Land Value Taxation: from proposition to practical policy

Land Value taxation is a policy idea with a pedigree which, in the United Kingdom, stretches back for well over a century.

Over that time, it has moved both up and down the political agenda, without ever being implemented in any concerted way, although there is a substantial accumulation of evidence of its use-in-action from other countries, including places as far as part as Hong Kong, Russia and Denmark, as well as at state and municipal level in Australia and the United States.

This paper begins by providing a definition of LVT and an account of the case for its introduction. It then discusses the practical issues which would have to be faced in moving to such a scheme. The paper ends with a suggestion that political conditions in Wales provide a potentially propitious context, in which a system of Land Value taxation could be introduced.

‘Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and ll the  while the landlord sits still. Every one of those improvements is effected by the labour and cost of the other people and the tax payers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing  to the process from which his own enrichment is derived. (Winston Churchill, 1909, quoted by Barker 2003: 116).

LVT: the case in favour

A Land Value Tax would be levied on the annual rental value of specific pieces of land, where the value is determined by different usages, for example whether it was agricultural or industrial land. Of course, it would be an alternative to existing forms of taxation, not an addition to them. As a starting point, a Land Value Tax is most often cited as allowing for the abolition of Council Tax, Business Rates and Stamp Duty Land Tax.

A major virtue of such a change lies in the progressive nature of Land Value taxation. In that sense  the case for a Land Value Tax rests not simply on its own inherent advantages, but on the undeniable unfairnesses and drawbacks on the existing system.  These range from the long term damage to the core economy, caused by the failure to use taxation as a means of smoothing peaks and troughs in the property market, to the individual unfairness of the Council Tax, which requires least well off people to pay a larger share of smaller incomes, while collectively imposing a lower tax burden on rich places than poor places.

The Land Value Tax reverses all these propositions. It rests on the basic fact that the supply of land is fixed. As Mark Twain said, when advising people to buy land, they aren’t making it any more. As a result, it is inherently scarce. Its price reflects three things:

• its scarcity value;
• the value of improvements made by the landowner; and
• the value of improvements made by other people, especially the public sector.

In modern conditions the first and third of these are almost entirely outweighed by the second. Therefore it is right and fair that value created not by the landowner but (mostly) by national and local government should be taxed.

The practical example most often cited is the Jubilee Line extension through south and east London from Green Park to Stratford which is estimated to have raised property values around the stations it connects by up to £10 billion. If only a small part of this windfall had been taxed, it would have paid for the cost of the extension itself. At the same time, while those who benefit from big increases in land values as a result of such development pay more, those whose sites have suffered (such as, for example, housing close to railway tracks which may decline in value because of noise or vibration) would pay less. This is a form of automatic compensation without any complicated appeals system. In just the same way a Land Value Tax could easily pay for many other much-needed infrastructure schemes.

What, then, are the main practical advantages of a Land Value Tax? First and foremost, such a tax would be tricky for even the rich to avoid. Land is hard to hide or move offshore in order to avoid getting taxed. For economists who advocate a Land Value Tax, such as those at the Organisation for Economic Development and Co-operation (OECD), there are two other big advantages: land taxes increase long-term stability and growth by fostering more productive use of capital while providing scope to limit taxes which fall  on production; and they stabilise government finances by bringing in revenue efficiently and quickly. In short a Land Value Tax is:

• Cheap to collect;
• Difficult to evade;
• Discourages speculative land holding; and
• Encourages active use of land, creating more job opportunities and wealth.

Practical politics and the LVT

Colbert famously said of taxation that its art lies in extracting the most feathers from the geese with the least hissing. For some economists, land taxes turn out to have great theoretical appeal, but fail in practical implementation because they always generate a lot of hissing. In this paper, I don’t want to underestimate the problems of tackling taxation, especially in an economic downturn. And the experience of the poll tax remains one which has scarred the collective memory of tax change in the property field.

Nevertheless, it may well be that the crisis induced by the austerity state is opening up one of those moments when a Land Value Tax is moving back into the realm of practical politics. Certainly, it has an impressive list of contemporary economic and political support, across the beyond the progressive left. Recent Liberal Democrat supporters have included both Vince Cable and Chris Huhlme. For Labour, Andy Burnham made it a centrepiece of his campaign for the Labour leadership, describing it as an idea so old-Labour it can be traced back to Thomas Paine. Both parties have active and effective reform groups, campaigning to make LVT official party policy. That is already the case in the Scottish Green Party where research carried out late in 2010 suggested that a land value tax of 3.16p per pound would generate enough cash to replace council tax and the uniform business rate, while leaving 75 per cent of Scottish households better off. The case for a shift to an LVT was accepted in both the Mirrlees review of taxation – which argued that both council tax and business rates should be replaced by a tax on land, rather than property –  and the Barker review of housing policy. Will Hutton, writing in the Observer in advance of the now-notorious budget of March 2012, called for the introduction of a Land Value tax on business and agricultural property. Certainly, one of the key advantages of an LVT is that it acts as an incentive to bring empty and underused commercial and residential sites and buildings, in towns and cities, into full, beneficial use. In an analysis of 238 empirical studies of Land Value taxation in the United States, Professor Steven Cord of the Indiana University, Pennsylvania concluded that economic growth had followed a buildings-to-land taxation switch, ‘in all cases’, with cities adopting such a policy ‘always out-constructed their neighbours’.

But Land Value Tax is not simply a policy of the radical left. Free-market capitalists and mainstream economists, such as Martin Wolf and Samuel Brittan, have both argued the case in favour. In a recent article, for example, Brittan called for radical reform, in which a future LVT would become ‘a major revenue raiser’.  And, indeed, on the right of the political spectrum, a Land Value Tax has gained new traction in relation to problems in Greece. Put simply, it is quite difficult to move an Athens mansion off-shore (or, indeed, one in Belgravia) in order to avoid taxation.

Does this breadth of support mean that we can be confident that we can move beyond a position where LVT is thought of as theoretically wonderful, but impossible in practice? Not by itself, I think. Rather, we need a practical and a political strategy for making it happen. Practically, as suggested at the start of this paper, that means learning lessons from elsewhere, including new means of addressing the need to value land on a regular basis, developed, for example, in both the United States and Scandinavia. It means finding a practical solutions to the problem of asset-rich:cash-poor individuals (the ‘Devon pensioners’, as they often appear in the literature), for example allowing such LVT payers to delay payment to become a charge against their estates, while allowing local authorities to borrow, in the here-and-now, against such a revenue stream  in the future. It means identifying potential exemptions to a Land Value tax, where open spaces in cities, for example, need to be preserved.  It means recognising that LVT is not a stand-alone policy,  but has to be aligned with other key policy tools, including a willingness to explore the experience of zoning and split-take taxation (where a tax on land values in combined with a partial tax rate on buildings) which has been deployed at municipal level in the United States.

Now, as will already be clear, it is not my contention, in this paper, that LTV is a magic bullet or that, by itself, it will eradicate the many anomalies in UK taxation. Rather, it makes a contribution – or, could do, provided the search for the perfect does not drive out the possible. In this way, it seems to me, practical proposals for  a Land Value Tax need to draw on two important Fabian virtues. First, its potential success relies, as suggested above, upon much, detailed hard work, in navigating a fundamentally simple idea through to the inevitable complexities of practical operation. Second, as the old Cunctator would have recognised, its implementation will need to be gradual – this is not necessarily a ‘big bang’ idea, and there are a variety of ways in which an LVT could be phased in. It is with one such possibility that this chapter now ends.

Wales and a Land Value Tax

The argument that, in a ‘living laboratory’ sense, Wales offers a promising opportunity to mount a practical LVT experiment, rests on three ps – politics, policy and powers.

Politically, in Wales, Land Value Tax is an idea with a strong lineage. Inside the Labour Party, the idea was first seriously advanced by Keir Hardie, in his 1906 Manifesto to the People of Merthyr Tydfil and Aberdare. Here is what he said:

“The slums remain, overcrowding continues whilst the land goes to waste. Shopkeepers and traders are over burdened with rates and taxation whilst the increasing land values that should relieve the ratepayer go to people who have not earned them.”

Three years later, a Land Value Tax was intended to be the centre piece of Lloyd George’s ‘People’s Budget’ of 1909. However, it was defeated by the vested interests of the House of Lords and property owners in the House of Commons. In doing so, a long and lousy tradition began, in which attempts to introduce Land Value taxation in the United Kingdom have always been undertaken by parties of the left, only to be overturned by the Conservatives, on their return to office. After the Lloyd George attempt, Labour administrations made similar efforts in 1947, 1967, 1974 and 1976. On each occasion companies and individuals took action to delay liabilities, in the realistic hope that legislation would be abandoned, following a change of government. My conclusion is that it will require a sustained period of government b the progressive left, if Land Value taxation is to have a realistic chance of becoming embedded. Since devolution in 1999, four successive Welsh elections have produced such administrations involving, at different times, all three Parties which self-describe themselves as belonging to the centre left. The political case for making Wales a ‘living laboratory’ for the introduction of an LVT is that it has a reasonable chance of overcoming the perverse incentives to undermine the effectiveness of such taxation which have been so apparent at the UK level where property interests have always seen off past attempts at land taxation.

In policy terms, too, there are a series of reasons why Wales provides a sympathetic location in which to attempt an LVT. To begin with,  Wales is the only place where (albeit with some pain) Council tax revaluation has been successfully attempted. We know what it takes to update valuation, and could apply the experience already gained to the preparatory work which would necessarily have to take place before a shift to LVT could be brought about. Then, we are (hopefully) on the brink of exactly the sort of development which highlights the social justice case for Land Value taxation. Electrification of the main railway line from London to Cardiff has already been announced, and the logical case for extension of that electrification to Swansea can, surely, not be long delayed.  Moreover, an announcement is expected, imminently, on Valley Lines electrification in South Wales – a much needed public investment in improving connectivity between Valley communities and the prosperous M4 corridor of South Wales. No-one doubts that, if the plan succeeds, it will drive up land values in areas newly made available for economic activity, following the pattern of the development of the Jubilee Line, cited earlier. The whole of that rising value will have been created through public investment. Yet, under present policies, the beneficiaries will be those who have done nothing, other than to strike lucky, and to harvest the windfall gains which policy interventions have conferred. Finally, and perhaps most importantly, in Wales, we already have, in TAN 6, ‘One Planet Development’, a planning policy approach which is sympathetic to land value principles.

That leaves only the third element: that of powers. As matters currently stand, taxation is not one of the fields of competence devolved to the National Assembly for Wales. But that, too is currently up for grabs. Following the Calman Commission, the current Westminster coalition has established  the Silk Commission for Wales, with a remit ‘to review the case for the devolution of fiscal powers to the National Assembly for Wales’.

The Campaign for Economic Justice, amongst others, has submitted evidence to Silk, calling for the devolution of powers which would allow the National Assembly to introduce a Land Value Tax, should it chose to do so.

In Wales – the part of the United Kingdom with the longest tradition of radicalism – we have no difficulty in understanding the notion that land is a resource we share in common, a true ‘common wealth’. As a result of being fixed and fundamental, it should belong to the people. Those who have the privilege of ownership should pay something back for that privilege, through a Land Value Tax. Once this is understood and agreed, the serious work of detailed  planning for its practical implementation can begin – and there’s no better place for that to happen than in Wales, the only part of the United Kingdom currently to enjoy the benefits of a Labour Government..

Mark Drakeford is Labour Assembly Member for Cardiff West.