Greening the Property Tax

This paper reviews the literature and policy discussions about the role of the property tax for land use. Various externalities of the development of land, such as new infrastructure needs, the loss of open space or air pollution due to longer commutes as people locate far from city centres, are not internalised fully by property taxes or other policy instruments and this is often thought to contribute to excessive land use and urban sprawl. The impact of property taxes on land use intensity and sprawl is ambiguous in theory, however, and it depends on tax design, as well as land use regulation policies and other taxes that can influence municipalities’ incentives to convert land for development. Yet, there is some evidence suggesting that higher property taxes can limit urban sprawl, in particular when the tax on land is higher than on structures, although effects are small given relatively given a limited price elasticity of land use. Various property tax design options are discussed that may help to better internalise land use related externalities.