Politicians are always averse to any change in taxation that will create ‘losers’ who will cost them votes, so they tend to resort to indirect taxes where no obviously disadvantaged group can be identified. Where homeownership is concerned the introduction of a land value tax would clearly create winners and losers.
The losers would be those who hitherto have been the winners over several decades; those who have enjoyed the benefits of increases in their asset wealth completely fortuitously, without any effort on their part, certainly with no increase of taxation. Under LVT this advantage would be arrested and gradually reversed over time, and would undoubtedly create opposition from those who have got used to the idea of ever increasing unearned asset wealth (due to increased land values), who would not wish to see this advantage eroded. The winners would of course be those homeowners who have seen their house values remain static or even reduce over the same period, due to being in areas of low or declining land values.
LVT advocates have long accepted that any change to LVT would require a transition period of probably at least 10 years to avoid the sudden shock of the necessary correction. Regardless of any change to an LVT system, even an updating of the property valuations for the current Council Tax (last carried out in 1991), would create winners and losers, so is constantly deferred by the politicians, making the situation worse with every year that passes. The discrepancies have now become so bad that any update would also require a transition period. Although a national application of LVT would be preferred, for such a radical transformation in taxation it is generally accepted that introduction at a local level is more feasible, and the best opportunity is in reform of the Business Rates and the unpopular Council Tax (for more on the council tax see below). The Council Tax is based on the capital value of the property (land and building), divided into eight value bands. If the owner makes an improvement such as an extension, the capital value increases and the tax goes up. This would not happen under LVT as the tax is based only on the value of the site, which is very much a function of location; more sought after locations would be taxed more highly. An effective LVT would be dependent on regular and accurate valuations, so the first step would have to be a new valuation where building values are separated from site values. During the transition period it is proposed that the winners should compensate the losers in a gradual manner. Also it is important that such compensation should be visible, immediate and personalised, and not in the form of some vague promise that other taxes would be reduced in the future. In the case of LVT replacing Council Tax the following proposal is suggested:
Assuming a new revaluation has taken place, this would then reveal the discrepancies due not only to the calculations being based on land values only but also to the consequences of 28 years of previous neglect. These discrepancies are likely to be significant and the first step would be to inform all taxpayers of the new dispensation and the estimated future tax liabilities over a transition period of say 10 years. Assuming overall revenue neutrality, it is proposed that in the first year nothing would change, but taxpayers would be served notice of their current Council Tax liability, the new liability under LVT and the difference between the two divided into ten equal parts to be added or subtracted as appropriate over a ten year period, starting in the second year. At the end of the 11th year a full LVT system would be established, and the Council Tax calculations could be abandoned. The transition period avoids any abrupt (and highly disruptive) changeover where taxpayers may gain or lose a large amount overnight. Those who are to gain from the change are obliged to defer their gain over a period, and those who are to lose, will have their loss eased over the same period. In this way the winners will be compensating the losers and the figures will be clearly shown in their tax bills every year. As a further concession to placate the losers it could be made possible for them to claim some percentage of the extra payments as a rebate from their income tax commitments, for a limited period.
The Council Tax Deficiency:
In England, local revenue for residential properties is currently collected through the Council Tax, which a great many commentators agree is grossly inefficient. One of the main criticisms is that the tax is still based on valuations that are 29 years out of date, but another serious defect is with the banding system. There are eight bands based on what the property would have been valued at in 1991 ranging between the minimum, band A at £40K, to the maximum, band H at £320K. Each council is allowed to set their own rates within these bands. In poorer areas the greater number of properties lie in bands A to D whereas In wealthier areas they tend to be in bands D to H, which means that wealthier areas can raise the same amount of revenue from a lower than normal rate, mainly from high value properties, which is seen as unfair. Table 1 shows comparative numbers of properties in the tax bands for different cities and counties in England in 2019:
The inequity of the system was summed up in an article by a councillor from Kirklees in West Yorkshire; comparing their situation to that of Westminster:
‘About 60% of our homes are in band A – – – If all their houses are in band H, then they only need to set their tax at a fraction of ours and make the same amount of money’ (Ref.1)
Within London, in 2019–20, a house in band D in Barking and Dagenham will be paying a council tax of £1556, more than double the tax of £752 for a band D house in Westminster. (Ref.2)
It is often the case that a multi-million pound band H apartment, in a high value central location, will be paying less council tax than a band D house in a low value location. These anomalies arise under the present system where the tax is based on capital values, with an arbitrary cap on maximum payments, disregarding the enormous variations due to location.
Were the tax to be based on location values only, these variations would be taken into account, resulting in a higher revenue from the high value locations. In that sense the LVT system would be more efficient; the total revenue accruing to the council would amount to whatever was required to meet its commitments, starting from the highest location values and decreasing according to the measure determined by decreasing site values. The council would set the rates, within these site value parameters on a sliding scale rather than a banding system. The bases of the current council tax and a proposed land value tax are very different. Within the constraints of the planning laws an LVT is not concerned with what is on the site, but only with a payment for the use of it.