Land Value Taxation

Proposals for a different approach to government revenue raising

Introduction

This paper is presented to expand upon the previous FoEG publication concerning Ecological Tax Reform (FoEG June 2005), and aims to examine land value taxation (LVT) in more depth, as a contibution towards the Review of Tax on Rateable Values that was set up by the States on 27th July 2005. FoEG urge the States to consider seriously this alternative method of raising revenue, and demonstrate here the clear benefits that can be achieved where LVT is used to replace other, traditional forms of taxation which impose perverse disincentives to economic activity and promote social and environmental degradation. In particular we are concerned that the current reviews of taxation and rateable values could exacerbate the problems already present by failing to acknowledge them. Land site value tax (LVT) is assessed upon the annual rental value of a site as though it were unimproved land, and in accordance with allowed uses under planning regulations. The LVT is then levied as a percentage of the assessed value. It provides a more stable revenue base than taxes aimed at earnings or enterprise, and is inherently fair. It has benefits for housing, transport and planning. Administratively, it is one of the simplest taxation systems to apply and one of the hardest to evade, as it is based upon a single valuation rather than a series of forms and returns. Those jurisdictions which use LVT have experienced significant benefits from the use of computerised geographical information systems (GIS) in recent years, as these have allowed records to be updated annually rather than on a five to ten year cycle as was common before. A close integration into the planning process has benefits for the efficient raising of taxation, and also assists planners in assessing the effects of policies in practice. As a radically different basis for taxation to income tax, the transition should be made in a phased manner, and existing taxes rolled back by degrees.

What is land value taxation?

The aim of land value tax is to recoup from landowners the value they receive by ownership of their land, and in as much as it replaces income and other taxes, relieves the tax burden from labour and capital. The ethical basis of this is that land (see Appendix for a definition of land in this context) is created at no charge by nature, and without any human effort, and in its natural state has varying values to mankind if it is used. Any parcel of land will also gain additional value from the works of the community which surround it, for instance urban land is provided with many facilities and services (roads, electricity, water, policing etc) which make it more valuable. Such values do not derive from the owner, unlike the value of any improvements made.

Once the site's value has been assessed in accordance with allowed uses, the landowner pays a percentage rate of the annual site value as tax, regardless of the use to which the land is actually put. In this way tax is paid in proportion to the benefits received from the works of the community at large, and to the economic value of the site. Rental values are much more stable than capital (exchange) values of land as they are not subject to fluctuations brought about by changing interest rates, leading to a more stable tax base.

How is LVT assessed?

"The valuation is the current annual market rental value of the land alone, disregarding buildings and other improvements. Each unit of land is assessed at its unimproved site value, with all surrounding land taken as being in its existing condition. All land is subject to the tax, and the valuation is on the basis of optimum use within whatever permissions and constraints apply." (Land Value Tax Campaign http://www.landvaluetax.org/fplanng.htm)

The rental value of any piece of land is that extra worth it holds over the least productive (or marginal) land.

In practice the process of valuation is essentially the same as for rateable values (ie inspection of properties/land parcels), and can be performed by valuers competent to value RV. We would point out that if the rateable value system is to be overhauled anyway, involving a thorough round of revaluation inspections, assessing for LVT adds no extra burden, merely changes the basis on which the valuation is made.

How is LVT different to Rateable Value?

Rateable Value explicitly assesses the value of the buildings upon a site, rather than the rental value of the site itself. In this way, improvements to the property increase rateable values and therefore tax liability, providing a disincentive to make improvements with the possible long-term effects of property falling into disrepair, and blighting neighbourhoods and commercial areas. LVT, being a land value tax, is payable at the same rate irrespective of the state of repair of buildings, and so does not encourage dereliction.

How does LVT help housing?

By taxing land at the same rate whether it is in productive use or not provides a strong disincentive to underuse and land value speculation. Currently landlords might leave buildings empty awaiting an upturn in the price of land, or allow them to become derelict in the hope of altering their planning status. Under LVT the landlord in such a situation is still liable to pay the charge, thereby making it unprofitable to hoard unused land - the best way to offset the tax burden is either to bring derelict properties back into use, or to sell them on to a new owner who will. Current taxation which targets labour and capital actively discourage such repairs by making them less economic compared to property standing empty.

The high incidence of empty and neglected properties causes an artificial shortage in the housing supply, thereby forcing up house prices and rent. LVT, through encouraging these properties back into use, will help to ease the situation.

How does LVT promote enterprise and employment?

By shifting the burden of taxation away from things society regards as good - namely employment, earnings and enterprise - there is less disincentive to invest labour and capital into enterprise, and a much more predictable tax burden which relates purely to the benefits received through the use of a particular site.

Underlying this assertion is the concept that sites are inherently of different values, ranging from the marginal - where a business will struggle to survive - to the highly favoured. Under current systems of taxation, income tax, corporation tax, payroll tax etc, all fall as heavily on businesses in marginal sites as on those in favoured sites. Effectively this makes the poorer sites unusable as businesses will not be able to meet the tax burden - a poorer site will require greater investment in labour and capital to become profitable, precisely those production factors which carry the greatest tax burden currently.

LVT values these sites at a much lower rate, making them more economic, and therefore keeping more actual sites in productive use. It also follows that if marginal sites are pushed below commercial viability, the overall supply of sites will be reduced, thereby increasing competition for all other sites and generally inflating prices and rents. Hence, by freeing up land for productive use and discouraging hoarding, the overall increase in supply will exert downward pressure on the capital cost of land which will have knock-on economic benefits. With less speculative land-hoarding there is also a lower tendency to see boom and slump cycles in the property market, which add to uncertainty and anxiety in both business and personal life.

How does LVT help farming and the environment?

Generally, agricultural land has a low rental value compared to urban and commercial sites. It is estimated that 90% or more of land values actually reside in urban areas, due to the developed infrastructure and population concentration which benefit commercial activities. Furthermore, agricultural land has varying degrees of productivity, hence arable, grazing, woodland or horticultural land will all attract different valuations.

Freeing up the farm from income and capital taxation, and the effective de-rating of farm buildings (which are improvements) offers the farmer the same benefits as businesses in other sectors by improving the terms on which labour and capital can be invested.

Land which is given any form of protection as a nature reserve, conservation zone, or is subject to agricultural production limits under quota schemes, should be zero- or down-rated for LVT purposes because such protection effectively prevents (or limits) any commercial activity, and therefore any rental value, on the site.

As LVT rates will be dependent upon allowed use, there should be less pressure on farmers to sell rural land for development purposes. Once planning permission is sought and acquired the LVT would immediately be payable at the rate applicable to the permission, ie housing, commercial, etc. LVT could then be used as a major tool towards rural conservation and promoting genuine agricultural self-sufficiency for the islands, an issue that will become more significant as oil prices (and hence imports) continue to rise.

Has it been tried anywhere else?

There are existing LVT systems and variants around the world, most commonly for local government revenue. As Guernsey is such a small jurisdiction, and not needing to fund some of the expenses (such as defence) which accrue in the larger countries, this distinction between local and national revenue-raising is less important.

Experience across Australia and New Zealand, which have had LVT-based tax systems for decades, has shown practically the sort of effects that can be achieved by introducing (or even debasing) LVT. A number of cities in Pennsylvania, USA, have used LVT as a major spur to urban regeneration after regional industries have collapsed. Denmark, South Africa, and British Columbia also use variants of LVT or Site Value Rating.

What taxes should be replaced/avoided if LVT is introduced?

Income tax – as income tax targets earnings, it is effectively a tax on employment and enterprise, things which are widely recognised as positive elements for economic performance. It takes no account of the community resources used to generate those earnings, unlike LVT. A great deal of effort can be expended by the wealthier members of society to reduce their tax liabilities.
Corporation tax – likewise, corporation tax is a tax on corporate earnings, which is complex to administer, and is constantly open to “renegotiation” by commercial sectors pleading a special case or threatening to withdraw from the island.
Stamp duty – only payable when property changes hands, and adds to the cost of buying property. Yet land receives its value from nature and the community every day of the year, whether or not it is being sold, and should be taxed accordingly.
General Sales Tax – is a highly regressive tax, raises the cost of living, suppresses consumer spending and therefore trade, and it also tends to fall more heavily on those with lowest incomes. Its administration is onerous, placing extra burdens on businesses and tax authorities alike, and where it has been used (for instance as the United Kingdom’s Value Added Tax) often ends up with a complex range of rates and exceptions. International trading is also made more complex by varying rates of sales taxes.
Rateable Values – RV taxes the private investment made in property, rather than the benefits received from the community at large. It can provide perverse incentives for property to lie empty or derelict.

Why should government choose LVT?

• Ease of administration – once the initial valuations have been performed (not dissimilar to the valuations required for Rateable Values) annual updating becomes relatively straightforward, especially where an established GIS exists. There would be no need for individuals or businesses to file annual tax returns, or for the tax authority to process and check them. Much work and expense in accounts departments would be rendered unnecessary by a much simpler, single-tax system.
• Difficulty of evasion – unlike taxes based upon assessable income, LVT cannot be avoided or evaded, as land cannot be hidden.
• Stability and predictability of revenue – LVT is not subject to variations brought about by the business cycle (partly caused by property speculation which LVT will reduce). The yield is also buoyant in the long term, because, in general, land values tend to rise faster than the rate of inflation.
  Positive outcomes for planning, social, environmental and economic policies – as annual land rental values are dependent upon permitted uses for a parcel of land, close integration between land-use planning and LVT can, and should, be achieved. Information useful to inform the planning process also comes about as a result of using LVT – commercial and residential trends would become evident more easily if land value maps and valuation rolls were available. Planners and political authorities would be in a position to gauge the effects of alternative policies, and so would the public. The awareness of anomalies in patterns of land values would direct the planners' attention to consideration of appropriate remedial action.
• An end to the “planning lottery” - LVT would recoup increases in land value due to public decisions of various kinds, such as infrastructure investment, planning policies and enhancements to land value resulting from special arrangements and subsidies. It would also provide a compensatory mechanism where land values are adversely affected, for example, due to road or industrial noise or as a result of restrictions on development applied under planning policies. This is of particular importance, because the implementation of the planning system and the provision of facilities such as bus stops, pedestrian crossings and traffic, car-parking and pedestrianisation schemes can all have a profound influence on land values. Currently owners can “cash in” on increased capital values which they have not contributed towards, or possibly suffer loss of equity if the impacts are adverse. With an LVT system in operation, the wider costs and benefits of such schemes would be transparent, and those directly benefiting from them would be charged accordingly.

How should LVT be introduced?

As with all radical changes, a phased change-over is generally better, as it allows the new system to settle down and for people to become familiar with its operation. A manageable order of conversion would be as below:

1) Conversion of business and domestic rates to a land value basis, bringing in agricultural and unused land at this stage.

2) Progressive increase in business LVT rates, with corresponding reductions in other business taxes, such as corporation tax and employers’ social security contributions. Avoid introduction of General Sales Tax, which depresses consumer spending and economic activity.

3) Progressive increase of domestic LVT, with corresponding reductions in personal taxes, such as income tax. Avoid introduction of inheritance or capital gains taxes, as these are complex to administer, and difficult for individuals to fully understand. Phase out stamp duty.

4) Harmonisation of tax rates between land use categories, increasing rate of LVT and corresponding reduction and replacement of other taxes.

Ultimately, only LVT and other resource-based taxes should remain with a much simpler administration and more predictable revenue flow.

Summary

Land value taxation promises to be a much fairer and simpler method of raising general revenue for the States, and can be phased in over a number of years so long as existing taxes are rolled back to a corresponding degree. It will address some of the difficult problems that currently seem intractable, such as how to deal with vacant premises in a time of housing shortage, by putting financial pressure on absentee landlords and property speculators.

As a system that is used in other jurisdictions, and with a history going back centuries, it cannot be described as an untested idea. In fact, where it is used it has popular support from business, residents and the authorities alike, as it taxes people and businesses on the benefits they receive from the community at large, rather than taking away a portion of what they have achieved by their own efforts.

APPENDIX

Definitions:

Land: The term 'land' is used here as defined in political economy, ie that part of the material world other than human beings and the products of their labour.

Land site-value tax: LVT is a tax on the annual rental value of land. The valuation
is the current annual market rental value of the land alone, disregarding buildings and other improvements. Each unit of land is assessed at its unimproved site value, with all surrounding land taken as being in its existing condition. All land is subject to the tax, and the valuation is on the basis of optimum use within whatever permissions and constraints apply.

LAND VALUE: as given in Section 3 of London Rating (Site Values) Bill, 1938/1939. (Relates to English law.)

The annual site value of a land unit shall be the annual rent which the land comprising the land unit might be expected to realise if demised with vacant possession at the valuation date in the open market by a willing lessor upon a perpetually renewable tenure upon the assumptions that at that date: (a) there were not upon or in that land unit: (i) any buildings erections or works except roads; and (ii) anything growing except grass heather gorse sedge or other natural growth; (b) the annual rent had been computed without taking into account the value of any tillages or manures or any improvements for which any sum would by law or custom be payable to an outgoing tenant of a holding; (c) the land unit were free from any incumbrances except such of the following incumbrances as would be binding upon a purchaser: easements; rights of common; customary rights; public rights; liability to repair highways by reason of tenure; liability to repair the chancel of any church; liability in respect of the repair or maintenance of embankments or sea or river walls; liability to pay any drainage rate under any statute; restrictions upon user which have become operative imposed by or in pursuance of any Act or by any agreement not being a lease.

"works" does not include any works of excavation or filling done for the purpose of bringing the configuration of the soil to its actual configuration;

"road" does not include any road which the occupier alone of the land concerned is entitled to use.

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