Can Land Value Taxes Be Fair? Devil Is in the Details

Newswise — Land value taxes could help to promote economic development by removing disincentives to improve property. But it's hard to determine fairness when switching from a traditional property tax system to a land value tax system because the data on land values and wealth patterns are often inaccurate or uncertain.

So says Dr. Elizabeth Plummer, associate professor of accounting in the M.J. Neeley School of Business at Texas Christian University in Fort Worth. She examined variables affecting fairness in land value taxation in her book chapter, "Fairness and Distributional Issues."

The chapter appears in Land Value Taxation: Theory, Evidence, and Practice, recently published by the Lincoln Institute of Land Policy and featuring the work of 12 leading scholars in the field.

"When a land value tax replaces a traditional property tax, one impact is that land values change. In the short term, building values go up and land values go down. Wealth would shift across persons and businesses," says Dr. Plummer, who has researched fairness and equity in property taxation.

Traditional property taxes involve the land plus any improvements (such as homes or businesses). In contrast, land value taxes are levied on the land only. To achieve the same level of tax revenue, taxing authorities must raise taxes on the land to replace the taxes on the buildings.

This increases tax payments for owners with relatively greater "land intensity," the ratio of land value to total property value. Land value incorporates the amount of land and its price per unit. The result is that some owners may suddenly face a much higher tax burden, while others enjoy a decrease.

For instance, auto dealerships could experience sticker-shock on their next tax bill, while an apartment building's taxes may drop. Or a middle-class homeowner with a more valuable lot may end up with higher tax payments than a wealthy homeowner with a mansion on a less valuable lot.

"Owners having properties with relatively lower-than-average land value ratios will benefit. Those with relatively higher land value ratios will pay more," Dr. Plummer explains. "This would have two major effects: Property owners' amount of wealth will change and their tax payments will change."

These shifts in wealth and relative tax burden raise questions about fairness and equity.

"There are two basic types of tax equity. In vertical equity, the rich pay more than those having less ability to pay, and in horizontal equity, equivalent taxpayers are taxed equally," says Dr. Plummer.

The degree of vertical equity is determined by whether the tax is "progressive" or "regressive." If the tax is progressive, the rich pay a larger proportion of their income in taxes, relative to those who are less prosperous. If the tax is regressive, the rich may still pay larger tax bills than the poor, but the amount represents a smaller relative proportion of their income.

Fairness depends on horizontal equity and progressive taxation. But evaluating whether a switchover from property taxes to land value taxes would reflect these two goals isn't easy. Various researchers have reached conflicting conclusions, Dr. Plummer says. This is due in part to the fact that land values and land ownership patterns are highly variable from city to city, and even neighborhood to neighborhood, so the progressiveness or regressiveness of a land value tax would depend on the jurisdiction.

Additionally, determining land values is difficult, since most taxing districts currently tax both land and improvements together. And the income or wealth possessed by individual taxpayers can only be grossly estimated because income-tax data are private.

"There's no centralized database of who owns land, how much they own, and its value. Also, there's no uniform way to determine land value. The accuracy of current assessments is questionable because most taxing districts have a traditional property tax and are not concerned with carefully estimating land and improvement values separately," says Dr. Plummer.

"In the long run, a land value tax may encourage owners to use their land more intensively and efficiently, and its value may consequently increase with time. Under a property tax system, taxing owners for improvements is a disincentive for them to improve their property, so a land value tax may help promote economic development, alleviate urban decay, or free up vacant land for other uses," she says.

"A land value tax could offer great benefits both to taxing districts and landowners, but only if it's fairly implemented," she says. "As with all tax reform, the devil is in the details."