Response to Modernising Local Government Business Rates Consultation Paper
Author: Henry Law
May 1998
CONTENTS
- ABOUT THE LAND VALUE TAXATION CAMPAIGN
- GENERAL BACKGROUND CONSIDERATIONS
- ANSWERS TO THE QUESTIONS
- DISADVANTAGES OF THE PRESENT UBR/COUNCIL TAX SYSTEM
- APPENDICES
APPENDIX 1 – DEFINITION OF LAND VALUE TAXATION
APPENDIX 2 – DEFINITION OF LAND VALUE
APPENDIX 3 – PILOT SCHEME
PART I
ABOUT THE LAND VALUE TAXATION CAMPAIGN
1 The Land Value Taxation Campaign is a non-party organisation
which was established with the aim of securing legislation
which would fundamentally change the basis of public revenue
in the United Kingdom. It proposes that existing taxes on wages,
goods and services should be progressively replaced with a
property tax on the annual rental value of all land. This is
referred to as Land Value Taxation (LVT) and is defined and
explained in the attached appendices 1 and 2. The Campaign
would wish to see 100% of the land value collected in this way.
2 The Land Value Taxation Campaign strongly recommends the
adoption of a property tax based on site-only valuation. Some
aspects of implementation and proposals for a pilot scheme are
outlined in appendix 3.
PART 2
GENERAL BACKGROUND CONSIDERATIONS
1 The Land Value Taxation Campaign believes that confusions
arise through imprecise definitions of “land”, or rather,
through indiscriminate use of otherwise precise definitions.
Whereas at law, “land” means immovable property (“real property”),
the Campaign uses the word in its meaning in political economy
(the whole of the material universe outside of man and his
products). A landowner in economics is not necessarily the
freeholder. Anyone with a beneficial interest in land (a holding
which could be let or sold at profit) is to that extent a
landholder. Popular usage more nearly corresponds to the
Campaign’s: people do not normally think of houses, factories
and farm buildings as “land”. To add to the potential for
confusion, book keepers drawing up balance sheets regard land
as capital, which in political economy it definitely is not.
2 Land Value Tax at a substantial proportion of the annual
rental value would induce the landowner to make optimum use of
the site, as it would be necessary to earn the income from which
the tax would be paid. Land would not be held out of use or
under-used.
3 One of the effects of Land Value Tax is that productive
activity on marginal land is not taxed, because the land value
tax assessment of marginal land is, by definition, nil. In the
absence of existing taxes, large tracts of sub-marginal land
would undoubtedly become capable of supporting productive
economic activity, and the Campaign would therefore advocate
the progressive replacement of existing taxes by Land Value Tax.
4 Land Value Tax is peculiarly suitable for revenue-raising in
a multi-tiered government structure, especially in comparison
with alternatives such as supplementary income taxes. Although
the Campaign was established to promote the case for a national
land-value tax, we would point out that, as is the case with
all forms of property tax, LVT is suitable for all tiers of
government and could be readily adapted to any multi-tiered
structure, for example that resulting from Scottish devolution,
the establishment of the Welsh Assembly and the London Authority.
5 Land Value Tax is morally justified, being in accordance with
the “benefit principle”; land values are created and sustained
by the presence and activities of the community today – any
arrangement made in previous centuries is of little relevance
since land value rests on the assumption that public services
and a state of civil order will be maintained today and for the
foreseeable future. An example of the operation of this principle
is that the tax would provide a clawback mechanism whereby
increases in land value due to infrastructure improvements,
subsidy, etc, were returned to the Exchequer, thereby providing
a rolling fund for further improvements if desired.
6 The Land Value Taxation Campaign is of the view that the
Business Rate and Council Tax should be unified into a single
land value tax. The assessment would be made on the assumption
that the site is in optimum use having regard to the planning
regulations, with rates of tax being the same for all land
within the same taxation area. At present, the same property
will be subject to substantially higher tax in business use as
compared to residential use. This distorts the property market
and patterns of land use, leading to a loss of business premises
in mixed use urban areas as these are converted to residential
use, with damaging effects on employment and local economies.
7 The Campaign has produced a paper, “Options for Property Tax
Reform”, which presents its case in greater detail. A copy is
enclosed with the present document.
8 In 1987, Brisbane City Council appointed a Committee of
Inquiry into Valuation and Rating, under the Chairmanship of
Sir Gordon Chalk, Deputy Premier and Treasurer of Queensland
(1965-1976). On this matter, the conclusions of the Committee,
which reported in 1989, are broadly in line with the Campaign’s
own position. Copies of the official summary of the Chalk
Committee’s report are available on request from the Land
Value Taxation Campaign, which distributes it with the consent
of Brisbane City Council.
PART 3
ANSWERS TO THE QUESTIONS
Q.1 The Government would welcome views on whether in principle
some local discretion over the business rate should be allowed.
The Land Value Taxation Campaign sees no reason in principle
why some local discretion should not be allowed in respect of a
land value based rate.
Q.2 The Government would welcome views on the operation of the
pooling system.
Under the Land Value Taxation Campaign’s proposals, where local
government is providing services to a national standard (eg police,
fire, social services, education, highways) and is effectively
acting as an agent of Central Government, the funding should
come from a land value tax set at a national level. Any locally
determined component of the land value tax should be primarily
to contribute towards the cost of discretionary facilities such
as libraries and leisure services. Thus, the requirement for
pooling should be minimal. However, the Campaign accepts that
disparities in land value in local government administrative
areas require some measure of equalisation such as that achieved
by Central Government pooling.
Q.3 The Government would welcome views on whether new formal
procedures and mechanisms are required and on other ways in
which to improve co-operation between local government and
local business.
This issue falls outside the Campaign’s self-defined remit.
Q.4 The Government would welcome views on:
i. whether there should be an overall maximum local
business rate;
The Campaign advocates the collection of land value tax at a
rate of 100% of the current annual rental value of the land,
disregarding the value of buildings and other structures and
improvements, on the assumption of optimum use of the site
consistent with planning regulations and other restrictions.
This would yield an annual sum well in excess of local
government requirements (including the large element now
supplied by Central Government) and implies operation of a
national land value tax, which is the Campaign’s objective.
ii. how quickly the local rate should be permitted to
increase;
The Campaign accepts the possible need for a phase-in period
for LVT.
iii. whether there should be separate limits on year on
year increases;
The Campaign advocates annual revision of the LVT assessments
by statistical analysis of market conditions supplemented by
field surveys on a rolling basis, possibly quinquennial review,
with a tax rate ultimately at 100% of this assessed annual
market rental value. Annual revaluation is possible under a
land value based system, but not under the present system where
buildings and improvements are assessed.
iv. other ways in which limits might be framed.
It is not possible to collect more than 100% of the current
rental value of land (otherwise sites go out of use), therefore
an LVT system is self-limiting.
Q.5 The Government would welcome views on whether the
relationship between council tax and local business rate
should take the levels or the changes approach; and on what
the relationship should be in either case.
The Land Value Taxation Campaign argues that all land, whether
in commercial, agricultural, or residential use, or vacant,
should be assessed at its current annual rental value on the
assumption of optimum use having regard to planning regulations
and other constraints, but disregarding the value of buildings,
structures and other improvements. All land within a particular
local authority area should be subject to the same rate of tax
based on that assessment.
Where different rates of tax apply to land in different classes
of use within the same taxation area, the land market, and land
uses, are distorted as one use is favoured against another. The
effects of the present system have been particularly damaging in
mixed-use town centre areas, where the more favourable treatment
of residential property has resulted in the loss of business
premises as these have been converted or redeveloped for
residential use, with harmful effects on the economy due to
the consequential loss of employment opportunities.
Q.6 The Government would welcome views on whether councils should
be able to offer a business rate rebate irrespective of the
relationship between the local council tax and the standard level.
Business rate rebates will be of no benefit to business occupiers
except in the very short term as they will be lost through rent
rises. Such rebates are therefore a gift to landowners and are
therefore pointless.
The essential principle is that total occupation costs are
determined by market conditions; if property taxes are low, this
is reflected in rental values and conversely, high property taxes
are reflected in lower rental values. In the long run (following
rent reviews), property taxes are passed backwards to landowners.1
Q.7 The Government would welcome views on whether there should
be any special arrangements for authorities with a high rates
base and on these and any other approaches.
Under the Land Value Taxation Campaign’s proposals, where local
government is providing services to a national standard (eg police,
fire, social services, education, highways) and is effectively
acting as an agent of Central Government, the funding should come
from a land value tax set at a national level. Any locally
determined component of the land value tax should be primarily
to contribute towards the cost of discretionary facilities such
as libraries and leisure services. Rich authorities would make
their due contribution primarily at the national level, but there
may nevertheless be a measure of pooling.
Q.8 The Government would welcome views on the desirability of
authorities providing earlier indication of changes in the local
rate and on these and any other approaches.
The interaction of property taxes and rentals is relevant here.
Advance notice of an unexpectedly small rate increase would lead
to rental levels being set higher than might otherwise be the case;
due to the prevalence of upwards-only rent revision clauses in
commercial leases, the converse would not operate. However, under
a land value based system, upwards-only clauses would not be
imposed because no landlord could take the risk of having vacant
property and therefore the risk of having to pay the land value
tax without income from a tenant.
Q.9 The Government would welcome views on the proposed arrangements
for access to the local rate by tier authorities.
The Land Value Taxation Campaign proposes that the tax comprises
elements as follows
National land value tax set by Central Government
Regional land value tax where applicable (Scotland, Wales,
Greater London)
County element where applicable
Local authority element
The maximum possible rate of land value tax is 100%, therefore a
natural limit applies. Although collected by the local authority,
national government would have first claim on the tax.
Q.10 The Government would welcome views on the relative merits of
these different approaches and suggestions for other ways of
dealing with network property.
The Land Value Taxation Campaign would argue that network
properties, like all other properties, should be assessed on
the basis of the land value alone.
It is necessary here to understand the general principles of
land value tax assessment. Each parcel of land is considered in
turn as though all structures and improvements on that site were
removed, whilst all other sites around remained in their present
condition. The site is then valued on the assumption that it was
in optimum use. Earthworks, cuttings, drainage works and similar
features are, after a set number of years, regarded as having
merged with the land itself, unless, like retaining walls,
fencing, etc, they require regular inspection and maintenance.
Applying these principles to the railways, the land minus the
structures thereon consists of a network of cuttings and
embankments comprising the trackbed. Arguably, the optimum use
of this land would be as a highway, and thus land free to the
public – and so of zero value for LVT purposes. This would of
course, apply only to the strip of land occupied by the running
lines. Land occupied by, say, carriage sidings, would be valued
on the basis of alternative use, which might be residential,
industrial or agricultural, depending on its location, whilst
land occupied by a major city terminus would be valued on the
basis of commercial use – eg retail/office.
This would, of course, have important implications for the
railway industry, since, at present, track access charges are
about 50% of train operating companies’ costs and are reflected
in subsidy levels. Thus, a change from business rate to LVT is
likely to mean a substantial reduction in the tax burden on the
railways, and hence a reduction in the need for subsidy.
Other network properties would be valued according to the land
surface occupied. Arguably, canals can be regarded as highways,
but associated lakes and basins have the value of mooring rights,
fishing rights, etc, whilst canals and canalised rivers also have
riparian rights in addition to their use for the passage of traffic.
Underground structures occupy no land surface and so escape any
liability to LVT. The case of overhead structures such as pylons
is more complex and we would wish to defer detailed consideration
of this question. Wayleave payments do not necessarily reflect
the cost to the landowner due to the presence of such structures.
Q.11 The Government would welcome views on whether the rates
burden on smaller businesses should be reduced and on these and
any other approaches.
Land value taxation would reduce the burden on business in several
ways.
* buildings and improvements would be exempt.
* the burden on business would be reduced because
the tax base would be widened by the inclusion of
vacant and agricultural land in the rating system,
and because under-used land would be rated on the
assumption that it was at optimum use.
* rentals would tend to fall as there would be a
substantial cost to landlords in keeping land and
buildings vacant, thus the element of speculative
froth would be removed from land pricing.
The Campaign is opposed to any exemptions or banding systems.
These open up loopholes which can lead to evasion or abuse. Tax
privileges also lead to higher rental values and so are ultimately
a gift to landowners.
Q.12 The Government would welcome comments and views on any of the
issues set out in this chapter to feed into the discussions with
representative organisations.
Technical issues discussed in Chapter 8
# 8.2, # 8.3
Transitional arrangements would not be necessary for the
introduction of LVT in the 2000 revaluation, since rental
levels would adjust in anticipation of the LVT. It should be
noted that the land value tax is payable by the beneficial owner.
Where leases are below current market rental value, beneficial
ownership is shared between tenant and ground landlord and the
LVT would be apportioned between the two. Once the system had
settled down, LVT assessments would be revised annually and no
further transitional arrangements would be required.
# 8.4
Under an LVT system, buildings and improvements are ignored in
the valuation, therefore the number of appeals would be greatly
reduced for this reason alone. Once land valuation lists had been
published, the principal ground for appeal would be that of
relativities between different sites and the system would quickly
“bed-down”. Appeals would then arise only where sites were affected
by significant changes in local circumstances.
# 8.7
With annual revision, land value tax would provide a buoyant
source of revenue. Historically, land rental values have
normally risen overall at least in line with the retail price
index and there is no reason why they should not continue to do so.
# 8.8
The Land Value Taxation Campaign is against reliefs in principle.
They open up loopholes, compromise the system and lay it open to
abuse. There is no reason for non-profit making bodies to have
privileged access to valuable sites.
# 8.9
Vacant property relief encourages owners to keep property vacant
for longer than they would otherwise do so, thereby creating an
artificial shortage and driving up rental levels generally. No
reliefs should be given. Land value tax should be payable on the
assumption of optimum permitted use, disregarding buildings and
improvements, and irrespective of whether the land is in use or
not.
Under an LVT system, assessments could not be reduced by
“constructive vandalism”. If the present system is retained,
constructive vandalism should be regarded as solely for the
purpose of tax avoidance and the assessment based on the previous
state of the hereditament.
# 8.11
Under an LVT system, all buildings and improvements would be
exempted from the valuation. All land should be assessed and
subject to the land value tax or rate.
# 8.12
Under an LVT system, railway tracks, tunnels, sewers, pipelines
and other structures would be ignored in the valuation, apart
from the land upon which they stood. On this principle, an
underground railway would not be subject to the land value tax
apart from the land value of surface sites such as stations. It
is perverse to tax structures of this nature on any other basis
since they form part of the stock of the nation’s wealth; the
present system penalises wealth creation at great cost to the
community overall; removal of this penalty and the associated
damage is the underlying rationale for land value taxation.
The value of these infrastructural works, and of public amenities
generally, would be captured in the value of the neighbouring land
benefitting from those works.
PART 4
DISADVANTAGES OF THE PRESENT SYSTEM
We would like to emphasise the disadvantages of the present
UBR/Council Tax system.
Disadvantages of the UBR
* Valuations involve the inspection of individual premises,
as installed machinery and plant are included in the valuation.
In some uses, the UBR is close to being levied simply as a
turnover tax.
* Many appeals are generated when valuations are revised.
* There is a financial disincentive to improve and develop,
as a modern building is assessed at a higher value and
subject to a higher tax than an old one.
* The tax “rewards” the owner of vacant or under developed land.
* Valuations are insufficiently frequent; UBR assessments
made at the peak of the boom in 1988 remained in force
throughout the subsequent recession. The consequences of
this are exacerbated by the transitional arrangements, which
effectively prolong the use of out-of-date assessments.
* The exemption of property in agricultural use distorts the
land market, favouring agriculture rather than other uses.
* The fact that all the revenue from the UBR is allocated
to local authorities by central government gives rise to
high “gearing” of discretionary local authority expenditure,
which can only be varied by a disproportionately large
increase in the Council Tax.
* Local authorities have no direct interest in promoting
improvements which would lead to an increase in commercial
rental values in their area.
* The tax can be avoided because valuations are based on
structures “as they stand” and buildings can readily be,
and sometimes are, rendered unusable for property tax
avoidance purposes, eg by “de-roofing” or “constructive
vandalism”.
Disadvantages of the Council Tax
* The tax is regressive in that an undue proportion of the
overall burden is borne by occupiers of lower-value properties.
* The tax is also regressive across local authorities, with
the lowest rates in England in Westminster, where some of the
most expensive properties in England are situated.
* The lack of provision for a revaluation means that values
are diverging from the original 1991 assessments. This is
true of whole areas, of property banding within areas, and
of individual properties within bands.
* Banding avoids valuation of individual properties, and
leads to fortuitous advantages and disadvantages for those
with properties whose value is close to the step from one
band to the next. As a result, the initial valuation
generated almost a million appeals and it is likely that
this would happen again if the values were revised.
* The tax generates insufficient income; £9.8 billion was
collected in 1996, as against £30 billion if the domestic
rates had continued and were still a similar proportion of
revenue. This shortfall has had to be made good by increases
in other taxes, notably VAT.
The UBR and Council Tax cannot be considered apart from one
another or from the administrative and electoral system of
local government.
* The relationship between the UBR and the Council Tax
distorts the overall land market, since it tends to favour
residential use. This encourages the loss of commercial
property, especially in mixed-use neighbourhoods.
APPENDIX 1
DEFINITION OF LAND VALUE TAXATION
A1.1 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.
A1.2 Each unit of land is assessed at its unimproved site
value, with all surrounding land taken as being in its existing
condition.
A1.3 All land, including vacant and agricultural land is
subject to the tax, and the valuation is on the basis of optimum
use within whatever permissions and constraints apply.
A1.4 In practice, LVT would operate in much the same way as
the present national non-domestic rate, with the difference that
no land would be exempt and buildings and other improvements would
in effect be de-rated.
APPENDIX 2
DEFINITION OF LAND VALUE
The following definition of land value is that given in Section 3
of London Rating (Site Values) Bill, 19392
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.
APPENDIX 3
SOME PRACTICAL ASPECTS OF LAND VALUE TAX IMPLEMENTATION
Information on site-only valuations may be obtained from abroad,
where systems of land value taxation or site value rating are in
operation. In this way, legislation and procedures can be studied
and valuation rolls and maps examined. The development of
information technology, in particular, geographical information
systems (GIS) and digitised mapping would obviously be of
particular relevance for the implementation of land value taxation.
In this country, land valuations were made under the heavily
flawed provisions of the Finance (1909-10) Act, 1910, but the
records were never published. After repeal of the provisions by
section 57 of the Finance Act, 1920, the valuations were preserved
in the offices of the Inland Revenue. When the London Rating
(Site Values) Bill was presented in 1939, some lessons had been
learned from earlier legislative attempts. Clearly, considerable
up-dating would be required in any new proposal, but the 1939 Bill
sponsored by the London County Council still provides a useful
starting point.
PILOT SCHEME
HM Government is considering arrangements for an elected Mayor
for London and an overall authority encompassing the London
Boroughs. The Land Value Taxation Campaign argues that London
should finance its revenue requirements exclusively from a duty
on site values. This would replace the UBR and the Council Tax.
There would be an element of equalisation between boroughs of
relatively high land value and those where total land value is
relatively low.
Ideally, the system the Campaign is putting forward would operate
throughout the United Kingdom, but the opportunity presented by a
major revision to the way in which the capital city is to be
administered, does suggest a fresh approach at the same time to
how revenue is to be raised. The 1939 Bill has set the precedent.
The Campaign considers the theory sound. Experience from abroad
is reliable and positive, and site-only valuation is practicable
within an acceptable time scale. Desk studies, backed by visits,
would show how cities such as Copenhagen, Brisbane, Pittsburgh
and Johannesburg operate (though the Campaign does not recommend
all of their procedures because the land value taxation principle
is not always fully applied and there are some imperfections in
the manner of its implementation).
Additional supporting evidence is actually available from the UK.
A pilot valuation of Whitstable, Kent was conducted in 1963 under
the auspices of the Rating and Valuation Association and updated
in 1974 in a study for the Land Institute.
The Campaign recommends a decision to adopt site value rating/land
value taxation without further ado and wishes for early introduction
of enabling legislation.
If, however, for reasons of the parliamentary timetable or other
priorities within the Government’s programme, it is not held to be
practical in the immediate future, the Campaign suggests that the
bill effecting changes in the government of London contain a
provision for a pilot site-only valuation of a grouping of
contiguous London boroughs (to include areas within the former
London County Council rather than outer suburban boroughs which
can be expected to reflect the general trends already displayed
in the Whitstable surveys).
A pilot survey in London would provide valuable experience and
yield useful information which the Campaign believes would
underpin the case for national implementation of the policy.
The survey could be conduced directly under the aegis of H M
Government or carried out by a qualified body as a research
project with Government backing.
1 This issue was discussed at length in a research paper published
in 1984, with the title “Local Fiscal Policy and Inner City Economic
Development” by R M Kirwan, Discussion Paper no 13, Department of Land
Economy, University of Cambridge. This paper includes a report of a
detailed survey and contains further references which are relevant to the
question.
2 The full text of the Bill is on this web-site (see index page)
or is available on request from the Campaign, which distributes it following
consultation with Messrs. Dyson, Bell & Co., and Mr J. Hastings, Clerk of
the Journals, House of Commons, confirming that there was no objection to
distribution.