Property tax as a policy against urban sprawl

Abstract

In theory, different property tax regimes can be used as levers to influence building development. In practice, however, property taxation might not be an effective policy tool for encouraging sustainable land use. For example, higher property tax rates can have contrasting effects on urban sprawl depending on whether the dwelling size effect or the improvement effect prevails. The dwelling size effect suggests that higher property tax rates lead to less urban sprawl because landowners choose to build smaller houses on smaller plots, while the improvement effect predicts more urban sprawl with a lower density of structures because a higher tax rate would encourage fewer multi-storey units. Therefore, it is essential to evaluate the empirical ex-post impact of various property tax regimes and tax rates on development to determine how to best use property taxes to encourage sustainable land use. This paper presents the findings of a literature review of ex-post empirical studies regarding the efficacy of property tax in encouraging sustainable land use in the residential sector. Results indicate that property tax can be an effective tool for reducing urban sprawl when the design of the property tax is carefully considered. Different tax regimes can affect construction activity in terms of location, the size of housing units and density patterns. For example, depending on the location, a split-rate tax system can be effective against urban sprawl because it encourages higher densities.