LVT Primer

LVT Primer
December 12, 2012 Alex

Here we’re dedicated to reforming the local property tax in Oregon.

Taxes are not just public revenue.

Income from taxation not only funds government, it affects our economy.

Taxation effects people’s behavior.  Taxes can have positive or adverse incentives.

Fundamentally there are only two sources of taxes:    1) Land          2) Labor and Capital.

Land rent (land value appreciation) is a social product, deriving from public amenities and location advantage.

Labor and capital’s product is individual, resulting from work and investment.

A basic principle of economic justice holds that legitimately created value belongs to the creator of that value.

Real estate is comprised of two components: land and improvements.  

Local government in its role as the steward of socially created land value is justified in collecting most of what the community has given – land rent, or increases in land value.  On the other hand, improvement value, the other component of property assessments, is attributable to an individual’s private capital investment.  Owners have the legitimate right to retain most of the building value which they themselves have created.

Tax incentives work this way:

What society wants more of will be taxed less – job growth and investment,
What society wants less of will be taxed more – land and resource consumption.

Therefore, “Tax land rent, not production.”

Principles

The LAND VALUE TAX –

…shifts the tax rate off of improvements onto land.

The conventional property tax system applies the same tax rate to both land and buildings.  This is arbitrary because these two components of real estate are fundamentally different, each with its own set of dynamics.
 – Land or site values are experienced generally, that is, on all parcels with similar location attributes—independent of investments in building improvements that individual owners may undertake. 
Improvement values are site-specific and derive solely from an owner’s capital investments.

In contrast to the conventional equal rate system, the land value tax (LVT) is a split rate tax.  Under the 2-rate property tax system, the tax rate on the assessed land values of all parcels in a taxing jurisdiction is higher than the rate on building assessments.  This heavier tax on land taxes mainly the site value created by the community at large.  The incentive effect is to invest in site improvements while conserving land.  In the aggregate, this encourages local investment, creates jobs, dampens land price inflation, expands housing, and stems the tide of urban sprawl.

Comparison

Land value taxation (LVT) is based upon the principles advocated by 19th Century political economist Henry George.

The theory of land taxation holds that a property tax based upon site values provides an incentive to bring land into productive use, encouraging more efficient land use.

This theory was never applied in its pure form – the abolition of all taxes save the tax on land, yet the idea lived on and was subsequently incorporated into law in several British Commonwealth countries, as well as in Taiwan, Denmark, and Estonia.  In the U.S., the state of Pennsylvania adopted LVT in 1911.

Phase-in Period

When converting from a conventional to a land value tax, it is prudent policy to begin with a revenue neutral tax rate.   Gradually, over a period of several years, the tax rate differential is increased.  The illustration below shows the tax rate splitting during the first stage to a 55 percent tax rate on land assessments.  Over time the split rate reaches a point where 95 percent of the total tax rate is on land assessments.

Differential

We have drafted a proposal to adopt the land value taxation system. We’ve formatted it as an LVT primer. It shows the key provisions of any LVT statute. Here you can download the primer slide show. Plus, you can read even more at Wikipedia. What do you think?

0 Comments

Leave a reply

Your email address will not be published. Required fields are marked *

*