Response to Modernising Local Government Business Rates Consultation Paper

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Author:  Henry Law
May 1998

CONTENTS

  1. ABOUT THE LAND VALUE TAXATION CAMPAIGN
  2. GENERAL BACKGROUND CONSIDERATIONS
  3. ANSWERS TO THE QUESTIONS
  4. DISADVANTAGES OF THE PRESENT UBR/COUNCIL TAX SYSTEM
  5. APPENDICES       
APPENDIX 1 - DEFINITION OF LAND VALUE TAXATION
APPENDIX 2 - DEFINITION OF LAND VALUE
APPENDIX 3 - PILOT SCHEME

PART I

ABOUT THE LAND VALUE TAXATION CAMPAIGN


1    The Land Value Taxation Campaign is a non-party organisation
    which was established with the aim of securing legislation
    which would fundamentally change the basis of public revenue
    in the United Kingdom. It proposes that existing taxes on wages,
    goods and services should be progressively replaced with a
    property tax on the annual rental value of all land. This is
    referred to as Land Value Taxation (LVT) and is defined and
    explained in the attached appendices 1 and 2. The Campaign
    would wish to see 100% of the land value collected in this way.

2    The Land Value Taxation Campaign strongly recommends the
    adoption of a property tax based on site-only valuation. Some
    aspects of implementation and proposals for a pilot scheme are
    outlined in appendix 3.

PART 2

GENERAL BACKGROUND CONSIDERATIONS


1    The Land Value Taxation Campaign believes that confusions
    arise through imprecise definitions of "land", or rather,
    through indiscriminate use of otherwise precise definitions.
    Whereas at law, "land" means immovable property ("real property"),
    the Campaign uses the word in its meaning in political economy
    (the whole of the material universe outside of man and his
    products). A landowner in economics is not necessarily the
    freeholder. Anyone with a beneficial interest in land (a holding
    which could be let or sold at profit) is to that extent a
    landholder. Popular usage more nearly corresponds to the
    Campaign's: people do not normally think of houses, factories
    and farm buildings as "land". To add to the potential for
    confusion, book keepers drawing up balance sheets regard land
    as capital, which in political economy it definitely is not.

2    Land Value Tax at a substantial proportion of the annual
    rental value would induce the landowner to make optimum use of
    the site, as it would be necessary to earn the income from which
    the tax would be paid. Land would not be held out of use or
    under-used.

3    One of the effects of Land Value Tax is that productive
    activity on marginal land is not taxed, because the land value
    tax assessment of marginal land is, by definition, nil. In the
    absence of existing taxes, large tracts of sub-marginal land
    would undoubtedly become capable of supporting productive
    economic activity, and the Campaign would therefore advocate
    the progressive replacement of existing taxes by Land Value Tax.

4    Land Value Tax is peculiarly suitable for revenue-raising in
    a multi-tiered government structure, especially in comparison
    with alternatives such as supplementary income taxes. Although
    the Campaign was established to promote the case for a national
    land-value tax, we would point out that, as is the case with
    all forms of property tax, LVT is suitable for all tiers of
    government and could be readily adapted to any multi-tiered
    structure, for example that resulting from Scottish devolution,
    the establishment of the Welsh Assembly and the London Authority.

5    Land Value Tax is morally justified, being in accordance with
    the "benefit principle"; land values are created and sustained
    by the presence and activities of the community today - any
    arrangement made in previous centuries is of little relevance
    since land value rests on the assumption that public services
    and a state of civil order will be maintained today and for the
    foreseeable future. An example of the operation of this principle
    is that the tax would provide a clawback mechanism whereby
    increases in land value due to infrastructure improvements,
    subsidy, etc, were returned to the Exchequer, thereby providing
    a rolling fund for further improvements if desired.

6    The Land Value Taxation Campaign is of the view that the
    Business Rate and Council Tax should be unified into a single
    land value tax. The assessment would be made on the assumption
    that the site is in optimum use having regard to the planning
    regulations, with rates of tax being the same for all land
    within the same taxation area. At present, the same property
    will be subject to substantially higher tax in business use as
    compared to residential use. This distorts the property market
    and patterns of land use, leading to a loss of business premises
    in mixed use urban areas as these are converted to residential
    use, with damaging effects on employment and local economies.

7    The Campaign has produced a paper, "Options for Property Tax
    Reform", which presents its case in greater detail. A copy is
    enclosed with the present document.

8    In 1987, Brisbane City Council appointed a Committee of
    Inquiry into Valuation and Rating, under the Chairmanship of
    Sir Gordon Chalk, Deputy Premier and Treasurer of Queensland
    (1965-1976). On this matter, the conclusions of the Committee,
    which reported in 1989, are broadly in line with the Campaign's
    own position. Copies of the official summary of the Chalk
    Committee's report are available on request from the Land
    Value Taxation Campaign, which distributes it with the consent
    of Brisbane City Council.

PART 3

ANSWERS TO THE QUESTIONS


    Q.1 The Government would welcome views on whether in principle
    some local discretion over the business rate should be allowed.

    The Land Value Taxation Campaign sees no reason in principle
    why some local discretion should not be allowed in respect of a
    land value based rate.

    Q.2 The Government would welcome views on the operation of the
    pooling system.

    Under the Land Value Taxation Campaign's proposals, where local
    government is providing services to a national standard (eg police,
    fire, social services, education, highways) and is effectively
    acting as an agent of Central Government, the funding should
    come from a land value tax set at a national level. Any locally
    determined component of the land value tax should be primarily
    to contribute towards the cost of discretionary facilities such
    as libraries and leisure services. Thus, the requirement for
    pooling should be minimal. However, the Campaign accepts that
    disparities in land value in local government administrative
    areas require some measure of equalisation such as that achieved
    by Central Government pooling.

    Q.3 The Government would welcome views on whether new formal
    procedures and mechanisms are required and on other ways in
    which to improve co-operation between local government and
    local business.

    This issue falls outside the Campaign's self-defined remit.

    Q.4 The Government would welcome views on:

        i. whether there should be an overall maximum local
        business rate;

    The Campaign advocates the collection of land value tax at a
    rate of 100% of the current annual rental value of the land,
    disregarding the value of buildings and other structures and
    improvements, on the assumption of optimum use of the site
    consistent with planning regulations and other restrictions.
    This would yield an annual sum well in excess of local
    government requirements (including the large element now
    supplied by Central Government) and implies operation of a
    national land value tax, which is the Campaign's objective.

        ii. how quickly the local rate should be permitted to
        increase;

    The Campaign accepts the possible need for a phase-in period
    for LVT.

        iii. whether there should be separate limits on year on
        year increases;

    The Campaign advocates annual revision of the LVT assessments
    by statistical analysis of market conditions supplemented by
    field surveys on a rolling basis, possibly quinquennial review,
    with a tax rate ultimately at 100% of this assessed annual
    market rental value. Annual revaluation is possible under a
    land value based system, but not under the present system where
    buildings and improvements are assessed.

        iv. other ways in which limits might be framed.

    It is not possible to collect more than 100% of the current
    rental value of land (otherwise sites go out of use), therefore
    an LVT system is self-limiting.

    Q.5 The Government would welcome views on whether the
    relationship between council tax and local business rate
    should take the levels or the changes approach; and on what
    the relationship should be in either case.

    The Land Value Taxation Campaign argues that all land, whether
    in commercial, agricultural, or residential use, or vacant,
    should be assessed at its current annual rental value on the
    assumption of optimum use having regard to planning regulations
    and other constraints, but disregarding the value of buildings,
    structures and other improvements. All land within a particular
    local authority area should be subject to the same rate of tax
    based on that assessment.

    Where different rates of tax apply to land in different classes
    of use within the same taxation area, the land market, and land
    uses, are distorted as one use is favoured against another. The
    effects of the present system have been particularly damaging in
    mixed-use town centre areas, where the more favourable treatment
    of residential property has resulted in the loss of business
    premises as these have been converted or redeveloped for
    residential use, with harmful effects on the economy due to
    the consequential loss of employment opportunities.

    Q.6 The Government would welcome views on whether councils should
    be able to offer a business rate rebate irrespective of the
    relationship between the local council tax and the standard level.

    Business rate rebates will be of no benefit to business occupiers
    except in the very short term as they will be lost through rent
    rises. Such rebates are therefore a gift to landowners and are
    therefore pointless.

    The essential principle is that total occupation costs are
    determined by market conditions; if property taxes are low, this
    is reflected in rental values and conversely, high property taxes
    are reflected in lower rental values. In the long run (following
    rent reviews), property taxes are passed backwards to landowners.1

    Q.7 The Government would welcome views on whether there should
    be any special arrangements for authorities with a high rates
    base and on these and any other approaches.

    Under the Land Value Taxation Campaign's proposals, where local
    government is providing services to a national standard (eg police,
    fire, social services, education, highways) and is effectively
    acting as an agent of Central Government, the funding should come
    from a land value tax set at a national level. Any locally
    determined component of the land value tax should be primarily
    to contribute towards the cost of discretionary facilities such
    as libraries and leisure services. Rich authorities would make
    their due contribution primarily at the national level, but there
    may nevertheless be a measure of pooling.

    Q.8 The Government would welcome views on the desirability of
    authorities providing earlier indication of changes in the local
    rate and on these and any other approaches.

    The interaction of property taxes and rentals is relevant here.
    Advance notice of an unexpectedly small rate increase would lead
    to rental levels being set higher than might otherwise be the case;
    due to the prevalence of upwards-only rent revision clauses in
    commercial leases, the converse would not operate. However, under
    a land value based system, upwards-only clauses would not be
    imposed because no landlord could take the risk of having vacant
    property and therefore the risk of having to pay the land value
    tax without income from a tenant.

    Q.9 The Government would welcome views on the proposed arrangements
    for access to the local rate by tier authorities.

    The Land Value Taxation Campaign proposes that the tax comprises
    elements as follows

        National land value tax set by Central Government

        Regional land value tax where applicable (Scotland, Wales,
        Greater London)

        County element where applicable

        Local authority element

    The maximum possible rate of land value tax is 100%, therefore a
    natural limit applies. Although collected by the local authority,
    national government would have first claim on the tax.

    Q.10 The Government would welcome views on the relative merits of
    these different approaches and suggestions for other ways of
    dealing with network property.

    The Land Value Taxation Campaign would argue that network
    properties, like all other properties, should be assessed on
    the basis of the land value alone.

    It is necessary here to understand the general principles of
    land value tax assessment. Each parcel of land is considered in
    turn as though all structures and improvements on that site were
    removed, whilst all other sites around remained in their present
    condition. The site is then valued on the assumption that it was
    in optimum use. Earthworks, cuttings, drainage works and similar
    features are, after a set number of years, regarded as having
    merged with the land itself, unless, like retaining walls,
    fencing, etc, they require regular inspection and maintenance.

    Applying these principles to the railways, the land minus the
    structures thereon consists of a network of cuttings and
    embankments comprising the trackbed. Arguably, the optimum use
    of this land would be as a highway, and thus land free to the
    public - and so of zero value for LVT purposes. This would of
    course, apply only to the strip of land occupied by the running
    lines. Land occupied by, say, carriage sidings, would be valued
    on the basis of alternative use, which might be residential,
    industrial or agricultural, depending on its location, whilst
    land occupied by a major city terminus would be valued on the
    basis of commercial use - eg retail/office.

    This would, of course, have important implications for the
    railway industry, since, at present, track access charges are
    about 50% of train operating companies' costs and are reflected
    in subsidy levels. Thus, a change from business rate to LVT is
    likely to mean a substantial reduction in the tax burden on the
    railways, and hence a reduction in the need for subsidy.

    Other network properties would be valued according to the land
    surface occupied. Arguably, canals can be regarded as highways,
    but associated lakes and basins have the value of mooring rights,
    fishing rights, etc, whilst canals and canalised rivers also have
    riparian rights in addition to their use for the passage of traffic.
    Underground structures occupy no land surface and so escape any
    liability to LVT. The case of overhead structures such as pylons
    is more complex and we would wish to defer detailed consideration
    of this question. Wayleave payments do not necessarily reflect
    the cost to the landowner due to the presence of such structures.

    Q.11 The Government would welcome views on whether the rates
    burden on smaller businesses should be reduced and on these and
    any other approaches.

    Land value taxation would reduce the burden on business in several
    ways.

        * buildings and improvements would be exempt.

        * the burden on business would be reduced because
        the tax base would be widened by the inclusion of
        vacant and agricultural land in the rating system,
        and because under-used land would be rated on the
        assumption that it was at optimum use.

        * rentals would tend to fall as there would be a
        substantial cost to landlords in keeping land and
        buildings vacant, thus the element of speculative
        froth would be removed from land pricing.

    The Campaign is opposed to any exemptions or banding systems.
    These open up loopholes which can lead to evasion or abuse. Tax
    privileges also lead to higher rental values and so are ultimately
    a gift to landowners.

    Q.12 The Government would welcome comments and views on any of the
    issues set out in this chapter to feed into the discussions with
    representative organisations.

Technical issues discussed in Chapter 8

# 8.2, # 8.3
    Transitional arrangements would not be necessary for the
    introduction of LVT in the 2000 revaluation, since rental
    levels would adjust in anticipation of the LVT. It should be
    noted that the land value tax is payable by the beneficial owner.
    Where leases are below current market rental value, beneficial
    ownership is shared between tenant and ground landlord and the
    LVT would be apportioned between the two. Once the system had
    settled down, LVT assessments would be revised annually and no
    further transitional arrangements would be required.

# 8.4
    Under an LVT system, buildings and improvements are ignored in
    the valuation, therefore the number of appeals would be greatly
    reduced for this reason alone. Once land valuation lists had been
    published, the principal ground for appeal would be that of
    relativities between different sites and the system would quickly
    "bed-down". Appeals would then arise only where sites were affected
    by significant changes in local circumstances.  

# 8.7
    With annual revision, land value tax would provide a buoyant
    source of revenue. Historically, land rental values have
    normally risen overall at least in line with the retail price
    index and there is no reason why they should not continue to do so.

# 8.8
    The Land Value Taxation Campaign is against reliefs in principle.
    They open up loopholes, compromise the system and lay it open to
    abuse. There is no reason for non-profit making bodies to have
    privileged access to valuable sites.

# 8.9
    Vacant property relief encourages owners to keep property vacant
    for longer than they would otherwise do so, thereby creating an
    artificial shortage and driving up rental levels generally. No
    reliefs should be given. Land value tax should be payable on the
    assumption of optimum permitted use, disregarding buildings and
    improvements, and irrespective of whether the land is in use or
    not.

    Under an LVT system, assessments could not be reduced by
    "constructive vandalism". If the present system is retained,
    constructive vandalism should be regarded as solely for the
    purpose of tax avoidance and the assessment based on the previous
    state of the hereditament.

# 8.11
    Under an LVT system, all buildings and improvements would be
    exempted from the valuation. All land should be assessed and
    subject to the land value tax or rate.

# 8.12
    Under an LVT system, railway tracks, tunnels, sewers, pipelines
    and other structures would be ignored in the valuation, apart
    from the land upon which they stood. On this principle, an
    underground railway would not be subject to the land value tax
    apart from the land value of surface sites such as stations. It
    is perverse to tax structures of this nature on any other basis
    since they form part of the stock of the nation's wealth; the
    present system penalises wealth creation at great cost to the
    community overall; removal of this penalty and the associated
    damage is the underlying rationale for land value taxation.
    The value of these infrastructural works, and of public amenities
    generally, would be captured in the value of the neighbouring land
    benefitting from those works.

PART 4

DISADVANTAGES OF THE PRESENT SYSTEM


    We would like to emphasise the disadvantages of the present
    UBR/Council Tax system.

    Disadvantages of the UBR

        * Valuations involve the inspection of individual premises,
        as installed machinery and plant are included in the valuation.
        In some uses, the UBR is close to being levied simply as a
        turnover tax.

        * Many appeals are generated when valuations are revised.

        * There is a financial disincentive to improve and develop,
        as a modern building is assessed at a higher value and
        subject to a higher tax than an old one.

        * The tax "rewards" the owner of vacant or under developed land.

        * Valuations are insufficiently frequent; UBR assessments
        made at the peak of the boom in 1988 remained in force
        throughout the subsequent recession. The consequences of
        this are exacerbated by the transitional arrangements, which
        effectively prolong the use of out-of-date assessments.

        * The exemption of property in agricultural use distorts the
        land market, favouring agriculture rather than other uses.

        * The fact that all the revenue from the UBR is allocated
        to local authorities by central government gives rise to
        high "gearing" of discretionary local authority expenditure,
        which can only be varied by a disproportionately large
        increase in the Council Tax.

        * Local authorities have no direct interest in promoting
        improvements which would lead to an increase in commercial
        rental values in their area.

        * The tax can be avoided because valuations are based on
        structures "as they stand" and buildings can readily be,
        and sometimes are, rendered unusable for property tax
        avoidance purposes, eg by "de-roofing" or "constructive
        vandalism".

    Disadvantages of the Council Tax

        * The tax is regressive in that an undue proportion of the
        overall burden is borne by occupiers of lower-value properties.

        * The tax is also regressive across local authorities, with
        the lowest rates in England in Westminster, where some of the
        most expensive properties in England are situated.

        * The lack of provision for a revaluation means that values
        are diverging from the original 1991 assessments. This is
        true of whole areas, of property banding within areas, and
        of individual properties within bands.

        * Banding avoids valuation of individual properties, and
        leads to fortuitous advantages and disadvantages for those
        with properties whose value is close to the step from one
        band to the next. As a result, the initial valuation
        generated almost a million appeals and it is likely that
        this would happen again if the values were revised.

        * The tax generates insufficient income; £9.8 billion was
        collected in 1996, as against £30 billion if the domestic
        rates had continued and were still a similar proportion of
        revenue. This shortfall has had to be made good by increases
        in other taxes, notably VAT.

        The UBR and Council Tax cannot be considered apart from one
        another or from the administrative and electoral system of
        local government.

        * The relationship between the UBR and the Council Tax
        distorts the overall land market, since it tends to favour
        residential use. This encourages the loss of commercial
        property, especially in mixed-use neighbourhoods.

APPENDIX 1


DEFINITION OF LAND VALUE TAXATION


    A1.1    LVT is a tax on the annual rental value of land. The
    valuation is the current annual market rental value of the
    land alone, disregarding buildings and other improvements.

    A1.2    Each unit of land is assessed at its unimproved site
    value, with all surrounding land taken as being in its existing
    condition.

    A1.3    All land, including vacant and agricultural land is
    subject to the tax, and the valuation is on the basis of optimum
    use within whatever permissions and constraints apply.

    A1.4    In practice, LVT would operate in much the same way as
    the present national non-domestic rate, with the difference that
    no land would be exempt and buildings and other improvements would
    in effect be de-rated.


APPENDIX 2


DEFINITION OF LAND VALUE


    The following definition of land value is that given in Section 3
    of London Rating (Site Values) Bill, 19392

    The annual site value of a land unit shall be the annual rent which
    the land comprising the land unit might be expected to realise if
    demised with vacant possession at the valuation date in the open
    market by a willing lessor upon a perpetually renewable tenure
    upon the assumptions that at that date -

    (a)    there were not upon or in that land unit -

        (i) any buildings erections or works except roads; and

        (ii) anything growing except grass heather gorse sedge or
        other natural growth;

    (b)     the annual rent had been computed without taking into
    account the value of any tillages or manures or any improvements
    for which any sum would by law or custom be payable to an outgoing
    tenant of a holding;

    (c)    the land unit were free from any incumbrances except such
    of the following incumbrances as would be binding upon a purchaser -

        easements; rights of common; customary rights; public rights;
        liability to repair highways by reason of tenure; liability
        to repair the chancel of any church; liability in respect of
        the repair or maintenance of embankments or sea or river walls;
        liability to pay any drainage rate under any statute;
        restrictions upon user which have become operative imposed by
        or in pursuance of any Act or by any agreement not being a lease.

        "works" does not include any works of excavation or filling
        done for the purpose of bringing the configuration of the soil
        to its actual configuration;

        "road" does not include any road which the occupier alone of
        the land concerned is entitled to use.


APPENDIX 3


SOME PRACTICAL ASPECTS OF LAND VALUE TAX IMPLEMENTATION


    Information on site-only valuations may be obtained from abroad,
    where systems of land value taxation or site value rating are in
    operation. In this way, legislation and procedures can be studied
    and valuation rolls and maps examined. The development of
    information technology, in particular, geographical information
    systems (GIS) and digitised mapping would obviously be of
    particular relevance for the implementation of land value taxation.

    In this country, land valuations were made under the heavily
    flawed provisions of the Finance (1909-10) Act, 1910, but the
    records were never published. After repeal of the provisions by
    section 57 of the Finance Act, 1920, the valuations were preserved
    in the offices of the Inland Revenue. When the London Rating
    (Site Values) Bill was presented in 1939, some lessons had been
    learned from earlier legislative attempts. Clearly, considerable
    up-dating would be required in any new proposal, but the 1939 Bill
    sponsored by the London County Council still provides a useful
    starting point.

PILOT SCHEME


    HM Government is considering arrangements for an elected Mayor
    for London and an overall authority encompassing the London
    Boroughs. The Land Value Taxation Campaign argues that London
    should finance its revenue requirements exclusively from a duty
    on site values. This would replace the UBR and the Council Tax.
    There would be an element of equalisation between boroughs of
    relatively high land value and those where total land value is
    relatively low.

    Ideally, the system the Campaign is putting forward would operate
    throughout the United Kingdom, but the opportunity presented by a
    major revision to the way in which the capital city is to be
    administered, does suggest a fresh approach at the same time to
    how revenue is to be raised. The 1939 Bill has set the precedent.

    The Campaign considers the theory sound. Experience from abroad
    is reliable and positive, and site-only valuation is practicable
    within an acceptable time scale. Desk studies, backed by visits,
    would show how cities such as Copenhagen, Brisbane, Pittsburgh
    and Johannesburg operate (though the Campaign does not recommend
    all of their procedures because the land value taxation principle
    is not always fully applied and there are some imperfections in
    the manner of its implementation).

    Additional supporting evidence is actually available from the UK.
    A pilot valuation of Whitstable, Kent was conducted in 1963 under
    the auspices of the Rating and Valuation Association and updated
    in 1974 in a study for the Land Institute.

    The Campaign recommends a decision to adopt site value rating/land
    value taxation without further ado and wishes for early introduction
    of enabling legislation.

    If, however, for reasons of the parliamentary timetable or other
    priorities within the Government's programme, it is not held to be
    practical in the immediate future, the Campaign suggests that the
    bill effecting changes in the government of London contain a
    provision for a pilot site-only valuation of a grouping of
    contiguous London boroughs (to include areas within the former
    London County Council rather than outer suburban boroughs which
    can be expected to reflect the general trends already displayed
    in the Whitstable surveys).

    A pilot survey in London would provide valuable experience and
    yield useful information which the Campaign believes would
    underpin the case for national implementation of the policy.
    The survey could be conduced directly under the aegis of H M
    Government or carried out by a qualified body as a research
    project with Government backing.

1 This issue was discussed at length in a research paper published
in 1984, with the title "Local Fiscal Policy and Inner City Economic
Development" by R M Kirwan, Discussion Paper no 13, Department of Land
Economy, University of Cambridge. This paper includes a report of a
detailed survey and contains further references which are relevant to the
question.

2 The full text of the Bill is on this web-site (see index page)
or is available on request from the Campaign, which distributes it following
consultation with Messrs. Dyson, Bell & Co., and Mr J. Hastings, Clerk of
the Journals, House of Commons, confirming that there was no objection to
distribution.

 

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