In one generation a Baltic nation transitioned from a socialist state to a successful democracy with “the best tax code in the OECD”.  The reason – taxing only land.

From Assessment to Collection, Three Places That Built Stronger Property Tax Systems

By Liz Farmer
Land Lines,  Special Anniversary Issue, 75 years,
Feb. 2021

Excerpts featuring the top rated tax system:

Tallinn, population 437,000, is the capital and largest city of Estonia. 

When the Soviet Union broke up in 1991, more than a dozen former Communist states had to develop a national government and revenue system essentially from scratch. Estonia took full advantage of the opportunity. Over the course of a generation, the Baltic nation of 1.3 million people transitioned from a system that hadn’t recognized land ownership at all to one that acknowledges land ownership, collects a land tax, and has created a sophisticated technological ecosystem. 

By taxing only land, not buildings, the system was designed to encourage development, particularly in Tallinn. “Unlike a tax on improvements, a tax on land does not discourage maintenance and construction,” says Joan Youngman, senior fellow and chair of the Department of Valuation and Taxation at the Lincoln Institute of Land Policy. “It can also reduce incentives for land speculation and for withholding land from the market in times of rising values.” 

Over the years this approach has helped drive economic development, especially in Tallinn. Construction boomed in the capital in the early 2000s, mainly with infill and higher-density housing. In 2000, fewer than 500 new flats were constructed; in 2007, more than 3,000 new flats were built. 

Estonia still has a weak spot familiar to property tax officials across the world: land values have not been reassessed since 2001, even as they have increased by roughly sevenfold over that time period, said Tomson, now the deputy director of a Tallinn-based real estate consulting firm. Tomson hopes there will be a reassessment in 2021, but he fears that the unpopularity of such a move will delay it. “The exact revaluation period is not fixed according to the law,” he says. “It is always easy to wait for better times.” 

US Think Tank Rates Estonian Tax System Most Competitive Worldwide

ERR.ee News
24 Oct. 2018
Economy

“For the fifth year in a row, Estonia has the best tax code in the OECD,” the Tax Foundation said. Established in 1937, the Tax Foundation is a tax policy research organisation which has stated that its research is guided by the principles of sound tax policy: simplicity, transparency, neutrality, and stability.

“Its top score is driven by four positive features of its tax code. First, it has a 20% tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20% tax on individual income that does not apply to personal dividend income.”

The third positive feature cited by the think tank was the fact that its property tax applies only to the value of the land, rather than the value of real property or capital. 

Australia, Estonia, and New Zealand only tax the value of land, which excludes the value of any buildings or structures on the land.

On November 5th, 2020, the parliament of Baden-Wuerttemberg, the second largest state in Germany, voted to implement land value tax. 

Comment:

Yes, the land value tax is an economic development driver.  However, its powerful incentive effect is weakened if valuations are not accurate or kept up to date.  This is the lesson the Pittsburgh experience taught us.  Before the failure by the assessment authorities, the land tax was a principal foundation of the Pittsburgh renaissance.  Accurate assessments are important!