Georgism and Displacement

A less disruptive land value tax

Georgism is having a moment. It’s not hard to see why: while Georgism is far from a new idea, modern problems like housing shortages and climate change are lending new urgency to land use policy. While a land value tax (LVT) may only be one part of a broader land use program, LVT proponents argue compellingly that it would alleviate housing scarcity and encourage more livable, vibrant, and sustainable cities, while efficiently raising enough tax revenue to fund new public investments. I won’t rehash the arguments or challenges here (if the concept is new to you, I recommend the links above as background before reading this post). Instead, I want to focus on an under-discussed issue with land value taxation: displacement. I will describe the problem as I see it, and then propose a simple solution.

The Dark Side of Efficiency

One of the core advantages of the land value tax is that it incentivizes productive land use. At its best, LVT is an admirable engine of free market efficiency, remaking vacant lots into apartment buildings. However, the dark side to this efficiency is displacement. Consider, for example, a retiree or public school teacher living in a modest house in an increasingly popular neighborhood. As the desirability of the neighborhood increases, so too does their land value tax burden, until ultimately they are forced to move out so their home can be put to a more economically efficient use. And unlike in the current housing market, they will not be compensated with accumulated equity, since the market value of their house will reflect only the improvement value and not the increased land value. The improved land use efficiency may help the city, but only at the expense of those who have already built a life there.

I want to be clear, however, that stasis is not a viable solution. Population growth, economic productivity, and climate change all require changes to the status quo. We cannot make it our goal to encase existing communities in amber and avoid displacement by avoiding change. But neither can we sacrifice the least privileged on the altar of progress. Not only is that inhumane, it is self-defeating: the abuses of Robert Moses¹ and others like him helped build the coalition for a legacy of veto points and suspicion which thwarted much future development. Similarly, a land value tax policy that does not address displacement will sow the seeds of its own undoing. A sustainable answer must synthesize the insights of both change and stability, bulldozer and vetocracy.

Fighting Displacement With Rent Control

For inspiration on how to proceed, let’s consider a frequently derided but enduringly popular policy: rent control. As Jerusalem Demsas recently wrote, the appeal of rent control is not that it is economically optimal (it isn’t) or that it will solve the housing crisis (it won’t). Rather, it is simply that it is a salve for displacement. I agree with this view of rent control, but I also want to stress that the benefits come at significant cost. In particular, it disincentivizes housing production, and it leaves long-term renters economically trapped when they might otherwise prefer to move. Still, the core insight here is solid: as effectively a transfer to existing renters, rent control reduces housing-cost-related displacement.

But what if we could use a more direct transfer? Rather than prevent rent increases, we could simply pay for them. Ideally in a way that avoids market distortions, and that leaves renters with equity that they (like homeowners) can take with them if they move. This is theoretically possible but challenging to design, and I haven’t seen anything that strikes me as a satisfactory and workable proposal. But in the analogous problem of land value tax displacement, I think there’s actually a simple and elegant solution.

LVT Transfer Payments

Let’s turn back to the Georgism case. Imagine first that we have a land value tax system, with accurate property value assessments, and a tax rate at or near the full value of the land rent. My proposal is as follows: every time tax increases on a residential parcel, the government issues a bond backed by the next 20 years of the net increase in tax payments from that parcel and gives the proceeds to the residents.² For example, suppose the tax on a given parcel increases from $10k/year to $12k/year. At a discount rate of 5%, the net present value of this $2k increase over 20 years is about $25k. If the residence is owner-occupied, this $25k would go directly to the homeowner, while if it is a rental, it would be distributed among the renters.³

This policy has several benefits:

• It mitigates displacement by sharing prosperity with residents impacted by increasing prices, and does this without trapping anyone in their current dwelling.
• It is a universal policy. All residents are treated equally, removing the special treatment homeowners currently receive without reducing either homeowners or renters to precarity.
• It provides an onramp to implementing land value taxes in the first place: if incumbent homeowners need to pay higher taxes, they’ll be more amenable if they get a sizable check to ease the transition.
• Unlike most social programs which require negotiating funding sources, these rebates immediately fund themselves. The bonds are revenue-neutral to the government over a 20-year horizon, and revenue after 20 years is pure upside.
• In contrast to policies that rely on price controls, it preserves market-based pricing incentives.

Footnotes