Property Taxes are Land Value Taxes
Under current conditions in most locations, with some reasonable assumptions, it seems like we can say that property taxes are land value taxes. We already have de facto Georgist tax policy. We just need to raise the rates and make them more universal and equitable.
Let’s start with some basic stipulations:
The price of a structure is the cost to build it.
The rent on a structure reflects the yield the market requires, based on the price.
The rent on land reflects the utility and scarcity of the location.
The price of land reflects the yield the market requires, based on the rental value.
The cyclical neutral yield on residential structures with average maintenance requirements is about 8%.
The cyclically neutral yield on land is about 3%.
Actually, the relative yields don’t matter that much to the conceptual point here. The main assertions driving this analysis are that the price of the structure is fixed by the cost of construction, the rental value of the whole property is fixed by supply and demand for living in that location, and the structure and land are bundled so that the value of one affects the value of the other.
Let’s say there is a house worth $600,000. $300,000 is structure and $300,000 is land (locational amenities and/or scarcity premium).
The rent is based on local supply and demand for homes, and the rental value above and beyond the rent required to provide an 8% return on the structure flows to the land value.
Now, let’s add a 2% property tax.
The $2,750 rent was based on supply and demand, so it doesn’t change. Since it doesn’t change, the quantity demanded doesn’t change. So, the $2,750 rent still seeks a $300,000 structure, which requires $2,000 rent. That leaves $750 that flows to either taxes or land value. At a 2% property tax rate, the tax bill would be $600/month, leaving $150 of excess rent still not claimed by the cost of construction or taxes. That would equate to $60,000 land value.
In other words, where there is any amenity or scarcity value attached to land, any marginal increase in property tax is a 100% land value tax.
In this scenario, the market would settle at an equilibrium that was physically equivalent to the starting scenario. That street would fill up with $300,000 homes. They would just be homes on $60,000 lots instead of $300,000 lots.
On homes that don’t have any residual location or scarcity value, property taxes increase the rent required on a given structure, and so the market would settle at some middle ground, depending on demand elasticities. A 1% property tax increase would lead to a combination of lower prices/high rents totaling about 10%.
But, even in this case, I think it would reflect Georgist goals, because from a tenant’s point of view, it would raise the rent on structures, but not raise the rent on locational amenities. That would nudge demand toward locational amenities.
I suppose that would also nudge demand toward places with a scarcity premium and raise the relative demand for moving to regions where zoning is a binding constraint on supply.
Also, property taxes would affect improvements. If a $100,000 addition was built on the $300,000 structure above, the total rental value, whether taxed or untaxed, would increase to $3,417. However, the additional property tax would lower the residual land value by $40,000, so the net property value would only increase by $60,000.
However, the rental income would reflect the cost of construction. The post-tax yield is higher on the property with the property tax than on the property with no tax, in this example. The owner gains in yield what they lose in value in the higher property tax scenario.
This would raise the supply curve on structures and raise the demand curve for amenities. That would be fine. Right?
The analysis starts to get tricky on some margins, but the main point here is that, where homes have market value higher than the cost of construction, property taxes are land value taxes.
This is the kind of framework that changes how you look at every property tax bill you've ever paid. The core insight — that where home values exceed construction cost, the tax burden falls entirely on land value — is elegant and has real implications for how investors should think about hold strategy in high-land-value markets versus construction-cost-dominant ones. The part that deserves more attention is the improvement penalty. If a $100K addition only nets $60K in property value because the tax erodes the residual land value, that's a meaningful drag on the ROI of value-add strategies in higher-tax jurisdictions. Investors running rehab numbers in markets with 2%+ effective tax rates should be modeling that compression explicitly, not just slapping the tax rate on the improved value as a line item. The other thread worth pulling: if this framework holds, then property tax abatement programs aren't really subsidizing structures — they're inflating land values by letting that residual rent flow back to the lot instead of the municipality. That reframes a lot of "pro-development" tax incentives as land speculation subsidies. How does this analysis shift in markets where construction costs have spiked above replacement value — does the land residual functionally disappear, and does the tax then behave differently?
New Hampshire has entered the comments.....at least as a demonstration of how reliance on property taxes can make certain towns permanently poor through distortions in public school financing. The Libertarian solution is to eliminate public education, and in that area the state is at the vanguard.
For the record, I approve of property taxes as long as they're paired with income and consumption taxes. New Hampshire is conducting in an experiment in how many public services can be degraded as long as they can suck on the prosperous teat of the socialist hellscape state along their southern border.