Race and the Land Value Tax

Land Value Tax

A Land Value Tax (LVT) is a tax on the unimproved value of a piece of land. It is similar to property taxes except that it is not assessed against the value of the buildings or other improvements that sit on top of the land. It is assessed purely against the land itself. The LVT could be coupled with a property tax that applies to buildings if you'd like, but it does not itself apply to them.

In theory, you could set the LVT amount equal to 100 percent of the rental value of the unimproved land. If such an assessment were made annually, you would basically ask yourself how much annual rental value the land has, and then submit a bill to the land's owner for that amount. This would capture all of the rents that flow from the land to the owner, but the owner could still make money by doing productive things on the land (like providing housing services or running a business).

If this played out in practice as it does in theory, levying such a tax would essentially bring the asset value of the land to $0. That is to say, a perfectly implemented 100 percent LVT would generate a world where buyers would not be willing to pay more than $0 to come into ownership of land, though they would be willing to pay money to come into ownership of the buildings on the land.

To understand why this is so, it is useful to break up a real estate transaction into two components: 1) a purchase of land, 2) a purchase of buildings on the land. The price of a real estate deal, e.g. a home purchase, should theoretically be equal to 1) the capitalized value of the flow of rents from the land, and 2) the capitalized value of the flow of rents from the buildings. Under a LVT, the capitalized value (to the owner) of the flow of rents from the land is $0 because those rents are going to be taxed at 100 percent. The capitalized value of the flow of rents from the building will be whatever they are and so that will become the price determinant of the entire real estate deal.

Racial and Housing Wealth

In our discourse about "housing wealth," we often conflate land value and building value. Thus, when talking about racial housing wealth dynamics, it is often remarked that blacks cannot expect to get wealthy from their home values increasing whiles whites often can. This is said to happen for a number of reasons, one of which is that the segregationist nature of our housing patterns makes buying black homes less attractive to whites. The dynamics of white flight also cause black home values to decline.

But this analysis is actually somewhat muddled and confused. Home values (i.e. the value of the physical structure) should hardly ever increase in price. When we are talking about "housing wealth" increasing, what we are talking about is land value increasing. The capitalized value of the flow of rents from the building does not go up. The capitalized value of the flow of rents from the land goes up.

Why do the land rents go up? For precisely the reasons discussed in the first paragraph of this section (among others). The rental value of a land in a residential area is driven by what's around it. It is driven by how attractive it is to live in that area not in that building. Due to segregationist dynamics, the rental value of the land in a black area does not increase in the same way as the rental value of the land in a white area, or at least doesn't do so as often or to the same extent. And that drives the housing wealth disparities so many have observed.

LVT and Racial Wealth Disparity

Since housing wealth disparities are not driven by homes literally getting more valuable, but by land getting more valuable, then the LVT could theoretically blow up this source of racial wealth disparity.

When land values in an area increase, the 100 percent LVT would immediately gobble them up through higher taxes. The asset value of the land (to the owner) would not increase at all. The segregationist dynamic would still cause land rental values to diverge, but the dollar value of those rents would never be accessible to the owner of the land. The divergence could still cause other problems (generally for local government revenue), but it would not cause racial wealth divergence.

So, at least in the narrow context of racial wealth disparities driven by racial divergence in "home values" over the course of ownership, an LVT could serve to check racial wealth disparities.