Sustainable urban development and land value taxation: The case of Estonia

Where real estate taxation differentiates between land uses, size of built structures, developed and undeveloped land, it has an influence on the decisions of landowners what and how to build. Still, real estate taxation is often only used to generate a stable source of revenue for the public administration, rather than as an active control mechanism in land policy and planning, despite its relationship with urban development. As a form of real estate taxation, a tax on land values only is recurrently discussed in literature to have beneficial effects for urban development. Planners who propose a land value tax (LVT) often argue that it leads to higher building density and a more frequent re-use of brownfields. LVT could curb undesired ‘urban sprawl’ and lead to a more efficient land use, compliant to zoning and urban planning designations. In most countries however, the real estate tax is determined by the value or size of buildings, and not by the value of land. Only a small number of countries has introduced a land-based only real estate tax system. Estonia is the only country in the European Union that in 1993 has done so, but there has been no case study of the effects of it on urban structure so far. This is surprising given its relatively rigorous implementation. In this paper, I will give an overview of the debate on land value tax and urban planning, before I briefly analyse the dynamics of land policy that ensued from the introduction of the land value tax on urban development in the Estonian capital Tallinn since its introduction in 1993. I compare my findings with neighbouring Riga in Latvia, which has retained a building-based taxation system. I conclude that, while statistical results indeed seem to suggest an increased capital-land-ratio and slightly increasing population density in Tallinn as opposed to Riga, both regions show considerable suburbanisation and sprawl, challenging the effectiveness of the LVT implementation in Tallinn. The result also points to the importance of other influences on urban development, and the difficulties in separating the effects of LVT from them.