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.
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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
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:
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;
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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