Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Written Evidence


Memorandum by Tony Vickers (LGR 31)

VALUE UK LAND—THEN TAX IT!

SUMMARY

  This paper explains the role that nation-wide land value taxation (LVT) could have in the financing of UK local government and how it might be achieved. The author is a chartered surveyor specialising in the politics of geographic information, also a local councillor. He has studied LVT for over five years.

  The paper is aimed at fellow politicians and non-specialist public officials, who are often subjected to "special pleading" by those with a vested interest in the status quo. It addresses the central issue of Minister Nick Raynsford's Balance of Funding (central/local financial arrangements) study.

  Brief details of three research initiatives are given, with which the author has been involved in Liverpool, Oxfordshire and Whitstable, Kent. Evidence is supplied from findings of these studies thus far.
The core message is that LVT should not be seen merely as one of a number of minor forms of revenue that councils locally can tap into (part of Raynsford's "Option 4") but could—and should—become the source of Rate Support Grant (RSG) funding by central government to councils in England and Wales, following a number of local studies and pilots of the tax itself, funded and coordinated in the next Parliament by ODPM. This "Tax Shift" could be completed within 7-10 years, at no net cost, on the back of existing e-government initiatives. At that stage, access via "precept" of LVT could also be given to councils as a local option, replacing all or part of council tax and business rates.


  Taxing land values can be seen as a natural consequence of the need to monitor land values: the "barometer" of sustainable land-use management. Value Maps make the results of such monitoring accessible to government at all levels—and to citizens. Research shows that this is more widely recognised—when put to interest groups in a balanced way—than politicians have hitherto realised: LVT could be a vote-winner if introduced gradually but with a clear purpose.

1.  WHAT IS LAND VALUE TAXATION1? (AND WHAT IS IT NOT!)

  1.0  The words "land", "tax" and "value" have many meanings. The definition of LVT given on the website of the UK Land Value Taxation Campaign (LVTC) www.landvaluetax.org is used here:

    ". . . a method of raising public revenue by means of an annual tax on the rental2 value of land. It would replace, not add to, 3 existing taxes."

  1.1  "Land" means "that which mankind did not make" and does not include buildings. 4

  1.2  "Value" implies continuity, not the ephemeral attribute (price) of an event involving landed property, such as transfer of ownership. Most importantly, because many commentators use the term more loosely, LVT is not a one-off tax or levy on a transaction. Kate Barker's so-called Planning Gain Supplement (PGS) joins a long line of such taxes that operate in an entirely different way to LVT and should be collectively termed land taxes. 5

  1.3  What all land taxes have in common is the attempted capture of some of the "unearned increment" of value that arises in and around sites where economic activity occurs. Barker's interim report (Barker 2004a) quoted from a speech by Winston Churchill in 1909, in which he described how this comes about. It explains why they are a legitimate source of public revenue:-

    "Roads are made, streets are made, services are improved, . . . and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived."

  1.4  However the effect on an owner anticipating this tax at the time of a transaction in land is quite different to its effect (as LVT) when applied continuously by virtue of ownership. The latter is a "holding charge", justified by the economic benefits actually and potentially received by those possessing rights to exploit the "economic rent" that comes with exclusive use of a natural resource of finite supply. It will therefore result in owners using land efficiently, whereas a tax that is only applied when development occurs—and to the land actually developed—will:

    (a)

    increase the cost of—and tend to deter—the very development which, presumably (by granting planning permission), the local authority wants to happen; and

    (b)

    fail to capture the unearned increment in value that generally accrues6 to nearby land.

  1.5  A "land monopolist" can avoid paying land taxes such as PGS by simply not bringing land forward for development. 7 He cannot avoid LVT, which recognises what any lender knows: that title to land is the source of continuing spending or earning power, even if that land is left idle in defiance of the democratic wishes of the community expressed through Local and Unitary Development Plans (L/UDPs). 8

  1.6  There need be no conflict between LVT and the UK planning system. LVT would be "Plan (L/UDP) Led", ie assessments for LVT would ignore the "hope value" of sites that cannot legally or practically be developed now. They would be based on the "highest and best use" (HABU) of a site under the regulated market conditions, planning laws and L/UDP that applied at time of valuation. The term HABU is well understood by valuers, is used in certain circumstances already, such as for Compulsory Purchase Orders (Connellan 2004, 172).

  1.7  LVT is used in many countries, most of which are described by Andelson (2000). Denmark, Australia, New Zealand, Jamaica, South Africa and Chile are among those most experienced in its use. 9 Hong Kong enjoys the largest land-value-based proportion of revenue. Many of the latest EU accession states—and even Russia—are in the process of introducing it, because it is probably the cheapest form of property tax to administer in the modern age. It also transcends the usual political divides, with support for LVT coming from left and right, greens and free-marketeers.

2.  WHO HAS BEEN CALLING FOR LVT—AND WHY?

  2.0  Forget "The Land Song" and LVT's origins in the nineteenth century land reform movement. 10 Its re-emergence as a subject for debate in British politics is a result of three concurrent phenomena: Devolution, Modernising Government and Environmentalism. None of these are going away.

  2.1  The current drive for LVT throughout Britain is not rural land reform but sustainability of urban communities and local governance. Calls for studies and trial implementation of LVT have, in the past five years, come from a wide range of organisations and commentators:

    1.

    The Urban Task Force (UTF) recommended a Vacant Land Tax (VLT), scored LVT very highly11 as a potentially effective measure for urban renewal but stopped short of outright endorsement of LVT, calling for "others" to study "mixed model site value rating" as introduced to a number of countries since the 1976 Layfield Committee reported, to possibly replace business rates (Rogers et al 1999).

    2.

    The Fabian Society, in the report of a Commission headed by Lord Plant into financial relations between central and local government (Jacobs 2000), included a whole chapter on LVT but concluded "today land taxation is more sensibly viewed as a form of environmental taxation" (Connellan 2004, 58). It called for a range of pilots using the "two-tier business rates" to which the UTF was referring12 to be carried out "to investigate their feasibility and effectiveness in a UK context".

    3.

    The Town & Country Planning Association (TCPA) commissioned a series of round-table discussions in late 1999, funded by the Joseph Rowntree Foundation (JRF) and following upon the UTF report the previous year, resulting in a report called A Taxing Question (Evans & Bate 2000). One of the report's five recommendations was that "The Government should seriously examine the case for establishing a system of LVT in the longer term".

    4.

    Friends of the Earth (FoE), in their 2001 commentary on likely Budget measures, for the first time explicitly called for LVT. FoE have subsequently lent their name to several initiatives in pursuit of the policy. 13

    5.

    New Local Government Network (NLGN) published a pamphlet New Localism, New Finance in August 2003, as a contribution to the Balance of Funding debate begun earlier that year by Government, in which author Professor Iain McLean called for LVT (McLean & McMillan 2003). McLean has since spoken at several events around the country, questioning the received wisdom that only relatively minor reforms to property taxes are necessary or achievable. His colleague at Nuffield College Oxford, economist Professor John Muellbauer, has also called for LVT in submissions to the Barker Review and HM Treasury's study of measures to prepare the UK for entry to the Euro14 (Muellbauer 2003).

    6.

    The New Economics Foundation (NEF) counts many LVT supporters among its founders and followers. In particular James Robertson, a former senior civil servant who now focuses on monetary reform, has written a briefing for policy-makers on where LVT might fit with a range of other measures, in a report for the European Commission Forward Studies Unit, published in 1999 (Robertson 1999). An earlier book by Robertson included a reprint of his 1993 "open letter to the Chancellor", in which he balanced phasing out of taxes on income, value added and profits (which obstruct efficient use of labour and capital) with phasing in of LVT, the absence of which obstructs efficient use of land (Robertson 1998).

    7.

    Financial Times columnist Martin Wolf has written recently of LVT as "a no-brainer"(Wolf 2004), the avoidance of which by UK Government today defies logic in the light of the problems that the policy potentially can solve.

    8.

    Transport for London (TfL) has been spending considerable public money, supported by ODPM and RICS, studying ways of measuring and then capturing the value which metropolitan transport infrastructure projects give to property owners, in order to help pay for the projects in the first place (Whelan 2003 & RICS 2004).

    9.

    The Barker Review of Housing Supply concluded that LVT was unlikely to be of great use in stimulating the supply of land for housing but said it was "a good method for raising revenue without distorting behaviour" (Barker 2004, 73).

3.  WHAT COULD BE THE ROLE OF LVT IN UK LOCAL GOVERNMENT?

  3.0  This section argues the case for LVT to be primarily a national tax assigned to local government, replacing that portion of general taxation that goes into the RSG. It does not however rule out use of LVT also set and raised by local councils (as SVR15) in the same way that counties, police and fire authorities precept into the council tax at present.

  3.1  The name of the Balance of Funding (BoF) Review implies its main purpose is to study the scope for councils to raise more of their revenue requirements themselves, thereby reducing dependency on central government grants and increasing accountability. It is hard to see how reforming the council tax or replacing it with any other tax will significantly change the BoF: the gearing effect will not change whatever source of revenue replaces it, however many bands there are. Assuming BoF is the problem, there are only two measures currently being discussed that solve it and both introduce new problems.

  3.2  Returning UBR to local control would, at a stroke, "improve" the headline BoF to around 50%. However it would recreate old inequities, because the tax base for non-domestic properties is wildly unequal between local authorities: those that lack a large business tax base would need a much higher council tax than others, through no fault of their Council or residents. Rich authorities, like Westminster, could set both a very low business rate and a low council tax. Councils with similar per capita income per head of population but different values and mixture of property types (commercial vs. residential) could set very different council tax rates that bore no relationship to ability to pay, in terms of either income or wealth.

  3.3  Removal of large areas of expenditure from local authority control is an even simpler way to "correct" BoF. Education, fire, social services and police are all candidates for direct funding from sponsor Whitehall departments. Stalin would be proud of a Government that "solved" BoF by further centralisation! But the logic of Government actions over the past half-century is to move in this direction, despite lip-service paid to strong, free local government. 16

  3.4  If a government wishes to create and maintain balance between the wealth of regions, the best way to do this is to use LVT. The geographic profile of land values is much more marked by contrasts between rich south and poor north than is the profile of personal17 and corporate incomes.

  3.5  Areas with high land values do not have significantly greater per capita spending needs than areas with low values, yet they offer greater rewards to land owners thanks to the greater wealth they are able to generate. 18 LVT creates tax havens where they are needed. By taking less in taxes on labour and capital, a relatively greater proportion of wealth generated in areas of low land values would be retained. 19

  3.6  The solution is to have a single, national LVT: the same rate per unit of land value (not area) collected for all types of land in all parts of the country, producing revenue equivalent to the total RSG funding for education, social services and other local authority functions: roughly £30 billion per year. By the same amount overall, other property taxes and then taxes on income, enterprise and profits could simultaneously be reduced. It is estimated that this transfer of tax burden from poor north to rich south, from entrepreneur and wage-earner to land owner, would stimulate economic activity in poorer areas especially by an amount that would allow grants and benefits to also be lowered. 20 Other advantages claimed for national LVT on all land include:

    1.

    more sustainable and efficient land management, because the gaps in the national database of property values would be filled (see below), hence also . . .

    2.

    a better-informed, hence more efficient property market; and

    3.

    access by local government to a highly efficient new source of direct taxation, SVR, at much lower cost than if first introduced piecemeal locally (Connellan 2004, 170).

4.  HOW DO WE GET FROM HERE TO THERE?

  4.0  In a word: gradually! However, it ought to be possible to reach "full" LVT (including the option for local authorities to precept their own SVR) within less than two Parliaments.

  4.1  The first Parliament would see:

    1.

    a number of local pilots, perhaps as "Smart BIDs",21 implemented alongside a major LVT research programme;

    2.

    the techniques for land valuation and tax administration in a mixed property tax system22 developed and refined;

    3.

    a political and economic case for nation-wide LVT developed, debated and put to the people in a general election; and

    4.

    at the same time, Scotland might proceed with full nation-wide LVT, acting voluntarily23 as the UK's full-scale pilot.

  4.2  The second Parliament would begin with a decision on full LVT then see:

    1.

    NDR phased out along with some other dysfunctional taxes on businesses;

    2.

    investment in new systems for Inland Revenue and councils to administer LVT;

    3.

    parallel implementation of a national land management system that would integrate local, regional and national land-use decision-making in public and private sectors;

    4.

    extension of LVT into residential and agricultural land;

    5.

    reform of planning gain (see note 8); and

    6.

    completion of the UK Land Registries, underpinning land and property rights and obligations.

  4.3  The whole transition could be self-funding, using the "incentive effect" of LVT to stimulate economic activity and widen the tax base, while a Public Private Partnership (PPP) between a consortium of companies supplying property information, IT systems, insurance and loan finance would provide the investment in modernised property tax systems for LVT.

  4.4  Business Improvement Districts (BIDs) could immediately provide laboratories for LVT. 24 Current funding of BIDs, from a UBR supplement alone, means it is unlikely they will be used for serious regeneration schemes. However nothing in the BIDs legislation25 prevents the whole of a local authority or even several adjacent authorities from forming a BID. A large "mixed model" LVT pilot, perhaps the whole of Greater London, could become a BID with the objective of financing Crossrail. 26 There could be a range of smaller BIDs, all on a voluntary basis and with local authorities acting as accounting bodies, in different parts of the country.

  4.5  BIDs have a "sunset clause", making it difficult for them to finance capital projects with a life of more than five years. It would therefore be necessary for larger ones linked to major infrastructure projects to promote their own Private Bill. Councils, as billing and accounting authorities, could still be partners in these ventures.

  4.6  Although there are political advantages in aligning LVT pilots with high profile projects like Crossrail, the main disadvantage of hypothecating LVT to a single project is that arguments about the boundary of areas influenced by the land-value effect of the project create complications. 27 So although BIDs and transport projects28 could readily provide laboratories for testing LVT theory and practice in the UK, it would be advisable to move as quickly as possible to making LVT a new form of general tax, not a hypothecated tax. Allow the GLA, for example, to use LVT instead of CT as its main source of revenue, much as Brisbane City Council has done for decades with almost identical government functions to GLA. 29

  4.7  The logic of moving from tightly defined pilots and hypothecated LVT towards whole-authority and general LVT can be extended to justify nation-wide LVT as soon as possible. There are many national projects, whether financed from private or public funds, which affect land values nation-wide but by amounts that differ widely from region to region. Examples are airports, rail electrification, broadband and switching power generation from carbon fuels to renewables. Therefore equity is best achieved by switching the funding of these onto land values, which achieves automatic and proportionate burdening of beneficiary and suffering communities, companies and individuals.

  4.8  Even before Government takes any initiatives towards LVT, there are three studies already under way which begin to inform the debate. A brief summary of these studies follows:

    1.

    Liverpool. The City Council resolved in June 2000 to ask Government to be allowed to introduce LVT to stimulate urban renewal. A research project Preparing for LVT in Britain, funded by the American Lincoln Institute of Land Policy www.lincolninst.edu from 1999 to 2003, used a 60-site inner-city area of Liverpool to test land valuation processes and taxpayer reaction to LVT (Vickers 2002a and 2003). The local Chamber of Commerce & Industry collaborated in a telephone survey and focus groups. Findings30 seem to dispel the myth that LVT would be complex, unpopular and ineffective and confirmed those of a nation-wide postal survey in 2000 (Vickers 2000) and face-to-face interviews in Newbury, control area to Liverpool, in 2001 (Vickers 2002a).

    2.

    Oxfordshire. Inspired by Liverpool, in June 2002 Oxfordshire County Council resolved to conduct its own study to look at the feasibility and desirability of LVT. Vale of White Horse DC (VoWH) supplied a trial area of about 3300 properties west of Oxford at Botley, its geographic information system (GIS) and revenues staff (see www.oxonlvt.org.uk). Lincoln Institute again helped by funding the site valuations, now nearing completion: a provisional set of values was supplied to VoWH in late May. The results of the trial, presented as GIS maps showing the effect of different mixes of property tax, will be made available at a one-day conference on LVT in Oxford on 16 September 2004. 31

    3.

    Whitstable, Kent. Two studies of SVR were carried out in 1963 and 1973 for the Rating & Valuation Association and The Land Institute respectively. Two researchers (one a rating expert, the other a town planner) at Kingston University are undertaking a third "Whitstable Study", again funded by Lincoln Institute, which should be complete in 2005 (Plimmer & McGill 2004). Their aim is to evaluate the interaction between LVT and the UK planning system, using the latest methods of valuation and spatial analysis.

  4.9  Therefore by the time the next (2005) general election is over, there will be considerable evidence to support a decision by the incoming Government on commissioning full tax-raising trials of LVT, perhaps initially in these three areas. As with other e-government project pilots, candidate local authorities could be sought from among volunteering councils possessing the right combination of attributes. In particular, in the case of LVT, a strong corporate GIS strategy and modern IT systems are essential.

  4.10  This researcher, also based at Kingston University and due to complete a PhD32 in early 2005, is focusing on the "UK plc business case" for a national land valuation. The hypothesis being tested is that the benefits of having all land regularly valued—and of making Value Maps available to all citizens and the property industry in particular—outweigh the costs. 33

  4.11  The conclusion emerging is that technological advances, globalisation of the property market, UK e-government initiatives and EC Directives are expected by most experts in relevant fields to result in UK being "value mapped" within 10 years, with the tangible business benefits ultimately exceeding those to government itself. The biggest threat is lack of political will to remove institutional obstacles to data sharing. Some supporting facts are in Appendix 1.

5.  WHAT ARE THE MAIN PITFALLS?

  5.0  LVT has often seemed too good to be true! Yet there are several issues around its implementation that deserve to be addressed by politicians before they accept its undoubted merits. 34

  5.1  What about the "little old lady"? The issue of cash-poor asset-rich owners of property and their property tax liability has been behind the council tax revolt. It could worsen under LVT unless other measures were taken, at the same time, to make the reform seem "fair". There are two types of answer that LVT supporters give and it would be up to Government to choose either or both. 35 The following measures have been adopted in countries that have LVT.

    1.

    Living-space Allowance. Just as we have come to expect a tax-free earned income allowance, we could have a tax-free LVT allowance. 36

    2.

    Deferment. Some countries (eg New South Wales) allow pensioners to choose to defer payment of LVT until either sale of the property or death, when unpaid tax (plus interest) becomes a first call on the deceased's estate. 37

  5.2  Wouldn't it be unfair on people who had just bought38 property, rather than shares? Every tax change creates transitional problems for financial and commodity markets and individuals to some degree. A gradual introduction of LVT, with advance warning and pilots, would allow people to take actions in anticipation of the reform, which would themselves be beneficial to property markets, eg selling or developing valuable land prior to the introduction of LVT. 39

  5.3  Why not exempt residents, churches, charity shops, etc etc? Some countries with LVT do have many classes of exempt property and taxpayer, serving the short-term interests of sitting politicians and current voters at the expense of efficient land-use management and property markets—and future generations. There may have to be such political judgements but all such exemptions add to the cost of LVT, reduce its effectiveness as an economic instrument and its other positive attributes. 40 As for exempting all residential property from LVT, studies have shown that once people see the pattern of "winners and losers" in the reform (using Value Maps), the overwhelming majority support it. In every case, by widening the tax base to include vacant and under-used land, most people will pay less under LVT than under CT. Let the picture speak for itself. 41

  5.4  Why are more councils and councillors not yet calling for LVT? Unlike the US and other federal states, there is no tradition of tax diversity in the UK. Devolution is beginning to change this but there is also the highly centralised nature of the functions upon which property tax systems depend: valuation and land registration. These are in any case unavoidably technical and politically unexciting subjects to most politicians! Unless Parliament legislates to enable local councils to have more freedom to choose their sources of funding, the debate remains sterile in the "real world" of council chambers. But as one of the members42 of the current House of Commons ODPM Committee said recently of LVT (Vickers 2002b):

    "This is not just a subject for debating societies. This is real politics. This is one of the most important issues on which our generation has to make a choice."


 
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