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Land Value Tax: A promising land-use tool proposed for our communities

Creating sustainable land use involves more than just planning. It also requires incentives. That’s why the North Star Chapter of the Sierra Club has joined with the Minnesota chapter of Common Ground USA to support state legislation that allows towns to create Land Value Tax (LVT) Districts.

Alex Burns
Alex Burns
The current property tax system taxes the total value of properties. This includes both the land and any structures on top of it. Because the average property has most of its value in the building, the conventional property tax is mostly a tax on building value.

This creates perverse incentives for speculators to buy up vacant and underused sites and to avoid building intensive uses. For the speculator, as long as annual holding costs are lower than the site’s annual appreciation in value, it pays to hold out. For those who want to make the most of the site, the more building value they create, the more they pay in property taxes.

As a result, a significant portion of land in cities, particularly near downtown areas, remains locked up as surface parking lots or other low-intensity uses. This has big environmental implications. Dense, high-intensity land use promotes sustainable transportation habits by making it easier to walk, bike, and take transit. It also limits urban sprawl and the resulting loss of habitat by concentrating development in existing urbanized areas.

Rich Nymoen
Rich Nymoen
LVT Districts would flip the script and tax the land value portion of properties at a higher rate than the building value portion. Places that have done this have experienced tremendous in-fill and redevelopment effects, along with other benefits. In the U.S., Pennsylvania has used this approach the most.

After Harrisburg, once one of the most distressed cities in the nation, adopted this approach in 1975, it saw 5,200 vacant properties restored and taxable businesses rise from 1,908 to 5,900. A number of smaller Pennsylvania towns saw dramatic increases in building permits issued and a majority of residents received tax reductions under the reform. A widely cited study of LVT use in Pittsburgh showed that building construction there leapt ahead of other Rust Belt cities.

The bill we’re supporting enables cities to pass ordinances that, first, identify specific geographic areas or parcels that would be in an LVT district. The district could be citywide or for just a corridor or neighborhood.

Once a district is designated, officials can then calculate its revenue under the conventional property tax system and then set out how to maintain the same level of revenue under a land value tax system.

The example below shows the effects on two properties if the NE Quadrant of downtown St. Paul were placed in such a district. The parking lot’s taxes almost triple, which creates development pressure to put it better use, and the Park Square Court Building’s taxes decrease by 24%, rewarding a land use that contributes to its surroundings.

Courtesy of the authors
Although this reform proposal has been around for a long time and is most associated with Gilded Age reformer Henry George, there has been a recent chorus of voices from the fields of planning, architecture, and economics calling for its widespread adoption. It’s time for Minnesota communities to have this tool at their disposal.

If you would like more information or would like to help with this campaign, send an email to minnesotacommonground@gmail.com.

Alex Burns is land use and transportation chair of the Sierra Club North Star Chapter. Rich Nymoen is the president of Common Ground USA Minnesota Chapter.

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Comments (12)

  1. Submitted by James Hamilton on 02/10/2020 - 09:56 am.

    In eminent domain proceedings, we use the “highest and best use” to determine land value.

    If I understand this correctly, it would sever the tie between taxes and actual land value as determined by the market. It could not fairly be called a “Land Value Tax”. It’s more an “underused land tax”, with who knows who determining what constitutes underuse.

    Let’s at least be honest about what it is.

    • Submitted by Edward Dodson on 02/10/2020 - 02:45 pm.

      The economics of land values is actually quite straightforward, if appraisers are appropriately trained. Every parcel of land has some potential annual rental value. This value is capitalized into a selling price based on investor expectations of what the land could be leased for to a user. For example, if a city lot could be leased out for $10,000 a year and the market-set rate of return on investments with similar risks is 5%, then the lowest selling price the owner would accept would be 20 times the imputed rental income, or, in this case, $200,000.

      Thus a reasonable market (i.e., sales) value for purposes of assessment would be $200,000. The optimum annual tax on the land would be $10,000. However, if this amount is collected, the return to land as an investment falls to zero. And land prices would fall accordingly. Thus, assessors would have to abandon sales values and adopt rental values as the basis for determining tax obligation.

      • Submitted by David Harold Chester on 02/12/2020 - 02:54 am.

        Socially Just Taxation and Its Effects (17 listed)

        Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?

        Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors of production (the other 2 being labor and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015).

        However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (see Mason Gaffney and Fred Harrison: “The Corruption of Economics”, 2005).

        Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife. There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.

        Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community, after an initial difficult start and not by the natural resources. As the village and city expand, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their site-values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid being by tenants make their residences more costly and the provision of goods and services more expensive. It also creates unemployment when entrepreneurs find the rents too high for them to operate and employ workers. This speculation causes wages to be lowered by the monopolists, who control the big producing organizations and whose land was previously obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.

        The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access rights to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily in rent for its right to access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce. The product becomes more costly–this monopolist can effectively charge more for it, than what an entrepreneur normally would, were he/she able to compete on an equal basis, because of the excessive rent demanded by the landlord.

        A wise and sensible government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed almost 140 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains, etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and wrongly find that land dominance has its own reward.

        17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics

        Four Aspects for Government:

        1. LVT, adds to the national income as do all other taxation systems, but it can and should replace them.
        2. The cost of collecting the LVT is less than for all of the production-related taxes—then tax avoidance becomes impossible because the sites being taxed are visible to all.
        3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the government’s management of national affairs.
        4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).

        Six Aspects Affecting Land Owners:

        5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
        6. The land owner pays his LVT regardless of how his site is used. When fully developed, a large proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not being used).
        7. LVT stops the speculation in land prices and any withholding of land from proper use is not worthwhile.
        8. The introduction of LVT initially reduces the sales price of sites, (even though their rental value can still grow over long-term use). As more sites become available, the competition for them becomes less fierce so entrepreneurs are more active.
        9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
        10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below).

        Three Aspects Regarding Communities:

        11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
        12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
        13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.

        Four Aspects About Ethics:

        14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks–LVT is a natural system of national income-gathering.
        15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
        16. The improved and proper use of the more central land reduces the environmental damage due to
        a) unused sites being dumping-grounds, and
        b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
        17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty and improve business ethics.

        TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!

    • Submitted by Jon Kingstad on 02/10/2020 - 08:16 pm.

      Highest and best use is a criteria for valuing land in eminent domain but the basic criteria is “fair value.” Most appraisers use a “comparable sales” method but there are more sophisticated economic valuations like capitalized value and development value which I believe is a variation on that method.

      One of the commenters below identifies a major concern about such authority which is the misuse of discretion to arbitrarily district boundaries to reward cronies and exclude outsiders. Corruption at the local level in Minnesota counties, cities and towns is much more prevalent than Minnesotans seem to believe.

  2. Submitted by Anton Schieffer on 02/10/2020 - 11:15 am.

    Allowing cities to implement a land-use tax is a great idea. Most people would be surprised to learn how little control cities have over their own property taxes.

    A land-use district in downtown Minneapolis would raise taxes on parking lots, which would then be developed into something useful. The same holds true for suburban and exurban areas, where large plots of land often sit unused. Our existing system of taxation encourages land speculation. This change would allow cities to encourage building instead.

    At the very least, those who support more local control of land use should be in favor of one more tool in the municipal toolbox. Let’s allow cities to do this first and let them decide if it’s worthwhile to pursue.

    • Submitted by Rich Nymoen on 02/10/2020 - 12:46 pm.

      Glad you support this reform, Anton. If you or anyone you know would like to join our campaign for this, please email us at minnesotacommonground@gmail.com

    • Submitted by Edward Dodson on 02/10/2020 - 02:48 pm.

      What is being proposed is not a “land use tax.” As the example indicates land of equal value would pay the same annual tax regardless of whether a building existed or not. Use of the land would by constructing a buildings would no longer be penalized by a building tax.

      As one economist has explained, the annual taxation of buildings (which are depreciating assets) equates to have to pay an annual sales tax on assets such as an automobile or computer or machine. The tax on buildings penalizes the owner for taking care of the building, replacing worn out systems and modernizing when needed.

  3. Submitted by Arthur Swenson on 02/10/2020 - 01:11 pm.

    If this scheme is adopted, anyone who owns, or plans to own, property within the city limits of Mpls, St Paul, or Duluth had better SERIOUSLY work on their connections to city hall. Defining these “districts” and working out the “formulas ” will be an unprecedented license to move money from the pockets of the less-well connected to those with more “juice” downtown.

    For example, what happens if my parking lot is INSIDE one of these districts, and my competitor’s lot, across the street, is OUTSIDE the district?

    • Submitted by Edward Dodson on 02/10/2020 - 02:53 pm.

      That is a fair concern. Every city that creates enterprise zones granting tax abatements within the zone has problems of firms simply moving from outside the zone into the zone with no increase in employment created.

      If the political support can be generated, the best approach would be to apply the change in property tax structure to the entire city. Market forces will then determine where new investment ought to take place as the cost of holding land idle will cost more than previously. Owners of vacant land will either come up with a development plan or put the land on the market for sale to someone who will.

  4. Submitted by Michael Hess on 02/10/2020 - 02:13 pm.

    How would this work in the case of underbuilt residential? For example in Minneapolis the 2040 Comprehensive plan created Transit corridor stripes many of which travel through residential neighborhoods – so on these streets which the city covets for large apartment buildings younow find many single family homes, or small scale residential (duplex fourplex etc…) some of these single family homes are smaller or less expensive than the adjacent blocks so they represent an earlier entry point to home ownership. How would a long time resident avoid being taxed out of their home because they had the misfortune to live where the city wishes to see a 4, 6 story or taller apartment building? Could Minneapolis created a zone that followed their Transit corridor designations?

  5. Submitted by Thomas Weyandt on 02/11/2020 - 09:40 am.

    But aren’t there close to 100 sections in the statutes that set up tax classifications? Special interests have created these niches over the years. Back 40 years ago there were maybe 8 or 10 subsections. TIF and the like are locked in and make this idea difficult to fashion and maybe impossible to implement. Make a lot of lobbyists happy if is attempted. For years politicians have listened to the beat of those folks who tout job creation. It’s been easy to cave to these demands and hard to prove that the promises have been met. Good luck.

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