Taxing land can provide $194 billion for Canadians
Excerpted from Common Wealth Canada report: Natural Common Wealth and Economic Rent in Canada
A land value tax (LVT) is a type of tax that is based on the value of the land itself, rather than on the buildings or other improvements on the land. It is a tax on the unimproved value of the land.
Imagine you own a piece of land. The land itself has value because of its location, natural resources, and potential for development. This value is independent of any buildings or structures you might have on the land. With a land value tax, you would pay a tax based solely on the value of the land itself, not on any buildings or improvements you have made.
The idea behind a land value tax is to encourage efficient use of land and discourage land speculation and hoarding. By taxing the land's value, it incentivizes landowners to use their land more productively or to develop it for the benefit of the community.
There are many possible benefits of a LVT in Canada, including the promotion of sustainable urban development, affordable housing, and more equitable wealth distribution. In addition, an LVT in Canada has the potential to raise billions of dollars in new public revenue by collecting the economic rent (unearned wealth) currently residing in Canada’s land value. This wealth currently accrues to landowners and is not related to these owners doing anything to generate income from their land. If this rent were to be captured, it could be used for the benefit of all Canadians.
Summary of Potential Revenue and Impacts of an LVT in Canada
The possible rent generated from a federal land value tax in Canada is $194 billion, an amount that could eliminate federal personal income taxes for all Canadians. Alternatively, this could increase the combined federal and provincial basic personal amount (0% tax bracket) to $88,100; resulting in 91.3% of Canadians having no personal income tax obligation. Or, this could generate a common wealth dividend for all Canadian adults of $6,136 annually.
The revenue potential of an LVT warrants attention, but must be considered carefully. The capture of additional economic rent from land values would require a reimagining of how we treat land ownership and how we allow wealth to be accrued from the value of land across Canada.
Discovering Land Rents in Canada
Discovering the total annual rents generated by land in Canada is a challenging exercise due to a dearth of direct measurement. However, several methodologies exist and have been applied in other jurisdictions, each having produced widely varying estimates. For instance, in his review of the relevant literature examining US land values, Lars Doucet finds estimates ranging from $15-$75 trillion - the consequences of which are widely different pictures of available revenue, tax offsets and distributional impacts.
Broadly speaking, there are three methods for estimating land rents: (1) deriving rents from land prices/values, (2) observing price trends in land/property, and (3) inferring rents from overall economic output. In most jurisdictions, aggregate land values/prices (hereafter referred to exclusively as land values) are not measured or disaggregated from property values at a national level and must therefore be estimated independently compounding potential sources of error.
Statistics Canada does however report total land values in its national accounts and this datum can therefore be used to calculate annual rents. Canada’s National Balance Sheet gives land’s 2022 value as $5.824 trillion. This measurement has its own limitations and likely under estimates total land value because its inputs rely heavily on available tax data. According to Statistics Canada the measurement of “the value of land includes both price and volume changes.” The fact that the measurement accounts for significant changes to land volumes indicates that it does not capture the full market value of unused or underused land that is otherwise important for identifying true land rents. However, for the purposes of revenue capture this erstwhile error might provide a closer estimate of land rents on taxable land in production in private ownership. The vast majority of land in Canada, 89%, that is likely omitted from this measure, is held as “Crown Land” i.e. the traditional and/or unceded lands of indigenous peoples claimed by the Canadian Crown. Significant portions of these lands are subject to outright indigenous title while the law holds that all other lands can only be used or occupied with consent. Therefore the Statistic Canada measure might be more precisely described as the value of land in private hands.
Using the relationship between land prices and land income (i.e. the capitalization rate, = annual net operating income / current price), we can use the measure of land values to determine privately held Canadian lands’ aggregate annual rents. The relationship between annual returns less taxes and expenses, and market price has been shown to be fairly robust predictor in the real estate market save for information inefficiencies and widespread reporting provides the market's expected rate of return. Historical trends show that the capitalization rate in Canada fluctuates between 3% and 8% in accordance to market conditions and interest rates, with a long term average of 5.5%. Therefore, we can estimate the total available taxable land rents for 2022 in Canada equals $320 billion ($5.824 trillion x 5.5%). Given the significant sources of error and assumptions that must be made in the other methodologies (discussed below), we will use $320 billion as the total available land rent in this paper.
However, it is important to note how much this figure differs from estimates put forward in other works using different methodologies. For instance, Foldvary (2006) reviews three calculations from the UK and USA which estimate the relationship between land rents and national income at around 22%. Using this figure for Canada would yield a land rents estimate of $593 billion (=$2.698 trillion * 22%) or nearly 185% larger than our previous estimate. If this methodology proved more accurate, it would suggest one of three possibilities. It might be that a significant volume of land is not captured in Statistics Canada’s estimate and would be subject to rent collection. Or it may be that the rents from these lands are already captured by the government in the form of imputed rents on government property (libraries, hospitals, military bases etc.) and through the collection of land rights leases (mineral, forestry etc.). Finally, it might be that the true value of land is being systematically under-assessed and that the true rent for any given plot is much higher. If any of these cases were to be true, then the amount of rent subject to collection would be proportionally higher, as would any use of these funds (dividends, tax offsets, etc.).
Alternatively we could follow the examples of Prosper Australia and the Vermont Green Tax & Common Assets Project, which estimate revenue potential (i.e. some subset of total land rents) by setting the rate the average annual growth in land values. While the authors of the Vermont paper use median increases in housing prices as a proxy for land values, the authors recognize the additional error that this introduces. However both of these estimates produce revenue estimates of roughly 5-5.5% of pre-intervention land values. Though they both fail to properly calculate which LVT rate would accomplish a 5.5% collection of land values (discussed further below) it does coincidentally produce a similar picture of total available land rents when applied to Canada.
Having determined the total available economic rent present in Canadian land, we must now select the proportion that could be reasonably and sustainably collected. In theory, all land rent might be collected without market distortion or dysfunction, as land would continue to have a productive yield. Previous proposals have advanced collect half of land rents, as in the case of the Green Party of Ontario; 75% as in the case of Rory Meakin in his proposal for taxing land rents in the UK; 90% as proposed by Tideman et al.; or nearly 100%, as in the Prosper Australia’s proposal or the Vermont Green Tax & Common Assets Project proposals.
Due to likely variability referenced above and the current tax burden on land (already accounted for in its market price), we selected a rate of 75% of the calculated annual land rent as a conservative rate which would allow for market function and some portion of the land rents to continue to accrue to owners to account for their capital’s opportunity costs. Capturing 75% of the available rent would allow for some land use and geographic variability in the application of any rate.
While any real world application would likely see a gradual introduction, we estimate that capturing 75% of land rents would have generated $242 billion in 2022. However, we must also consider that land rent which is already being levied by existing property taxes. An estimated $38.5 billion of property taxes paid in 2020 were attributable to land value (rather than structures and improvements), comprising 42.5% of all property tax receipts from all levels of government that year (the most recent year with full and accurate data). This corresponds to an aggregate effective land value tax rate of 0.82% in 2020. Assuming the rate remains static, in 2022 we can assume property taxes collected roughly $47.7B in land rents.
Therefore we calculate that the net additional revenue that could be generated by such a proposal at $194 billion.
One final consideration is determining which tax rate applied to the value of land will effect the collection of 75% of its rental value. Because land values are understood to be a product of their present and future income potential, reducing the net rental income that may accrue to the owner will in turn reduce its price. At the hypothetical extreme, an LVT that collects 100% of land’s revenue potential (imputed or realised) would push the price of that land to 0$. This is one of the central features of an LVT. Recalling the capitalization rate above and solving for price where the cap rate is given, yields:
Value of land = land rental value / (land value taxation rate +land capitalization rate)
Therefore, for any given land value taxation rate, we can determine the resultant land price. That the tax burden of any plot of land would be fully capitalised into its price, has been demonstrated in jurisdictions that have instituted changes into the tax rate on land. In this instance, this gives a resultant aggregate price of $1.42 trillion and constitutes a 76% drop in land values. Taking the product of this price and the rate that will produce it, will yield the revenue. The quotient of the revenue collected and the land’s total rental value thus yields the land rental taxation rate.
The result, in our instance, is thus that a 17% LVT will capture 75% of land’s rental value. 17% of the post-reform value equates roughly to 4.2% of the pre-reform land value or 2.4% of the average residential property value.
While the theoretical relationship between land prices and its corresponding tax rate is well understood, how exactly the market would price in an additional land tax would be subject to numerous other factors, chief among which is how that additional tax revenue is spent. For instance in their exploration of potential federal tax policy shifts in the United States, Tideman et al. model the impact of a 20% land value tax alongside a 12.% consumption tax which is used to reduce taxes on all income to 0 (neither of which are modeled in the preceding calculations). They find the combined impact of such a reform would be a sustained drop in land values by approximately 75%. Meanwhile, in applying this same model to the UK’s economy, Kumhof simulates that a more modest LVT of 2.4% funding reductions to the labour and capital income tax rates would increase the long term price of land in the UK by over 40% due to efficiency gains and asset inflation from the resultant economic growth. Given the sensitivity of both the assumptions and likely accompanying policy decision, it is well beyond the scope of this paper to model long term revenue flows or asset values.
See our report Natural Common Wealth and Economic Rent in Canada for a better understanding of the taxable rental value of Canada’s land and natural resources that could be used to lower income taxes and pay dividends.
