Land Value Tax Shifts
A land value tax (LVT) shift involves taxing the land value portion of properties at a higher rate than the building value.
The current property tax system taxes the total value of properties. This includes both the land and any structures on top of it. Because the average property has most of its value in the building, the conventional property tax is mostly a tax on building value.
This creates perverse incentives for speculators to buy up vacant and underused sites and to avoid building intensive uses. For the speculator, as long as annual holding costs are lower than the site’s annual appreciation in value, it pays to hold out. For those who want to make the most of the site, the more building value they create, the more they pay in property taxes.
As a result, a significant portion of land in cities, particularly near downtown areas, remains locked up as surface parking lots or other low-intensity uses. This has big environmental implications. Dense, high-intensity land use promotes sustainable transportation habits by making it easier to walk, bike, and take transit. It also limits urban sprawl and the resulting loss of habitat by concentrating development in existing urbanized areas.
Places using land value tax shifts have experienced tremendous in-fill and redevelopment effects, along with other benefits. In the U.S., Pennsylvania has used this approach the most.
After Harrisburg, once one of the most distressed cities in the nation, adopted this approach in 1975, it saw 5,200 vacant properties restored and taxable businesses rise from 1,908 to 5,900. A number of smaller Pennsylvania towns saw dramatic increases in building permits issued and a majority of residents received tax reductions under the reform. A widely-cited study of LVT use in Pittsburgh showed that building construction there leapt ahead of other Rust Belt cities.
A recent chorus of voices from the fields of planning, architecture, and economics have called for the widespread adoption of this approach. For more specifics, see this report by Oregon’s Northwest Economic Research Center that was funded in part by Common Ground USA.