Henry George and Land Value Tax

Land Value Tax is a compelling and relatively unknown economic philosophy related to land taxation. Henry George popularized it in the late 1800s and fans of his work are known as Georgists. This week, we’ve decided to focus on this topic to spread awareness of Georgism as a plausible solution to our nation’s serious urban housing, inequality, budget and populist issues. There’s a wonderful book on the topic that I highly recommend called, Land Is A Big Deal, by Lars Doucet, which was released last year.

Tax what you want to discourage

Property tax is a tax on the value of land and its improvements. Under the current regime, improvements to a property increase the owner’s tax bill. Taxes are often used to discourage behavior, so these increasing tax bills disincentivize building.

In urban areas, most of the value of real estate is land, and it’s grossly under-assessed and under-taxed. In the book, the author uses an example of a lot in Manhattan that sold for $5.8m in 2011 and $8.9m in 2021. The land value was assessed at $132k in both cases. In urban areas, land is roughly 70% of the value of a property. I spot-checked this with current data from the Boston area. On my first search, I found an empty lot in Dorchester for sale at $1.5m. That land is assessed at just $25,600, which translates to an annual tax bill of just $273. That owner is paying close to zero to hold over a million dollars of a fixed supply asset that could be used to add to the local housing stock. Under the current regime, landowners benefit from surrounding urban development without adding value. It is a broken system.

Land Value Tax is better than a Billionaires Tax

Today’s political narrative focuses on taxing the rich. The problem with taxing people is they can leave, especially the wealthiest. Norway and France have attempted wealth taxes only to see overall tax receipts fall after the wealthiest residents move – a disastrous outcome. We should instead replace the rallying cry of “tax the rich” with “tax the land.” Land ownership is concentrated among the wealthy. Also, importantly, land cannot leave. Land Value Tax is a viable method to prevent wealthy landowners from sitting on land without improving it, which artificially suppresses the housing supply.

It’s estimated that if we implemented Land Value Tax, we would generate between $1-2T per year, every year, at today’s numbers. A billionaire’s tax would barely move the needle. You’ll have to read the book for the details on that math, but it is comprehensive. The most devoted Georgists believe we can eventually replace all taxes, including income tax, with a single land value tax. One step at a time.

Technology’s Role – Open Access to Data Is Key

Open data sets allow anyone from motivated hobbyists to serious researchers to evaluate, test and track changes to the current system. Real estate data is not nearly as comprehensive and widely available today as it could be, but it will get there eventually. When that happens, open-source models will be used to track and influence land taxation and land use policies. Open access to the data is the key variable.

The author of Land Is A Big Deal, Lars Doucet, proposes a billionaire buy Redfin for the current market cap of $1.7b just to release the data for public use. Relative to the impact, it would be a small acquisition cost.

Why don’t we have an LVT Land Value Tax?

We picked the wrong system when we decided to tax land improvements and not land. The Georgist argument proposes that Land Value Tax should run around 85% of the land rental value.

Land rental value is like the land’s cap rate, or the rent it would yield with no improvements if operated as a dirt parking lot. The quick translation in today’s terms is to tax land at around 4%, roughly the current cap rate. Cap rates change over time, so further work must be done to determine the calculation.

This means taxes on the Empire State building would be close to 0% because the building is worth far more than the land, which is fair given how much it contributes to the city. While taxes on an empty parking lot next to the Empire State building would be close to 100% of the parking revenue. The incentive with LVT is to build. Land Value Tax would incentivize adding units to Boston’s Bay Village and the South End, two neighborhoods with high land value appreciation and virtually no incremental building. Overly restrictive building regulations are another story.

A land value tax is possible, but vested interests will actively fight it off until there is no alternative. It’s a compelling argument, and I recommend reading Land Is A Big Deal if you want to learn more. There is no silver bullet, but changing our treatment of land as a scarce and essential urban resource is an intelligent path forward.

There are attempts in the US and abroad to implement and test Land Value Tax policy. Josh Farahzad is a passionate entrepreneur who has dedicated his time and energy to this vision. Meeting him over the weekend was how I fell into the Henry George rabbit hole.