In Explanation 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. 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 (1).
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), (2). 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.
In the hierarchy of use values indicated in Fig.1 below, the industrial land values are considerably higher than the surrounding agricultural values. Where prime urban land is concerned the differences are even more extreme. In the Chelsea Barracks redevelopment scheme of 2008, the 12.8 acre site was sold for £959m. (£75m/acre) (3). In London W1 in 2019 a residential plot was being offered for sale (without planning consent) at the rate of £576m/acre (4).
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 probably 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.
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, and this deficiency should be taken into account when devising any appropriate formula for taxing rural land. Also it should be noted that 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 (5), 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.
A further issue of LVT is whether it is best applied as a national or a local tax. Most LVT advocates would prefer the tax to be national, but at the same time they acknowledge that this would be a very big step to take and that it may be more realistic to accept that successful implementation may be achieved more readily at the local level. If the tax is seen to work well at local level in different selected cities then it may be more easily extended to the national level. Also, as local taxes are essentially urban in nature, agricultural land would be excluded. In either case a lengthy transition period of at least 10 years would be required to avoid any sudden disruption.
There are good historic examples of the successful operation of local LVT around the world. In New Zealand it was used successfully for 133 years and in Pittsburgh USA for 87 years until both systems were brought to an end through the onset of Neo-Liberalism in New Zealand In the 1980s, and the inadequate revaluation system in Pittsburgh in the 1990s.