Explainer: Taxing rezoning windfalls (betterment)

In its 2021 budget, the Victorian government announced a new tax on windfall land value gains from rezoning (also known as a betterment tax) This note explains the economic principles behind such a tax, the benefits of applying such a tax, implementation issues that need to be considered, and lessons from the operation of similar taxes elsewhere. Property is, conceptually, a finite bundle of rights. Rezoning grants additional property rights to owners of an existing set of property rights. Those new rights could instead be sold at a market price. A tax on the value gain from rezoning at anything less than 100% is equivalent to selling the new property rights from the community to the current property owner at a discount. Just like selling other property rights from the public to the private sector does not add to market prices in property markets, nor does selling rezoning rights. A tax on rezoning windfalls is uncommon not because it is a bad tax but because it is a good tax.