Memorandum by the Land Value Taxation
Campaign (FLU 04)
PAYING FOR THE LONDON UNDERGROUND
1. SUMMARY AND
PROPOSAL
1.1 It is generally accepted that the operational
costs of London Underground can be covered by traffic receipts,
but capital costs (including replacement of life-expired rolling
stock and signalling equipment), must be financed from another
source.
1.2 The social benefit derived from public
transport operation is not an abstract good, but appears as land
value. Improvements in transport infrastructure give rise to increases
in land value. These "external benefits" cannot be captured
by the operators or infrastructure providers. A significant proportion
of the land value of Greater London is sustained by the operation
of railway services.
1.3 An ad valorem tax on these land
values (land value taxation, LVT) would automatically capture
increases in land value resulting from improvements in transport
infrastructure, along with all other land value. Thus, public
investment in such infrastructure would directly give rise to
an increased tax base and increased tax revenue, and provided
that it was inherently sound, a project could readily be financed
by borrowing on the assurance of an increased revenue stream.
1.4 All land in the area served by the London
Underground should therefore be subject to an ad valorem
tax as described in section 2.1 below, with a proportion of the
revenue potentially available for the financing of capital rail
infrastructure projects.
2. AIMS OF
THE LAND
VALUE TAXATION
CAMPAIGN
2.1 The Land Value Taxation Campaign is
a non-party organisation which was established with the aim of
securing legislation which would fundamentally change the basis
of public revenue in the United Kingdom. It proposes that existing
taxes on wages, goods and services should be progressively replaced
with a property tax on the rental value of all land. This is referred
to as land value taxation (LVT). The policy advocated by the Campaign
would ultimately secure 100 per cent of the rental value of land[1]
for the Exchequer, but it is recognised that, as with any radical
change in the tax system, a transition period would be desirable.
The Campaign therefore accepts that the introduction of LVT would
be phased in a series of deliberate steps.
2.2 Although the Campaign was established
to promote the case for a national land value tax, we would point
out that, as is the case with all forms of property tax, LVT is
suitable for all tiers of government and could be readily adapted
to any multi-tiered structure including devolved bodies in Scotland,
Northern Ireland and Wales, London and any future English regional
assemblies, as well as existing local authorities.
3. DISCUSSION
3.1 Broadly speaking, the operational costs
of London underground can be covered by traffic receipts.
3.2 Capital costs (including replacement
of life-expired rolling stock and signalling equipment) must be
financed from another source.
3.3 A significant proportion of the land
value of Greater London is sustained by the operation of railway
services. In the absence of such services, the capital would not
be able to function as an effective centre of commerce and administration.
The social benefit derived from public transport operation is
not an abstract good, but appears in the shape of land values.
Statistical techniques are available which make it possible to
determine the proportion of total land value which may be attributed
to transport infrastructure.
3.4 This is most easily seen where new railway
infrastructure has been provided. Recent examples are the construction
of extensions of the Docklands Light Railway and the Jubilee Line,
which have substantially enhanced land values over a wide tract
of east and south-east London. This has been reflected in house
prices and commercial rentals. In recent years we have seen many
other examples of this process at work; the building of the Victoria
Line pushed up land values in a whole swathe of north-east London,
whilst the Brixton extension had the same effect south of the
Thames.
3.5 At present, the advantages of transport
investment pass as a windfall gain to some landowners, whilst
others may be adversely affected by disturbance, pollution and
traffic noise. Compensation for the losers is often fortuitous,
and no satisfactory mechanism exists for public collection of
the value gained by the landowners who benefit. Those advantages
continue to be enjoyed indefinitely, so that a single contribution
extracted from one, or a few, obvious beneficiaries, before a
project such as a rapid transit line has commenced, is unsatisfactory
and insufficient payment for benefits which will continue, and
indeed grow, for decades.
3.6 In the most recent example, those with
property in Southwark, Bermondsey and Lewisham have, in effect,
enjoyed a windfall gain and can either cash-in when they sell,
sit back and enjoy the higher rents they can ask, or take out
a loan on the enhanced security—and all at the expense of
taxpayers at large. It is a strange state of affairs, and small
wonder that the Treasury is reluctant to commit public funds to
rail investment. It must be emphasised that in all these instances,
it is the underlying site values which have been enhanced.
3.7 It would be arbitrary to fix on the
relationship between land value enhancements and the corresponding
infrastructure improvements to which they give rise. A proportion
of all land value is attributable to public transport operations.
Of its nature, this value is "off system" and cannot
be captured by the transport system operators.
3.8 An ad valorem tax on land values
(land value taxation, LVT) will automatically capture, as public
revenue, a proportion of the land value attributable to public
transport operation. If such a tax were in place at a significant
rate, infrastructure investment would yield in a transparent way
a genuine return to the exchequer. This would provide a fair and
straightforward means of collecting the value created by infrastructure
improvements. Year by year, the tax would capture for the Exchequer
a proportion (or, if desired, the whole) of all land value, including
enhancements, whether due to infrastructure developments or anything
else.
3.9 Under a LVT regime, transport subsidies
would appear in an entirely different light. Most schemes could
confidently be expected to pay for themselves, and were this not
so, the cost of subsidy for social reasons would be transparent
and thus a matter for properly considered political judgement.
3.10 Without LVT, it is virtually impossible
to devise a formula which relates the benefits which property
owners receive from new or improved infrastructure and the contributions
those owners make to public funds. LVT provides a fair and straightforward
way of collecting the unearned site rental revenue resulting from
infrastructure improvements, and for compensating the losers also.
LVT is not arbitrary; provided that revaluations are carried out
frequently, the tax captures for the community the whole (or a
pre-determined proportion) of the value of all land, including
enhancements arising from infrastructure developments or any other
causes. At the same time it ensures that people whose property
is adversely affected receive compensation for their loss, since
they are required to pay less in land value tax thereafter.
3.11 A change from existing taxes to LVT
is desirable—indeed, overdue, for many reasons. The growth
in self-employment and the spread of e-commerce seriously threaten
the present tax base. But there would be particular benefits for
the railway industry. At present, Railtrack's own UBR assessment
is based on traffic flows, but under LVT, the land actually occupied
by the running lines would be regarded as highway open to the
public (the alternative use) and assessed at zero value, thereby
relieving the railways of a significant burden.
3.12 A further benefit concerns the setting
of investment priorities. If a system of LVT were in operation,
many of the external costs and benefits which are at present ignored,
would automatically be measured in the valuation process. It would
then be possible to conduct a more accurate assessment of the
costs and benefits of transport infrastructure and of the relative
merits of competing projects—for example, it would be possible
to establish if it was better value to put public funds into high-profile
prestigious schemes or projects having a more local impact.
4. "THINKING
THE UNTHINKABLE"
4.1 The assumption that capital expenditure
on the London Underground should be "paid for" other
than by fare-paying passengers is essentially a variant of the
"predict and provide" philosophy which has driven other
areas of public policy for the past fifty years. The difficulty
with "predict and provide" is that the predictions become
self-fulfilling because the provision drives demand in a direction
pre-determined by the authorities involved.
4.2 A variety of alternative policies are
possible, in which users would pay substantially higher charges.
These include:
4.2.1 fares are set to maximise revenue;
4.2.2 fares are set at a level high enough
to cover both operating costs and the cost of replacement of capital[2],
but with no further significant extensions or improvements to
the system being made;
4.2.3 fares are set so that traffic levels
match the capacity of the system at an arbitrarily set standard,
for example, not more than 10 per cent of passengers are standing
at any time.
4.3 Each of these policies would have far-reaching
consequences. Their immediate effect would be to encourage travel
by other modes, but the traffic on former British Rail lines in
the London area is already close to capacity at certain times
and road usage is constrained as it approaches saturation point.
Diversion to ex-BR routes and roads could, however, be checked
by fiscal measures such as parking taxes and congestion charging.
This would lead to demands for higher wages for those working
in Central London, and, in so far as commuting was discouraged
or prevented altogether, would create labour shortages and add
further to the pressure for wage increases. The capital would
become less attractive as a tourist centre; tourists would spend
less; there would be less demand for hotel rooms and for cafes
and restaurants, theatres and other places of culture and entertainment.
Profitability of businesses would fall, and this would be reflected
in lower land values. Just as support for public transport sustains
land values, so the withdrawal of support would lead to a decline.
But the consequences would not stop there, as businesses would
seek alternatives. Some might locate elsewhere in South-East England,
others to the provinces, yet others would take advantage of developments
in electronic communications. Other parts of Britain would become
relatively more attractive to tourists. The end state of affairs
is impossible to foresee, but it is not inconceivable that the
benefits would outweigh the disadvantages. Undoubtedly, patterns
of land value would change and under an LVT system would be captured
as public revenue.
4.4 The Campaign as such has no view as
to the desirability of such a course of action, but it could be
a serious option and we would urge that it be considered, and
the consequences examined, at the broadest possible level.
5. FOR FURTHER
INFORMATION
5.1 The London Rating (Site Values) Bill
of 1938-39 is an example of model LVT legislation. This would
obviously have to be updated and adapted to suit present circumstances
and to conform to the law in Scotland and Northern Ireland. Copies
are available or may be downloaded.
The URL is http://www.landvaluetax.org.uk/1939bill.htm
5.2 Proposals for a transition from existing
local taxes to a land-value based system are set out in the Campaign's
publication "Options for Property Tax Reform".
Copies are available or may be downloaded.
The URL is http://www.landvaluetax.org.uk/lvtprpsl.htm
5.3 Following a comprehensive study of local
taxation, commissioned in 1986 by Brisbane City Council and chaired
by Sir Gordon Chalk, KBE, LLD, formerly Deputy Premier of Queensland,
a report was published in 1989 in which the committee strongly
recommended that the city keep its existing system, based on site
values. This is essentially the stance advocated by the Land Value
Taxation Campaign. A copy of the summary of the Chalk Committee's
two-volume report is available on request or may also be downloaded.
The URL is http://www.landvaluetax.org.uk/brisbane.htm
5.4 The interrelationship between land value
taxation and planning are discussed in a document originally prepared
as a submission to the Royal Town Planning Institute. Copies are
available on request or may be downloaded.
The URL is http://www.landvaluetax.org.uk/planning.htm
March 2000
1 The term land is used here not in its legal sense
but is given its meaning as defined in political economy ie "that
part of the material world other than human beings and the products
of their labour". Back
2
This assumes that the fares required to cover replacement of
capital is less than the level required to maximise revenue, which
may not be the case. Back
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