Land Value Taxes (LVT) are far from a new concept. This idea dates back to economic giants like Adam Smith and David Ricardo. Still, their popularity surged after Henry George's seminal work, Progress and Poverty, which made a compelling case for taxing the unimproved value of land as a means to curb inequality and promote economic fairness. While LVT has seen renewed interest in modern policy discussions, recent conversations highlight some significant shortcomings in its practical implementation.
I recently had the pleasure of interviewing Floyd Marinesco from Common Wealth Canada, a think tank advocating for a Land Value Tax to address housing challenges in Canada, for our MoveSmartly show and podcast. Floyd shared insights into how this idea could reshape housing markets and what lessons might apply to other regions facing similar issues. Today I’ll share three important disconnects that came to light during our discussion.
What is a Land Value Tax?
At its core, an LVT is a tax levied on the value of land itself, excluding any improvements made to it, such as buildings or infrastructure. The principle is simple: the value of land reflects societal investments—like transportation networks or zoning laws—rather than the landowner’s efforts. Proponents argue that taxing land discourages speculation, encourages productive use, and avoids penalizing development, as the tax doesn’t increase when a landowner improves the property.
But while the idea sounds promising, there are practical issues that challenge its efficacy as a tool to address housing shortages and affordability.
The Disconnect Between Builders and Buyers
One of the key arguments for LVT is its supposed ability to incentivize landowners to build more housing. By exempting improvements from taxation, advocates claim landowners will see greater financial benefit in developing their properties.
However, this argument falters when the tax dynamics are scrutinized. When builders construct owner-occupied housing—such as condos or low-rise homes—the tax benefit of excluding improvements primarily flows to the buyers, not the builders. This means developers don’t experience a significant financial incentive to build simply because improvements to land are not taxed.
Substituting Taxes Without Real Change
A second concern arises when considering how LVT might replace traditional property taxes. Take, for example, a downtown parking lot redeveloped into a 70-storey condo tower with 500 units. Under an LVT system, the tax on the land would remain the same regardless of whether it supports a parking lot or a high-rise.
From the perspective of the new condo owners, would this land-based tax be significantly different from current property taxes? Likely not. In some cases, it might even result in lower tax bills. If this is true, what have we truly accomplished by replacing one tax with another? Without meaningful shifts in tax burdens or incentives, the LVT risks becoming more of a theoretical reallocation than a transformative policy tool.
Equity Concerns and Zoning Limitations
The effectiveness of LVT is further complicated by zoning constraints. In many jurisdictions, landowners are limited to building single-family detached homes, regardless of demand or land value. This leads to inequitable outcomes. Consider a senior citizen living in a modest bungalow next to a neighbour who replaces their home with a sprawling McMansion. Both landowners pay the same tax under an LVT system because the tax is based solely on land value, not on the structures built.
This scenario raises a troubling question: is an LVT truly equitable, or does it inadvertently grant wealthier homeowners a tax break? By failing to account for disparities in how land is utilized, an LVT could disproportionately benefit those with greater means, undermining its intent to promote fairness.
Conclusion
Land Value Taxes, while grounded in a long tradition of economic thought, may not be the panacea for housing affordability that some of its advocates envision. Issues like the misalignment of incentives for builders, the potential for tax substitution without meaningful change, and inequities in zoning and land use call for a more nuanced approach. If we’re serious about tackling the housing crisis, we need to critically evaluate whether LVT addresses the core challenges—or if it risks becoming an outdated solution to a modern problem.
John Pasalis is President of Realosophy Realty. A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).
Have questions about your own moves in the Toronto area as a buyer, seller, investor or renter? Book a no-obligation consult with John and his team at a Realosophy here: https://www.movesmartly.com/meetjohn
December 6, 2024
Policy |