Introduction

In Canada, as in many other parts of the world, the debate over tax reform is ongoing, with policymakers and economists continuously seeking solutions to address inequality, stimulate economic growth, and promote sustainable development. One proposal that has gained traction in recent years is the implementation of a Land Value Tax (LVT); a levy on the value of land irrespective of its improvements, sometimes referred to as a location tax. The concept of taxing land value, rather than traditional forms of taxation such as income or property taxes, is rooted in the principle of communal wealth generation, minimal distortion, and equitable resource allocation. In this article, we delve into the rationale behind taxing land, explore the potential benefits of an LVT for Canada, examine the design considerations and challenges associated with its implementation, and propose a path forward for policymakers. 

A shift to land taxation would be no small feat in an economy, culture, and political system which promotes, subsidizes, and privileges property ownership; but it is unquestionably the right thing to do. As wealth and social inequality widen, housing becomes systematically unaffordable, and our economic prospects stagnate; Canadians owe it to themselves and future generations to make this change now.

Why Tax Land?

Land is by far our most valuable national resource, valued at nearly nearly $7 trillion, with its sale, rental and associated industries (real estate) forming the largest sector of the Canadian economy. This value, however, is rarely derived from the actions of individual landowners but is a product of communal efforts. Public investments, infrastructure developments, the collective activities of businesses and residential communities contribute, and a growing population are what make land more valuable. Yet, paradoxically, this accrued value overwhelmingly benefits individual landowners and, because of this, serves to exacerbate inequality and distort land use and public investment decisions. Over 20 years from 1999-2019, the real average net worth of renters of all ages increased by just under $10,000. During that same period the net worth of homeowners increased by $380,000. Indeed this real advantage and the promise to be able to profit from society’s efforts through land appreciation has spurred a collective obsession with property investment, leading to successive housing bubbles and Canadians paying for ever-larger mortgage debts and rents. Taxing land is therefore fair; it prevents public wealth from being captured by private interest and instead returns it to public coffers. 

The concept of taxing land is rooted in the principle that what is generated in common should be shared in common. By implementing a Land Value Tax (LVT), communities can reclaim a portion of the wealth generated by their communal efforts. This not only alleviates a core driver of inequality but also ensures that the benefits of public investments are reinvested back into the community, fostering sustainable and inclusive growth.

Why it’s Good for Canada

Make Housing Accessible

Implementing an LVT in Canada could significantly impact the housing market, making homeownership more accessible to a broader segment of the population by reducing the prohibitive upfront cost of home ownership. By putting a price on holding land, landowners are incentivized to use it more efficiently, reducing idle or underutilised land making it much less attractive to speculate on. This, in turn, increases the availability of land for housing development and encourages densification, addressing the housing shortage in urban centres. In short, landholders will be incentivized to develop their land now, or sell it to someone who will – better aligning supply and demand.

Furthermore, by curbing speculation and stabilising property prices, an LVT can mitigate the boom-and-bust cycles that often plague real estate markets. This shift away from speculative investment towards more sustainable development practices ensures that housing design and pricing align with the needs and demand of ordinary Canadians looking for somewhere to live rather than catering to the preferences of investors. For instance, in Canada’s largest housing market, Toronto, more than half of condos constructed since 2016 were bought by investors, prompting developers to choose, design, and price projects for this market whose concern is largely appreciation gains. 

Reduce Taxes on Income or Property

One of the significant advantages of implementing an LVT is the potential to reduce taxes on income or property. By shifting the tax burden from productive activities such as work and property improvements to land ownership, an LVT can remove some of the foundational distortions in the economy. While the taxation of goods, services, and incomes inevitably lead to some deadweight loss because their production is variable, land cannot be created nor destroyed and is thus immune from this particular effect. This shift therefore not only increases Canada's competitiveness and productivity but also allows individuals to retain more of their hard-earned income.

Moreover, by eliminating taxes on property improvements, an LVT encourages investments in buildings and infrastructure, further stimulating supply creation, economic growth, and development.

Create a More Productive Economy

A well-designed LVT promotes better land use, leading to more prosperous and livable communities. By capturing a portion of the value generated by public investments, an LVT ensures that society can invest confidently in much-needed infrastructure projects and recoup some of the wealth they generate. Additionally, by reducing distortions caused by other taxes, the so-called deadweight loss of economic activity that does not occur as a result of taxes on labour and investment, an LVT fosters a more efficient allocation of resources. Simply put, more work, construction, and investment will happen where the marginal cost of taxes was inhibiting it.

Given the fixed quantity of land, more investment does not result in more production, simply higher prices while investment in the real economy results in increased and new production. With less profit available to be made through the sale or ownership of the finite and already existing supply of land, capital would also shift to seek the higher returns of more economically productive investments, such as the construction of new structures. This could liberate billions of investment dollars to fund the next generation of technology, business, and infrastructure. 

Raise Public Revenues

Presently, the vast majority of Canada tax revenues are collected through the taxation of the $1.4 trillion of income Canadians collectively earn every year. At $300 billion, Canada’s annual land rents could provide a significant additional or alternative tax base that can be accessed through an LVT. Taking the form of dividend payments or rebates, such funds could be efficiently used to tackle other social objectives, such as redistributive policies aimed at alleviating poverty and/or broad-based transfers to low- and middle-income households,  infrastructure investments, or offsetting revenues from taxes on corporate incomes, capital, or consumption; in addition to the structure and income taxes discussed previously.  

Protect the Environment

Incentivizing better land use through an LVT can help mitigate urban sprawl, protecting valuable green spaces, wildlife, and farmland. By incentivizing densification, it can significantly reduce the cost and environmental impact of delivering municipal services and resources. By discouraging land speculation and encouraging densification in areas of high demand, an LVT promotes sustainable development practices that safeguard the environment for future generations.

Design Considerations for Canada

Tax Magnitude

Land Value Taxes could be applied at any level, from a minimal increase to the share of property taxes being paid on the value of the land and not the structure (a so-called split-rate approach) to a maximal, near or total collection of all land rents. In determining the degree of collection, policy makers must balance the efficiency and productivity gains of moving to a less distortionary tax system and the potential shocks and disruptions of reforming the largest sector and foundation of the Canadian economy. 

Tax Incidence

While an LVT offers numerous benefits, it is not without challenges, particularly given how long families and businesses have operated under our present system. Because of the social primacy of homeownership, lower-income Canadians who own land do so in a much greater proportion to their income than their middle and high-income neighbours. This means that the incidence of a tax falls in greater proportion on them despite the fact that most low-income families rent and would therefore not be subject to the tax at all. That is why many notable LVT proposals prioritize recycling revenues in such a way as to benefit those lower-income households most impacted by unaffordable rents and mortgages. This can be achieved in numerous ways including Basic Income type payments and progressive income or property tax relief.

Implementation 

To optimise the economic benefits of an LVT, careful consideration must be given to any eventual tax shift, its implementation, and timeline. Though the vast majority of Canadians can be left better off, like any tax change, some will end up paying more. In most cases, this will be beneficial, targeting mansions where there should be hundreds of condos, and speculators at the city’s edge; however there will inevitably be instances where the tax falls in opposition to another societal value or objective. The classic problem of the little old lady who owns a large plot of land but has a very meager income can be simply addressed with accompanying implementation policies such as the ability to defer payment until sale. In all cases such objections can be addressed in a limited and specific way so as to not undermine the overall effectiveness of the policy while ensuring that its benefits are more fully realised.

Families, businesses, and markets would also need time to adjust to a new tax system; right-sizing their homes, adopting investment and retirement planning, developing land and giving time for more supply to be built. It may be preferable therefore to implement an LVT slowly to minimize shocks and maximize benefits.

Structural Challenges

Transitioning to an LVT will require careful planning and consideration of the structural implications for the Canadian economy. Under a maximal approach, land would be substantially decapitalized upon the introduction of the tax and, from there, the assets securing many mortgages and other financial instruments will lose substantial value, threatening the multiples of credit and returns upon which much of the financial system is built. At the same time, productive investment would become comparatively more attractive, prompting massive shifts in capital and likely requiring significant restructuring for nearly all economic actors. The degree to which this will result in unwelcome shocks to the financial system is largely dependent on the scale and length of introduction for such a change. A more moderate LVT proposal such as a change in the composition of property taxes to more heavily tax land would be unlikely to cause similar effects. Policymakers must therefore navigate numerous complexities to ensure a smooth transition to a more efficient tax system. 

Issues such as the housing crisis, the financialization of the economy, and environmental degradation are not solely consequences of low taxes on land; however, LVT has the potential to drastically improve each of these areas. To realise its full potential, other policies such as land use and planning liberalization, banking reforms, and further environmental protection should all be considered alongside LVT. The effectiveness of land value taxation relies on how well it translates collective priorities into price signals for land owners. The policy will therefore require a host of legal and regulatory changes such as zoning reform which will enable the signals to be received and acted upon.

The Canadian economy has been operating under a non-neutral and economically inefficient tax system for so long that many decisions (from investment structuring to family home purchases) have been thus based. Limiting the powerful rent-seeking incentive that has built our property-centric economy will help alleviate this structural risks of a system reliant on appreciation gains and effect a shift to a model of economic prosperity centered on real production and productivity gains. However, it will take time and careful transition planning to untangle all perverse outcomes of our present system.

Other Land Value Capture Policies

While there are numerous approaches to land value capture, including project-specific development charges and transit-infrastructure targeted taxes, implementing a tax shift to a revenue-neutral LVT is the most effective solution for Canada. By replacing less efficient taxes with an LVT, such as income or property taxes on improvements, the economic benefits of land value taxation can be maximised. However, such a wide reform would constitute the single largest change to the tax code since the introduction of income taxes, but that fact alone need not be an impediment. Any step to capture more of the wealth that society generates and invests is beneficial. From capturing the value created when a new subway station is constructed with local surcharges to split-rate property taxes that assess and tax land and improvements independently, returning the common wealth to Canadians is a worthwhile endeavour. 

A Path Forward for Policy Makers and Advocates

Though it may fall outside the present political zeitgeist, there are numerous common-sense steps for which we may advocate, and policy makers effect that would clarify the case for land value taxation.

Report the Value of Land in Canada

To pave the way for the implementation of an LVT, Canada must first gain a comprehensive understanding of its most valuable resource — land. By accurately reporting land values and assessing their impact on the economy, policymakers can make informed decisions that prioritise the collective well-being of communities. In too many jurisdictions, property assessments are undertaken with alarming irregularity and often amended or distorted to prevent public rancour about the impact of these assessments on their tax bills. Taking a lesson from British Columbia, all Canadian jurisdictions should similarly assess property by improvement and land value annually to ensure we have an accurate picture of the challenges plaguing our housing market and the data to fix them moving forward. 

Pass Legislation Empowering Cities

Empowering municipalities to experiment with split-rate taxation and LVTs is essential for driving innovation and fostering local solutions to complex challenges. By having provinces grant their cities the authority to experiment and implement LVTs at the municipal level, we can quickly develop exemplars and best practices to emulate across the country. Local governments are clamouring for more taxation authority to meet their service requirements. There is no reason why communities should not have the ability to tax themselves in a less distortionary and inhibited manner than property taxes. 

Look at What’s Working

Land value comprises a significant portion of nearly all jurisdictions which levy property taxes with some, like Estonia, exclusively taxing this value. Elsewhere, as in Singapore, Hong Kong, Taiwan and Russia, other forms of land value capture (in the form of land leases, development charges, and land rates) form a significant base of public taxation. To chart a path forward, governments should examine these case studies and assess the best practices and economic and social implications of implementing an LVT. These studies can provide valuable insights into the optimal tax rates, potential challenges, and transition strategies necessary to realise the full benefits of land value taxation in Canada.

Conclusion

While by no means a silver bullet, implementing a Land Value Tax in Canada offers a compelling solution to address inequality, promote sustainable development, and foster economic growth. By harnessing the communally-generated value of land and reinvesting it back into our communities, Canada can build a more prosperous and equitable future for all its citizens while repairing the many harms and distortions of our present system.