Land Value Taxation and Local Government Finance
Central collection or local?
Author: David K. Mills
December 2003
Background and Introduction
Proponents of collection of the National Land-Rent to fund the public revenue – a policy known in this country historically as land value taxation (“LVT”) – will not gainsay the proposition that, in theory, the rental value of all land throughout the world belongs to all of the people on it and should be shared equally by all. In practice, however, the writ of the United Kingdom government runs only in the U.K., and it is sensible and politically realistic to accept limitation of discussion to what currently is possible – LVT operating in England, Scotland, Wales, and Northern Ireland.
LVT may be attained directly, by legislation in Parliament at Westminster. Alternatively, again as a result of legislation at Westminster, it may begin by collection at local government level, to be extended in due course to contribute also to central finances. In this Paper, the conventional term, site value rating (“SVR”), will be used to describe drawing revenue from the location value of land for the primary purpose of financing the traditional local authorities. The new devolved national bodies are not covered, except in so far as they are under reference in this opening section.
The Land Value Taxation Campaign (“the Campaign”) published a Paper, “Options for Property Tax Reform”, which, inter alia, set out the case for LVT to be collected by Central Government for distribution to lower tier authorities, from the Parliament in Edinburgh and the Assemblies in Belfast and Cardiff, down to parish councils. “Options” proposed an ideal arrangement for SVR, involving significant changes from current practice. All land was to be included. All land was to be charged at the same percentage rate. Not only were the council tax and uniform business rate (“UBR”) to be replaced, but LVT would be introduced to cover the needs of the devolved bodies. Furthermore, LVT/SVR would be used to replace the significant Central Government contributions now paid to lower tier authorities from general taxation.
The Campaign thus carried SVR as far towards LVT as it is possible to take it without actually bringng in full national LVT itself. SVR is not normally seen in this light. Usually it is advocated only for traditional local authorities from county to parish level, and only as a replacement for council tax and the UBR. The Campaign argues for LVT, preferably directly. The route of what one may perhaps call creeping SVR, is a legitimate option, and indeed has the attractions that go with the adaptation of existing and familiar systems; but there are difficulties associated with it which are inherent in financing local government in whatever manner, and are too significant to be ignored. With revision of the UBR being finalised and a first revision of the council tax scheduled, advocates of SVR will wish to be reminded of the extraneous local government issues which arise in the context of local government but do not bedevil national LVT.
It is assumed in this Paper that SVR will be introduced and applied throughout the U.K., and that all land will be valued in accordance with its optimum use within planning and similar constraints, ignoring for each site in turn all improvements made in or upon it but taking all of the surrounding area as being in its existing state of development. It is further assumed that SVR will be properly implemented, and not so blemished as to forfeit the support of those who would normally be pressing for its adoption.
Land value, localities, and equalisation
Valuation is to-day the responsibility of the Inland Revenue. Land valuation will likewise be a central responsibility. The simplest way of introducing SVR is to abolish the council tax and the UBR and require local authorities to make good the lost income by a levy on land (site) values. Questions immediately arise.
Is there to be any capping or are local authorities to be permitted to take as much as they want? SVR can not be “passed on”, so no one but beneficial holders of land will suffer. On the other hand, land holders in different localities could be paying significantly different amounts, which might be thought unfair. There is an obvious incentive for voters collectively to indulge themselves, via local government, at the expense of holders of land in their own authority’s area. Again, if SVR is to be a stepping-stone to LVT, does it make sense to allow local authorities to take more or less what they want, with Central Government to come along later and pick up only the leavings? If there is capping, there is bound to be ill feeling between central and local government. Either way, SVR is involved in conflict.
There are basic differences between local authorities which arise from the area of the territory they cover and from the size and demographic composition of the population.
The land value of a locality is not necessarily or even primarily generated locally. London and Edinburgh are great commercial, financial, political, and administrative centres. They depend, however, not only on their own efforts and resources nor yet on these resources with just the support of their immediate hinterlands, but also on the general level of economic activity of the entire community and indeed on dealings world-wide. The land value of neither city can be said to belong solely to its inhabitants.
There are bound to be anomalies stemming from the total land value available to a local authority. The City of London is so well endowed with valuable land within its area, that it could raise its revenue from a low percentage levy. Against this, a remote rural authority would have to charge a high percentage to bring in adequate funding.
Again, local government authorities vary in their perceived needs. This raises issues of social policy (a prosperous provincial town v. a former industrial centre now dilapidated v. a rural backwater v. almost any little fishing port v. a newly expanded commuter dormitory village).
For all these reasons, it is almost certain that Central Government will, willy nilly, have to step in and limit the freedom of local authorities to do what they might like. To equalise the relative advantages and disadvantages, Peter will be robbed to pay Paul, or Central Government will have to continue to support local government bodies from general taxation. Either way, the procedure will not be fundamentally different from the present grant system. In all this, SVR will be a political football. One is in the realm of subjectivity and political judgement.
SVR in context
Although with SVR the revenue source will have changed, the general context will not. The problems of local government finance are entwined with the structure and responsibilities imposed or assumed by its various tiers. Add periodic re-organisations, boundary arguments between tiers, planning issues and disputes, local accountability (real and as a buzz-phrase), local democracy (ditto), and somehow SVR is supposed not just to survive, but to survive triumphant and untainted.
SVR is better than the present sources of income available to local authorities, but it is by no means sure it will be strikingly simpler to operate. Provided the percentage levied is not too low, and provided also that the system is not riddled with exemptions and rebates, SVR may be expected to discourage vacant premises, encourage better development and re-development, and stimulate infill in urban areas rather than outward sprawl. That is indeed something, but there are many “ifs” and “buts” and it is important to ask what SVR will probably not achieve.
The limitations of SVR
This is not the occasion to argue how much the full collection of the Rent of Land would yield. If, however, total land value were supposed to be no more than the sum of the yields from the council tax and the UBR, then simple adoption of SVR would be a reasonable ambition. On the other hand, if all or most of present taxation comes ultimately from Land-Rent, in however distorted and unhelpful a way, then that Land-Rent must be a figure in the order of present tax revenue plus present land value. Whilst this is likely to be an exaggeration, it is a valid indication of the ultimate potential yield, as was explained in Issue No. 124 of the Campaign’s publication, “Practical Politics” (July 2003).
If one holds that SVR will raise only a relatively low percentage of total land value, it follows that a great deal is still being left in private pockets. In such circumstances, SVR will not bring the major economic and social changes that proponents of full LVT expect and call for. It must be feared that SVR will not cut out land speculation and therefore that it will not end the recurring cycle of boom and slump. It will not correct at the primary phase the maldistribution of wealth between those who provide their labour and those who merely charge for permission to have access to a piece of the earth’s surface and its natural resources. It will not stop unemployment. It will not lead to the ability in future generations largely to do without the elaborate, costly, and none-too-effective apparatus of state welfare.
LVT centrally and the possible long term implications for local government
When LVT (not SVR) is introduced, the initial levy should not be trivial. As a general proposition, the sum should be large enough to justify the costs of valuation and collection; to permit a noticeable lowering of existing taxes so that citizens see and enjoy instant benefit; to ensure that profit from holding and, a fortiori, withholding land is significantly dented; and to have, as soon as may be, those major gains which will follow from the correct policy properly applied. Unless real gains are achieved, there is the prospect that the electorate will not rally to support the government (single party or coalition) that rought in the LVT legislation, and that opponents will be able to mangle or dismantle the system before it has bedded down and before its benefits have spread widely enough and deeply enough to be fully appreciated.
There should be determined moves, proceeding in a series of clear steps, towards, as nearly as is practicable, full collection of the national Land-Rent. It is not the purpose here to predict or ruminate in any detail upon the interactions of the changes that will come about over time as the effects of LVT are felt. In general, though, it is argued that, as the benefits of LVT work through, there will be greater prosperity; and that that prosperity will be justly distributed, with Rent of Land going to finance public expenditure, Wages going to reward Labour (by hand and brain) and Interest going to the providers of Capital at whatever rate is necessary to induce people to save instead of spend. As the benefits of LVT accrue, current government expenditure in a number of areas will be neither needed nor wanted and can be scaled down or brought to a halt. Indeed, it is even possible that the sum available from the collection of Land-Rent will exceed normal peace-time expenditure, so that an eventual accruing surplus could be paid out to citizens on a per capita basis, as a form of reverse poll tax.
In such circumstances, the structure and responsibilities of different tiers of local government, which are in any case subject to frequent change, are bound to undergo a series of substantial revisions, not least as the duties performed on behalf of central government alter – aspects of education and welfare functions, for example. One may expect to see some reduction in the level of services traditionally supplied by local government. Others, of course, will certainly be retained and indeed may well be expanded, such probably as parks and leisure and general environmental improvements. In the markedly changed conditions posited, local government may well be financed by central government grants from LVT (the Rent fund) together with an element of local charges for services where this is judged apposite.
Conclusion
One cannot know now the time-scale or circumstances surrounding a decision to introduce legislation for LVT or SVR. In this Paper, the question has been presented as LVT to be achieved directly or LVT to be achieved via SVR. It is not likely to be so simple a choice. If it were, the argument for LVT to be achieved directly by means of a National Land-Rent Act or incorporation in a Finance Act seems overwhelming.
The advantages of the oblique SVR approach are real, but are more than offset by the pitfalls inherent in any method of raising finance for local government, and by the distractions of later public events which cause legislators to take their eye off the ball with the job barely begun, so that SVR remains as a mere local government tax and becomes fossilised as such.
The prospect of SVR specifically as a means of financing local government, with no intention of proceeding to full LVT, poses the same reservations, but in more acute form. It is true that, with SVR in place, it remains open to proponents of the land values policy subsequently to press for full LVT. Experience abroad, however, suggests this will prove exceptionally hard to achieve. There are further problems arising from the blemishes which have consistently over the years disfigured past and present schemes of whatever sort which have been put in place for local government funding -principally a panoply of exemptions and rebates. There is greater danger of a patchwork of errors when local government alone is involved than when revenue is being raised for Central Government.
LVI is more than just a better way of raising public revenue: it is fiscal recognition of the ethical position that Earth was not man-made and belongs to all, so that payment of the land-rent charge is compensation to everyone else for the right to exclusive use of a particular piece of land. Any legislator prepared to introduce SVR in higgledy-piggledy manner, without regard to principle, has lost the plot – in both senses!
OccasionaI Papers published by the Land Value Taxation Campaign are the work of their authors and may not necessarily reflect in every detail and nuance the stance and opinions of the Campaign itself.