Chicago Fed Letter, No. 489, November 2023
Changes to property tax structures, including the introduction of split-rate taxation, have been seeing increased interest from policymakers. Split-rate property taxation is rooted in the concept of land value taxation, which is an alternative to the form of property taxation used in most U.S. communities. In this Chicago Fed Letter, we explain what these alternatives to traditional property taxation are and provide some history on their implementation in the U.S.
We begin with a few definitions.
Property taxes in the U.S. are based on the market value of a property, including land and alterations to that land (including buildings). These additions to unaltered land are called “improvements.” Property taxes are calculated at different rates across municipalities. They have long been a significant contribution to local municipal revenues in the U.S. Wallis (2000) notes that by 1902, property taxes made up about 57% of state revenues and 73% of local revenues. While property taxes are no longer a significant portion of state revenues (representing just 1.2% in 2021), they remain a large portion of local government revenues. According to the U.S. Census Bureau’s Annual Survey of State and Local Government Finances, property taxes made up 48% of local government self-sourced revenue across the U.S. in 2021.
Pure land value taxes, in comparison, are taxes on the value of land, excluding any improvements to the property. The case for land taxes dates back to eighteenth- and nineteenth-century economists and philosophers Adam Smith, David Ricardo, James Mill, and John Stuart Mill. They wrote about land taxation as a means to encourage economic development. In his influential 1880 book, Progress and Poverty, 1 Henry George cites ethical reasoning for the land value tax along with economic efficiency reasons. He argued that because land value is not decided by the owner but by the community and the surrounding area, land value taxes should go to benefit that community (Dye and England, 2009). Under a pure land value tax system, an empty lot of land would be taxed at the same rate as neighboring, equivalent parcels with homes on them. Removing a tax on improvements removes the disincentive to develop improvements on land.
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