Radical solutions to the housing crisis must focus on land
A new report from the London Assembly has taken a good look at the question of land and has recommended a clear route forward for the next London mayor to move towards introducing a Land Value Tax (LVT). The report proposes a step by step approach with an initial review of the powers that would be necessary for LVT to replace council tax, business rates and stamp duty land tax; an economic feasibility study to model the likely yield of LVT compared to the other taxes; and, if the study is positive, a trial of LVT in a geographically defined area of London.
The report rehearses the reasons behind the need for a radical new departure that has the potential to release far more land for productive use to meet the needs of a city that is growing rapidly in population and requiring the regeneration of many of its older neighbourhoods. It argues that new mechanisms are needed to fund London’s growth – which will continue to feed land and property inflation under current policies. And it argues that LVT would match the current appetite for devolution – with even the current mayor arguing for London to have considerably greater tax-raising powers and the Government already agreeing to devolve business rates by 2020.
As others have before, the report illustrates how the existing structure of property taxation encourages inefficient use of land and deters development. Council tax fails to deal with high value land, business rates fail to address unused land and taxes productive enterprises instead, and stamp duty is a disincentive to land sales.
LVT is defined by the report to be ‘a tax on land, payable by the landowner, at a rate of tax which is determined by the value of the land in its ‘optimum use’ (as decided by a public authority) as opposed to its actual or current use’. There would be a clear incentive to bring forward under-utilised land and the tax has the potential to reduce reliance on Whitehall funding and could lead to substantial community benefits when land values increase following public investment.
There is considerable public support for stronger action to be taken against land banking and against corporations which hold land simply to let it accrue in value without penalty. The report estimates that there are around 2,000 brownfield sites in London that may be available for development, comprising about 2% of the land area. It also comments that almost half the notionally available sites in London were held by those who had no incentive or intention to build. Based on the GLA’s Strategic Housing Land Availability Assessment (SHLAA) in 2012, land classified as ‘potential housing land’ could accommodate 276,000 new homes, equivalent to 7 years extra housing supply.
The theory behind the merits of land taxation is straightforward. Unlike other assets, land has borne no cost of production and it only has value because of its scarcity. As the report says, ‘land value owes nothing to individual effort and everything to the community at large’. The tax is transparent and the asset it taxes is unmoveable – it cannot be shifted to the Cayman Islands!
The report notes that the modern case for a land tax can be traced back to Winston Churchill in 1909. He argued that landowners should be taxed on the benefits they accrue from external developments, which have been provided by the labour, investment and tax payments of others, often through public investment. Although developers do make section 106 and Community Infrastructure Levy payments, these represent only a small fraction of the uplift gained, for example, by new transport infrastructure. If owners of underused or vacant land paid more through a more broadly based land tax, ordinary taxpayers would be required to pay less.
The GLA report is frank about the objections that have been made about LVT. There are significant challenges in introducing any new tax and making it operationally workable. Many of these are practical around identifying ownership but the idea of ‘optimum’ land use is new and potentially complex, and existing land value is often a moveable feast depending on the variable potential value of different developments. It is also frank about the political challenge, pointing out the ridiculous position where council tax is still based on 1991 values due to the perceived political risk of revaluation. The switch would create substantial winners and losers, and the losers will be able to afford lawyers and lobbyists! It therefore identifies some alternatives that have been suggested such as a specific derelict land tax and a system based on incentives rather than taxation, as well as better use of the mayor’s existing powers, including the power to set up area development corporations like for Old Oak and Park Royal.
The approach recommended is therefore gradual and based on a series of investigatory steps, clarifying issues and working towards holding a pilot. But it concludes that the political context is right – a desperate housing shortage, housing becoming a serious brake on growth, and a strong move towards the devolution of powers to elected mayors. For those like me who have long supported the idea of land taxation whilst being doubtful about its political deliverability, this report and its careful approach makes a lot of sense.