Value Increment Tax

The Principle of Land Value Capture

The value of land increases when land owners fund improvements. Publicly funded investments such as improvements to infrastructure and the provision of public services can also increase the value of land. Value capture is a means for government to recapture a higher proportion of what economists call the “unearned increment,” increases in land value that are a result of governmental actions rather than the owner's efforts.

Similar to the site value tax in that both tax the unearned increment, the VIT differs from site value taxes in applying only to the portion of the unearned increment that is the direct result of public investment, and its purpose is to fund public investments that will raise the value of the land. Unlike property taxes, VITs do not increase with the landowner's improvements.

Conventional property tax allows the government to capture some of the increased value of land, but the amount may be less. Moreover, because the VIT does not tax buildings and other improvements based on expenses the landowner has incurred, property owners additionally benefit from the greater value they have created at their own expense.

The VIT also has common ground with the capital gains tax on property, which levies tax on the increase in value between the acquisition price and the sale price of the land. Neither the VIT nor the capital gains tax would include in the tax assessment improvements made by the property owner only the VIT would isolate the increase in value arising from public investment as the basis of tax assessment.

The idea of the VIT is not new. Popularized in the 19th century by American political economist [Page 1688]Henry George, who based his arguments on earlier thinking by British political economists David Ricardo and John Stuart Mill, the central proposal was a single tax on the unimproved value of land. George believed that revenue generated by his land tax would be adequate to make all other taxes unnecessary, while at the same time avoiding the discouragement to production that was indivisible from a system based on property taxes.

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