In the explanation of part 2 it was pointed out that LVT was predominantly an urban rather than a rural tax, in the sense that by far the greater revenue would be derived from the former. Although rural land accounts for about 87% of Britain’s total land area, it represents only about 5% of the total land value (1). The primary difference between urban and rural land values is that urban land values are determined by location within a close knit agglomeration of sites, each contributing to the ‘economic pressure’ that gives rise to the increase of value.
This significance of location does not apply within the rural situation where sites are at some distance from any existing economic centre and although they may be adjacent, are far too large in area and diffuse to create any such economic centre due to proximity. As explained in item 3.01 under Causes of Land Value/ Population Intensity, there is no agglomeration effect where rural land is devoted entirely to farming. Agricultural land values are slight in comparison with urban land values, especially where large cities are concerned. Also the variations in value due to location are much greater within an urban context.
The figures below, taken from the Valuation Office Agency Report for 2011 show the differences in values in £/hectare, between agricultural and residential land for some typical areas in England (2).
Table 1: Comparison of Agricultural and Residential land values.
It is interesting to note that regional differences in agricultural land are far less than the regional differences in residential (urban) land values. Agricultural land value in Oxfordshire is the same as that in Leicestershire, but the residential land in Oxford is 2.5 times more valuable than that in Leicester. No doubt the high values in Oxford are influenced by the proximity to London; the ‘London effect’ does not apply where agricultural land is concerned, Whereas urban values are determined by variations in location, agricultural values are determined mainly by variations in fertility, which are quite small by comparison. The best farmland (prime arable) is rarely more than double the price of the least valuable (poor grassland). Figures published by the estate agents Savills on farmland prices show that in 2011 the average prime arable land was selling for £7000/acre (£17,297/hectare), poor grassland at £3500/acre (£8,648/hectare), (3). In the above mentioned VOA. report, cleared industrial land in the same cities was valued per hectare at:
Oxford, £1m; Leeds, £0.6m; Manchester, £0.65m. and Leicester, £0.4m.
Where use values are concerned agricultural land is always at the bottom of the hierarchy, as shown in fig.1 below; Industrial land is always more valuable, and residential more valuable than both. In prime urban areas residential land can attain very high values: In London in the Chelsea Barracks redevelopment scheme of 2008, the 12.8 acre site was sold for £959m. (£75m/acre) (4). In London W1 in 2019 a residential plot was being offered for sale (without planning consent) at the rate of £576m/acre (5).
The point being made here is that there is such a vast difference between urban and rural land values where LVT revenue potential is concerned that, in the case of farmland, the simple application of a tax measured directly according to site value is not sufficient; clearly the factor of land area plays a more significant part. Using the figures for Oxfordshire above, it would require 188 acres of prime farmland to match the value of 1 acre of residential land in Oxford itself. In the central London example, a one acre site would require an equivalent farm area of almost 27,000 acres.
So how might one resolve this taxation issue peculiar to rural land? As with industrial land I would suggest a special formula designed specifically to deal with the rural situation, agreed between the government and all interested parties such as the National Farmers union, the Country Landowners Association, the National Trust, English Heritage etc. An obvious complication arises with the current farm subsidy system (the CAP), which is paid to land holders rather than tenant farmers, in proportion to the acreage held rather than any consideration of productivity. This payment is ostensibly for good stewardship of the land but has the effect of raising farm and land prices, benefitting only the large landholders and making it more difficult for small tenant farmers, by raising rents. Julian Pratt notes that subsidies:
‘burden the taxpayer, benefit the landowner by increasing the market rent and market value of land’ (6)
This system of subsidies will of course disappear when Britain finally leaves the European Union, but will need to be initially replaced with something similar. The new formula would need to take into account whatever system of subsidy came into place, but also how it might then be gradually wound down until a correct balance is found between returns to the farmer and realistic food prices. It should also be designed to encourage small farming start-ups and those willing to exploit marginal situations. In considering how any land value tax should be applied to the rural situation it is necessary to recognise that the benefits of infrastructure are fewer in rural areas. Areas devoted exclusively to farming do not enjoy the same intensity of infrastructure. Items taken for granted in urban areas, street lighting, mains sewage, bus and train services, gas supplies, broadband etc. are often sparse or non-existent in rural areas, and this deficiency should be taken into account. Also it should be noted that many farmers, instead of actually farming, now have an additional or alternative role as custodians of the land; guardians of the environment, on behalf of society.
In a book on real estate investment in the US (7), Prof. Roger J. Brown presents an interesting analysis of land use rental values for a hypothetical city in which he breaks down the values and areas of different uses ranging from commercial, light industrial, residential, heavy industrial and agricultural. He shows these results in a diagram that bears a striking resemblance to fig.16 in the part 2 explanation, which I show again here in fig.1 as a linear curve with the different zones indicated in similar proportions to those in Prof. Brown’s diagram.
It is notable that the largest proportion is taken up by residential and also that the agricultural zone becomes marginal at the greatest distance from the centre. Where the implementation of LVT is concerned there is a case for exempting agricultural land altogether. In 2009 the Irish Government commissioned a study on the feasibility of introducing a Site Value Tax (SVT), which in the final publication excluded agricultural land. It could be argued that the revenue raised from an agricultural land tax would not be worth the administration costs, but, in Ireland another reason could have been political, in that it would have been difficult to get the legislation past the big farming interests. Unfortunately however the recommendations of the study were not adopted and Ireland continued with a conventional undifferentiated property tax.
(1) Duncan Pickard, Lie of the Land, p.41.
(6) Pratt, The Stewardship Economy, p.66