Land value tax is a levy on the value of land. Where that land has a higher value, the revenue from the levy is higher. This simple concept is crucial to understanding how land value tax can encourage density, reduce urban sprawl and ensure land is used as it is demanded.
Land is more expensive the closer to the city centre it is (all other things being equal) as a result of higher demand stemming from amenities, proximity to infrastructure and agglomeration.
Today’s system (the top diagram) dictates that land owners of plots A, B and C are incentivised to hold on the the land as values rise. They may well decide to develop (for a windfall) but there is a strong incentive not to take on development risk and simply wait for prices to increase. As a result, land remains unused (or rationally used for things which bring a return for the owner but is sub-optimal for society e.g. Car parking) in the city centre and developers go out further for land that becomes available. This means the city will sprawl outward. This will increase infrastructure costs and, if constrained by the Green Belt, a shortage of homes will further increase property prices.
With land value tax (the bottom diagram), the landowner has a levy to pay, year in, year out. This financial burden will either incentivise them to develop on it (the risk of development is reduced as the alternative is a levy cost). The land with the highest value will have the largest levy revenue and so will come forward quickest. As more is built towards the city centre, people might not want to live in the suburbs and empty properties may be better used as greenspace (which increases value itself).
Importantly, this will also increase density. As land in the city centre has the largest monetary liability, the landowner will want to maximise the return on investment in order to pay it. The denser the building that sits on the land, the larger the revenue generated to pay for the same levy value.
But there is also an extra benefit – how brownfield sites could be best used. Landowners of brownfield sites will sit on the land and either wait for the value to increase or to wait for public investment to help with decontamination. As a result, developers will – understandably – move elsewhere as they would have to internalise all of the decontamination risk themselves (or wait for the public sector for investment which is a transfer of money from taxpayers to the landowner).
With a land value tax, the landowner is incentivised to improve the land in order to sell it or to use it for development. The cost of improving the land ready for development and then selling it (or developing on it) would be more profitable than sitting on an asset that has an annual liability.
Taxing land will increase density, reduce sprawl and incentivise better use of land creating development benefits but also public savings accruing from agglomeration and a more focused zone for infrastructure investment.