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. Although any change to LVT would create winners and losers in any part of the economy where land was involved, it is arguably the effect on homeowners that would give politicians most concern; there would clearly be winners and losers.
The losers would be those who hitherto had 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 opposition would be considerable, not only from these homeowners, but also the government itself, as Josh Ryan Collins and co-authors note:
‘No government wishes to see the damaging effects of a fall in house prices, especially when almost two-thirds of voters own a property’. (1)
The winners would of course be renters and 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 it 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. Garry Nixon in Andelson’s book notes that the land value assessments that operated in Canada in the early part of the 20th century became up to forty years out of date and whenever attempts have been made to correct this:
‘- – – the landowners (who share a marked disinclination to share their new found gains) band together and lobby for the status quo’ (2)
As mentioned in Item 2.02, it is generally accepted that introduction at a local level is more feasible, and the best opportunities would be with reform of the Business Rates and the unpopular 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. To ease the additional payments required from the losers, it is proposed that the winners should only gain their advantage incrementally through the transition period, as described below.
In the case of LVT replacing Council Tax I would suggest there are two possibilities, both the same in principle but different in degree; one a change to a full 100% LVT, the other to a partial LVT based on the ‘split rate’ system practised successfully in several cities in Pennsylvania, USA.
Taking the 100% system first: Assuming a new revaluation has taken place (which in itself may take a year), this would then reveal the discrepancies due not only in the calculations distinguishing site values, but also due to the consequences of 29 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 as well as the new liability under LVT, and the difference between the two divided into ten equal parts to be added or subtracted as appropriate over the 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 would avoid any abrupt (and highly disruptive) changeover. Those who are to gain from the change would be obliged to defer their gain over a period, and those who are to lose, would have their loss eased over the same period. In this way the winners would be compensating the losers and the figures would be clearly shown in their tax bills every year. 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. As a further concession to placate the losers it might 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 second system would be similar in application to the first except that the ultimate aim would be to arrive at a proportional imposition of the tax divided between the building and the site (say 40/60% or 20/80%), so there is still some element of tax on the building. This of course is a compromise, but it would make the transition easier, especially for the losers, and would leave open the option of applying a 100% LVT in the future, if it was seen by the taxpayers to be working beneficially. And this is the crucial part – it has to be seen to be working for the majority. I am inclined to favour this second course as being more practical and more flexible. It is important to get the taxpayers onside, otherwise the whole experiment could founder. Another considerable advantage of adopting this second option is that we could benefit from the experience of the cities in Pennsylvania which have practised the split rate system successfully for many years. (3)
If LVT were to be introduced at the national level, dealing with the the issue of winners and losers would be magnified considerably, but a similar formula could be devised where the principle of winners compensating losers over a transition period would still apply.
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’ (4)
Within London, in 2019–20, a house in band D in Barking and Dagenham will pay a council tax of £1556, more than double the tax of £752 for a band D house in Westminster. (5)
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.
(1) Josh Ryan Collins, Toby lloyd & Laurie Macfarlane, Rethinking the Economics of Land and Housing, Zed Books Ltd. 2017, p.147
(2) Garry B Nixon / Andelson, LVT Around the World, p.67.