Do Land Value Taxes Curb Land Prices? Capitalization, Speculation, and Spatial Inequality in Loja, Ecuador

This study investigates the spatial heterogeneity of land value tax capitalization and its implications for housing affordability in Loja, Ecuador, using a novel dataset of 1419 repeat land sales (2010–2017). Employing instrumental variable approaches within both parametric (Spatial Error Models) and semi‐parametric (Generalized Additive Models) frameworks, we document significant spatial variation in tax capitalization effects. Properties located in the urban core experience a 2.5% reduction in land prices for each 1% point increase in the effective tax rate, with this effect diminishing by approximately 0.6% for every additional kilometer from the city center. This gradient reflects differences in land supply elasticity, proxied by proximity to the urban core. Although tax capitalization results in lower nominal prices near the center, it does not necessarily enhance affordability, as buyers face higher long‐term tax burdens. Moreover, institutional practices, such as systematic underassessment in rapidly appreciating areas and the shifting of fiscal burdens to slower‐growing areas, undermine the intended price‐stabilizing effects of the tax and exacerbate equity concerns. The findings emphasize the importance of complementary policies aimed at curbing land market financialization and implementing administrative reforms to better align value capture mechanisms with rapidly rising land values, particularly at the urban fringe. As the first empirical analysis of land tax capitalization in Latin America, this research contributes to the methodological understanding of spatial heterogeneity and provides critical insights for the design of equitable and effective urban fiscal policy.