A land value tax is a tax imposed only on the land itself—it disregards the value of any structures built upon it. They’re immaterial to the appraised value of the physical property on the land and to the owner’s tax liability. The concept was first introduced by Henry George, an American political economist and writer, in his 1879 book, “Progress and Poverty.”
The land value tax is in place in numerous cities in the United States as of 2021, and it’s been proposed in others. Learn how the land value tax works and what impact it may have in the place you live.
Definition and Examples of a Land Value Tax
A land value tax is based solely on the value of unimproved land, without consideration of any buildings or other structures erected upon it. It also disregards things like structural improvements, drainage improvements, and the value of any crops that may be growing on the land.
From 2011 to 2016, Altoona, Pennsylvania was the only city in the U.S. to rely on the land value tax alone. Other countries that rely on the land value tax include Denmark, Singapore, and Estonia.
Picture a multi-acre parcel of land in the countryside. One half of that land is an eyesore: It’s home to only a handful of wooden remnants from a structure that existed there decades ago. The other half boasts a $2 million mansion. Both of these parcels would be taxed the same based on a land value system because they share identical appraisal criteria: the location of the land itself.
Likewise, a commercial garage might sit upon a city parcel while that mansion sits in the countryside. The mansion owner would pay significantly less in tax with the land value system than they would with the traditional property tax system because the dwelling sits upon remote country land. The garage owner, on the other hand, would pay more than the mansion owner because their land is in a prime city location. With the land value tax, the bottom line and determining factor is the land's value.
- Alternate name: Annual charge on the rental value of land
How a Land Value Tax Works
The land value tax doesn’t do away with property tax assessments, but rather it just eliminates assessment of any structures that sit upon it. The land’s value must still be assessed, and it’s typically assessed at a greater rate than it would have been in a traditional property tax system.
In a traditional property tax system, improvements upon the land are taken into consideration, while in the case of the land value tax system, they are not.
The potential use of the land where a property sits is considered, regardless of whether the owner ever gets around to taking advantage of it for that purpose. This can depend on zoning regulations, and properties can be reassessed after rezoning. For example, land in a thriving city that’s convenient and nearby consumers would be assessed at a higher value than a parcel surrounded by woods.
The Split-Rate Property Tax
Some county and municipal taxing authorities use a hybrid version of the land value tax called the split-rate property tax, otherwise known as a graded tax. Through this system, land and buildings residing on the land are treated as separate units, taxed at different rates.
As a result, this type of tax skews more heavily toward the value of the land, taxing it at a higher rate. If the owner of the land wants to reduce the burden, they can develop the land to its highest and best use value. While they will pay more taxes, it will be offset by the increase in the property’s market value.
Pennsylvania is a good example of a state that uses the split-rate tax. Approximately 20 municipalities within the state have implemented split-rate taxes, including Pittsburgh and Scranton. According to a recent study that used Pennsylvania as a basis for research, commercial properties may benefit more from split-rate taxation rather than residential and industrial uses.
Pros and Cons of a Land Value Tax
As with all tax systems, the land value tax has its share of supporters and detractors.
The tax burden on owners is reduced
It encourages new development
It doesn’t penalize owners for making home improvements
The tax sacrifices a portion of the revenues that municipalities and counties rely upon for funding of operations
It can discourage ownership in some areas
It can limit property and homeowners from controlling their tax burdens
- The tax burden on owners is reduced: Property owners can typically anticipate lower tax bills with the land value tax because they’re only being taxed on a portion of their asset: the land it sits upon.
- It encourages new development: Investors have no incentive to allow land to sit idle with this type of tax. They can make improvements upon it and use it within zoning limits, which can result in new and often needed development in urban areas.
- It doesn’t penalize owners for making home improvements: Homeowners can invest in their properties and make improvements to them without worrying about an increased tax bite.
- The tax sacrifices a portion of the revenues that municipalities and counties rely upon for funding of operations: Fewer taxes paid by property owners means less revenue raised by municipalities and counties. This can translate to reduced or inferior services and infrastructures provided to citizens, and this can force government taxing authorities to reassess more frequently.
- It can discourage ownership in some areas: Investors may be more likely to sell and unload highly taxed urban parcels through the land value tax, rather than wait for a more optimum time for development.
- It can limit property and homeowners from controlling their tax burdens: In the case of the land value tax, owners cannot move land to a new location to achieve a lesser tax burden. Their options for having any control over the amount of taxation they’re subject to are greatly reduced.
- A land value tax is based solely on the value of unimproved land, without consideration of any buildings or other structures erected upon it.
- A land value tax rate is typically higher than a traditional property tax rate to compensate for less value being subject to taxation.
- Generally, homeowners have less of a tax burden with the land value tax because the overall value of what they’re being taxed on is reduced, as construction and improvements are eliminated from the assessment equation.
- The land value tax doesn’t financially penalize owners and developers for making improvements and can encourage new development as a result.