Thesis: The imposition of a land-value tax on commercial property by the US government would lead to more efficient use of scarce land in urban areas.
Most Americans are familiar with the concept of a property tax: a major tax levied against one’s real estate, based on the value of the land and the improvements made to that land. The notion of a land value tax (essentially just a piece of a traditional property tax – the piece based on a plot of land’s value) and the efficiencies it can bring about has growing clout amongst economists today, as housing costs in urban areas skyrocket.
Data gathered by Yale economist Robert Shiller and cited in The Economist shows that “the inflation-adjusted cost of building new housing in America is roughly the same now as it was in the 1980s. The inflation-adjusted cost of buying a new home, by contrast, has risen by 30% over the same period”. There are two main driving forces behind this dramatic increase in land value. One, the information era and the rise of skill-based services has drawn workers to highly-skilled areas (e.g. cities), where proximity to other similarly-skilled workers increases their productivity and job opportunities, effectively increasing demand for urban land. Two, after cities became aware of the detrimental effects of unchecked growth and urban sprawl, they began to institute strict limitations on growth, effectively decreasing the supply of urban land. Combined, these forces have made land in these urban areas incredibly costly, making it more difficult for labor to move to the most productive markets in the country.
Another study presented by the same Economist article above found that the inefficient patterns of land use imposed by high urban housing costs could mean that US GDP in 2009 was a whopping 13.5% lower than it had the potential to be. Land-value taxes are a potential mechanism for keeping inefficient land use in check. Since they do not carry the same downfalls as other forms of taxation (land supply cannot be reduced and the tax cannot be evaded), they carry no deadweight loss. Unlike property taxes, they don’t de-incentivize investment on a plot of land. Not only do they increase revenue, but that increase is compounded by public investment: the construction of a neighborhood monorail would increase the value of land in that neighborhood, and thus the new revenue from land-value taxes could help pay for the investment. Since the value of a plot of land increases as a result of the activities of others, it would make sense to tax that value. But most importantly, land-value taxes lead to more efficient uses of incredibly scarce land as owners must ensure that their land is being used in the most productive way possible. New York mayor Bill de Blasio has introduced a tax increase on New York’s vacant lots, as described in Brokelyn, in an effort to put the land to productive use. I predict it won’t be long before we see other cities following in his footsteps. But the idea is politically difficult: for most Americans, their home is their biggest asset, and they won’t take kindly to anything that threatens that asset’s value. And the idea of low-income families being pushed out of a house so that some developer can put up a new set of condos has media frenzy written all over it. For that reason, I propose that the tax be limited to commercial properties for the foreseeable future.