Land Value Tax: Can it Work in the District?

The idea of imposing a “land value tax” in the District pops up from time to time. Rick Rybeck at Just Economics has been promoting land value taxes for as far as I could remember. Both the 2013 Tax Revision Commission (here) and the 1997 Tax Revision Commission (here) gave consideration to a land value tax as a means of restructuring real property taxes. The 1997 study is especially worthy of a read as it walks the reader through many compelling arguments for why the District should consider a land value tax (equity, efficiency, and denser development) and how the tax incidence could be redistributed across the city when overall tax revenue is held constant.

The idea has recently returned to local policy discussions. In March, Daniel Herriges called for a land value tax in D.C. in Greater Greater Washington, correctly pointing out that the District’s current real property tax regime penalizes commercial development, especially in parts of the city that needs development the most. In September, Urban Institute researchers identified a land value tax as a “high-potential” tool to increase housing supply in the D.C. region.

Can the District increase density and expand the housing supply through a land value tax? A comparison of zoning limits to what is already built suggests: not where development is needed the most. Our analysis suggests that a land value tax can increase the pace of densification in some parts of the city, but—due to zoning restrictions—will do little to increase the housing supply in parts of the city where supply is already short.

Even with more permissive zoning, the administrative difficulties in implementing a land value tax could be great. The District’s current real property tax assessment regime does not always distinguish between land value and building value and overhauling how land and improvements are assessed could cause taxpayer angst and anger.

The tax regime can help incentivize development, but it cannot address the underlying problem of restrictive land use practices. Still, a land value tax could be a worthwhile reform. The progressive nature of a land value tax, especially for residential properties, can create legislative buy-in for its implementation and help break resistance against development. Importantly, a mental accounting of what land value taxes might mean for the city also helps highlight how its tax regime help or hinder future development.

What is a land value tax?

Land value tax refers to a property tax regime where the tax is imposed on only the value of the land and not to the value of improvements—the real estate jargon for whatever is built on the land. A variation on the same theme is a split-rate tax (sometimes called the graded tax) where both the land and the improvements are taxed, but land is taxed at a much higher rate.

While originally proposed in 1879 by Henry George in Progress and Poverty as a much more efficient alternative to all other forms of taxation (mainly because you cannot move your land elsewhere, or do anything with it but put something on it), today, the resurrection of the land value tax is not primarily for the purpose of reforming the tax regime to increase efficiency and equity, but to increase density (see here, here, and here). The rationale is straightforward: At the extreme, when improvements are not taxed at all, there will be a strong incentive to increase density because this will reduce the average tax on the entire property (land and improvements combined). The bigger the gap between the land tax rate and the taxes imposed on the improvements, the greater the incentive to develop. [1],[2]

How would a land value tax work?

Imagine two residential properties [3] in two different parts of the city: one, a small house sitting on a large lot in a neighborhood with high tax assessments (like a single family home in Friendship Heights) and another, much larger building sitting in a lower-valued neighborhood (like a small multifamily building in Deanwood). For illustrative purposes, let’s not worry about the lot size and assume that properties are valued as shown in Table 1: Property 1 has land valued at $100,000 and improvements valued at $100,000, while Property 2 has land valued at $50,000 and improvements valued at $150,000. Both have a total assessed tax value of $200,000.

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