A land value tax (LVT) promises a more predictable approach to taxing property by focusing solely on the value of the land itself, excluding any buildings present. This taxation method has roots tracing back to the early agrarian societies where land taxation aimed to benefit the broader community.
Key Takeaways
- A land value tax (LVT) assesses property taxes based on the land’s value and related improvements, not the buildings erected upon it.
- LVT is deemed fairer for agricultural domains where land remains productive.
- Economists favor land value taxes as an example of ad valorem taxation since the land’s value is typically more stable than structures.
Understanding the Land Value Tax
LVT is designed to fairly value land—a finite asset whose base value doesn’t change as drastically as the structures built on it. Changes in land value are often influenced by the activities in and around the land’s vicinity. For instance, a rural acre may have less economic contribution compared to an acre in a bustling urban center close to critical infrastructures like a food distribution center.
Historically, society has viewed land as an asset owned collectively, meant to be utilized sustainably across generations. The value of human activities on a piece of land often correlates with the landowner’s wealth, making LVT a fair taxation foundation. Nowadays, land and building assessments are typically conducted separately for tax purposes.
LVT, also known as a site valuation tax, is a form of ad valorem tax—meaning taxes levied “according to value.” Modern implementations often appear in annual municipal land assessments where land and buildings on the property are valued separately. Homeowners might enhance their buildings, thereby increasing taxable value, but the land still retains a relatively stable value. Conversely, if a building falls into disrepair, taxes may decrease while the inherent land value remains consistent.
Deadweight Loss and the Land Value Tax
Property value fluctuations are often driven by volatile market swings, engendering what is known as deadweight loss—a societal cost affecting the funding of essential services like police and fire departments. LVT mitigates these swings by attributing a stable, intrinsic value to the land, thereby fostering a manageable and fair taxation system for real estate.
By stabilizing property taxation and decoupling building value swings from the more stable land value, LVT creates a foundation capable of sustaining essential community services, enhancing societal well-being, and ensuring equitable tax burdens.
Related Terms: ad valorem tax, property assessment, market fluctuations, deadweight loss.
References
- Lincoln Institute of Land Policy. “Assessing the Theory and Practice of Land Value Taxation”, Page 2.
- W.J. McCluskey, Owiti A. K’Akumu, and Washington Olima, “Land Value Taxation – Chapter One: Theoretical Basis of Land Value Taxation”, Page 3. Ashgate Publishing, 2005.
- Lincoln Institute of Land Policy. “Land Value Tax Holds Promise for Cash-Strapped Cities and Towns”.
- Angus Stevenson and Maurice Waite. “Concise Oxford English Dictionary”, Page 18. OUP Oxford, 2011.
- Wisconsin Department of Revenue. “2020 Property Assessment Process Guide for Municipal Officers”, Page 33-34.
- Tax Foundation. “Reviewing the Deadweight Loss Effects of High Tax Rates”.
