Whenever something is taxed, less of it is produced. In the case of LVT, the tax is on land that is in a desirable location with lots of nearby amenities. LVT encourages urban sprawl by punishing retail, industrial, and residential concerns that choose to agglomerate with higher taxes. LVT means less walkable cities and more LA style sprawl.
> LVT encourages urban sprawl by punishing retail, industrial, and residential concerns that choose to agglomerate with higher taxes.
Can you explain more? I don't see it.
If a place already has high property taxes, and they are currently assessed on the land and the improvements then improved land in an area will receive a relative "tax reduction" compared to a full encompasing property tax. This means it is beneficial to improve land (the opposite of urban sprawl). The more the improvements the more the gains. Or thought another way improvements are "tax free" so it's easier to gain profit from improvements and is incentiviced.
If the location has low or no property taxes, then LVT will introduce a tax to the area and usually the plan is for this this tax is replace / offset other forms of tax (ex sales taxes). So enterprise would be taxed less and the land would be taxed instead. So again doing more commercial activity compared to a similarly sized lot doing less would be rewarded.
I'm not seeing any method that benefits sprawl for LVT compared to property taxes.
First order effects are usually stronger than second order effects.
Imagine you are considering to start a small manufactory, say for artisanal socks. You can purchase land anywhere, since the bank will lend to you at a cheap rate backed by the land as collateral. You consider two options; option 1 is in a dense urban area, close to your workers and walkable with lots of public transit. The land is expensive due to nearby amenities. Option 2 is some exurbian land that is accessible via commute. The land is cheap. Assume without LVT that option 1 is preferred because it provides a better lifestyle for your workers. Now add LVT; the tax rate on the urban land is set based on rents, so the fact that a bank would lend cheaply against good collateral no longer matters; you cannot afford the land because local rents are too high.
It’s just a thought experiment to demonstrate a simple principle; society gets less of whatever is taxed.
First, most places in the US at least already have a form of property tax. So you should be comparing LVT to property tax, not LVT to no tax. So most the above doesn't apply.
But even if you did use your example above. Imagine as well there is someone else trying to open a fancy large bookstore containing as well hangouts like cafe, a bar and lecture halls for reading and book discussion. Their main draw is foot traffic and to be a neighborhood lounge where people will stroll by and stop in to pass some time about a subject they like.
They also want use of the same land, and for them the downtown location will also benefit their employees but critically it is also extremely important for their expected customers. For them, they would profit more from their location downtown and wouldn't likely be able to stay in business in the exurban location. So they would be willing to pay more for that dense urban location because it largely benefits the greater economic activity and better use of the locaiton - they would correctly outbid the manufacturer who can open a manufacturing plant just about anywhere and only marginally benefits from being in the dense urban location.
So in result if the LVT means less manufacturing in downtown (where it really isn't needed), and more businesses can operate where they benefit from the density then that's a plus for society and LVT working as is should.
And even all of tht said, neither of these are really the main examples to show the true benefit of LVT.
Remember when reviewing the impacts of a new policy, they are always at the margin. So the appropriate situation to imagine for your bookstore is one where the benefits of land in the core are slightly greater than benefits from land in the periphery. Since LVT makes land in the core more expensive due to taxes, on the margin all businesses and residences would migrate towards the periphery.
Property tax creates its own distortions, just like all taxes. But it is less distortive since going back to the example of a manufactury or a bookstore, no matter where they locate the property tax changes less than a land value tax, meaning the decision on where to locate is based on efficiency rather than taxes.
You're still muddling two distinct concepts together. Let's start with a simpler case where it is easier for people to reason about.
There is a single lot in the urban core. There are two proposed businesses vying for the lot. The first is an empty parking lot, the second is a two story parking garage. Under a property tax, the second group would be taxed for the improvements of building the above ground garage they would be taxed on economic activity - that is a bad disincentive for society. Under an LVT they would not be taxed for improving the property, there would be 0 marginal tax on economic improvement of the land. Now where it may not have been profitable previously to add the garage it now is. That is what you want. You have a market for this property, and it is now beneficial to be sold to the buyer with plans for the best economic use of the property.
A second example. Imaging a single city block split into lots. The city changes from a property tax to a LVT. The amount of money they collect from this block stays the same - but to change they will reduce the taxes on improved lots and raise the taxes on unimproved lots. Now those who improve their lots are no longer subsidising the free riders who are sitting on unimproved lots. Again you are supporting beneficial economic improvements and their activty instead of penalizing it via a property tax.
The case you are thinking of, you are using the phrase "marginal" but you are not applying marginal reasoning. Marginal implies a small change with all else being equal. You cannot apply marginal analysis to land as land is not substitutible - there is not "margin" between being in a dense urban center and in the exurbs.
There can be more buyers for a single plot of land. Enough buyers that they can be though of as substitutible. There are not more sellers for a single plot of land - you can't create more land, or produce more land with those characteristics of that dense urban center. Marginal analysis from the perspective of the buyer fails here and that's the mistake.
> no matter where they locate the property tax changes less than a land value tax, meaning the decision on where to locate is based on efficiency rather than taxes.
Again this is thinking that second order effects are first order. The first order effect here is the price of the property. The price of the property in the urban center will at least 2x-3x the price of that same property in the exurbs. It will dwarf any differnece in method of taxes. Even if LVT were 3x the property tax most property taxes are roughly 1% of the purchase price per year. Price not tax is the dominant factor and the reason why that comparison you made isn't valid. Within a price band yes tax will impact decision making, across price bands price obviously dominates. And tax dominating within a priceband is a good thing because we have now changed the policy to no longer tax economic improvements to land - so the tax policy is actually better. It's improving behavior at the margin.
Then why do realtors do showings for multiple locations? It’s because the locations are substitutable, with buyers balancing price and amenities. Land is substitutable.
> confusing second and first order
Prices are a second order effect, not a first order effect (unless there’s price fixing). LVT makes land with amenities relatively less attractive, which lowers demand. Lower demand then moves the price, but the quantity demanded will still be lower since the demand curve has shifted down. This causes an exodus from urban centers to the periphery.
>property taxes disincentivize development
True. Assuming constant revenue, a move from property to land value tax would create a relative migration from city cores to a highly developed exurbia. If the LVT was high enough, we’d get single plot high rises with multistory garages only accessible by freeway surrounded by untouched nature reserves.
> Aassuming constant revenue, a move from property to land value tax would create a relative migration from city cores to a highly developed exurbia
At this point it appears you're just ignoring basic economics price sensitivity. Lowering overall taxes on a lot will not cause a migration from that lot.
I mean you can just keep repeating that phrase, but it doesn't then make it true. If you continue your argument that eliminating a tax on economic activity in an area will reduce the amount of activity in that area then there likely is little left for us to discuss.
If you are a prospective shop owner deciding where you want to locate your shop, LVT makes no difference at all. If you move to an agglomeration to make it bigger, you might raise other people's LVT slightly. 'Tragedy of the Commons' style.
Perhaps if all the shop owners got together as a cartel they would face the incentives you talk about. But not for individual owners.
Also, LVT does not change the total yearly cost of some land. It obviously doesn't change rents; and even for land owners it doesn't change the recurring costs: the sum of cost of capital for the value of the land plus all taxes is the same with LVT or without. (Basically, the market will prince the LVT burden into market prices of land. Imagine a city where some plots of land have to pay LVT and some don't: the total cost of ownership for comparable plots would be the same independent of whether they are LVT plots or not. Same for renting plots.)
This only happens if zoning limits housing supply.
As urban demand goes up, builders are incentivized to keep building denser ...... until equilibrium is reached.
LVT's main benefit is that it helps remove zoning confusion. It makes houses, parking, offices and factories compete on comparable financial ground. And promotes a minimum level of upzoning based on the value of the land. (Usually corresponding to demand for said land)
