Hong Kong is one of the most prosperous countries on Earth, in 2019 it topped the rankings for economic freedom, while also having one of the longest life expectancies out of any location on Earth.

But on the other side of the coin, several problems are currently plaguing the city, especially in recent years. The Chinese Communist Party (CCP) has, for several years, continued to tighten their grip over the functions and liberties of the city, leading to many demonstrations against their rule, most notably the 2019-2020 protests which captured eyes around the world. 

But this isn’t the only major issue that exists within the city’s policies, there exists another which is putting a stranglehold on the people of Hong Kong. It doesn’t exist within the realm of politics or civics, rather it exists because of an ever increasing demand pushing up against an item with fixed supply; an item whose availability is being artificially restricted, both privately and publicly. Hong Kong has an enormous land problem in the form of tremendously high land prices, and it’s not being captured correctly for the public benefit.

Selling the Ground

Hong Kong’s revenue collection is quite special in how much they draw their revenue from land. Economics identifies land, and other resources which are relatively fixed in supply (i.e. non-reproducible) as perfect tax bases for both efficiency and equity purposes. 

In line with this, at many points throughout history, different localities with their own economies have seen varying implementations of taxes on resources which are fixed in supply, to generally great success. A few examples include Norway with its oil reserves and New York City with its land during the 1920s. The former created the world’s largest sovereign wealth fund while the latter created the largest housing boom seen in the Big Apple’s history, ending its housing crisis and growing its population extensively.

Hong Kong’s experience with the benefits of collecting revenues from its most important non-reproducible resource, land, was similar. The country was able to draw in massive amounts of revenue from publicly capturing its land’s value, helping it fund its incredibly expansive public transit system effectively, without cutting into the incomes of working Hongkongers or business investments into the growing island.

But, there was one enormous difference that separated Hong Kong’s land value capture experience from somewhere like New York City’s, it was done through selling the land on leases, instead of taxing it annually.

High Land Prices Hurt Everyone

In order to fulfill its revenue requirements, the government of Hong Kong has relied on land sales to make an ample amount of income from their land. While there does exist a property tax, it only collects 15% of the rental income, which also includes the building in its assessment, leaving even a smaller percentage of land’s rental income for tax collection.

The way Hong Kong has carried out these sales is by nationalizing the ownership of their land under a branch of their government known as the Lands Department. The department is responsible for selling land to prospective users, and in turn bringing the land revenue to the public coffers.

However, there exists two major caveats to this policy:

1. While the government has never formally announced it, many residents and scholars studying Hong Kong believe the government has a high land price policy, purposefully restricting the supply of land so that the government can maximize its revenues. Whether or not it’s true, the very existence of the theory speaks to the rent-seeking incentives carried forward by relying on land sales.
2. When Hong Kong sells its land to private owners, it loses its ability to tax the value of the land (save for the land portion of the aforementioned property tax). Not being able to recoup the value of land when a sale is completed leads the owners of land leases to perverse incentives that will be covered shortly.

Through a combination of Hong Kong’s incredibly attractive investment opportunities, that the annual collection of land values were foregone for sales of land titles instead, and that its supply has been made artificially scarce, Hong Kong’s land prices have soared as the city has grown into a commercial hub. This, in turn, has dramatically increased property prices, with the average in 2020 being a staggering 1.25 million US dollars.

This huge land boom has led to several problems. High land prices make land speculation quite profitable. Unlike other assets, land’s non-reproducible nature makes speculation almost purely harmful since there can be almost no increases in the supply of land to offset it. As a result, land becomes more scarce and expensive than it needs to be, further worsening property affordability.

You may have been thinking of land reclamation as offsetting the issue, but the keyword there is reclamation, it takes what was once underwater or unusable land and turns it into land fit for use by people. The land was always there waiting to be reclaimed for use. As such, the total amount of surface area that a country can rely on still remains fixed, leaving the land problem as glaring as it always has been.

Hong Kong is no different, recently the land bubble it has cultivated has begun to pop as the prices of land and properties have seen a steady drop since 2021. Hong Kong’s land sale revenue, in turn, has seen staggering losses in just a few years, forcing the city to rely more on revenues from taxing work and investment.

Clearly, something must change. Hong Kong needs a way to capture its land’s value without all the inconsistencies, speculation, and lack of affordability brought on by land sales. The answer is quite simple, and is the true preferred way of economists when it comes to compensation for exclusive ownership of land.

Tax the Land’s Value

The answer to how the land’s value should be collected is not for the government to act like any other landowner and sell off the land on high prices that are left well alone in taxation afterwards, but to instead charge the owners of land as much of their plot’s value as possible. Instead of land sales, implement a land value tax (LVT) while constantly re-valuing it annually to account for any growth and change. The tax should be levied by the treasury equally on all land, be it land owned by the Lands Department or land owned on leases by private owners. 

This way, Hong Kong can maintain the consistent and beneficial revenue from land without the downsides. Requiring consistent payments would make holding land idly unprofitable, making artificially restricting the supply of land whether by government or private policy a burden instead of a piggy bank. At the same time, a land value tax reduces the upfront price of land, further adding on to the reduction in speculation while stabilizing lending. Discouraging resources from being wasted on idle speculation and hoarding would make access to the land cheaper for those wanting to make an active, beneficial use of it.

Moving towards a land value tax and away from land sales would allow Hong Kong to recoup tons of revenue it lost when selling off the land fully with all the added benefits mentioned above. At the same time, the extra revenue could be used to reduce taxes on production the government had to lean into in order to avoid revenue issues. 

Shifting the burden of taxation from production of goods and services and onto the non-reproducible assets of the economy would work double duty in enhancing efficiency and reducing inequality. Most importantly though, it would bring about economic justice, letting Hong Kongers keep what they’ve worked for while compensating them for losing access to what they need but can’t make more of.

With that in mind, the answer is clear.

The Necessary Switch

If Hong Kong wants to deal with its land problems, it must change its land revenue system from one primarily based on sales, to one based on annual taxation.

High land prices caused by a lack of consistent taxation, both of the public and private owners of land, and whether mandated by policy or not, aren’t sustainable for the populations that eventually face them. It matters little whether or not the profits are private or public, letting any profit-seeker find its strength by in the exclusive ownership of a non-reproducible asset like land invites bad actors, backwards incentives, instability in the form of bubbles and bursts, and severe inequality.

If all signs are pointing to a drop in land values and a bursting of the bubble for what is perhaps humanity’s most vital resource, then it’s clear the ground can not be treated as a moneymaker for its owners. Thus, if Hong Kong wants to prevent its land prices from ever rising to unaffordable levels as seen in the past and find a revenue system that doesn’t punish its people for working or investing, the city must charge the annual bill for exclusively owning a piece of the island.

Of course, the tightening of the Chinese Communist Party’s grip around governance is the primary concern the island faces, and is a particularly discouraging sight with how recently they hopped on the land sale train compared to Hong Kong, and the disastrous effects it has had on the economy. 

But if change is possible, the city already has the framework to implement the one it needs in relation to the land; being able to reform its property tax to solely target land held either by the government or by private owners. What remains to be seen is when the initiative will, or even can, be taken to make the right move.