After decades of relative obscurity during the Cold War, Georgism—the idea, named after nineteenth-century economist Henry George, that taxes should be levied on land, a community good, not the individual goods of labor or capital—has been experiencing a bit of a resurgence. Publications such as the Economist and Bloomberg have published opinions declaring the superior economics of a land value tax, and Nobel-prize winning economist Joseph Stiglitz has long argued for a land value tax as a key revenue source for developing economies. However, perhaps the greatest allure of land value taxes comes in what they offer cities and towns beyond economic efficiency—a development pattern and taxation philosophy that can foster more vibrant communities.
How to Implement a Land Value Tax
There are several ways to implement a land value tax. The concept that landowners owe one is very old, but the general idea proposed by George and supported by most current land value tax proponents is to use the tax as a substitute for other taxes. The most direct route is likely as a replacement for county property and sales taxes. Depending on the exact split between the value of property and land, the first step would be to replace the common 1-2 percent tax on all real property with a 3-5 percent tax only on the value of land. The land value tax would be somewhat higher if the intent is also to replace local sales taxes and somewhat lower if land is already the largest portion of property taxes (for example, in San Francisco County). This would not only be more economically efficient but would also help move more fiscal power to county governments and promote more livable communities. What’s more, it would less tangibly—but perhaps more importantly—change the relationship between individual taxpayers and the community.
The first impact would be in increasing localities’ ownership of their own fiscal policy and thus the direction of their development. In California, for example, local county property taxes are limited to 1 percent of property value, but in addition to a 6 percent sales tax feeding the general fund, there is a mandatory “local” sales tax of 1.25 percent that funds municipal governments. The property tax limit is a product of the 1970’s “tax revolt” that led to passing Proposition 13; the sales tax is largely needed to make up for the massive budget shortfalls this has caused. However, sales taxes in general are much more regressive than a property tax would be, hitting poorer Californians harder than the wealthier landlords and homeowners who benefit from the lower sales taxes.
Additionally, the statewide mandate takes away county and municipal discretion over what level of taxation is appropriate for their communities. Making a portion of the “local” sales tax a statewide mandate may be unavoidable for economic reasons; in commuting areas made up of many municipalities and even several counties, like the San Francisco Bay Area with its five counties and myriad towns, dramatically-different sales taxes could distort markets, leading people to drive across borders to make major purchases and ultimately leading to a “race to the bottom” as municipalities attempt to lure in one another’s residents with lower taxes. Property taxes alleviate this to some extent, but not entirely. Any firm or individual looking to build new real property is going to take into account the tax rate, and a higher tax rate could lead to less building and investment (and therefore fewer jobs and services) than otherwise. And local income taxes create another problem—determining the actual residence of an individual. This is hard enough for states, and it is even harder for counties or municipalities with more fluid borders and fewer resources to investigate potential fraud.
These barriers in the way of raising local revenue leave counties and towns increasingly dependent on either state-mandated taxes like the California local sales tax, or relying on block grants and other funding mechanisms; either way, local fiscal control disappears and with it some of the best opportunities for exercising participatory democracy and community problem-solving.
A land value tax, on the other hand, puts much more control in the hands of localities. There is no question where a parcel of land is located, and no way for tax dodgers to move it out of the county. This allows local governments to effectively raise revenue without worrying that they are hindering economic development or feeling pressure to compete with their neighbors in cutting their taxes. Indeed, the worst impact that having a higher land value tax than neighboring counties could have is to lower land prices in the affected county—not only self-correcting for the problem but making land purchases more accessible for younger people.
Indeed, the impact on land prices could be quite a salutary one. If prices fall to reflect taxes, the overall costs of owning a plot of land for ten years will likely be roughly the same (higher ownership costs are, after all, the mechanism causing prices to fall). However, where now a major cost of owning land for most people is interest payments to banks, a lower initial sales price followed by higher tax would replace part of that down payment, frequently borrowed from banks, with a recurring tax payment that would be easier to pay out of current income. This would allow more money to stay in the local economy rather than becoming concentrated in major banking and investing centers. It also generally reduces the power of banking systems and makes foreclosure and other disadvantages thereof less pressing. All of this gives local voters and stakeholders better control over the sort of place they want to live in and the ability to raise the revenue they need without worrying about how to compete with their neighbors.
Encourages Beautiful, Multi-use Architecture
Simply “not burdening economic development” is faint praise though, even for a tax system. Fortunately, land value taxes go further, creating incentives for the sort of development that creates stable and livable communities. Taxing all property equally rewards the lowest cost construction possible. Big box stores use up acres of land but build stores that cost perhaps ten million dollars and lose value rapidly. The low resale value of these buildings is even a perk for their owners allowing big box stores to slash their property taxes by claiming their buildings are worth only a fraction of the construction costs, based on the very low prices paid for similar stores. In the current system, they are not necessarily wrong—there are very few good uses for an enormous retail box with essentially no aesthetic or architectural value, and very few potential buyers as well. But rewarding corporations for creating massive, useless shells of buildings by taxing them at a far lower rate than a high quality, durable structure is perverse in the extreme. Initial construction costs are enough of a barrier to high-quality construction, but a higher annual tax is an unnecessary extra impediment.
A healthy community—both economically and aesthetically—should pride itself on including buildings with lasting value, whose history includes multiple owners and uses. The current property tax structure penalizes such construction. Shifting that burden to the value of land, on the other hand, would create an incentive to use every square foot as efficiently as possible. Large parking lots and offsets would be discouraged, as would sprawling, single-floor, warehouse-like retail stores. Smaller (in terms of acreage) businesses that used space more efficiently (but require a higher per-foot investment in capital) would be rewarded with a lower tax burden. Two-to-three story retail buildings, multi-story carparks, and other investments that increase the per-acre value would become effective ways to reduce tax liability. Beyond aesthetic preferences for quality construction over big boxes and multi-acre parking lots, this has tangible social benefits. Environmentally, durable buildings mean less construction in a given period of time, thus using fewer resources and releasing fewer greenhouse gasses. Moreover, buildings with more stories but a smaller footprint are more energy efficient to operate than large single-story buildings. There are socioeconomic benefits as well—more efficient land use creates higher density, and greater density allows for higher social mobility as jobs and residences are physically closer to one another and geographic segregation is less impactful.
A Land Value Tax Strengthens Social Bonds
The practical benefits of municipalities and counties shifting their tax burdens from sales and property to land are significant and make the idea worthy of consideration. But it does not have to be a dry, technocratic sell—the philosophical argument is just as strong. Georgism is not any more absolutely individualistic or communalistic than the current mixed economy, but it draws the defining line between the community and individuals more appropriately. As land is taxed instead of property, sales, or income, the message sent about both is changed. Land value taxes affirm the truth that land is something uncreated, the exclusive use of which is a privilege brought about by community membership. This way of thinking about land binds the users of it closer to their community.
On the other hand, removing or diminishing sales, property, and income taxes tells members of the community that their industry and effort is valued, and that as much as possible the government will allow them to reap the fruits of their own work and investment. While it is hard to imagine anyone enjoying paying their taxes, and any systemic change is likely to run up against resistance, a shift on the object of taxation would at least cause taxpayers to reflect on why they are paying them—not simply because they happened to work or sell within a given set of lines, but because they made exclusive use of a particular piece of ground for that year. This more intuitive, less intrusive basis for taxation can hopefully lead to a long-term shift in the perceived relationship between taxpayers and their local governments. Less arbitrary taxes with a firmer justification in the relationship between the individual and community should reduce the resentment felt by individuals who perceive that they receive fewer benefits from taxation than others (because taxes would be tied to a very specific benefit, the exclusive use of land). And since the greatest portion of land value, unlike that of labor or investment, comes from the quality of government services offered in a location and the general vibrancy of the economy, the benefits of the taxes would demonstrably accrue to those who paid them—again, helping to reduce the tension between taxpayers and the government.
In most cases, legislation to make land value taxes possible in the United States needs to be passed at a state level. Currently, Pennsylvania is one of only a few States that allow cities to set “split rates,” taxing land at a higher rate than other real property, and has seen some notable local successes. This approach—giving cities and counties control over their tax bases—is the best one. While it is likely that every county would benefit from a land value tax approach, it is important that local control and local buy-in be prioritized. The greatest benefit of this model, after all, is the way that it strengthens communities without sacrificing the individuality of their citizens.
Addressing Criticisms to a Land Value Tax
There are, of course, arguments frequently leveled against a land value tax. The most often repeated (but with any analysis, most specious) is that land, once purchased, ought to belong to the holder in perpetuity, and any tax levied on it effectively negates that individual’s land ownership. It is unclear, however, how this argument applies any more to a land value tax than a standard property tax, which also falls on land. Beyond that, however, it is necessary to ask by what basis land is owned in the first place.
In the liberal tradition the United States inherited through Locke and others, property has traditionally been justified on the basis of labor—a person owns their own body, thus they own their labor; by extension, they own the products of their labor. That they can sell those products and purchase others is a natural extension of this logic. But as Thomas Paine wrote in his 1797 pamphlet Agrarian Justice,
“Man did not make the earth, and, though he had a natural right to occupy it, he had no right to locate as his property in perpetuity any part of it; neither did the creator of the earth open a land office, from whence the first title-deeds should issue.”
While holding land as exclusive property makes sense for a settled society to make investments in buildings and agriculture, it is on a certain level more artificial than that property created by human labor. Even coming from the assumption that every tax on property is unjust, a tax on landed property seems more justifiable than any other, since only that tax keeps intact the right to the fruit of one’s own labor.
More practical arguments have been levied as well, and these require policy answers. The first is the question of low-income individuals who find themselves in possession of high-value property—particularly the elderly or families who have suffered the loss of a major breadwinner. It is tempting to dismiss this argument as peculiarly concerned with only one class of struggling individual—after all, why is the same concern not extended to the much larger class of renters who find themselves in the same situation? Nonetheless, it is worth addressing. While at some level, geographic mobility is needed to keep an urban economy efficient and dynamic—and this does mean that people must leave as well as enter desirable neighborhoods—there is also a human, community benefit to allowing people to stay in their homes whenever possible. Fortunately, a solution has already been implemented for property taxes: tax deferral. Many localities allow seniors, and some allow families, to defer their property taxes until a later date—that is, until they sell the home or it is inherited by their next of kin. The problem with such schemes, if there is one, generally comes from mortgage companies failing to honor them. This can be rectified legislatively: if the deferment is on land only, and not property, it may be more likely for mortgage companies to honor, since the value of the land is less likely to deteriorate over time than that of the property.
A second objection is that a land-based tax system would disadvantage agricultural and recreation uses of land, leading to overbuilding and a loss of the positive externalities associated with open spaces, even those that are privately owned. This is more plausible—after all, the entire idea of the land value tax is to use land in a more economically efficient way, which could certainly lead to the loss of land that is being enjoyed “unprofitably.” This is less likely to be an issue for agricultural land for the simple reason that agricultural land is generally valued very cheaply if it isn’t zoned for, or doesn’t have infrastructure for, commercial or residential development. On the other hand, agricultural equipment and buildings are quite expensive, so it’s not at all clear that a working farm would actually pay more in a land value tax system than a property tax system.
Even if they did, there are plenty of tools to preserve open space that is seen as valuable to the community. Tax exemptions are already routinely provided on property taxes; there is nothing that would make them harder to use for land. Indeed, the justification of a tax exemption for open space is much stronger under a land value system. The reason for taxing land value is that that privately owned land is a resource being withheld from the community for private use. Land that continues to serve the community—by providing habitat for wildlife, hunting, fishing, or hiking access, or even just scenic views—ought reasonably to be taxed at a lower rate than land that is primarily being used for the benefit of its owner. A land value tax would only add incentives for landowners to formalize the status of their land, using conservation easements or other tools, in order to secure lower taxes on it. Designating such land intentionally as a community decision will be, in the long run, more efficient and likely more equitable than simply hoping open spaces preserve themselves by chance.
The primary barrier to accepting land value taxation as a substitute for more conventional property, income, or sales taxes is fear of and resistance to change. Fortunately, the implementation of such a system doesn’t require an immediate, grandiose overhaul.
Instead, once state codes allow it, the ratio of property to land taxes on the county or municipal level can be adjusted gradually to avoid too much economic disruption and allow the benefits of the tax to become visible over time. Making this adjustment in a revenue-neutral way will also help overcome the initial resistance to a “new” tax by making it clear that what is occurring is a substitution, not an addition, to the existing tax structure. Once the tax is put into reality, the dramatic benefits for communities will become clear. Markets will become more vibrant, communities more livable, and the overall relationship between communities and their governments will be healthier.