Memorandum by the Land Value Taxation
Campaign (GF 03)
GAP FUNDING: THE IMPLICATIONS OF THE EUROPEAN
COMMISSION RULING ON GAP FUNDING SCHEMES FOR URBAN REGENERATION
IN ENGLAND
FOREWORD
The Land Value Taxation Campaign ("the
Campaign") was formed in 1987 as a non-party body advocating
a national land rent charge to replace conventional taxes which
weigh on wealth creation. This national land rent charge is known
historically as land value taxation ("LVT").
PART A—REPLIES
TO QUESTIONS
I. The Campaign notes that the Environment,
Transport and Regional Affairs Committee ("the Committee")
has set out five lines of inquiry which it wishes to follow. The
Campaign has numbered these, 1 to 5, in the order adopted by the
Committee, but has chosen to respond to 1, 2, 4 and 5 before turning
to 3.
II. LVT is a property tax which lies exclusively
on that portion which represents purely the location value or
site value of land: buildings and other improvements are not included
in the valuation.
III. The Campaign uses the word, land, in
the meaning attributed to it in classical economics, as a factor
of production distinct from labour and capital (which is man-made
and represents "stored labour"). This use is different
from that given it at law, and different again from its treatment
in book-keeping.
IV. General explanatory points on the nature,
operation and effect of LVT are set out in Part B, below.
1. The contribution that GAP funding has made
in regenerating derelict and other difficult sites in areas of
"market failure"
(a) The Campaign points out that the market
in land, as distinct from the market in man-made capital goods
and consumer goods, is inherently imperfect. The price mechanism
does not work with land. Land and manufactured goods respond differently
to price stimuli. If plums, sunglasses, bricks, tiles, window
frames, or cement are in short supply, rising prices will promote
increased production or the movement of existing stocks from where
there is no scarcity. Land, however, is not reproducible nor is
it moveable. All that can happen when demand for it rises, is
an increase in price, followed by further increases as demand
persists. Niggardly planning decisions may locally aggravate the
problem, but ultimately land is, literally, a natural monopoly,
and behaves as such.
(b) Land does not depreciate—indeed,
it usually appreciates, with no effort being required on the part
of the owner. There is currently no actual outlay or "holding
charge" on unused bare or derelict land. Even valuable city
centre land which could sustain a princely commercial development,
makes only a derisory contribution to the public revenue, in the
form of UBR, if used only as a car park or advertising site.
(c) LVT is a powerful incentive to land
holders to bring land into good productive use or make way for
others who will do so. LVT thereby ensures, not so much that there
is more land (for its supply was effectively fixed at the Creation),
but that the land that already exists becomes generally available.
Furthermore, LVT is to be seen as a replacement tax, so that removing
or abating existing taxes concurrently increases the rewards accruing
to productive effort.
(d) When the Committee complains of "market
failure" in this context, it is condemning the whole basis
of land holding in this country. The Campaign agrees. The "failure"
is intrinsic.
2. The consequences of the European Commission
ruling for urban regeneration
(a) The inherent flaw in the land market
under prevailing conditions of land holding, is such that the
availability or otherwise of GAP funding is not, and can not be,
significant overall.
4. The scale of public funding required to
enable alternative schemes to produce equivalent results
(a) No additional public funding would be
required to implement the Campaign's proposals; on the contrary,
since that which ought to be taxed is at present not taxed, there
would be an advantage to the Exchequer. The cost of a survey of
the entire land area, to assess site value alone, ignoring buildings
and other developments in and on the land, would be less than
the cost of a periodic updating of the valuations for the UBR
and the council tax. The other benefits of a switch from the current
panoply of taxes to LVT would be huge, and would draw in their
wake the basic resolution of the brownfield land dilemma, at no
extra cost.
5. What provisions should be contained in
a new regeneration framework
(a) Introduction of LVT would require an
Act of Parliament. Brownfield sites would not require special
legislative mention or treatment, except possibly in one set of
circumstances as described in the comment on 3 below.
3. What alternative schemes should be considered
to replace gap funding
(a) The Campaign proposes the introduction
of LVT.
(b) The present system of property taxes
rewards inaction and speculation whilst penalising development
in line with its extent and quality—indeed, it acts as a
brake on the profit motive! With LVT in operation, it becomes
uneconomic to hold land out of use or use it at well below its
potential. The owner needs an income to enable him to meet the
LVT bill, and is thus under an incentive to bring the land in
to good use or make way for another who will. As taxes are taken
off buildings and other improvements, there is every encouragement
to make optimum developments.
(c) There is much interest in use of so-called
"brown" land. In so far as "brown" land is
simply land which once was gainfully used but, though fit for
good use, is now unused or sadly under-used, the position is straightforward,
and LVT will resolve the issue with no further ado.
(d) Where "brown" land is contaminated,
it is obviously less valuable than good land, depending on the
extent of the pollution. The principle, that the polluter pays,
is not always practicable in present circumstances; we are not
starting from scratch today since the contamination may have occurred
long ago. The current rental value of such contaminated land is
low, and, under an LVT system, the duty payable by the land holder
is likewise low. The cleaning operation is regarded as a non-taxable
improvement for whatever period it is decided to stipulate in
the legislation (say, 20 years or on earlier transfer of the holding),
after which the cleansing work is treated as having "merged
in the land" (ie its effect is permanent and the land is
for practical purposes indistinguishable from other, good land)
and the site is thereafter subject to a new, higher assessment.
If, for some reason, central or local government were to pay in
whole or in part for site rehabilitation, then the owner would
be allowed no abatement of the land value duty beyond the portion
that related to his own contribution. LVT would then recover government-funded
clean-up costs as soon as the rehabilitated land became available
to the holder.
(e) There may be rare circumstances in which
the cost of restoring a site to usable condition, exceeds the
assessed and foreseeable future value of the land in question,
giving it notionally negative value in its contaminated state.
In such cases, the only option, short of doing nothing, is to
have the land cleansed at public expense, for social reasons.
The landholder is then required to pay the levy on the newly assessed
site value. Any shortfall has to be written off as public expenditure
on the environment. It is of course perfectly possible that removing
an eyesore and potential hazard, will affect neighbouring sites
and raise their value. This would recoup the apparently lost public
money. Only LVT operates in this fair and just manner.
LVT would cut the tendency, to urban sprawl
and would act to stimulate and reward regeneration of run-down
inner-city areas. It would prompt the rehabilitation of dilapidated
properties and bring vacant properties back on the market. It
would be expected to reduce pressure to extend development on
green-field sites. Nevertheless, some people probably prefer to
live in and commute from the country, or indeed to work in suburbia
or the country, and it is not part of the Campaign's brief to
argue that they be prevented from doing so. The point the Campaign
is making is that LVT would remove a barrier—an inherent
imperfection in the current land market—which today is certainly
forcing people and businesses out of the inner city, willy nilly.
PART B—GENERAL
EXPLANATORY POINTS
ON THE
NATURE, OPERATION
AND EFFECT
OF LVT
(a) The value of land is most assuredly
affected by such purely natural factors as climate, topography,
the presence of minerals, and inherent soil quality. Primarily,
though, the value of land arises from the presence and activity
of people—where they live, work, and disport themselves;
the infrastructure they create and maintain; the organs of government
they establish. What has been achieved and is in place now, is
important but it is not alone decisive: what defines land value
is belief in the morrow, in the maintenance of civil order and
of a viable economic and social fabric—in short, confidence
in a flourishing future for the nation.
(b) The Campaign urges the case for revenue
raising on the benefit principle, whereby payment is made for
benefits actually received. LVT is in fact so based. The landholder
pays a duty in return for exclusive enjoyment of the natural and
social advantages of his site. What he achieves thereafter, he
is free to enjoy untaxed.
(c) LVT makes land owners accountable to
the community through the annual payments they are required to
make in exchange for the benefits they gain from holding land,
in direct proportion to the value of those land holdings. LVT
thus balances the rights enjoyed by the beneficial holders of
land with the duties they owe to the community at large.
(d) LVT progressively reduces the selling
price of land, as the percentage levied on the annual rental value
is increased. Making land more affordable significantly widens
the scope for access to land and for use of land in a variety
of ways, and it facilitates acquisition for community purposes
where this is held to be desirable.
(e) Where land holding is conditional, restrictions
on use are reflected in the assessment for LVT, to establish an
equitable arrangement. Right of public access and designation
as a conservation area or SSSI, for example, are, like any other
encumbrance, reflected in the assessments, providing compensation
to land holders who do not enjoy unhindered use of their land.
(f) Existing taxes such as income tax, VAT,
and motor fuel duties flout verifiable experience of geographical
and land value considerations. Their effect at marginal locations
(where the LVT assessment would be zero or very little) and in
respect of marginal activities (such as crofting) is disproportionately
heavy, and is in some circumstances the reason that such activities
are not viable—the activity could sustain a livelihood but
not when tax has to be paid as well. LVT allows remission of existing
taxes and encourages marginal activities: indeed, it promotes
locations which are now sub-marginal so that they come to provide
an acceptable livelihood.
(g) The principle of LVT is payment for
locational benefits received. Whether they are gainfully used
or not is a matter of personal choice, but, in aggregate, holders
will undoubtedly be stimulated to make better use of idle or wastefully
used land. This is a chief benefit from LVT.
(h) LVT is fair in its incidence, the yield
is certain, the administrative costs are low once the system has
"bedded down", and avoidance and evasion are in practice
impossible, land cannot be hidden or removed to cyberspace, and
in any case it is a condition of retaining the land holding that
the annual duty is paid.
(i) A switch to a system of LVT does not
prejudice a proprietor in possession. As the site value of land
is collected, taxes on buildings and other improvements attached
to land are abated, as are taxes on production (wealth creation),
the earnings of labour and capital and trade. Titles remain. No
confiscations are involved. Security in possession is guaranteed
by payment of the annual rental value of the land in the form
of LVT.
(j) Land holders actually have little or
no reason to fear LTV. Few (individuals or corporations) will
be solely beneficial owners of land. Most will perform work (by
hand and brain) and will be providers of capital (man-made, coming
from savings). These, and earnings from them, will be untaxed,
and land now marginal or sub-marginal will be able to sustain
productive economic activity. With full LVT, doing no more than
holding land will not produce an income stream for private enjoyment;
but using land properly will become fully remunerative.
(k) Information on land holdings is compiled
in the LVT registers and maps, and is of course made public.
(l) The Campaign is firmly of the opinion
that the taxation of land values and the remission of existing
taxes that it makes possible, are a necessary prerequisite for
the development of "brown" land.
David Mills and Henry
Law
26 June 2000
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