Land Value Tax (LVT)

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Land Value Tax (LVT)

What Is a Land Value Tax?

A land value tax is a more predictable method of taxing property since it is based simply on the value of a piece of land rather of any related structures. The notion of a land value tax may be traced back to the early days of agricultural civilizations, when determining ways to properly tax landowners for the benefit of the greater community was a common societal aim.

Key Takeaways

  • A land value tax (LVT) is a property tax assessment system that solely evaluates the value of the land and associated improvements, not the buildings erected on the land.
  • An LVT is seen to be a more equitable kind of land taxes in agricultural areas when the land is productive.
  • Ad valorem taxes, such as land value taxes, are popular among economists because land values are more stable than those of homes or other structures.

What Is a Land Value Tax (LVT)?

Understanding the Land Value Tax

A land value tax (LVT) is meant to appropriately value land, which is a limited asset with a base value that does not fluctuate as much as the buildings erected on it. Land value fluctuations are heavily influenced by what occurs on and around the land. An acre of property in a rural environment, for example, may not contribute as much to the area economy as the same sized plot in a downtown metropolitan position, where the site may be near to a new food distribution facility that requires an extra loading dock.

Land has been seen by communities from the beginning as an asset that cannot be possessed by a person in the conventional sense of ownership, but rather as a rental that is passed down from generation to generation. Because human activity on a piece of land generally defines its total worth, and that activity is usually invariably tied to the wealth of the owners, a land value was considered as a more equitable foundation for assessing taxliability. This has resulted in our current system of taxing land and buildings separately for tax reasons.

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LVT is an ad valorem tax that is also known as a site valuation tax. The Latin word ad valorem means “according to worth.” Modern examples include the yearly municipal land assessments that homeowners get, in which their property is evaluated independently from the numerous structures on their land. A homeowner may make changes to the structures on his or her property, affecting the taxable value. However, the land itself has a more consistent value over time. The inverse is likewise true in the case of a landowner who allows his structures to deteriorate. In this situation, the total property taxes paid to the community would be lower, but the land itself will retain more or less its former value, which is essential when a prospective buyer considers their tax burden and the true value of what they are acquiring.

Deadweight Loss and the Land Value Tax

Property value fluctuations are mostly driven by market movements and may be quite volatile. These changes result in what economists refer to as deadweight loss, which is a measure of the loss to society as a whole. These losses have far-reaching consequences in terms of paying the essential services required by any thriving community, such as police, fire, and rescue.

The land value tax serves to prevent market volatility by separating the more stable value of the land from the structures, resulting in a more controllable real estate taxation system.

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