Land Value Tax

By: J. David Chapman/September 14, 2023

I believe in property rights. I am against high taxes, but also understand governments must have revenue. I am for affordable/attainable housing for citizens. The question is: How do we accomplish all this without government overreach and leaving constituents worse off?

If you tax income, it provides a disincentive to work. If you tax property including improvements, it provides a disincentive to build physical buildings on the vacant land. At times, as a society we choose to tax intentionally to discourage an activity like “sin taxes” on tobacco, alcohol and marijuana. However, there are also taxes that governments levy to pay for services without changing behaviors.

We can place blame in many places for the housing crisis we are experiencing in America. General inflation, rising interest rates, increasing labor costs, and increasing material costs are just a few. One not talked much about is tax policy. We have an interesting issue of failing to use valuable in-demand land for its best purpose, potentially housing. Part of the reason owners of vacant land sit on it, and do not develop, is that they are punished by taxation for investing in their property. If they improve the land, the property will receive a higher value assessment and the owner will be required to pay higher taxes.

In general, vacant lots can contribute to decline and, if there is no valuable structure on a property, the landlord pays a nominal property tax. This both lowers tax revenue (property, income, and sales) and hurts neighborhood quality for everyone else.

One solution proposed is a land value tax, or LVT. This entails separating out the value of the land without any improvement on it and taxing it separately – at a higher rate. Many times, land appreciates in value due to no effort by the owner, but by others’ efforts in the community.

Under LVT, taxing land reduces the profit that comes from just owning a piece of property or appreciation. Instead, you are incentivized to put that land to work. People would consider developing something on the land, or consider selling the land to someone that would, because of the holding-cost burden of the LVT tax.

I am always concerned about property rights; however, there might actually be some policy changes here that would incent owners to develop vacant, unproductive land, solving some societal problems.

J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).