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 owner of an unused or derelict site would still pay the tax, for the site would retain its potential value whether used or not. This would discourage the deliberate holding of sites out of use 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 during which other unsuitable taxes––for example, those that are impediments to wealth creation––could be reduced or eliminated. As LVT is proposed as a replacement tax, not an additional tax, the overall receipts from all taxes would remain the same.
All taxes have an economic or social effect. Taxes on a commodity will affect the production and purchase of the commodity––for instance taxes on trade will inhibit trading. Certain taxes are designed deliberately to affect social behaviour rather than to simply raise revenue, for example eco-taxes and the so-called sin taxes.1 Taxes generally 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 economic activity ceases. Most taxes suffer from this defect: income tax is a discouragement to work, VAT is a discouragement to trade, and so on. LVT would have no deadweight loss because land supply is fixed and the imposition of the tax will neither increase nor decrease supply. Neither will any increase or decrease of economic activity on the site affect its value for the value is determined by other external factors (see Part 3, Item 1, Causes of Land Value). With accurate and regular valuations the tax would be easy to collect; there would be little wastage and no avoidance. For these reasons LVT may be seen as an efficient tax, and most economists agree on this point at least.
A tax on land values would 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. 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 with 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 (see Part 3, Item 15: which taxes?). The overall tax take would vary according to government requirements, which, in the case of LVT, could be reduced due to the efficiency of collection. Where this occurred, any reduction in LVT would be measured ‘from the top down’, that is to say with a graduated percentage reduction inversely proportional to the 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: 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 felt by LVT advocates that a local system initially would be more feasible where implementation is concerned. Also there are certain advantages to the introduction at a local level:
- LVT could be trialed in certain selected cities willing to support a pilot scheme.
- 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, US.2
Business Rates are an indirect non-domestic tax based on the annual rental value of the property (land and buildings, plus fixed plant or equipment). There is already a working valuation system, updated every 5 years (last carried out in April 2015). A change made with any system of taxation inevitably causes some to gain and some to lose, but with an indirect tax such as business rates the problem is reduced, or at least de-personalised. For this reason it would likely be more acceptable to the politicians––businesses do not have the vote. A land value-based business tax would also encourage investments in machinery, equipment and improvements to buildings and physical assets, as these would not be taxed, so there is a lot to be said for replacing business rates with LVT..
The Council Tax by contrast is a direct domestic tax based on the capital value of the property––the market selling price––land and building combined. It is currently based on a valuation system that is virtually defunct, not having been carried out since 1991. This could no doubt be resurrected, given the political will. Replacing the council tax with LVT would accentuate the problem of winners and losers (see Part 3, item 7), but I believe this difficulty has to be faced up to sooner or later; the longer it is left, the worse it will get. The defects of the council tax are explained in more detail in item 7. A regular and reliable valuation system is essential. The neglect of this condition was the main cause that undermined the LVT system in Pittsburgh over the years (See Related Essays: The Pittsburgh Experience) Another undermining factor is the granting of exemptions and thresholds, usually by politicians hoping to curry favour with the voters: One of the reasons the local land-value taxes are so ineffectual in many states in Australia is because of the exemptions and high thresholds on domestic property.
A Transition Period
In all cases 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 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. Especially in the case of domestic property a transition period of at least 10 years is suggested.3 One of the problems with a longer period is in dealing with the impatience of politicians who often 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, Land Value taxation around the World, Walter Rybeck gives an example of what not to do, with the unfortunate experience of Uniontown, 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. As Rybeck notes, ‘Its story is a cautionary tale of how not to introduce a two-rate tax.’ 4
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 whose implementation was not properly thought through and has caused much unnecessary hardship, unreasonably bringing 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 the 1991 valuations so 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, 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 case study of The Pittsburgh Experience. (see Related Essays) This recounts the split-rate system that operated in Pittsburgh from 1914 to 2001: * For the first 28 years it functioned well, with regular valuations every 3 years. But after 1942, with a change of administration to a more centralised control, the valuations became irregular and finally neglected, eventually causing the demise of the tax. So it cannot be stressed too much that a regular and reliable valuation process is absolutely essential to any proposed LVT system.
* A ‘split-rate’ is the name employed in the US, where the tax is applied separately in different proportions to the building value and the site value.
(1) Current UK eco-taxes are: fuel duties, climate change levy, air passenger duty, vehicle excise duties and landfill tax. Sin taxes are alcohol duties, tobacco duties and betting and gaming duties.
(2) Refer to Josh Vincent, Strong Towns: https://www.strongtowns.org/journal/2019/3/6/non-glamorous-gains-the-pennsylvania-land-tax-experiment
(3). In Australia in 2012 the Australian Capital Territories (Canberra) introduced LVT to replace Stamp Duty over a 20 year period. https://thenewdaily.com.au/money/property/2019/04/05/land-tax-stamp-duty-debate/
(4) Walter Rybeck. Chapter 9 of Land Value Taxation Around the World, third edition, 2000, Blackwell Publishers, edited by Robert V. Andelson p. 169