What is it?
The main factor that determines the price of land is the infrastructure around it - transit lines, schools, recreational centres, parks, etc. When governments decide to build or improve infrastructure, all the properties around that infrastructure gain value. This added value is what economists call a windfall gain. It’s extra wealth that landowners have gained thanks to external factors.
A land value capture tax is a mechanism by which governments can use those windfall gains to pay for the infrastructure creating the wealth gains. Instead of raising income taxes or implementing a user fee or a sales tax, governments can tax the windfall gains of land around the new infrastructure to pay for the project. While the mechanism under which this happens can change, the goal is ultimately to capture the land value gains created thanks to public investment to reinvest it back into the costs of the infrastructure that created that wealth.
This tax has been used by cities such as Portland, New York, Hong Kong and London to fund transit projects. In Canada, Metrolinx in Toronto and Translink in Vancouver have both looked into using this form of taxation to fund new transit projects.
What is the difference between the land value capture tax and existing property taxes?
Existing property taxes tax a percentage of the total value of the land and all the buildings in that land. That percentage will be the same across a given jurisdiction. So, if a property (land + building) is worth $1 million and the property tax is 2%, the landlord will be paying $2,000 regardless of where that property is located within a city.
A land value capture tax, on the other hand, aims to capture the value gained by a property thanks to infrastructure built around it. Depending on how the tax is implemented by a city, the taxes paid by those properties will pay a significantly higher tax rate than a property whose value did not go up thanks to those infrastructure projects. This extra tax is used to capture gains in property value and use them to pay for the infrastructure projects.
In many ways, this creates a disincentive to speculate on the value of the land, because much of the speculative profit gained by speculators is captured by the public. This, in turn, helps keep the value of the land from rising at the levels they are rising today.
If these revenue gains are used to build affordable housing units and public infrastructure in other parts of a city, that can also help stabilize prices. With higher supply of affordable housing, people will not be forced to buy or rent housing units with high speculative prices.