In the complex landscape of Maryland’s tax system, residents and businesses navigate a labyrinth of state income taxes, local income taxes, local property taxes, state property taxes, sales taxes, and corporate income taxes. Collectively, these taxes contribute approximately $38 billion to state and local governments. However, these essential revenue sources come with significant tradeoffs: income taxes may discourage labor and investment, sales taxes can inflate the cost of goods and services, and property taxes impede property development and affordable housing. This intricate and burdensome system begs the question: Is there a more effective alternative?
Enter the concept of a land value tax — a tax focused solely on the value of land, disregarding the value of buildings, personal property, and other improvements. The idea isn’t new; it has roots in the economic principles of Henry George, a 19th-century economist who argued that while people should own the value they produce themselves, the economic value derived from land should belong equally to all members of society.
This blog post delves into a bold proposition for Maryland: replacing the existing state income tax, local income tax, local property tax, state property tax, state sales tax, and corporate income tax with a single land value tax. Throughout the paper we discuss the merits of a land value tax and different types of land taxation and estimate potential revenues from a land tax in Maryland, discuss current land assessment data, explore the impact across counties, and provide a roadmap for reform. Our aim is to offer a clear, evidence driven perspective on how Maryland can take a revolutionary step towards a more efficient and equitable tax system.
What is a land value tax?
In economics, land is defined as all naturally occurring resources, including minerals, forest products, water, and of course, the actual land. A land value tax is a tax paid on all of these resources but not on the manmade structures on top of them. The difference between a land value tax and the modern property tax system is that property taxes currently tax both the land value and the value of any structures or improvements on top of it. A land value tax only taxes the value of the unimproved land.
The moral argument for a land value tax is that no person should profit from simply owning natural resources. Would any of us be comfortable with a group of investors purchasing the air and charging us to breathe it? Profiting by charging others to live on the Earth is just as ridiculous. With a land value tax, people could profit from their labor, investments that increase economic output, and improvements made to land — but not simply by owning the land itself.
The economic argument for a land value tax is equally as strong. Generally, if you tax something you get less of it. A tax on consumption reduces the consumption of goods and services. A tax on labor means fewer hours worked. Taxing property decreases development. But by taxing land–you will have less land? Nonsense, the amount of land is fixed. Hence, a tax cannot reduce the supply nor negatively impact the economy. This truth has led many economists to dub the land value tax the perfect tax.
The idea that a perfect tax exists may go against many people’s idea of economics. People on all sides of the political spectrum believe that taxes are inherently passed onto consumers. In most cases, this intuition is correct — tax increases usually lead to an increase in the price. However, the price increase is not because tax increases give suppliers the magic ability to raise prices. Tax increases reduce the profit margin for sellers, which in turn reduces the amount of suppliers, which increases the price. These price increases lead to fewer purchases and deadweight loss, a cost to society created by market inefficiency. The end result is that the tax shrinks the overall economy. For a complete example on how taxes shrink economic activity watch this Khan Academy video.
However, these principles do not apply with land, because the amount of land cannot shrink. Thus, it can be taxed without worrying about harming the economy. On the contrary, a land value tax may actually increase economic output as landowners are compelled to use land more efficiently. Owners of vacant lots, suddenly in possession of a new tax bill, would be quickly incentivized to develop their land into valuable community assets or sell to someone that can do so. Baltimore, with its more than 14,000 vacant homes, may stand to benefit the most from a land value tax.
We recognize that some of the economic theory surrounding land taxation can be difficult to understand and that this section may not be sufficient for folks who are new to the idea. Yet, we do not want to bog down this post with economic theory. Fortunately there are plenty of amazing resources already for those interested in better understanding land taxation.
Land Rents vs. Land Value
In order to properly discuss the potential revenue from land taxation in the next section it is important to differentiate between taxing land rents and taxing land values. While the term “land value tax” is used most frequently, most land taxation advocates are actually advocating for a land rents tax. A land rents tax is a tax rate based on the annual rental value of the land. If a plot of land can be rented for $2,000 per year, then a 50 percent land rents tax would collect $1,000. A land value tax, on the other hand, taxes a percentage of the sale value of the land. If a plot of land sells for $100,000, and there is an annual land value tax of 4 percent, then the land value tax would collect $4,000.
Economic theory suggests that the optimal land taxation rate would be 100 percent of the land rents, ensuring that no one could solely profit from land speculation. The land capitalization rate is expressed as the percent of the value of the land that it can be rented for each year. A 2023 survey estimates that the current capitalization rate in the United States is roughly 6.5 percent. Thus, theory suggests that the optimal land value tax would be 6.5 percent.
Note that a 100 percent land rents tax is mathematically equivalent to the state owning all the land and leasing it out at market value. When this collective ownership of nature is paired with a universal dividend, it ensures that all of us benefit equally from nature.
Budget impact
Eliminating Maryland’s state income tax, local income tax, local property tax, state property tax, state sales tax, and corporate income would leave a $38 billion hole in the budget. In this section we explore a few different studies in order to estimate the land value of the state and thus the potential revenue generated from land taxation.
New Estimates of Value of Land of the United States — William Larson
This 2015 paper published by the Bureau of Economic Analysis estimates that the total value of Maryland land in 2009 was $470 billion. If land values have continued to grow at the same rate of GDP, then Maryland’s land would be currently valued at $660 billion. Thus, based on this paper, Maryland could replace the $38 billion raised in other taxes with a 5.7 percent land value tax. If Maryland opted to tax land values at 6.5 percent then it could eliminate all other forms of taxation and raise an additional $5 billion in revenue.
Metropolitan Land Values — David Albouy, Gabriel Ehrlich, Minchul Shin
This research published in The Review of Economics and Statistics (2018) estimates that urban land values alone were valued at more than twice the GDP in 2006. The paper also estimates that in 2006 the value of land in the Baltimore metropolitan area was $275 billion. If land values increased with GDP, then Baltimore land values would be worth $470 billion today–suggesting that the Larson study dramatically underestimates land values across the state.
If land values represent twice the GDP of the state ($480 billion) then the total value of Maryland land would be approximately $960 billion. Based on these estimates, Maryland could tax land values at 4.0 percent and remain budget neutral while eliminating all other taxes. If Maryland taxed land at 6.5 percent, it could eliminate all other taxes and raise an additional $24.4 billion, enough to provide every adult and child in Maryland with an annual $4,000 dividend. According to PolicyEngine, this dividend would cut child poverty in the state by 66 percent and overall poverty by 46 percent.
Trickle-Up Economics Assessing the Impact of Privatized Land Rent on Economic Growth — Australia Research Institute
While the US does not collect much land value data, other countries collect more granular data and are able to estimate more precise calculations. This 2018 paper from Australia estimates that land rents are approximately 20 percent of GDP. If land rents are 20 percent of GDP and Maryland captured this with a 100 percent land rents tax, Maryland could eliminate all other taxes and still have a $56 billion surplus. If this surplus was paid out as a dividend to all Marylanders, we would each receive $9,180 annually. According to PolicyEngine, this dividend would cut child poverty by 86 percent and overall poverty by 72 percent. If Maryland were to simply target raising enough to replace other taxes then it would need to tax land rents at 40 percent (land values at 2.6 percent).
While these studies vary widely as estimates of Maryland’s land value, all of them demonstrate that Maryland could forgo its current tax system in favor of a land value tax and result in a budget surplus.
Current Land Assessment Data and Problems
In Maryland, there are more than two million property accounts. Once every three years the State Department of Assessments and Taxation (SDAT) must appraise each property. For each appraisal, SDAT provides a land and improvements valuation separately. Assessments are supposed to be based on an appraisal of the fair market value of the property. However, these assessments, especially the land assessments, are essentially useless.
For example, take this block of homes in Butcher’s Hill. On one side of the street there are 7 row homes. Across the street are two larger vacant properties. SDAT values the vacant properties at a combined $154,300, with the land values at a total of $32,200. Meanwhile, the set of rowhomes has a combined assessed value of $2.1 million and an assessed land value of $560,000. These assessments are obviously wrong — two equal parcels of land, directly across the street from each other, one with an assessed value of $560,000 and the other with just $32,200.
Other methods of evaluating the accuracy of land assessments from SDAT also reveal major flaws. On November 7, 2023 a vacant lot in Locust Point, 1430 Cooksie Street, sold for $425,000. SDAT had the property assessed at $17,600. In fact, of all vacant property sold in Baltimore in November of 2023, the assessed value was just 11 percent of the sale price.
To pave the way for a land value tax in Maryland, the essential first step is to improve the accuracy of land assessments.
County Impact
Across the state, different local governments have vastly different budgets due to varying incomes, property values, consumption, and tax rates. Contributions to state coffers also vary widely leading to inequitable taxation and access to public goods and services. The first graph below shows the total state and local income taxes per capita for each county in Maryland. The second graph shows only the local tax revenue per capita for each county.
These graphs demonstrate the inequities of the current tax system. The poorest counties have the smallest budgets, and thus, the least access to public goods, resulting in disparities across education, public safety, and much more. A more equitable system would collect and distribute the tax revenue at the state level to ensure that each county had an equal amount to spend per capita. By shifting away from local property and income taxes and towards a statewide land value tax, we could bridge the resource gap between counties, fostering fairer access to essential public services and narrowing disparities.
For a more detailed breakdown of tax collection by county see this spreadsheet.
A Roadmap towards Land Taxation
While switching from the current tax code to a land value tax would almost certainly be an improvement, it’s unlikely to happen overnight. Still, a transition towards land taxation is possible.
First, the state must collect better assessment data. Lawmakers are more likely to take land taxation seriously with concrete revenue projections. In order to estimate revenue, the state must collect the best possible data. Thus, the first piece of legislation that could lead to a land value tax is simply a bill to mandate more accurate and annual assessments.
Another plausible pathway is for the state to allow local governments to tax land at a different rate than improvements, which is currently banned by state law. Imposing different rates on improvements and land, often called a split-rate tax, is rare but not unfound in America. Several jurisdictions in Pennsylvania tax land separately. In 1994, 12 years after Harrisburg began taxing land at four times the rate of buildings, Mayor Stephen Reed remarked that “The two-rate system has been and continues to be one of the key local policies that has been factored into this initial economic success here.” The number of vacant structures in Harrisburg declined from over 4,200 in 1982 to under 500 by 2001.
Following the success of Harrisburg’s land taxation, Allentown began taxing land at nearly five times the rate of improvements. Under the new tax plan 70 percent of residential parcels saw a tax decrease. Regarding the policy, US Senator Pat Toomey noted that “many of the properties that did pay more have new or better buildings on them.”
Currently, Detroit’s Mayor Mike Duggan is advocating for the state legislature to allow Detroit to implement its own split rate tax. A recent study found that under the Mayor’s plan, neighborhood homeowners would see their tax bills decrease by 18 percent. The report also estimates a 16.3 percent growth in the total value of taxable property over five years and a 10.9 percent increase in the city’s general levy over the same period. If the Mayor is able to mount the necessary political hurdles, the split-rate tax will appear as a ballot referendum in the November 2024 election.
Of course, Maryland could implement similar reforms. If the state allowed local governments to tax land at a higher rate than property, these jurisdictions could act as laboratories to experiment with reform. If these same localities saw success, then the state could explore taxing land at the state level. Baltimore, with similar issues in blight and vacant homes as Detroit, would be a prime target for reform.
Conclusion
Maryland’s existing tax code stands as a stark testament to inequity and inefficiency. The daunting task of enacting satisfactory reforms within the current system may span decades or even longer, with no guarantee of success. Instead of continuing to proceed with the status quo, Maryland should throw out its broken system and design a new one. While a single tax on land is possible, it’s important to note that retaining certain taxes, such as those addressing negative externalities like gas and tobacco, is crucial to protect the environment and safeguard the interests of third parties. By embracing a forward-looking approach that prioritizes fairness, transparency, and economic progress, Maryland can lead the way toward a more equitable tax landscape, one that fosters prosperity and equity for all of its residents.
