The Effect of Potential-based Land Tax on Land Utilization

Abstract

Land as a scarce resource requires efficient allocation, which includes efficiency in producing the highest value and efficiency in consumption conforming to people’s willingness-to-pay. Thus methods for controlling proper land utilization are essential for societies to reach sustainability. Like in many countries land and property tax in Austria is based on the profit that everyone could achieve using the land. This concept of a productivity-based land tax was developed centuries ago, when land in European economies was mainly used for agriculture. The implementation was simple, because soil quality, which is the main factor for possible productivity, could be determined. However, economies changed and the profit from agricultural areas – and thus the value of agricultural land – decreased with the effect that also the utilization of former agricultural areas altered. Therefore, also an adjustment in the tax system seems to be appropriate. In the paper the effects of such a change will be discussed. Determination of land tax should be objective and fair. The value of land is an objective criterion and since it reflects the wealth of the land owner it is also a fair measure. The value of land can be defined in different ways but the obvious meaning should be the market value, i.e., the revenue that will be gained if the land is sold. The market value is based on a number of factors including general economic situation and location, but one of the most prominent factors is potential use. Areas that allow a highly profitable use have a higher market value than areas with many restrictions on the use, e.g., due to regulations on groundwater protection or monument conservation. Austria has a large number of data sources that are suitable to determine land value in a mass appraisal approach (Muggenhuber et al., 2013). The implementation would be simple from a technical perspective, even if comprehensive political discussions are required. Land and real properties are also commodities within the capital market with rather stabile asset values over time. Thus, they also can serve as parking place for investments with minimal maintenance costs.. Therefore, people may purchase land in residential areas as a financial investment without improving the land with the consequence that the municipality is forced to create additional residential areas and provide the necessary infrastructure. This stresses the budget of the municipality and has a negative effect on resource management. If land tax is based on the potential of the land, land owners may rethink their strategy. The tax causes financial losses of the potential is not exhausted. Potential buyers will have an interest in the land, because they want to utilize the potential now. In addition, the political decision makers explicitly see the monetary effect of their decisions, and the beneficiaries become visible for the public