Capital v annual values debate continues

I have been involved in a long discussion with a correspondent on the relative merits of capital value (CV) and annual rental value (ARV) assessment. The older British Georgists have always advocated LVT on ARV assessments because until 1993 all UK property taxes were on ARV. It was always taken for granted that LVT would be levied on ARV and this was the case in the 1939 London County Council Bill.

People such as the late Vic Blundell who ran the Georgist organisation in London for many years up to the 1980s, took this view, on the basis that if all land rental value were collected, land would change hands at no charge. At very high rates of LVT, land would change hands at small premiums reflecting the capitalisation of the uncollected rent.

In 2005 the Campaign was one of the sponsors of a CV valuation study. The area included residential property subject to an annual property tax of around £1000 per annum, at the same time as commercial property was subject to about five times that amount per unit of floor space. This led to an under-valuation of the commercial properties relative to the domestic ones. We then capitalised the actual amounts of tax payable and added them to the selling prices, which had already had the hope value “stripped out”. Thus the valuations were very much adjusted from actual selling prices.

But it seems to some of us that there are fundamental objections to the use of CV assessment (though not of course to the use of CVs as valuation evidence).

1. CV represents the capitalisation of the rental value that is uncollected. This is in our view the most serious objection. To levy a tax on CVs will fail to take account of the land rent that is already being collected at the time of valuation.
2. CV includes hope value. This will include expectations of what planning authorities might decide in the future and therefore allows scope for endless argument. ARV, on the other hand, is the value of the consent that has actually been granted. There is no dispute.
3. CV is a tax on a value that can only be realised on sale. It is therefore unfair to landowners and gives rise to a legitimate objection to LVT as an unjust tax. The objection does not apply to ARV assessments as rental values can always be realised.
4. CVs are volatile unless rates of LVT are high enough to damp the cycle. This can lead to hardship in some cases. ARVs are by contrast relatively stable.
5. The primary value of land is its ARV. CV is a derivative value, subject to factors such as interest rates, market expectations and hope value based on the possibility of future development.
6. The aim of LVT is to collect rent so why not simply measure the rental value? This is not difficult unless there is very little in the way of a rental market. CVs can be used as part of the evidence to construct the data set.
7. LVT on CVs is lumpy – small differences in the rate result in large differences in yield and liability.

Advocates of CV assessment argue that Henry George himself referred to “using the existing machinery of taxation”, but that is hardly evidence of support for CV rather than ARV assessment, since the existing machinery of taxation could be used for either. It most certainly would not have applied in countries where ARV had long been practised.

Arising out of these considerations, there is suspicion about the use of CV assessments. The practice of basing LVT on CV may be the reason why LVT rates rarely rise above about 1%, equal at most to about 20% of ARV, possibly less. The widespread use of capital value assessments for property tax in the US gives rise to endless, and perfectly valid, criticism. It gets LVT a bad name. Introducing LVT based on capital values sows the seeds of failure from the outset.