Briefing Paper for APPG on Land Value Capture
Briefing Paper on Value Capture for Members of the All Party Parliamentary Committee on Land Value Capture
By Joe Bourke, Coalition for Economic Justice as Secretariat to the APPG
What is ‘value capture’?
Public investment in a new rail and road can generate huge increases in surrounding land values. In part the increase derives from improved accessibility for existing residents and businesses. High windfalls also arise once land has been rezoned to capitalise on higher development opportunities generated by the new infrastructure.
Value capture mechanisms seek to claw back at least some of the increased business revenue or land value. These funds are then allocated towards the initial costs of infrastructure provision. In the case of a planning change, land value uplift can also help ensure that affordable housing for low income groups is included in new development.
How does value capture work?
Several different approaches are used overseas. Transit value capture is used in Hong Kong and Japan to fund railway lines and new town development. This is a project-based approach which packages investment in railway and housing development together. Commercial holdings along the railway line deliver an ongoing revenue stream as do long term investment in residential development. In Hong Kong, a significant program of public rental and subsidised home ownership has also been delivered as part of this model.
Project-based transit value depends on access to large swathes of low cost land (in Hong Kong the government retains land ownership, so the land component is essentially free). It also depends on ongoing residential and commercial investment along the new route over time, which in turn assumes buoyant economic growth. When the Japanese economy stagnated, the potential for railway operators to self-finance their projects did too.
Tax Increment Financing (TIF) is used widely in the US to finance new transit and urban renewal projects. The model draws on anticipated increases in business revenue or rents in areas where incremental value uplift will occur. A portion of the increase is captured via a special property tax which is then allocated to repay the debt.
Australian local governments have also introduced special purpose levies to fund specific items through property taxes or rates. The Gold Coast light rail project for instance, was partly financed via the council’s annual transport levy.
In the UK the Northern line extension has been partly financed with the use of incremental business rates generated and retained within a new Enterprise zone across the wider Vauxhall Nine Elms Battersea (VNEB) Opportunity Area.
Value capture through the planning process, such as the Community Infrastructure Levy, is an alternative approach. Unlike S106 development contributions, which are used to internalise the costs of servicing a particular project (like roads, carparks, or footpaths), so they aren’t borne by existing ratepayers, value capture focuses on the benefits (often called “betterment” or “planning gain”) accruing from public investment or planning decisions.
One way of capturing value created through public investment or planning is to levy the charge on the first property transaction (i.e. land sale) following the change. An example would be the use of Community Land Auctions, where the local authority engages in a competitive tendering process to secure potential development land that is of good value and re-auctions the land with planning consent attached.
Another is to add an additional levy to existing contributions paid by developers. In the UK S106 planning obligations are levied for site-specific infrastructure and for provision of affordable housing. The Community Infrastructure Levy is a tariff based approach to funding strategic infrastructure development that can be levied on all new developments in a local district and Section 278 (Highway Act) paymentscan be utilised to secure necessary highway improvements to make development acceptable in planning and highway terms.
Research undertaken by the Centre for Progressive Capitalism shows that for new build property in England alone, the potential incremental uplift from land value capture for residential housing (over and above what is currently recovered through S106 and CIL payments) is around 185 billion over 20 years.
What would need to happen to extend value capture models in the UK?
A number of issues must be addressed if value capture is to be extended in the UK. First, calculating value uplift is complex. Often land prices rise in anticipation of investment or a planning change, so a robust framework for value capture should be in place well before such speculation might occur.
Second, value capture should not discourage development or make land acquisition more expensive. This means close attention to project viability when setting capture requirements. Third, robust mechanisms for collection through either the planning process, as an ongoing land value tax, or when land is sold, are needed.
Finally, while transport infrastructure is vital, other socially beneficial infrastructure such as schools, which also improve land values, and genuinely affordable housing, which is often lost when land values rise, need to be provided for.
The 2017 party manifesto’s give an insight into the approach of the main political parties in the UK to issues of Land Value Capture and local government finance.
We will work with private and public sector house builders to capture the increase in land value created when they build to reinvest in local infrastructure, essential services and further housing, making it both easier and more certain that public sector landowners, and communities themselves, benefit from the increase in land value from urban regeneration and development.
Richard Bacon MP is particularly interested in promoting self-build and facilitating the use of small plots for self-build. Richard is the Chair of the APPG on Self-Build, Custom and Community Housebuilding and Place-making. He is supportive of the concept of public authorities purchasing land for self-build, preparing building plots – and retaining the uplift in value that results – and then making the plots available for individuals and families to build their own homes.
Nick Boles MP, had given support to LVT in the past (in his 2012 MacMillan lecture) – but specifically in relation to securing the early use of undeveloped land with residential planning permission. Mr. Boles had recently urged his party to develop and promote policies capable of making the Conservative party more attractive to younger voters, who – he has argued – were finding it increasingly difficult to rent or buy a home.
We will initiate a review into reforming council tax and business rates and consider new options such as a land value tax, to ensure local government has sustainable funding for the long term.
At the reception for the Launch of the APPG, David Drew MP argued that the state had to collect some of the land value to fund the state’s services. In the general election Labour were accused of ‘grabbing people’s back gardens’. The level of public debate needed to be raised, “so that people can see why and how we are doing it, why its time has come. We have to explain to people, because it is quite a complicated issue, in a way that people can see the benefit of it.”
He said “It is about fairness. We live in an unfair society now, and the biggest unfairness of them all is land”. In particular, it was necessary for the state to share in the astronomic gains that accrue to land developers. He noted that the political parties would get nervous about this proposal, “so they have to be pushed”.
Review business rates and consider the implementation of Land Value Taxation.
In the introduction to After the Storm, Sir Vince Cable noted:
“…one of the main tasks of opposition parties [is] to redesign the archaic, inequitable and unpopular system of property taxation... to make council tax more closely proportional to the value of property. A more radical and far-reaching reform would be to give practical substance to long-mooted ideas for the taxation of land… The practical problems of valuation and making the transition from a land market massively distorted by planning have so far frightened away reformers. But such a reform is now long overdue.”
In the concluding paragraphs of the book he wrote:
“In principle, wealth taxation in the form of proportional levies on property values or land values should be easy to impose since property and land are immobile... Such taxes are … favoured by economists because they do …not discourage work or saving. We have proxies for wealth tax in the form of capital gains tax, but it excludes owner-occupied property and addresses only capital appreciation, not the stock of capital, which is …easily avoided through inter vivosgifts.
Without doubt a theoretically superior approach would be a land value tax, an idea that can be traced back to Adam Smith, David Ricardo, Henry George and Winston Churchill, and which has advocates on both right and left, and in the radical centre of politics. Such taxation has the additional merit of helping to deflate volatile bubbles in land and property values, and discourage the hoarding or inefficient use of land… Why, beyond a few limited experiments, has a land value tax never been tried in over two hundred years? Practical issues of valuation and the big gains and losses of moving from our current system help to explain it. There is, however, a strong case for moving incrementally in this direction, through a land value based approach to commercial property taxation or by trying to capture the value of land for the public in other ways; public land banks and/or community land auctions.
There is enormous scope for arguing about the detail of tax policy, but the strategic objective, on grounds of both fairness and economic efficiency, should be to shift tax from income to assets – property and land- as well as to expenditure, provided that the latter can be applied progressively (maintaining VAT exemptions) or applied to goods that create wider social costs (carbon-based fuels, for example).
…the instability and inequalities generated by property and land markets were a major feature of the financial crisis. They lie at the heart of a distorted system of credit. They underpin a growing divide in the housing market between social classes and generations. And they cut to the heart of what it means to have a common identity, to belong to the same society. Political indifference is not sustainable.”
Action on empty homes to bring them back into use and a trial of a Land Value Tax to encourage the use of vacant land and reduce speculation
Caroline Lucas MP speaking about her 2012 Private members bill commented:
“A Land Value Tax could be a fair and progressive way to encourage both the creation of more homes, and a more efficient and sustainable use of land by making it unprofitable to sit on unused land.
“Over a period of time, it could help to stabilise the property market and tackle the boom-and-bust factor that contributed towards the 2008 financial crisis – discouraging disproportionate amounts of capital from being tied up in property and excessive accumulation of debt.
“With the IFS Mirrlees Review stating that the case for a ‘thorough official effort to design a workable system’ of LVT is ‘overwhelming’, I’m now calling on the Treasury to commission research into how the reform might work in practice.
The House of Commons research briefing on land Value Taxation is available at http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN06558
The SNP have previously included LVT proposals in their manifesto and at their spring conference this year adopted a resolution “must include exploring all fiscal options including ways of taxing the value of undeveloped land” in its gradual land reform programme.
National or Local
The total annual revenue to all levels of UK government from all forms of land and property tax (including Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance Tax, Community Infrastructure Levy / S106 and elements of Capital Gains Tax) is currently about £90bn. Most of this revenue derives from property market transactional activity (sales, award of planning permission, improvements to buildings) and very little from the vast bulk of increments in land value accruing to existing landowners. Transactional taxes have a negative incentive on property market activity. Development is deterred by S106/CIL and sales deterred by SDLT. Taxes based on value (known by the Latin term ad valorem) have the opposite effect, especially if levied only on the land element and excluding the value of investment in improving the property.
Several independent analyses have shown that the yield from this unearned “site premium” (a term for the annual rental value of land sites owing to their locational attributes and not what has been built on them) could be between £100bn and £250bn. One estimate puts the site premium on housing land aloneat over £200bn.
If Land Value Tax (LVT) was used for both national and local government finance, only one level of government would need to be responsible for its administration. As is the case now with parish & town councils, in two-tier local authority areas and with the GLA, other levels of government could ‘precept’ into the LVT tax base: setting budgets to cover their own expenditure and then setting a tax rate to be collected by the ‘billing authority’, which could be HM Treasury (if LVT was embedded within income tax and/or corporation tax).
There are advantages and disadvantages to either using LVT only for local government (Site Value Rating) or only for national government.
For LVT as a national tax, these are just a few advantages:-
· National government nowadays invests huge amounts in ways that can benefit (or harm) land values everywhere. Why should Town/County Hall recover the fruits of that investment (or have to compensate those harmed by it), while Whitehall does not?
· Land values in London and south-east England are much higher than in less prosperous areas. This is not the fault of those areas but a consequence of their relative attractiveness for investors. If LVT were collected by national government, it would provide a natural, simple to administer, means of equalising geographic wealth inequalities. At present, rich local authorities (e.g. Westminster) can pay for services at a much lower cost to their council tax payers than is the case in poor areas, which exaggerates the relative advantage they already have.
· Central government currently relies on several more regressive taxes than local government does (VAT, SDLT, and National Insurance). With national LVT, some such taxes could be abated or phased out entirely, with a greater impact on economic efficiency and wealth inequalities than if it was only available to local government.
On the other hand, a good case can be made for local government to use LVT:
· ‘Rates’ based on property values have always been the preserve of local government: even Council Tax is a ‘hybrid’ form of rates. It is the case in most countries that property taxes are assigned to local government.
· Planning decisions are made locally and are the most obvious source of changing land values for voters. At present it is “NIMBY costly” to award planning permission, whereas refusing is ‘free’. Aligning local decision making with the local finance tax base seems democratic.
· To a large extent land values reflect the economic performance of communities and the quality of their governance. Local government should be rewarded for good performance.
Reforming Local Government Finance
Since local taxes are devolved in Scotland, N Ireland and Wales), this section is primarily only relevant for England. A brief summary of the prospects in the rest of the UK follows.
In some respects, N Irelandwould find it easiest to implement, because there was never any Council Tax or Uniform Business Rates implementation there in the 1990s. Also the various agencies that administer property valuation, ownership and base mapping are combined there and have undergone fairly comprehensive recent modernisation as part of a wholesale revaluation in 2010. The systems needed for LVT would much more readily be devised. Also the Republic of Ireland already has, since 2010, a Site Value Tax which uses similar principles
Scotland’sland and ownership registration systems are different to those in the rest of Britain, as is their legal framework. However LVT was recommended early on to the devolved Parliament as part of a wider Land Reform package. The Scotland Act gave Scotland power to introduce any new tax it wishes, which could include LVT as a partial replacement to other UK-wide national taxes as well as for local councils
Wales has hitherto been given far less autonomy over local taxation. However, under the Wales Act (2017) “local taxes to fund local authority expenditure (for example, council tax and non-domestic rates)” are now explicitly excluded from the UK Government’s reserved fiscal powers.
If LVT is ever to be a national tax, the implications of that would need to be considered from the outset of any initial purely local English implementation. Council Tax could perhaps be replaced by using the “notional rental value” of owner-occupied property as a form of “income” for tax purposes. This is not new in the UK, until the early 1960s Schedule A of Income Tax was just that.
If it was the rental value of owner-occupied land sites that formed the basis of local taxation, then Site Value Rating (SVR) of both domestic and non-domestic land could be implemented through the income tax and corporation tax systems respectively, even if there was no national LVT. As happens in Sweden and several other countries – and happens now with Uniform Business Rates – the revenue from SVR could be assigned fully to local government although it was collected centrally. Under the Swedish system, local authorities have some discretion in setting the rate for the centrally collected property tax, which is not the case with UBR.
Existing Local Government Taxes
A nationwide system of property taxation, to raise revenue for welfare facilities in parishes, was introduced in 1601. Its rate was fixed annually by each parish and as local government was reorganised with borough, city and county councils created over time and taking responsibility for more services, so every level of local government acquired the ability to set its own ‘rate’.
Initially this property tax was levied on property owners, “as it would be they who benefited from locally-provided services”. However perhaps partly because England & Wales have never had a complete register of land ownership, what became known as “the rates” gradually came to be levied on occupiersof property.
The UK is unusual in this respect: in almost all other countries the local property tax is levied on owners, not occupiers. Although few countries have a land value tax, many more assess the value of property in two components: the value of the buildings and value of the site itself. This is particularly so with countries which have introduced or reformed their property tax systems since mass valuation by computers became feasible.
The separation of value into building and land components allows some legislatures to set different rates of taxation for each element and could even allow the taxation of land to be entirely separate from the taxation of buildings. Thus the occupier of the building (tenant or leaseholder) could be made liable for the building element while the owner of the land site – freeholder in our terms – was liable for the land element.
Throughout North America, property tax assessments of land and building value are separate, although only a few jurisdictions use LVT. In about 20 cities in Pennsylvania, the land element of property tax has been increased and the building element decreased. Research has indicated that for each one percent shift in this so-called “split rate tax” over time there follows a 16% increase in volume of construction, compared to cities that have not split their tax rates. Clearly owners have a great incentive to make better use of derelict and under-used urban sites.
For historic reasons, rates have for a century at least been seen by the British public and tax administrators as the means of paying for local services, not as a tax to recover the unearned element of land value that lies behind LVT theory, or any form of wider economic policy. For the 1976 Layfield Commission, which reviewed the whole subject of local government finance, the main reason for rejecting LVT was that it would be unfair to make landowners per se pay for local services which they might not be receiving, because they do not necessarily occupythe property that receives local services from that local authority.
Until 1990, local property taxes on all forms of property were based on the annual rental value, not the capital value (or estimated sales price). The term ‘rent’ has one meaning to tenants and another meaning to economists.
Occupiers of property (tenants) pay rent to their landlord and property rates are generally based on “the rent at which it is estimated [the property] might reasonably be expected to let from year to year”, known as “net annual value”.
“Economic rent” on the other hand is the surplus arising to a producer (of any goods or services) from the fact that the cost of supplying it is often less than what the market will pay: the unearnedelement of value. In the case of land, there is virtually no cost incurred by an owner in supplying it. Therefore the entire rental value of land, which is often the majority of actual rent paid by an occupier, is unearned. Taxing the rental value of land therefore has no negative impact upon economic activity, because it does not raise the cost of supply of land.
Clearly it would be unjust to make an occupier pay rates on the basis of ‘economic rent’, because it is only the site owner who benefits from this element of value. That is why rates in the UK are based upon a recent assessment of what the market rent for the whole property is worth to an occupier. This requires detailed and costly inspections of each property at each revaluation, which are then subject to appeal by ratepayers – at further expense to both parties.
However this means that where land is under-used it is being taxed at less than the ‘economic rent’ value. In effect, the owner is ‘capturing’ almost all of the unearned increment of value arising from the site being in a valuable location. Local authorities who need rates revenue are being denied their due, as are the communities they serve.
In 1990 the Community Charge (or Poll Tax), replaced rates on domestic property in England & Wales. Simultaneously non-domestic rates were put onto a uniform national ‘poundage’ (rate in the pound), hence Uniform Business Rates (UBR). Local councils (boroughs and districts) collect the revenue, pass most of it to central government and then receive a proportion back depending on ‘need’ as assessed centrally. All UBR revenue is however assigned to local government.
When the Poll Tax was introduced, it very quickly became extremely unpopular, such that it was replaced by the Council Tax in 1993. Since then, rates (other than in Northern Ireland) have only been levied on non-domestic property.
The Council Tax is a hybrid of the Poll Tax and Rates, hurriedly introduced to resolve a political crisis. It has an element of personal taxation derived from the former: Poll Tax was levied on every adult occupant of a home, at a fixed annual rate. The Council Tax assumes there are two adult occupants, with a discount of 25% available for single occupancy. The property element is calculated by placing each property in one of eight bands of capital value, with a valuation date increasingly antiquated and artificial: a “drive-by” valuation in 1991, which took only six months nation-wide.
APPG Work Program
The overall aim of the APPG on Land Value Capture is to be recognised as an influential and effective partner in the area of Land Value Capture for the public benefit; so as to ensure political commitment from the UK government and other sources to address the issues arising from shortages in the supply of land and necessary infrastructure for housing and its impacts on inequality and poverty in society.
Key objectives include:
Raise political awareness about Land Value Capture and its role in addressing housing supply constraints and poverty in general.
To make addressing Land Value Capture a political priority for the UK government, all political parties and the international community.
Keeping MPs and Peers informed with current and emerging issues in Land Value Capture and International best practice.
Holding regular meetings and events and so provide an opportunity for those with a common interest to meet and debate their views.
Deliver the aims of the Group and its members via a range of activities including informal gathering such as receptions, formal presentations by organisations at meetings, letter writing, tabling Early Day Motions and Parliamentary Questions.
Establish working groups to investigate and report on areas of concern
Liaise with other APPGs including the APPG for Housing and Planning and the APPG on self-build, custom and community housebuilding and place making; and where appropriate, work in partnership with other APPGs on cross‐cutting issues.
It is anticipated that the APPG will focus primarily such as hosting events, conducting inquiries and publishing reports.
The first meeting proposed in the spring is a conference of Metro Mayors and Chairs of Combined Authorities to gather evidence on the potential role of Land Value Capture in delivering on the mission of devolved administrations.
The second meeting proposed is an evidence gathering session on the 1961 Land Compensation Act, compulsory purchase, public land banks and community land auctions.
The third meeting proposed is an evidence gathering session on the economic efficiency, fiscal stability and inter-generational equity of shifting tax from income to assets – property and land
The first year of the APPG would conclude with a report on the findings of the group to coincide with the AGM and public reception.
Vince Cable, After the Storm: The World Economy and Britain’s Economic Future, London: Atlantic Books, 2015)
Ninth report of the House of Commons ODPM Select Committee (2004)
A Markov Chain Monte Carlo Analysis of the Effect of Two-rate Property Taxes on Construction (Plassmann and Tideman: 2000. Journal of Land Economics)