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

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Victoria Masterson, Senior Writer, Formative Content

  • The US was short almost four million homes at the end of 2020, according to estimates.
  • The UK, meanwhile, is also in the middle of a housing crisis.
  • The land value tax system incentivizes landowners to improve their land and properties.
  • Communities can benefit from revitalization and fewer vacant buildings.
  • Land tax also helps recoup the cost of infrastructure like roads and railways.

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.

Image: Twitter/@saeidh1991

What is the World Economic Forum doing to support the Future of Real Estate?

While investable real estate has grown by more than 55% since 2012 (PwC), the COVID-19 crisis has underscored weaknesses in relation to human and planetary health along with drastic inequalities, leaving a stark reminder of the influence the built environment has on societies and the vulnerabilities that exist in times of crisis regarding how spaces perform.

As the real estate industry looks towards recovery, the need for transformation is clear. Portfolios must be rebalanced, and distressed assets repurposed. Technology must be fully embraced, and sustainability and wellness must be at the core of design and operation. The affordable housing crisis that already existed pre COVID-19 must be systemically approached to ensure access to adequate and affordable housing. If the Real Estate industry is to deliver transformation, it is more important than ever to ensure that policy, financing and business solutions are aligned in delivering better buildings and cities.

The World Economic Forum has brought together CEOs from the Real Estate industry to develop a Framework for the Future of Real Estate to help drive the industry’s transition to a healthier, more affordable, resilient and sustainable world.

What is land value tax?

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.

How does it work?

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.

What impact could it have?

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.

Where is land value tax already used?

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.

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: