<p>Highest and Best Use is based upon what is legally permissible.</p>
<p>&quot;The highest and best use considers only the uses that are legally permissible (meeting zoning, health, and public restrictions), physically possible (has adequate size, soil conditions, and accessibility), and is economically feasible (income is anticipated). The use that meets these criteria and produces the greatest net earnings (best returns) is the highest and best use.&quot;</p>
<p><a href="https://www.henrygeorge.org/ted.htm" rel="nofollow noreferrer">https://www.henrygeorge.org/ted.htm</a></p>

CC BY-SA 4.0
2024-06-09T11:46:28.617Z
But doesn't that go against the criteria for non-shiftability (full capitalisation) that the LVT shouldn't be use-discriminatory? 

From Dwyer "There has been some confusion in the literature on why such taxes cannot be shifted. The inability to shift a land value tax is not because it is a lump-sum tax (which it is not), nor because it is uniform in rate in all tax jurisdictions (which it need not be), but because the tax does not discriminate between different uses of land."

Or am I misinterpreting the word "uses"?
Victor Nielsen
CC BY-SA 4.0
2024-06-12T18:42:55.280Z
Not sure on the source material, but Dwyer discusses this at length in Taxation: The Lost History - https://cooperative-individualism.org/dwyer-terence_taxation-the-lost-history-2014-oct.pdf For example, "To be neutral, a tax on rent must be levied on the basis of the highest and best use, regardless of the particular actual use."
user13353
CC BY-SA 4.0
2024-06-17T09:18:07.747Z
It is actually from the same source. But from what I understand it his text, "highest and best use" refers to the highest and best permitted use. And the "particular actual use" refers to what the lot is being used for at this moment within its permitted use. So what he is saying is that the tax should not be based on what is currently on the lot (because the building might not be the best use any more) but what could be there instead within the permitted land use determined by market price of the land.
Victor Nielsen
CC BY-SA 4.0
2024-06-09T04:53:37.897Z
2024-06-09T04:53:37.897Z
user13353
<p>According to Dwyer (<a href="https://doi.org/10.1111/ajes.12082_3" rel="nofollow noreferrer">2014</a>), a land value tax should be based on the highest and best use. I interpret this as not taking into account the permissible use, meaning that people owning land in a zone that permits uses much lower than highest and best use face a significant disadvantage, because they would not be able to sell their land at a value compensating them for the land value tax. Here is an excerpt explaining it:</p>
<blockquote>
<p>There has been some confusion in the literature on why such taxes
cannot be shifted. The inability to shift a land value tax is not
because it is a lump-sum tax (which it is not), nor because it is
uniform in rate in all tax jurisdictions (which it need not be), but because the tax does not discriminate between
different uses of land. The land value tax should be levied according
to potential use, determined by the competitive market price, not
based on its current use. A land use tax can be shifted, and so can a
tax based on current rental income, which happens when assessors
improperly assign a value to land according to its current use. In
those cases, the tax can be shifted, and it is no longer neutral. One
technical feature of land values that explains certain puzzles is that
the optimal assessed value should always be based on the
second-highest bid for a parcel, not the highest. The value of any
site is always determined by the value that other users are deprived
of. This guarantees that a visionary who sees a use for land not seen
by others can still make an extraordinary profit from that insight. A
final note about this section is the surprising conclusion that a
revenue-neutral shift from existing taxes to land value taxes might
not result in any lowering of land prices. That is, the general
equilibrium result (the effect on aggregate land prices) might be the
opposite of what is expected by a partial equilibrium result (the
effect of land value taxes on a single site). Since tax capitalization
works in both directions, the removal of existing taxes should raise
land prices, and the imposition of a land value tax should lower them.
The result should logically be little or no change in aggregate land
prices. Of course, the price of some locations would rise and others
fall, but the net effect should be no change, although there are
complexities, discussed in Section 4.2. The net effect on land prices
is important in considering questions of compensation, which are
discussed in a later chapter. It means the transition to a land value
tax system would be much smoother than has often been anticipated.</p>
</blockquote>
<p>My question is, if LVT is assessed based on highest and best use (which it apparently need to be to ensure that efficiency conditions holds), doesn't that mean that planning gain (the gain in value from rezoning land from for example farmland to residential land) is not captured and would need a separate planning gain tax?</p>
<p>If LVT was based on highest and best permissible use, it would completely capture planning gain since the land value would increase, meaning the land value tax would increase meaning that this tax increase would be capitalised into a lower possible selling price through the net present value approach. Is this not ideal? Or did I misinterpret the highest and best use?</p>

<pareto-efficiency><political-economy><optimal-taxation><land><rent>
If land value taxes should be estimated at highest and best use, wouldn't that mean that planning/zoning gain would not be captured?
Victor Nielsen
# If land value taxes should be estimated at highest and best use, wouldn't that mean that planning/zoning gain would not be captured?

(Asked by: username_0 on 2024-06-07)

According to Dwyer ([2014](https://doi.org/10.1111/ajes.12082_3)), a land value tax should be based on the highest and best use. I interpret this as not taking into account the permissible use, meaning that people owning land in a zone that permits uses much lower than highest and best use face a significant disadvantage, because they would not be able to sell their land at a value compensating them for the land value tax. Here is an excerpt explaining it:

> There has been some confusion in the literature on why such taxes
> cannot be shifted. The inability to shift a land value tax is not
> because it is a lump-sum tax (which it is not), nor because it is
> uniform in rate in all tax jurisdictions (which it need not be), but because the tax does not discriminate between
> different uses of land. The land value tax should be levied according
> to potential use, determined by the competitive market price, not
> based on its current use. A land use tax can be shifted, and so can a
> tax based on current rental income, which happens when assessors
> improperly assign a value to land according to its current use. In
> those cases, the tax can be shifted, and it is no longer neutral. One
> technical feature of land values that explains certain puzzles is that
> the optimal assessed value should always be based on the
> second-highest bid for a parcel, not the highest. The value of any
> site is always determined by the value that other users are deprived
> of. This guarantees that a visionary who sees a use for land not seen
> by others can still make an extraordinary profit from that insight. A
> final note about this section is the surprising conclusion that a
> revenue-neutral shift from existing taxes to land value taxes might
> not result in any lowering of land prices. That is, the general
> equilibrium result (the effect on aggregate land prices) might be the
> opposite of what is expected by a partial equilibrium result (the
> effect of land value taxes on a single site). Since tax capitalization
> works in both directions, the removal of existing taxes should raise
> land prices, and the imposition of a land value tax should lower them.
> The result should logically be little or no change in aggregate land
> prices. Of course, the price of some locations would rise and others
> fall, but the net effect should be no change, although there are
> complexities, discussed in Section 4.2. The net effect on land prices
> is important in considering questions of compensation, which are
> discussed in a later chapter. It means the transition to a land value
> tax system would be much smoother than has often been anticipated.

My question is, if LVT is assessed based on highest and best use (which it apparently need to be to ensure that efficiency conditions holds), doesn't that mean that planning gain (the gain in value from rezoning land from for example farmland to residential land) is not captured and would need a separate planning gain tax?

If LVT was based on highest and best permissible use, it would completely capture planning gain since the land value would increase, meaning the land value tax would increase meaning that this tax increase would be capitalised into a lower possible selling price through the net present value approach. Is this not ideal? Or did I misinterpret the highest and best use?

**Tags:** pareto-efficiency, political-economy, optimal-taxation, land, rent

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## 1 answers

### Answer by username_1 on 2024-06-09. Score: 1

Highest and Best Use is based upon what is legally permissible.

"The highest and best use considers only the uses that are legally permissible (meeting zoning, health, and public restrictions), physically possible (has adequate size, soil conditions, and accessibility), and is economically feasible (income is anticipated). The use that meets these criteria and produces the greatest net earnings (best returns) is the highest and best use."

<https://www.henrygeorge.org/ted.htm>

> **Comments:**
> **username_0**: But doesn't that go against the criteria for non-shiftability (full capitalisation) that the LVT shouldn't be use-discriminatory?   From Dwyer "There has been some confusion in the literature on why such taxes cannot be shifted. The inability to shift a land value tax is not because it is a lump-sum tax (which it is not), nor because it is uniform in rate in all tax jurisdictions (which it need not be), but because the tax does not discriminate between different uses of land."  Or am I misinterpreting the word "uses"?  
> **username_1**: Not sure on the source material, but Dwyer discusses this at length in Taxation: The Lost History - https://cooperative-individualism.org/dwyer-terence_taxation-the-lost-history-2014-oct.pdf For example, "To be neutral, a tax on rent must be levied on the basis of the highest and best use, regardless of the particular actual use."  
> **username_0**: It is actually from the same source. But from what I understand it his text, "highest and best use" refers to the highest and best permitted use. And the "particular actual use" refers to what the lot is being used for at this moment within its permitted use. So what he is saying is that the tax should not be based on what is currently on the lot (because the building might not be the best use any more) but what could be there instead within the permitted land use determined by market price of the land.  

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