Modernising Local Government Finance

Tuesday, 05 February 2008 22:28
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Response To Government's Green Paper:

Modernising Local Government Finance


Author: Henry Law

Date: December 2000

PREFACE

Whilst the Campaign welcomes the decision to review local government finance, it regards the suggested changes as inadequate. The Campaign advocates replacement of the existing system of local government finance by land value taxation, in accordance with the principles set out in the accompanying document, "Options for Property Tax Reform", for the reasons set out therein.

The Campaign made a formal response to the Consultation Paper: "Modernising Local Government - Business Rates" in May 1998.

A copy of the response is available.
SUMMARY OF CONCLUSIONS

(a) The Council Tax and the Uniform Business Rate should be replaced by a property tax based on site values only; all land, including vacant and agricultural land would be assessed for the tax, and the assessment would be on the assumption that the land was at its optimum permitted use within the constraints of planning regulations.

(b) Within a given taxation area, the rate of tax should be the same for land in all classes of use.

(c) The tax should be multi-part, with elements set by central government, the local authority and any other tier of government which may be established under devolution proposals. For that part of local government finance where service provision is to a national standard and local authorities are, in effect, acting in the status of agencies on behalf of central government, it is suggested that they should be fully funded from the national element of the site value rate; examples include police and fire services, education and social services.

(d) It would be desirable to revise valuation lists annually. In most cases this would not require inspection of individual sites since much of the work would be amenable to statistical adjustment. Provision should be made for major quinquennial revaluations though experience with annual reviews may show that these are unnecessary.

(e) Although, given the political will, there is no reason why, subject to a realistic phase-in period, the proposals set out in "Options for Property Tax Reform" should not be implemented without further ado, it would be possible to implement land value taxation initially on a local basis, for example, to fund the London Boroughs and the Greater London Authority, or in a region such as Merseyside, Tyne and Wear, the South Hampshire conurbation or Northern Ireland.

1 AIMS OF THE LAND VALUE TAXATION CAMPAIGN

(a) 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 rental value of all land. This is referred to as land value taxation (LVT) and is defined in appendix 1.

(b) 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 the multi-tiered structure which is emerging as a result of constitutional reform in the UK.

2 COMMENTS ON PROPOSALS IN GREEN PAPER

Part 1 - Introduction

The Campaign fully supports the aims set out in part 1 of the Green Paper.

Part 2 - How local government works

The Campaign has no comment to make regarding part 2.

Part 3- Reforming the revenue grant system

In the view of the Campaign, those local government services which are provided in accordance with nationally agreed standards should, in principle, be funded by a national land value tax. This would include police and emergency services, social services, education

Part 4 - capital investment and borrowing

In respect of those local government services which are provided in accordance with nationally agreed standards, capital funding should come from Central Government. Other, discretionary services should be funded by local authority borrowing, in particular, through the use of bonds, secured on the basis of the enhanced land value which would accrue from the capital expenditure; this is particularly appropriate for transport investment, which results in enhanced land values in the areas benefitting from the project. Projected land value enhancements are an effective way of measuring the likely benefit of capital investment.

Part 5 - taxes and charges

Council Tax

(a) The Council Tax is not working well as a local tax, other than to the extent that, as with all property taxes, it is reasonably efficient.

(b) Council Tax is regressive, being heavily loaded against occupants of low value properties who pay a disproportionately high share of tax. Owing to the spread of house prices in different parts of the country, quite modest properties in the south-east are in the top band.

(c) Selling price is undesirable as a method of property tax assessment. This is because the price capitalises elements such as hope value which are absent from annual rental values. One consequence is that selling prices are liable to sharp, short-term fluctuations; annual values are not affected in the same way.

(d) Council Tax is not payable on vacant residential land.

(e) Valuations have fallen out of date.

(f) The Campaign takes the view that the Council Tax should be replaced by a land value tax with national and locally determined components.

Business Rate

(g) The Campaign is opposed to the levying of a supplementary Business Rate. In the Campaign's view, it is wrong for a local authority to be able to opt for increased taxes to be paid by those who do not have the power to vote. The proposed Partnership Arrangements do not adequately address this concern.

(h) Such bodies will subvert the fundamental democratic principle that decisions should be made by democratically elected representatives.

(i) Only large businesses will have the spare resources which will enable them to participate in Partnership bodies - and decisions are likely to be made at the expense of smaller businesses who will not have the time to devote to attending forum meetings.

(j) All discretionary expenditure will come under the control of this group.

(k) Partnership Arrangements are a recipe for control by small coteries comprised of long-serving Councillors and officers, and the big businesses in the town - estate agents, etc. The system will be open to corruption, a danger aggravated by recent changes such as cabinet government and elected mayors which have reduced the extent to which decisions can be scrutinised.

(l) The Campaign is aware of the danger that local authorities could "milk" businesses without voters, who are primarily residents, having to bear the costs of this decision. In its view, however, this is best avoided by making property in all classes of use subject to the same rate of tax, based on its valuation, which would, preferably, be based solely on the site value of the hereditament. In this way, voters would share the burden of all tax increases.

Rate Relief

(m) The Campaign takes the view that the Business Rate should be replaced by a land value tax with national and locally determined components. This would provide relief by excluding buildings and improvements from the assessment.

(n) The benefits of rate relief for small firms would certainly be eroded over time by rent rises, as surveys over many years indicate that this would happen; it is the total of rent plus rates that matters to occupants. The advantages to the occupants would last no longer than the period to the first rent review. The Campaign is not in favour of making financial donations to landlords in this way.

Local taxes in urban areas

(o) The Campaign points out that under a system of land value taxation, increases in land value arising from successful regeneration give rise to an increased tax base. Under the scheme proposed, both the locally determined and national elements of the tax would be higher, and the local portion could be retained by the local authority.

Review of revaluation

(p) The Campaign is of the view that revaluation should be annual, using a combination of statistical sampling and adjustment, and definitive valuation.

(q) The cost of site valuation is substantially less than the present cost of valuation of land and improvements; less than half the amount of information has to be obtained, sites are considerably easier to value than buildings or improvements, especially since, in many urban areas, development has taken place with land divided into large numbers of adjacent identical sites.

(r) Annual valuation of sites is therefore more practicable than valuation under the existing method which assesses land and buildings.

(s) Annual revaluation would reduce the incidence of sharp, periodic changes in tax liability, and there would be no necessity for transitional relief. Any additional costs would be largely offset by removing the need for transitional measures, and a reduction in the number of appeals.

Fees and charges

(t) The Campaign has no objection to raising revenue for "market goods" directly from fees and charges, since this is the most effective way of ensuring that payment is by the beneficiaries.

(u) As regards congestion charging for the use of the highway, the Campaign notes that, if properly implemented, this is an application of the principle of charging for space by payment to the public exchequer, which underpins the concept of land value taxation. The Campaign is aware of the Cambridge proposals for congestion charging, and whilst we were in favour of these in principle, we are also conscious of the technical problems entailed in the implementation of these charges.

(v) The Campaign is against the taxation of car parking spaces as such; land value taxation should be the sole form of property taxation. The value of any parking spaces will automatically be reflected in the site value.

Some general points

(w) We would stress once again that property in all classes of use should be treated the same for tax purposes ie it should be subject to the same rate of tax based on its valuation. In addition to reducing the incentive to "milk" business ratepayers, this would remove the present distortion in the land market, and consequent influence on patterns of land use. At present, the same property is subject to a considerably higher tax if in business use rather than residential use. Consequently, there is an incentive to convert commercial and industrial buildings, leading to a shortage in some areas, with damaging effects on local economies.

The following points (x) to (aa) are quoted from the summary report of the Brisbane City Council Inquiry into valuation and rating

(x) It is necessary to distinguish between "market goods", "merit goods" and "public goods". As a basic principle - in seeking to recover the cost of the works and services it provided, a revenue-raising authority should - as far as possible charge the beneficiaries of such works and services to the extent that such works and services and their beneficiaries could be distinguished and were identifiable. Where works and services were not, or could not be, separately identified and specifically charged for, their cost should be recovered by a basic general charge which should nevertheless conform, as far as possible, with the benefit principle.

(y) As a general revenue base, a tax or rate levied on property - provided it is levied on land and not upon the buildings or other visible improvements erected on land - is the basic general revenue source which most nearly conforms with the benefit principle. Every resident of the city and every activity conducted in the city uses occupies land directly or indirectly, and a charge on the value of land used or occupied is paid, directly or indirectly, by every citizen. If all land in the city were valued frequently and in accordance with use of it permitted by the city's town planning controls, a land value charge should accurately reflect the benefit derived from its use or occupation. Moreover, a charge on the value of land encourages development and discourages the speculative withholding of vacant land from productive use (whereas a charge on the value of buildings other improvements tends to penalise enterprise and development.)

(z) A charge on the value of land is relatively simple and inexpensive to administer and is impossible to evade. Land is a finite commodity and a charge levied at the same rate on all uses of land does not affect the free market allocation of resources and cannot be passed on. The rental value of land, when capitalised, gives land its value, and to the extent that the community captures some of the rental value of land by way of a charge, a land value charge operates to depress the selling price of land.

(aa) In respect of "merit goods", charges should be related primarily to the value of the service or benefit provided (rather than to some arbitrarily determined level of cost-recovery); while in the case of any local government works or services which were effectively "market goods", local government should adopt a realistic pricing policy.

Part 6 - Different services and authorities

As a general principle, those services which are provided in accordance with nationally specified standards should be paid for out of a national land value tax. Those services which are provided at the discretion of local authorities should be provided by a locally determined component of the land value tax.

Part 7 - A new approach to local government finance

Answers to the questions

Reforming the revenue grant system

1 Grant distribution

As a general principle, those services which are provided in accordance with nationally specified standards should be paid for out of a national land value tax. Those services which are provided at the discretion of local authorities should be provided by a locally determined component of the land value tax.

Taxes and charges

13 Revaluation cycle

All property taxation should be subject to an annual revaluation cycle by statistical adjustment, with major definitive quinquennial reviews.

15 Safeguards for supplementary business rate.

(a) The proposed Partnership Arrangements do not adequately address this concern.

(b) Partnership bodies will subvert the fundamental democratic principle that decisions should be made by democratically elected representatives.

(c) Only large businesses will have the spare resources which will enable them to participate in Partnership bodies - and decisions are likely to be made at the expense of smaller businesses who will not have the time to devote to preparing for and attending forum meetings.

(d) All discretionary expenditure will come under the control of this group.

(e) Partnership Arrangements are a recipe for control by small coteries comprised of long-serving Councillors and officers, and the big businesses in the town - estate agents, etc. The system will be open to corruption, a danger aggravated by recent changes such as cabinet government and elected mayors which have reduced the extent to which decisions can be scrutinised.

(f) The Campaign is aware of the danger that local authorities could "milk" businesses without voters, who are primarily residents, having to bear the costs of this decision. In its view, however, this is best avoided by making property in all classes of use subject to the same rate of tax, based on its valuation, which would, preferably, be based on the site value of the hereditament.

15 Business rate reliefs

(a) Business rate relief will be clawed back by landlords in rent increases at the first rent review. There is no merit in this proposal.

(b) Business rate relief should be through the application of land value taxation in place of the existing business rate, since buildings and improvements would not be included in the assessment.

16 Tax reinvestment

Land value taxation would automatically result in increased incomes for local authorities where urban regeneration had been successful.

Further comments and conclusion

(a) The Campaign advocates replacement of the existing system of local government finance by land value taxation, in accordance with the principles set out in the accompanying document, "Options for Property Tax Reform&quoit;, for the reasons set out therein.

(b) The Campaign advocates the replacement of the Council Tax and the Uniform Business Rate by a property tax based on site values only; all land, including vacant and agricultural land would be assessed for the tax, and the assessment would be on the assumption that the land was at its optimum permitted use within the constraints of planning regulations.

(c) Within a given taxation area, the rate of tax should be the same for land in all classes of use.

(d) The tax would be multi-part, with elements set by central government, the local authority and any other tier of government which may be established under devolution proposals. For that part of local government finance where service provision is to a national standard and local authorities are, in effect, acting in the status of agencies on behalf of central government, it is suggested that they should be fully funded from the national element of the site value rate; examples include police and fire services, education and social services.

(e) It would be desirable to revise valuation lists annually. In most cases this would not require inspection of individual sites since much of the work would be amenable to statistical adjustment. Provision should be made for major quinquennial revaluations though experience with annual reviews may show that these are unnecessary.

(f) Although, given the political will, there is no reason why, subject to a realistic phase-in period, the proposals set out in "Options for Property Tax Reform" should not be implemented without further ado, it would be possible to implement land value taxation initially on a local basis, for example, to fund the London Boroughs and the Greater London Authority, or in a region such as Merseyside, Tyne and Wear, the South Hampshire conurbation or Northern Ireland.

(g) The Campaign commends to the Secretary of State the report of Brisbane City Council's Committee of Inquiry into Valuation and Rating. A copy of the summary of the Committee's two-volume report accompanies this submission.

(h) The Campaign draws to the attention of the Secretary of State one of the conclusions in the Scottish Land Reform Policy Group's "Recommendations for Action", that

"A comprehensive economic evaluation of the possible impact of moving
in the longer term to a land value taxation basis should be undertaken".

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, 1939

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 - Greater London Authority Area

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 administered, and the problems now arising in connection with funding of the capital's infrastructure, does suggest a fresh approach at the same time to how revenue is to be raised. The London Rating (Site Values) Bill of 1939 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 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 a pilot site-only valuation of a selected area, such as Greater London Authority, or in a region such as Merseyside, Tyne and Wear, the South Hampshire conurbation or Northern Ireland.

A pilot scheme 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.
 

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