LVT may be described as a levy that society imposes for the exclusive occupation and use of a site. The use to which the site is put may or may not be for wealth creation purposes. For instance where a site is occupied for a purely residential purpose, the levy is still payable according to the value of the site. Also the owners of vacant sites would pay the tax whether occupied or not. This would discourage the deliberate holding out of use of sites for speculative purposes. As with most property taxes, there would need to be an appeals system. With LVT, valuations could always be challenged, but these would be more likely on the high value sites rather than near the margin, where the tax burden would be less.
LVT should be introduced gradually without any sudden shock; over a transition period of ten years or more (see below), in which other unsuitable taxes could be reduced or eliminated; those for instance which are impediments to wealth creation. LVT is proposed as a replacement tax, not an additional tax; the overall tax take from all taxes would remain the same although, because LVT is an efficient tax, considerable savings could be made, so reducing the overall tax requirement. All taxes have an economic or social effect; taxes on a commodity will affect the production and purchase of the commodity; taxes on trade, for instance, will inhibit trading. Certain taxes are designed deliberately to affect social behaviour rather than to simply raise revenue, eco-taxes and the so-called sin taxes for example. Taxes tend to have a negative effect on economic activity, what economists describe as a deadweight loss, where the imposition of the tax may negatively affect its efficiency in raising revenue – even to the point where the burden is so great that the activity ceases. LVT is a tax that has no deadweight loss. The imposition of a tax on land values may well cause a reduction of values by bringing land, held out of use for speculative purposes onto the market, but it would not otherwise increase the overall amount, which is fixed. The overall amount of land would neither increase nor decrease, and though the value might alter, it would, through a comprehensive valuation system, be visible to everyone, and could not be obscured. LVT would cause a shift in the burden of taxation away from the margin towards the centre; away from less prosperous areas onto the more prosperous, as measured by location values. Thus it would satisfy the requirement that taxes should be paid in accordance to the ability to pay.
In an established system of LVT one might envisage the principal source of revenue coming from LVT, alongside other useful taxes, which are retained (refer to item 3.15, Which Taxes). The overall tax take would vary according to government requirements, which could be reduced due to efficiencies. Where this occurred, any reduction in LVT should be measured ‘from the top down’, that is to say with a graduated percentage reduction inversely proportional to site value. This would effectively raise the level of the margin and have the effect of taking more marginal sites out of tax altogether.
A Local or a National Tax?
There are two possibilities for the application of LVT, either at a national level or a local level. The introduction of a national LVT, would have one major advantage in that it would effect a geographic redistribution of the tax burden nationally, and so reduce the inequalities resulting from the so-called north /south divide (which is more accurately a London and the rest divide). Although a national tax may be preferred in the long term, it would be a very major step, and it is generally considered by LVT advocates that a local system is more feasible from a practical point of view. Also there are certain advantages to the introduction at a local level:
- LVT could be trialled for instance in certain selected cities willing to support pilot schemes.
- As LVT is primarily an urban tax, it would be well suited to local urban councils (as opposed to rural councils).
- LVT could replace Business Rates and Council Tax, which are already functioning, with their own valuation systems, however defective.
- There is a better chance of explaining the principles of LVT to taxpayers, who are already paying property taxes.
- Councils could learn from successful applications of local LVT already operating, for example in Harrisburg, Clairton and Allentown in Pennsylvania, USA (1).
Business Rates are an indirect non-domestic tax based on the annual rental value of the property (land and buildings + fixed machinery/equipment). The system has the advantage of a valuation system that is reasonably up to date (April 2015), and updated every 5 years. The Council Tax is a direct domestic tax based on the capital value; the market saleable price (land and building combined). Being an indirect tax, business rates are the preferred candidate from a political point of view and also have the great advantage of having comparatively up to date valuations, whereas the council tax (in England and Scotland) has not been re-valued since 1991, so that regardless of any change to LVT, a new revaluation would in itself require a significant transition period, to ameliorate the extra burden of tax payable by the inevitable ‘losers’. (See item 3.07, ‘Winners and Losers’).
A Transition Period
A transition period would be essential. Many of the objections raised against LVT are based on the assumption that it would be introduced overnight (as happens quite often with much legislation when, with a change of government, the new administration abolishes some existing system and introduces its own ‘improvements’). Any change to LVT would have to be gradual, measured and designed to cause the least disruption to those affected. A transition period of at least 10 years is suggested (2). One of the problems with a longer period is in dealing with the impatience of politicians, who believe they have only 5 years to achieve their purposes, so education is important, not just for politicians, but for the voting public in understanding the basic principles of LVT, and why it would take time to repair centuries of injustice. In Andelson’s book, Walter Rybeck gives an example of what not to do, with the unfortunate experience of Uniontown in Pennsylvania, which adopted and then rejected LVT in the same year,1992. The officials introduced the two rate system abruptly without first correcting the 34-year-old assessments, and without advanced notice. It was of course a disaster.
‘its story is a cautionary tale of how not to introduce a two rate tax’ (3)
A lesson could also be learnt from the botched introduction of the government’s 2010 Universal Credit scheme, which had general cross-party agreement as a good idea in principle, but the implementation was not properly thought through and has caused much unnecessary hardship and unreasonably brought the whole idea into disrepute.
A Valuation System
There is no doubt that any successful system of LVT (or any property based tax) is dependent on an effective valuation system, being established and regularly maintained. One of the reasons for the apparent failure of the current council tax is that it is still based on valuations carried out in 1991 and therefore the tax demands become ever more detached from reality with every year that passes. All politicians and local councillors know this but are unwilling to do anything about it, as they see that a new valuation would create corrections in which there would be losers (see item 3.07); and so the situation continues to deteriorate.
As well as the example of Uniontown mentioned above, another more long drawn out example of the consequences of neglecting the valuation system is described in the essay on the split-rate system in Pittsburg, which operated from 1914 to 2001. For the first 26 years it functioned well, with regular valuations every 3 years, but after 1940, with a change of administration to a more centralised control, the valuations became irregular and finally neglected and were eventually the cause of its demise (see item 5.02). So it cannot be stressed too much that a regular and reliable valuation process is absolutely essential to any proposed LVT system.
(1) Refer to Josh Vincent, Strong Towns: https://www.strongtowns.org/journal/2019/3/6/non-glamorous-gains-the-pennsylvania-land-tax-experiment
(2). In Australia in 2012 the Australian Capital Territories (Canberra) introduced LVT to replace Stamp Duty over a 20 year period.
(3) Rybeck /Andelson, LVT Around the World, p.169.