Why I Support a Land Value Tax

I’m firmly convinced that a land value tax  (LVT) is the best way to finance local government.

Here’s why:

• The land value tax is efficient. Unlike other taxes (including property taxes) it can’t alter behavior, since the supply of land is fixed. A tax on alcohol sales results in less alcohol being supplied, a tax on gas less gas being supplied. But no matter the price of land, there is the same amount of it (at least for areas away from the coasts – and rising sea levels are hardly are response to property taxes!).
• A land value tax taxes rents. In economics, rents are payments that don’t incentivize additional production or economic activity – and thus, from the perspective of society, something akin to wasted money. Again, the supply of land is fixed! All payments to owners of land on the basis of land value (as opposed to structure or improvement value) are rents.

• Caveat: I’m not going full Georgist here and calling for the abolition of private land ownership. Because, for example, I believe that private landownership is justifiable for reasons of allocative efficiency.

Now why is a land value tax the best way to finance local governments?

• The value of land is “location, location, location”. Thus a LVT aligns a city’s financial incentives with good government by making desirable city a city with the greatest tax base. A well-planned city, with qualitypublic services, amenities, transit, responsive local government, etc. will have higher land values than a poorly-run city.
• This incentivizes density (if that’s what people value), transit-oriented development (and good transit planning), etc. and punishes any overly-restrictive zoning laws.
• It also encourages allocating resources within the city to where they will do the most good – since land value is function of the quality of public services, especially education. For example, $100 more spending per pupil in CPS in the South Side of Chicago will probably go a lot further than the same increase in the North Side. Thus, from the standpoint of maximizing the tax base, a city would be incentivized to allocate resources where they get the most bang for their buck.

• The second virtue of a LVT in the context of local government is that it puts the burden of paying for the city on the people who benefit most from the city – the businesses and individuals who locate there. Unlike a sales or gas tax, which raise money from non-residents, a LVT raises money by taxing assets located immovably within the city – and then spends that money providing services to enhance the value of those assets.

Now I anticipate some critiques and counterarguments (lets debate this!), so let me make some points ahead of time:

• I’m aware of the problems (especially in Chicago) in assessing property values. Tax assessments should be updated when properties are sold, but often aren't. Land valuation would be a similar challenge, although I think it would actually be easier since there is less variation among sites than structures. (e.g. "Why is my 20000 sq. foot lot assessed at a different rate than my neighbors?") It should also be noted that property tax assessors already assess site value.
• There are variety of mechanisms for getting more accurate assessments. For instance, a structures value could be estimated from insurance premiums against total loss. I may expand on this in a later post.
• Additionally, many of the criticisms of a LVT are also true of property taxes. But you have to tax something to pay for the city, and I think that a LVT is the best option. Even if you aren't as in the tank for a LVT as I am, you should compare it to raising equivalent funds from a property tax as a question of practical politics.