Land Value Taxation (also known as split-rate property taxation, or two-tiered real property taxation, not just LVT) is a type of real property taxation. Whereas the typical property tax taxes land and improvements at the same rate, LVT applies to land at a higher rate while simultaneously reducing, or even eliminating, the tax on buildings.
For example, in Allegheny County, Pennsylvania, Clairton has levies at 103 mills on land and 4.32 mills on buildings rather than 29.5 mills on both (City and School District combined).
Traditional property taxes are calculated based on the assessed values of the improvements on a parcel, as well as the value of the land within its footprint. These values can be determined by a number of means, including through comparisons with local property sales records, through computer-assisted approaches, as well as through more generalized formulas that take into account land uses. Under a traditional property tax, a single rate is applied to the total value of the property (improvements + land).
A split rate tax simply imposes a different (higher) tax rate on the portion of a property’s overall value that comes from the land.
A true land value tax is levied on the assessed value of the land alone, and the value of improvements is untaxed.
Traditional property taxes are based on the assessed values of owners’ land and improvements (buildings), so those amounts are already known for every parcel currently on the tax rolls. Whether a city adopts a split rate tax or a true land value tax, determining owners’ tax bills involves simple mathematical calculations based on the values of the existing property tax assessments.
Because a switch to a land tax will eliminate taxes on improvements, it’s not a foregone conclusion that a homeowner will see an increase in their overall tax bill, even if they live in an area with high land values. In fact, residents rarely see their taxes go up as a result of LVT. If, however, the introduction of LVT does raise taxes on these individuals, tools like tax deferrals or caps can be implemented to limit or eliminate the impact. Many such tools already exist at the local and state levels, so there is no need to create new policy solutions in tandem with embracing a land tax.
The short answer is “they don’t.” This is because a land tax captures the value of the land, not the improvements, and identical, adjacent lots, no matter how differently they’ve been developed, will have very similar land values.
If, for example, two parcels are near a subway station, park, or major office complex, their owners have equal access to those amenities, and hence, those pieces of land are equally valuable. The fact that one owner has done nothing to take advantage of that access and another has made major investments that give the people on their property access to those benefits doesn’t make one owner’s land more valuable than the other.
Taxing land value alone “rewards” (or at least does not discourage) investments in buildings and other improvements, because owners know they will not see their tax bills go up as a result of those investments. Popular abatement programs, designed to encourage construction by forestalling the onset of improvement taxes by years or even decades, operate on the same principle; however, unlike abatements that shift the tax burden to others and eventually end, leaving property owners to either lobby for further tax breaks or consider moving elsewhere to take advantage of new tax breaks, LVT ensures that taxes are paid fairly by all and never sunsets, encouraging long term investments in cities and towns.
In general, residents and small businesses see their tax bills go down under LVT. As a rule, land speculators see their taxes go up.
Why is this? Because traditional property taxes place the bulk of the tax burden on improvements, the highest bills go to properties with the biggest, most expensive buildings (unless the owners were able to negotiate a tax abatement as a development sweetener, that is). If you were to create a “heatmap” of a city’s tax bills, it would likely be patchy – showing hotspots in areas with big office and commercial developments and fancy homes, wherever they are in the city. A land value tax, in contrast, emphasizes the value of the land under the buildings, so properties in areas with the most community amenities (i.e. the most desirable places to live and work) would receive the highest tax bills.
In general, downtowns are the bustling areas of a city or town, with a concentration of shopping, jobs, transportation, and entertainment options. All of these community-generated amenities make this land the most valuable. What housing there is downtown is often in the form of residential over commercial mixed use and apartment buildings, which claim little land area. Land in downtowns is at a premium, and if improvements are taxed more than land value, it creates the perverse incentive to hold downtown land in a blighted or idle state, in the hopes of one day selling high .
In contrast, land-intensive developments, like neighborhoods of single family homes, office parks, and farms, are typically farther flung, because that’s where land is readily available. And unsurprisingly, land values on the periphery are lower because the community has less to offer there.
So if you were to reimagine that heatmap, this time under a land value tax, the hotspots would shift to the most amenity-filled areas. Downtown land near parks, public transportation, job centers, and entertainment, would be taxed highest; and land far from the city center, and farther from these amenities, would be taxed least.
Since residents in downtowns live on little land, their bills are largely unaffected, and because those on the periphery live on less valuable land, their bills also typically stay the same or decrease. In contrast, downtown speculators see their bills skyrocket, and are left with the choice to either improve their land to make their holdings profitable, sell to someone committed to making those investments, or pay full board for the privilege of holding their land out of use.
The natural characteristics of land contribute to its value, but the primary determinant of whether a property is valuable or not is what it gives its owner access to. We all implicitly understand that the most valuable properties are the ones near jobs, entertainment, and transportation; the ones characterized by good public safety, and that give their owners access to things like good public schools. Clearly, the property owners didn’t create those amenities, but their proximity to them is a huge advantage, and it’s capitalized into the value of their land.
Skeptical? Imagine a scenario in which a new subway line is sited. What happens to the value of the land near the newly constructed stops? It skyrockets. A subway is an investment of public money, but under improvement-focused traditional property taxes, the people who reap the financial benefits of that investment are the local private landowners, whose bills increase only slightly (if at all), but whose properties are now worth much more than they were before the infusion of tax dollars next door.
A land tax closes that loop. If a subway line is sited, the value of adjacent parcels still increases, but the owners of those properties see their tax bills go up as a result. Of course, policies such as tax deferrals or phase-ins can be put in place to dampen the immediate effects of those increases, but ultimately, taxing land value means that owners pay what’s fair for the right to be in a particular place and enjoy the particular set of community-provided benefits it affords them, to the exclusion of others.
Case studies show that LVT does not pressure the development of areas designated open space or preserved as parkland. Zoning changes will ensure protection for these from development, along with existing tools such as TDRs and establishing non-taxed parkland. Also, by encouraging growth in urban areas that are already developed, LVT makes it less attractive for developers to seek land in rural areas to build on. A developer in an urban or inner-ring suburban core may take advantage of the need to use less land and establish community “pocket parks,” raising the inherent neighboring land value and capitalizing the project into a fairer selling price.
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