Would a land value tax incentivise housing growth?


A 0.75% tax on urban residential land as proposed by the Opportunities Party (TOP) to help fund income tax relief could come with the added benefit of helping solve New Zealand’s housing shortage

The value of land is collectively and publicly created, Strong Towns’ Rick Rybeck writes.

But private landowners can appropriate this publicly-created value regardless of whether or not they put it to productive use. In other words, they don’t have to contribute to the good party going on around them.

“Speculation inflates land prices near existing infrastructure, thereby pushing development to cheaper (but more remote and less productive) sites. This destroys farmland, and it requires the wasteful duplication of expensive infrastructure, increasing tax burdens,” Rybeck writes.

Land speculation is often referred to as “real estate investment”, he says.  But “investment” is the creation of something new that enhances future production. Buying and selling land creates nothing; it’s what you do on the land that creates value. Land speculation in itself is just gambling. It is betting that the work of the community will enhance land values, without contributing to that enhancement.

Rybeck says a land value tax (LVT) would return the value of land to the communities that created it, recycling that value to fund public needs like infrastructure creation, operation and maintenance. The benefits are several:

  • LVT makes land speculation less profitable and reduces the incentive for fringe suburban development.
  • Shifting the property tax off of building values and onto land values can make both buildings and land less expensive, thereby making housing more affordable while fostering business growth and employment.
  • Communities that have implemented this reform have outperformed comparable communities using the traditional property tax.

Rybeck does point out that most things that we’re familiar with are produced – if we tax them, production falls and prices rise. Therefore, many assume that if we tax land, its price will rise.

“But land taxes don’t reduce the amount of land. Taxing land values reduces the benefits of land ownership. This reduces land prices,” he writes.

LVT enjoys broad support among economists. Yet few places are implementing it, which raises the question: Why hasn’t land value taxation been implemented more widely?

World Economic Forum Senior Writer Victoria Masterton reports of one example in the United States in Harrisburg, Pennsylvania, which started using land taxes in its system in 1975. 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,” Masterton writes.

“The number of empty buildings has fallen, investment and jobs have grown and Harrisburg has benefitted from greater tax revenues.”

Masterton explains that with property taxes (or council rates), owners who improve their properties can be taxed more, which disincentivises investment.

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

“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.

“Land value tax incentivises 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,” Masterton writes.

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

TOP expects an annual 0.75% LVT in New Zealand to generate $7 billion a year, which it would use to fund $5.8 billion of income tax cuts and a Teal Card scheme to support young New Zealanders who are worse off than the previous generation.

The party says its income tax relief would often outweigh costs potentially being passed on to renters and ultimately an increase in the stock of rentals as a result of the tax would drive down rent prices. Commercial, rural, conservation and Māori land would be excluded from the policy, and superannuants could opt to defer payment until there is a change in ownership of the property.