In many places a large part of what property tax is for is things like roads, water, sewer, police, fire, and schools.
For most of those how much money is needed for them depends a lot more on what is on the land than on the land itself. E.g., the amount of sewer capacity needed for a lot is proportional to the number of people who live on the lot. It thus seems sensible to have a tax that includes as a factor what is built on the lot.
I would go further and actually argue that you need more road and sewer capacity because someone inserted a blank patch of land between dense areas.
The tax is an incentive to develop when the land's value is high. The city is basically saying that you have an obligation to build something useful or sell the land to someone who will.
I'm interested to see what happens. I'm hopeful that it will be good for urbanization.
Surrounding towns will probably not do LVT, which will also be interesting.
Surface streets are obviously proportional to land area. So are water and sewage infrastructure, and they're massively more expensive than streets. As others have pointed out, water treatment and supply are handled by usage charges.