a 137% increase in property taxes.
Before the city of Harrisburg implemented a split rate tax system, it had 4,200 vacant structures, numerous empty lots, and was the second most distressed city in the United States according to the Federal distress criteria. Since levying the tax, the city gained more than $1.2 billion in new investment and the number of vacant structures declined from 4,200 to 500. Today, the city of Harrisburg continues to levy a split rate tax at a land to building ratio of 6:1. Although some researchers argue that the conditions of Harrisburg’s success are hard to replicate elsewhere, including the city’s energetic and motivated mayor, local politicians assert that the land value tax was a key factor in Harrisburg’s ability to combat blight and spur development.
Land value taxes have also been levied internationally. Australia relies heavily on several variations of a land value tax to fund state and local budgets. New Zealand and South Africa have also successfully implemented land value taxations to support their local governments and redistribute tax burdens. Both domestically and internationally, the land value tax has been beneficial for local governments to make housing more affordable for at-risk communities by lowering their property taxes, increasing high density development, and generating revenue for local budgets.
Shortcomings and Alternatives
To effectively stimulate construction of high-density development, a split rate tax would need to be implemented alongside other policies and conditions. If land use regulations and zoning are too restrictive, developers will not be able to increase density and build new structures. Additionally, land value taxes require that assessments of land and improvements be done promptly and accurately. Land can be difficult to value because its price is not directly recognized when a property is sold. In many of the cities where the land value tax was rescinded, researchers argue that the tax became a scapegoat for issues with infrequent and inaccurate assessments and clumsy rate-setting procedures. In order to avoid these problems, local governments would need to adopt the best assessment practices, frequently reassess land values, and change zoning to allow high density development.
Some argue that a land value tax will not encourage the development or sale of valuable land. Instead, landowners who cannot afford to pay the tax will be forced to sell their land, while wealthy landowners may choose to bear the cost rather than develop their land. This concern was realized in some Pennsylvania cities, where local governments indicated that the land tax was not a large enough burden to stimulate development. If split value taxes are administered at a local level, communities can decide individually what land to building ratio to implement. In areas where undeveloped land is important, such as agricultural communities, the ratio may remain low, while larger cities that seek to incentivize development may implement higher ratios.
Others argue that land value taxes will more heavily impact individuals who have chosen to invest in land as opposed to those with similar economic means who have invested in stocks and bonds. Further, it disproportionately impacts those who own land at the time the tax is implemented since higher property taxes are offset by lower mortgage payments for those who buy land after the tax is instituted. Some types of landowners, including businesses such as golf courses or land-rich but income-poor residents, may also be hit particularly hard by the land value tax if they rely on undeveloped land for their business or do not have the means to make improvements to their land. In order to tackle these concerns, cities may need to take measures such as phasing in split rate taxes over several years, implementing tax credits for low-income residents, creating exemptions for burdened property owners, or varying tax rates within the locality.
If implemented with the right conditions and supporting policies in place, land value taxes could be an effective way to encourage a greater supply of high-density housing, generate money for local governments to spend on housing programs, and make housing more affordable for low-income residents. When deciding on this issue, individuals will need to consider if they believe landowners should bear additional tax burdens to support affordable housing. Is it fair for current landowners to pay a tax that will not be as acute for renters and future landowners? Should industries that depend on undeveloped land be burdened by higher taxes to improve housing supply and affordability? Finally, should the government focus on increasing tax revenue and investing in affordable housing programs, or should the focus be increasing development and lowering taxes for residents?
