Henry George’s big idea
The land value tax, an increased tax rate on land and a reduced tax rate on buildings and improvements, has been tried in the U.S. primarily in Pennsylvania, and in some cases has been abolished just as quickly as it was instituted. Henry George’s great idea—that taxing land and not buildings would encourage urban development and curtail speculation—seems to have had a checkered history in practice. A new book, Land Value Taxation: Theory, Evidence, and Practice, edited by Lincoln Institute visiting fellows Richard F. Dye and Richard W. England, sheds more light on this distinctive approach to property tax reform.
The book is a comprehensive review of theory and published evidence on the land value tax and explores the results of its implementation in the U.S., primarily in Hawaii and Pennsylvania, and abroad in Australia, New Zealand, Jamaica, South Africa, Estonia, and elsewhere. “There has long been a need for a careful assessment of the statistical evidence on land value taxation,” said Gregory K. Ingram, president of the Lincoln Institute of Land Policy, a think tank in Cambridge, Mass., whose founder, John C. Lincoln, was inspired by the writings of the 19th century philosopher Henry George, an early proponent of land value taxation. “We wanted to learn why a form of taxation regarded as highly efficient by economists is often tried but then discarded, and whether it has achieved desired policy goals.”
As an alternative to the property tax, a land value tax increases the tax rate on land and decreases or eliminates the tax rate on buildings. A tax on land is often claimed to be very efficient and produce few unintended economic costs, to increase the density of development, to reduce speculation in land, and to speed development generally. The authors conclude that theory supports the first two claims and indicates that a land tax will lower gain from speculation though not eliminate it. Land Value Taxation: Theory, Evidence, and Practice suggests that a land value tax does not alter the timing of development.
In addition, the authors found that the implementation and political context for the land value tax has been challenging, often due to problems in assessment and issues that arise concerning fairness. In Pennsylvania, the land value tax is in place in 14 municipalities, but was tried and discontinued in 7 others. Harrisburg, a distressed city in the 1980s, initiated the land value tax as a continuing part of its economic development program. In Pittsburgh, which began a land value tax in 1913, there was evidence of its favorable impact on building activity, but the tax became a scapegoat for poor assessment and rate setting practices, and Pittsburgh reverted to a traditional property tax in 2001. In Hawaii, the land value tax was blamed for overdevelopment in locations such as Waikiki, where singer Joni Mitchell was inspired to write the lyrics “They paved paradise, and put up a parking lot.” The land value tax was abolished there in the mid-1970s.
In many cases relatively mild versions of the land tax have been implemented—often a modestly higher tax on land than on buildings—and so produced only small increases in development density, for example, that are difficult to measure. To be politically and economically successful, the authors argue, a land value tax must be accompanied by a sophisticated assessment system, frequent re-assessments, a nimble rate-setting process, effective land use planning, and ongoing public education.
Land Value Taxation: Theory, Evidence, and Practice provides guidance for additional empirical work by identifying areas where existing studies are weak or contradictory, and informs new attempts to implement land value taxation. It settles some debates about land value taxation and initiates new ones, including issues of fairness and equity in land taxation, winners and losers when a land value tax is implemented, and what political coalitions are likely to form in support of and in opposition to the land value tax.
As a long-time proponent of greater reliance on revenue from the taxation of land values to pay for public goods and services, it is clear that the full potential of this measure to stimulate competitive land markets requires a far higher effective rate of taxation of location rental values than has been applied anywhere to date.
What is needed to fully test the power of the measure is a community to fully exempt property improvements from the tax base. Doing so would make easier the process of assessing the annual location rental values. Moreover, as the selling price of land stabilized and (if the theory is accurate) began to fall, communities could acquire land parcels and make these available for private development under leaseholds awarded by competitive bidding.
Communities concerned about displacement of seniors or other households on fixed incomes could adopt “circuit breakers” that, for example, capped the annual amount of land value tax paid based on an affordability formula. The unpaid amount would accrue as a lien against the property (i.e., improvements and land parcel) to be paid at time of sale or transfer to heirs.