What is land value tax and could it fix the housing crisis?

Housing is broken. There aren’t enough homes to go around. And affordability is a growing problem. The United States alone was short almost four million homes at the end of 2020, while in the United Kingdom, the cost of buying a home has risen faster than wages in recent decades, pricing too many people out of the market.

Could land value tax be a solution?

Here’s an explainer on what it is and how it could make a difference.

Land value tax is a tax on a piece of land, rather than the property sitting on top of it.

Location is what gives the land its value. This includes roads, railways and public services like schools and parks.

Tax-paying communities fund these services – rather than landowners. Land tax is a fair way for communities to recoup some of these costs, when land values rise.

Land tax is also more stable than taxes on buildings, which fluctuate in value with the ups and downs of property markets.

And land doesn’t move. It can’t be taken overseas to escape taxes, like capital. Wealthy people who typically own more land will tend to pay more land value tax.

Land value tax is generally based on the “unimproved” value of the land. So essentially the land in its natural state, with no buildings on it.

This means the owner of a vacant plot of land would pay the same amount of taxes as a neighbouring owner with a block of apartments on their land.

With property taxes, owners who improve their properties can be taxed more. This disincentivizes investment.

With land taxes, property improvements aren’t taxed. Owners are encouraged to make improvements, to increase returns from their land.

Land value tax incentivizes landowners with empty or run-down buildings to get them back into use. They won’t be taxed on these improvements. And the money they might make through rents will help cover their land tax bill.

As a result, communities might see the supply of housing in their area increase. Neighbourhoods which previously had lots of empty properties could be revitalized.

One example is Harrisburg in Pennsylvania in the United States. It started using land taxes in its system in 1975, according to Local Housing Solutions, a housing policy platform. Land was initially taxed at double the rate of buildings. Now land is taxed at six times the rate of buildings.

This is believed to be behind improvements that have revitalized the city. The number of empty buildings has fallen, investment and jobs have grown and Harrisburg has benefitted from greater tax revenues.

Harrisburg is one of around 20 areas of Pennsylvania using split-rate taxes. This combines one tax rate for the land with a second, lower tax rate for any improvements on top of the land.

Local authorities in other US states, including Virginia and Connecticut, are also starting to adopt split-rate tax systems.

More than 30 countries use types of land value tax. They include Australia, New Zealand, Kenya, Taiwan, Singapore and Denmark.

In Australia, land tax is charged annually by most state or territory governments. Main homes are usually exempt. But you may have to pay land tax if you own rural land or land with residential, commercial or industrial properties on it.