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 part 2 under the heading: 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. The Planning and Architectural website Audacity quoted comparative figures for average agricultural and residential land values for 2005, in £/hectare (1)
Country Agricultural Residential
England £9.287 £2,460,000
Wales £8,628 £2,180,000
Scotland £4,858 £I,680,000
Another significant difference is that whereas urban values are determined by variations in location, agricultural values are determined only by variations in fertility, which are quite small by comparison. Agricultural values are quoted in £ per acre or hectare, urban values by the square foot or the plot, which may be no more than a small fraction of an acre. 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 in 2012 show the average prime arable land selling for £7500/acre, poor grassland at £3500/acre (2). A Valuation Office report of 2011(3) shows mixed farmland in Oxfordshire selling at £8500 /acre, whereas residential (urban) land in Oxford itself was selling at £1.6m/acre. In the Chelsea Barracks redevelopment scheme of 2008, the 12.8 acre site was sold for £959m. (£75m/acre) (4). In central London in 2013 a half acre site was being offered for sale for residential redevelopment at the rate of £218m. /acre (5).
The point being made here is that there is such a vast difference between urban and rural land values where LVT implementation 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 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 (6), 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 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.