A land value tax is a type of ad valorem real estate tax. Only the land itself is taxed; any buildings or improvements on the land are excluded from the calculation of the tax. This is in contrast to many other forms of property tax.
Adam Smith, the 18th century British economist, argued for a land value tax in his work, The Wealth of Nations. In the United States, the best known activist for a land value tax was Henry George, a 19th century reformer. George believed that land value taxation would eliminate the need for other taxes.
Proponents of a land value tax have advanced several arguments in its favor. One argument is that it encourages improvements to the structures located on the land. Ordinarily, such improvements would be taxed, which discourages the owner of the land from making high-quality improvements. Another argument is that a land value tax decreases speculation in land and prevents investors from taking large amounts of land off the market. This speculation is believed by some experts to increase the price of land and encourage suburban sprawl.
A third argument in favor of a land value tax is its effect on real estate prices and housing. Proponents argue that alternate forms of property taxation make it more difficult to build affordable housing. They also believe that a land value tax would stymie the formation of real estate bubbles, which would have several positive effects. One effect would involve preserving farm land by making it more attractive to build in cities—currently, a great deal of productive farm land has been lost to the building of suburban houses. Another positive effect would involve directing capital away from real estate and into more productive sectors of the economy.
Opponents of land value taxation believe that sufficient tax revenue cannot be raised by taxing land alone without raising the land value tax to unacceptably high rates. They argue that other forms of taxation must also be used, which dilutes the benefits of the land value tax. If a land value tax is instituted incorrectly, it could cause property values to plunge, which could damage the economy.
A number of cities and countries have instituted some form of a land value tax. Harrisburg, Pennsylvania in the US has helped revive its downtown area through a modified land value tax. The Australian city of Sydney also uses land value taxation.