An alternative to the local property tax, the land value tax offers certain benefits over the economically inefficient property tax. However, its novelty and legal and political challenges continue to make it an elusive option at this time.
According to numerous polls, the most hated tax is the local property tax. Economists Marika Cabral and Caroline Hoxby argue that Americans are averse to the property tax because it is the most noticeable and important major tax. In addition, many economists agree the property tax is economically inefficient because it taxes the value of improvements, which acts as a tax on economic development. A tax is said to be inefficient if another system could raise the same revenue while increasing economic growth.
One proposed alternative to the property tax is the land value tax. The land value tax would allow state and local governments to maintain control over a significant source of tax revenue while addressing issues of efficiency.
Although not used extensively, the land value tax is more than a theoretical abstraction. Local governments in New York, Pennsylvania and Hawaii have used it. In addition, twenty-five nations use some form of the land value tax.
The land value tax has been implemented in two forms. In a pure land value tax system, the tax is applied to the value of the land with no tax applied on improvements. In a split-rate tax system, land value is taxed at a higher rate than improvements. For example, in Harrisburg, the 2008 tax on the value of land was 28.67 while the tax on improvements was 4.78, a ratio of 6 to 1.
