Libertarians need to temper the rave over the Land Value Tax

A comparison of the Land Value Tax (LVT) and zoning laws:

Henry George argued in his work “Progress and Poverty” in 1879 that a Land Value Tax makes sense as a means to recapture gains from community activities which benefit individual landowners. George is most often mentioned when the LVT comes up, although he did not create the idea. There are several claimed positive outcomes from an LVT:

1.      Public investment in infrastructure (roads, bridges, water & sewer) causes land value to appreciate, and by taxing the increased land value, the public investment is re-captured to enable ongoing repair and maintenance in public infrastructure, and to support future investment in additional infrastructure.

2.      In urban areas in particular, density is encouraged so as to make more efficient use of land. Land will not sit idle. High-rise construction is encouraged. This can help to mitigate problems of congestion, supposedly, but I tend to think parking becomes a problem. Parking garages will have high prices due to the high value of land. But this can encourage development of high speed rail to bring commuters in from outside of urban centers.

3.      The LVT can be used to combat negative effects of urbanization - pollution, poverty, etc.

4.      In comparison to the more traditional property tax, which taxes capital improvements upon the land, the LVT offers several improvements. The assessment process is simpler, less costly, and less prone to special influence and corruption. If one parcel of land is improved through construction with an LVT, the tax will not increase for that one unit. Collective improvement of the community will increase land values, and thus increase the LVT amount. Thus the LVT does not discourage proper maintenance and repair of any individual parcel in a group, which can be a problem with a conventional property tax, which assesses each property separately.

But the above claimed positive impacts are offset by several negative effects:

1.      Land appreciation occurs not only due to public investment, but also due to at-risk private investment. Appreciation which occurs due to private investment, should not be taxed. Otherwise private investment is discouraged. This presents a significant challenge in trying to honestly measure the appreciation which occurs from the public investment vs. private investment. But still one would expect this challenge to be a lesser degree than the challenge of fairly assessing for conventional property taxes.

2.      The tax could become over-utilized. In order to maintain a balance in consumer choices for transportation, there should still be user fees applied to transportation (fuel taxes, tolls, etc.). If only an LVT is used to collect for public transportation infrastructure operation and maintenance, this creates market imbalance if public control of transportation is higher for one form of travel (automotive, roads) and less for other forms of travel (airplanes, rail).

3.      In rural areas, the key issue with the LVT is not so much the roads, but public education. A conventional property tax more appropriately levies costs based on usage of public schools. An LVT in a rural area would disproportionately assign public school costs to owners of larger parcels. Renters would come out way ahead in terms of shifting their public education cost burden to others. The cost of public education has risen enormously in the years since the LVT concept was often suggested to be the “least bad tax” by libertarian economists.

4.      The convenience of the LVT, plus the need for balance, would encourage government to expand to where it has an extreme level of control of all forms of transportation, and other services as well. The competing market segments would be lobbying against each other to get a greater share of the LVT for their choice. The lobbying revenues which flow to elected public officials, plus the “generic” nature of the LVT, could encourage lazy governing and a continuous expansion of this tax, to where it eclipses all other use based forms of revenue collection.

5.      As with all taxes, “fairness” depends on political leverage. If development flattens out and land/property values are no longer increasing, the LVT can become a punishment if there is no infrastructure growth and the LVT revenue serves only for maintenance of existing infrastructure. Infrastructure should not be allowed to decay, but nor should an excessive LVT be squandered away. It’s easy to see how the LVT could become a wealth redistribution tax. The LVT could be a dangerous tool if applied by progressives.

6.      To avoid problems of progressivism, it would still be important to have a system of user fees for maintenance of some, perhaps not all, roads and bridges. If an LVT were the ONLY means for maintaining roads and bridges, this would continue to force cooperation between different layers of government. We see this cooperation get ugly for other things (Medicaid with unfunded mandates for example). LVT proponents often speak of eliminating all user fees for roads. This isn’t a good idea. The LVT could work well for local and county roads, but for limited access state and federal highways, tolls could be used instead. This approach would protect the concept of federalism, better than the fuel tax approach does now. A toll approach also corrects the coming problem of all-electric vehicles, which pay no fuel tax, and therefore no user fee.

Zoning laws got going in the US in 1908 in Los Angeles and the concept has been expanding rapidly ever since. Local government police power is given broad latitude, as the US Supreme Court is reluctant to become the ultimate zoning board of appeals. The Supreme Court Kelo vs. City of New London decision in 2005 is viewed as a gross error by many, as it allowed eminent domain concepts to expand to public BENEFIT, not just public USE. So zoning power is very great now in local communities.

Whereas the LVT is more theoretical due to limited application, this is surely not the case for zoning laws. Here I compare and contrast zoning laws to the LVT:

1.      Protection of property values. This is certainly the key driving force for zoning. Existing property owners want their investment protected. But an LVT argument could apply here. How much of the appreciated value for property owners is from their own economic activity, and how much from others, whether “others” are public or private investors? The property owners want to see only gains, and no losses. Actions of others are highly regulated and controlled, such that future investors incur higher costs and higher risks than the original developers. The original owners reap the rewards while seeing lower risks.

2.      Whereas the LVT is intended to increase pressure for land use efficiency, zoning laws often do the opposite. Minimum lot size requirements drive up housing prices and are a barrier to entry- often a deliberate policy to block minorities and the poor from building. In and near urban centers, land use efficiency is important. Moving out into rural areas, undeveloped land is certainly beneficial to the environment. For farming in particular, over-tilling of the land due to high LVT taxes would in the long run damage the land and reduce its commercial value. Generally speaking, the LVT concept would be better nearest urban centers, whereas zoning may be more environmentally beneficial in rural areas

3.      Zoning doesn’t necessarily care about infrastructure cost balancing, which is a key focus of the LVT. In many cases, property development projects are subsidized in hopes of economic activity producing gains to help pay for infrastructure later on. A large residential development may incur a great deal of costs for road construction, and those lightly traveled roads, little more than publicly funded driveways, will never collect nearly enough revenue in fuel taxes to pay for their maintenance. So called impact fees are collected to help cover those costs. Those fees often are not built on logic but on political leverage. The initial entrants into the zone protected region, often impose an infrastructure burden beyond what they pay for, whereas the future builders (and NIMBY thinking often clamps down on ANY construction) might be over-charged. In this way zoning can create Ponzi scheme scenarios – the early entrants are the winners, those who come in later foot the bill. Property tax caps can also encourage inflated impact fees. An example – an internet service provider asked to repave entire streets, rather than patch cable lay-down paths, as a means of trying to recover from street maintenance which is dishonestly under-funded. Users pay for street maintenance through their internet service provider, certainly not honest governing.

4.      In general the LVT would be more pro-growth whereas generally zoning laws are most tightly applied in anti-growth areas. Whereas an LVT could encourage high speed rail and use density where appropriate, and therefore reduce commute times for traveling workers, zoning most certainly contributes to “urban sprawl” with long commute times and loss of quality of life.

5.      Since the LVT is more theoretical now than actual, it’s hard to predict what the LVT would do to the so called “welfare state” problem. Zoning most definitely feeds the welfare state problem, as the barrier to entry creates inflated housing prices and restricted choices on where to live and work. An LVT could also feed the welfare state due to its possibility of expanding to be a wealth redistribution tax, as discussed earlier. An LVT has to be kept out of the control of progressives. Progressivism will find a way to poison any taxation approach.

Zoning is a central planning concept executed by local governments, with a history of weak oversight by higher levels of government. An EXCLUSIVE LVT approach would also create central planning hazards, especially if no user fees were used for state or federal highway operations and maintenance. An LVT would improve federalism over our current approach of redistributed fuel taxes, if we were careful to keep government layers broken apart. If local governments all push an LVT fraction up to the feds for major highway operations and maintenance, progressives would pressure for the federal government to take over control of every inch of public roadway in the US. Would any libertarian/conservative want that? No. We would want to use the LVT correctly and keep government layers separated.

Zoning laws have a long established pattern of limiting liberty and freedom. Whereas the LVT concept has little traction yet in the US, we would have to be very careful if the concept catches on, to prevent some of the same defects as we get from zoning.