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Land Value and Community Betterment Taxation in Britain

Proposals for Legislation and Practice

Nathaniel Lichfield and Owen Connellan

February 2000, English

Report II presents proposals for legislation and practice in Britain for what is generally termed land value taxation (LVT) that is taxing the land (as distinct from land and buildings in combination) for the benefit of the community. While open to various interpretations, in this Report it comprises the introduction of a series of taxes geared to annual exactions (LVT) value capture by capital exaction (betterment) and exaction for contributions to infrastructure financing (IF). It does not in this Report include recoupment of value to the community simply as a result of public ownership of property.

The LVT proposals (Chapters 4-7) are preceded by a Context (Chapters 2-3) and succeeded by Related Issues (Chapters 8-10).

Part I (Chapter 1) presents the Scope of the Report based upon its Terms of Reference. The Context for LVT is presented in Part II. First, we present the current situation of infrastructure financing in Britain, in order to show that the frontier of such financing is steadily being switched from the traditional approach, in that increasingly the cost of the infrastructure is being borne by the sector which makes profit from development as opposed to the public purse (Chapter 2). One particular instance is picked up, namely the practice of exacting ‘planning gain/obligation’ which is similar in intent to the US ‘impact fees’. This system is working badly in Britain and, following a review, our proposal is that it be replaced by exactions based upon the established practice of environmental assessment. Then we introduce the Recoupment of Betterment (Value Capture) by Capital Levy (Chapter 3). We give reasons for not returning to the three major efforts of earlier Labour Governments (in 1947, 1966 and 1975/6) to achieve such betterment. Instead we propose a continuation and enhancement of Capital Gains Taxation (CGT) which was introduced by the Labour Government in 1974, following an initiative by the Conservatives in 1973. In addition we support the suggestion for a new Greenfield Tax (GT) aimed at profits on the development of open land whose proceeds would be hypothecated for subsidy on “already developed land” within urbanised areas (brown land).

Our proposals for an annual land value tax are presented in Part III. We start with a description of extant taxes that impinge on land ownership in Britain (Chapter 4) leading to a five country review of historically used systems and past proposals for Britain (Chapter 5) together with a review of possible options. Their evaluation follows (Chapter 6) before suggesting an acceptable solution (Chapter 7).

We start with the conclusion that the traditional ‘Georgist’ exaction of a near 100% of economic rent at highest and best use would amount to the nationalisation of rental value and the right of owners to receive it, leading to the virtual disappearance of the land investment market. Several less drastic options are then reviewed: less than 100% tax on land rent, hope values dropped in favour of plan-led values, differential taxation of land and buildings, exclusion of some types of land ownership, incremental values over base dates, existing use values instead of “highest and best.” A synthesis of options is made to find a solution which we consider accountable to the current to Government and public opinion, that would be simple and cost-effective to administer. A transitional basis is envisaged moving from the shallow end to deeper waters as Government and public opinion permit, to ensure that the landowner bears the tax. This would take the form of an annual owner’s land tax that could be passed up through a hierarchy of ownership interests, starting with an apportionment as between land and buildings of rating assessments at the next revaluation. Concurrently, vacant land or some agricultural fringe land could also be taxed at highest and best use. Gradually over time the land portion of the rating assessment could be revised from existing use to future expectations of value, and ultimately the occupier’s tax on the buildings etc., element might disappear altogether, leaving the sole application of land tax as envisaged by the Georgists, but not as high as 100%.

Having presented our proposals for Land Value Taxation including Capital Value Capture, we then introduce Related Issues in Part IV. First there is an extension of the discussion from our Report I (Part III) on how to make Land Taxation compatible with development planning, on the proposition that each on its own could be in conflict (Chapter 8). But this aim for compatibility reveals a weakness in the land market which could undermine a prime purpose in this Report, to ensure that Land Value Taxation and Value Capture should be borne by the land owners and not by the developers. Just because the regulatory system which has grown up under town planning (planning permits, environmental assessment, and charges etc) is time consuming, and the bidding for land leading to sale is often under pressure, the developers are led to formulate bids under some uncertainty as to the circumstances which should determine the amount of the bid. If so, the consequences could be unfortunate in the public interest, since overbidding for the land can put pressure on the developers to cut costs in their development proposals. Thus we propose (Chapter 9) an improvement via the landowner needing to provide more information to the development industry prior to the sale of the land, linked with the possibility of introduction of transactions via options. Here we make no firm proposals except that the matter should be investigated.

Finally, in (Chapter 10) we pick up the requirement in the Terms of Reference for the Report that we have regard to political feasibility of our proposals in terms of the likelihood of their being adopted in Britain under the New Labour Government. On this we cannot draw clear conclusions since the Government has not included the topic in their election manifesto or subsequent programmes. Then we review the possibility of support for LVT from the other political parties (Conservatives, Liberal Democrats, Scottish Nationalists, Greens and European Union) and end with an account of how a shallow end approach can enhance political feasibility.

Our proposal here is not to enter into any political campaign. Instead we hope that our Reports will offer a basis for discussion around the topic, both immediately and at the next election, possibly in the year 2002.