What are the practical barriers to LVT?

Wednesday, 20 May 2009 21:26
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Valuation

A problem consistently raised as an impediment to LVT is that of valuing land in its highest and best use within the framework of the UK planning system. The system is flexible and largely responsive implying that the most profitable use for a site, and hence its value, is difficult to determine accurately until planning permission is received. Valuation by comparison with market sales of similar sites might be difficult if, as may be found in highly developed locations, such sites are scarce while it might also be difficult to separate from the price paid any amount due to unconfirmed expectations of development or ‘hope value’ in order to arrive at a taxable value. A more prescriptive planning system could be envisaged which would provide greater certainty with regard to the maximum permitted use of a site but the question arises as to what value is placed on flexibility in order to determine the acceptability of any loss; for instance the flexibility that might recognise the value of amenity over an otherwise more profitable use.

Development

It is advocated that LVT would stimulate development and evidence is drawn from jurisdictions where limited implementation has been undertaken; the Pennsylvania dual rate system, for example. However, such an outcome might be made less certain were the planning system to represent the main obstacle to development rather than developers’ willingness to develop; for instance, land identified in development plans is rarely available for development immediately while developers may maintain land banks in order to ensure that an adequate supply of land receives planning permission rather than for speculative purposes. Since LVT aims to transfers the tax burden from land and improvements to land alone and from the occupier to the landowner, the latter might be expected to shift as much of the burden as possible back onto the occupier by way of a rent increase that offsets the relief he has gained. However, an increase in development would tend to reduce land values and limit the amount that the landowner could shift; thus, the extent to which the operation of the planning system limits any stimulation effect might reduce a key theoretical economic benefit of LVT implementation.

Revenue adequacy

LVT would shift the burden of taxation to those properties whereby the land value in relation to the total value (land plus improvements) is greater than the average. This implies a loss of revenue for local authorities that preside over areas of low land value where social expenditure requirements might be high. If the tax were set locally (site value rating) this may lead to an increase in the rate entailing that land owners in such areas were taxed at a greater rate than other, more prosperous areas. Alternatively, a centrally set rate would imply a need for redistribution which may reduce local accountability and the prospect that a prosperous area may be deprived of the necessary funds to support growth. Growth in revenue would require an increase in land values or an increase in the rate of taxation. A neutral LVT (that would raise an equal amount from land values as was raised from the incumbent system) would increase the number of taxable hereditaments by including vacant and underused land as well at that scheduled for development. However, this has the effect of taxing future development in order to accommodate present expenditure and, as such development is implemented, might entail that revenue will not keep pace with the expenditure requirements of growth.

Implementation cost

Revaluations for the purposes of LVT are envisaged to take place on a regular, possibly yearly, basis and it is argued that the cost will be mitigated by computer-assisted mass appraisal methods. However, confidence in valuations would require accuracy which would imply frequent updating of amendments in development plans and specific planning decisions. Reference may also be required to the existence of easements, restrictive covenants and long leasehold interests which restrict a landowner’s development options and, therefore, the highest and best use. While a cost would be attached to allowance for such factors inaccurate valuation could entail a risk of an increase in the costs associated with an expanded appeals process.
 

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