A land value tax is basically a tax on the unimproved value of land. That's significantly different from the traditional property tax based on the value of improvements such as buildings.
The idea of a tax on the unimproved value of land has a long history, dating to the physiocrats of 18th-century France who were considered the creators of the first scientific school of economics.
Their ideas around land as the source of all wealth carried over into America, beginning with founding fathers such as Benjamin Franklin and Thomas Jefferson, and then to political economist Henry George, author of an influential 1879 book titled Progress and Poverty.
'The most logical source of public revenue'
George argued that a land value tax -- functioning as a single tax -- is the most logical source of public revenue because there's a fixed supply of land, and each parcel's value is based on what's been developed around it and its ability to be served by public infrastructure.
Thus, in that sense, a landowner would pay a tax rate based on the value of the land, rather than on the building value or rental value. For example, a vacant property in a housing subdivision under development would be taxed at the same rate as those next to it that have occupied homes.
A land value tax can also be part of a split-rate tax system, in which the land and the buildings are taxed at different rates, often depending on the type of real estate. Applications of pure land value tax -- that tax acting alone as a source of public revenue -- are rare in the United States.
The land value tax experiment in Pennsylvania
From 2011 to 2016, Altoona, Pennsylvania, was the first and only American city to rely on a land value tax alone, according to the Center for Innovative Finance Support at the Federal Highway Administration (FHA).
The center also says that more than a dozen Pennsylvania cities have a split-rate property tax, in which the value of land is taxed at a higher rate than the value of improvements on that land.
For more on that, check out this interesting read on the land value tax and its impact on property owner behavior since it was first adopted by Pittsburgh and Scranton in 1913: "Non-Glamorous Gains: The Pennsylvania Land Tax Experiment."
Some arguments for a land value tax
The land value tax has drawn some renewed interest from advocates who see it as a way to address growing economic inequalities as well as a way to encourage investment in redevelopment of inner cities rather than in the suburbs and beyond.
"A tax on the return to land, and even more so, on the capital gains from land, would reduce inequality and, by encouraging more investment into real capital, actually enhance growth," Nobel Prize laureate Joseph Stiglitz and former chairman of the president's Council of Economic Advisors wrote in a piece for the National Tax Journal. "This is, of course, an old idea, promoted most famously by Henry George."
The FHA finance support center, meanwhile, says the land value tax is well-suited to established cities and smaller growing cities where there is a need to build new mixed-use infill projects but where high taxes on improvements discourage new development.
Indeed, one obvious effect of a land value tax would be on land speculation. A land value tax makes holding on to an unimproved property less attractive than under the traditional property tax regime.
There's just not as much incentive in that kind of unimproved land ownership to hang on for price appreciation, which in turn can encourage property owners to develop the land themselves or sell it for active development.
Land value tax as a progressive tax
A land value tax can be considered a progressive tax, one based on the taxpayer's ability to pay. The income tax is another example. In this case, the tax is based on the inherent value of land, as opposed to say, a state or city sales tax, which is the same regardless of who's paying it and is considered a regressive tax.
Along with arguments of equity, proponents also say a land value tax could help deal with the issues of urban sprawl, since, as this academician argues, landowners would be incentivized to use their land efficiently rather than leaving it to be taxed at very low levels while waiting for it to become more valuable.
Arguments for a land value tax often cite the works of the aforementioned Henry George. He argued that most taxes discourage productive activity and that the government should be funded by a "single tax" on land, a tax based on the land's natural, unimproved value.
Abandoning property and 'significant redistributional effects'
A 2005 report by two Federal Reserve economists examines the idea of a land value tax -- in the context of a two-rate plan for taxing land and buildings. The writers mention that one of the core difficulties is measuring the value of land net of improvements.
The writers note: "If a pure land tax were to capture all current and future rent from the landowners, the market value of the land would become zero. This would be equivalent to the government taking the land from landowners."
A land value tax also could, by that argument, lead to abandonment of property, leaving decisions on its distribution and use pretty much completely in the hands of the government.
And, the writers add, "the change to a pure land tax would likely have significant redistributional effects, with large landowners likely incurring substantial adverse wealth effects. This effect, however, might be viewed by some as a virtue rather than a fault."
All that and more -- including plain old inertia that tends to keep things as they are -- makes any kind of widespread adoption of a pure land value tax unlikely at best.