Land Value Taxation - the essential reform

John Digney

This article originally appeared in issue 85 (Summer 2014) of Wild Land News.

The early years of the Scottish Parliament were marked by a flurry of activity on land reform. Years of apathy and prevarication at Westminster meant there was plenty of work to do. After the Labour landslide election of 1997, the formation of the Land Reform Policy Group (LRPG) by the Scottish Office meant the new parliament could hit the ground running with ready-made proposals for reform. Yet despite the late Donald Dewar’s hopes that land reform was to be an “ongoing process”[1], after the first few years of the millennium the momentum subsided. All went quiet until summer 2012 when the SNP broke its silence and formed its own Land Reform Review Group (LRRG). Once again the big landowners are squirming, anticipating another attack on their privileges. But have they any need to fear? Is there anything truly radical in the offing or is it just going to be window-dressing?

There was some very good work done under the general banner of land reform in those early days of the Scottish Parliament. MSPs had barely got their feet under their desks before they were dismantling the feudal system. Then came the long-awaited legislation on national parks and public access rights. Much less successful, however, was the flagship Community Right-to-Buy (CRtB) which was an attempt at redistribution, recognising the problem of Scotland’s highly concentrated pattern of private land ownership.

Failure of the Community Right-to-Buy

The CRtB emerged from public consultations by the LRPG and was promoted “as an essential prerequisite of land reform” by Donald Dewar.[2] The LRPG predicted that it would “effect rapid change in pattern of ownership,”[3] a claim that sounded wildly optimistic even at the time, and which has proved to be pure fantasy. The Scottish Government’s own figures show that by 2012 only 11 successful purchases had been made since the legislation came into force.[4] In a newspaper article in 2009 Andy Wightman calculated that at the current rate of progress it would be year 2025 before even 1% of Scotland’s land was in community ownership.[5]

The idea of buy-outs was probably inspired by the success of communities such as those of Assynt (1993), Eigg(1997) and Knoydart (then ongoing). These were iconic purchases which had enjoyed huge press coverage about the problems of remote communities under absentee landownership. Much of the funding came from the public purse, trusts, charities and individual private donations. However, the assumption that such contributions would continue on the same scale until the “rapid change in pattern of ownership” had been accomplished across Scotland was always implausible. Even if communities could negotiate the complex bureaucracy required to prepare a bid for a buy-out, where would the funds come from? The notion of huge sums of public money being poured into the pockets of already-rich landowners would have grated with the majority of taxpayers.

Donald Dewar was all too aware of the problem and the risk of becoming a hostage to fortune when he warned that “we would need to ensure that the wishes of the community did not automatically lead to a demand on the Government for funds – we cannot be the provider of all resources for this project”.[6] The Government has now admitted that the money available from the Scottish Land Fund “is often too small to make more than a modest change to the pattern of land ownership in Scotland”[7] which begs the question as to why such extravagant predictions were made for the CRtB in the first place.

The LRRG is due to complete its work by May 2014, but so far it seems they are committed to extending the CRtB in some form.[8] Unlike the LRPG, their remit rightly includes urban land. Land reform ought to be about the ethics of recognizing the equal birthright of all citizens to what Nature has provided, and those ethics don’t change with change of land use. Whatever the LRRG comes up with, it must be based on firm principles that don’t vary according to whether land is pigeon-holed as rural, urban or something in between. So in view of the limitations of the Scottish Land Fund it will be interesting to see whether they will pursue the CRtB in an urban context where land values may be hundreds or even thousands of times greater acre for acre than in remote rural parts.

Rather than flogging a dead horse, now would be a good time for the SNP to ditch the CRtB as a failed Labour initiative. At best it could be retained in the event of a community finding a generous private benefactor, but realistically it should be acknowledged as a policy cul-de-sac.

A fiscal approach

If we accept the axiom that everyone has an equal right to life, and therefore to the necessities for sustaining life, we must accept that everyone has an equal right to the land resource that provides those necessities. Land reform legislation must give practical expression to this and must restore equal land rights.

Nevertheless, we should not expect the Government to achieve this by seizing or buying the land from current titleholders and reapportioning it equally (or arbitrarily) among the population. With the current pattern of distribution as a starting point we can, through the fiscal system, achieve fairness by balancing the privilege of land ownership with a corresponding financial obligation on the owner to the rest of society. We do not need to divide up the land physically; we do not need land nationalisation; we simply need to socialise the rental value of all land.

The case for land reform was greatly advanced in the 1990s by the series of McEwen Lectures. In the 1996 lecture, Prof. John Bryden repeatedly urged a fiscal approach. He noted:

“We need to capture for society realised incremental rents arising from sources other than investment by landowners, including those arising from general social and economic changes, public investments, public subsidies and regulations.”

and:

“We need to reverse the situation which has given to landowners the “residual power” in land, and which enables them to capture many of these incremental rents for private benefit.”[9]

Prof. Bryden was the external assessor to the LRPG, and it is a pity that these ideas were not pursued to their logical conclusion. It follows that if we are to capture future incremental rents for society, we should also apply the principle to existing land values, as these are simply the aggregate of past increments, generated by the same processes of social and economic change and public investment. For all practical purposes the supply of land is fixed and finite. Land has no production cost; its value is purely a measure of the level of public demand for particular locations, further enhanced and sustained by the provision of publicly-funded services and infrastructure. These publicly-created values should be returned to the public purse as a prime source of public revenue, with a concomitant reduction of existing punitive and destructive taxation on work and enterprise. The way to achieve this is by the system commonly known as Land Value Taxation (LVT), which regrettably was kicked into the long grass by the LRPG, but more encouragingly, was included in the LRRG’s initial list of potential reforms for consideration.

Land Value Taxation

Land Value Taxation would involve:

• ■The annual payment of a sum equivalent to the economic rental value of the land. It would include all land parcels, large or small, rural or urban.
• ■It would be charged on the value of the land alone, and would exclude the value of buildings and other man-made improvements on the land.
• ■Valuation would be based on optimum permitted use within prevailing planning and environmental constraints.

The implications and effects would be:

• ■The privilege of holding land would be balanced by a reciprocal obligation to society in direct accordance with the value of the land held.
• ■It would cancel out the financial advantage of merely owning land per se, as rental income to the owner would be equalled by the amount payable.
• ■It would dismantle the power structure of landlordism which is based on the legalised monopoly of our most basic resource.
• ■The benefits accruing from community-generated land values would flow into the public purse rather than private pockets. Public subsidies and investment in services and infrastructure that drive up land values would be recycled back into the public purse.
• ■Those who claim to “own” the country would have proportionate financial responsibility for the country’s running costs.
• ■It would apply universally to all land and all landholders, so could not be portrayed as selective, arbitrary, divisive or vindictive.
• ■It would restore society’s stake in the land resource without recourse to nationalisation or physical repossession, and without compromise to the principle of legally-secure tenure.
• ■It would penalise and therefore discourage the holding of land as an indulgence or as a trophy. Land hoarding would become expensive and pointless, and speculative values would collapse. This would break the cycle of boom-and-bust which is driven by the property market – it is the land that is the volatile element of that market, not the bricks and mortar.
• ■Inefficient rural estates would begin to break up and the way would be open for a wider pattern of ownership.
• ■It would penalise and therefore discourage dereliction. Land held deliberately out of its designated use would incur the same charge as if it were in use. Permitted development of available land within existing urban areas would therefore be encouraged, relieving the pressure of sprawl into rural areas.
• ■Land rendered economically useless through, for example, conservation designations or by virtue of its sheer remoteness, would have zero rental value and therefore zero liability for LVT. Such land would therefore not be a financial burden on the owner and there would be no pressure to develop it to cover costs.
• ■The temptation to manipulate the planning system for personal profit would be reduced as the enhanced value from planning permission would be captured for the public purse rather than by landowners/developers.
• ■Whereas the present tax system is a cheats’ charter and a breeding-ground for institutionalised corruption, dodging LVT would be impossible as land cannot be hidden or exported to a tax haven.
• ■Assessment could be done largely from maps. The skills for valuation (distinguishing the location value of land from the separate value of buildings and improvements) already exist within the surveying/valuation/estate agency professions.
• ■Crucially, as a huge source of alternative rather than additional revenue, it would enable the Government to liberate the economy from the burden of penal taxation on labour and productive enterprise. Massive cuts could be made to our present counter-productive taxes.

With rental income matched by outgoing payments, there would be much less incentive for landowners to encourage inappropriate development as the increase in income would be absorbed to leave no net gain. Windfarms on upland sites, for example, can generate megabucks as well as megawatts, sometimes to the tune of tens of thousands of pounds in rent per turbine per annum. This uplift in value would be returned to the public purse instead of going into the private pockets of landowners who have done nothing to create it.

The full effect of LVT would only be felt if it were to be levied at 100%, but most recent studies have considered a more modest application at local authority level. The Scottish Government’s Burt Committee report of 2006 into local government taxation[10] found very few drawbacks with LVT, with public unfamiliarity seemingly the main one. Burt queried the ease of valuation, but there were no concerns over this in a pilot study in 2009 by Glasgow City Council which confirmed that “databases, systems and controls are in place” and stated “We have therefore not identified any insurmountable problems from a practitioner’s perspective in introducing a LVT.”[11] A study by Oxfordshire County Council in 2005 was similarly confident about implementation.[12] Andy Wightman produced a detailed study of LVT for the Green party in 2009,[13] the results of which are summarized in Chapter 30 of his book “The Poor Had No Lawyers.”[14] Most recently the Mirrlees Report of 2011, commissioned by the Institute for Fiscal Studies, observed: “The economic case for a land value tax is simple, and almost undeniable” and recommended replacing business rates and stamp duty land tax on business property with a land value tax for business and agricultural land.[15]

Despite the term LVT being used in all of the above-mentioned studies, it is something of a misnomer. It is more of a user fee than a tax, on the same lines as a parking fee where you choose your space and occupy it at the going rate for the location. Even homeowners are land monopolists, albeit on a tiny scale, and the way to achieve a level playing field is for us each to compensate the rest of society in accordance with the extent of our chosen monopoly.

The Greens are the only party promising LVT. Both the Liberal and Labour parties used to have it as a core policy, although Labour rather lost the plot with their post-war attempts to capture publicly-enhanced land values for the public purse. Their legislation was fatally flawed as it relied on one-off charges levied at the point of development, which simply caused stagnation as developers sat tight and hoarded land while awaiting the inevitable repeal. Now Ed Miliband wants to curb land hoarding - why not look at LVT?

Disagreements between the SNP and Westminster about oil revenues pepper the independence debate. But if the SNP considered the land under their feet as well as the resources under the North Sea, they could unite with their pro-independence allies, the Greens, and tap a huge alternative source of public revenue. Unlike the oil, the land won’t run out. The link between land reform and fiscal reform needs to be made. If we allow politicians simply to “do” land reform in isolation and then move on to something else, the result will inevitably be a ragbag of improvised policies targeting the various symptoms rather than the underlying malaise. We need to break the power of land monopoly at source, or we shall always be on the back foot in our efforts to control it.

References:

[1] Donald Dewar – “Land Reform for the 21st Century” McEwen Lecture 4th September 1998, P.10

[2] Ibid. (P.19)

[3] LRPG – “Identifying the Solutions” (September 1998) P. 23

[4] Scottish Government “Overview of Evidence on Land Reform in Scotland” 2012 (P.16)

[5] The Herald – “Five Years On – What Has Land Reform Achieved?” 12th June 2009

[6] Ibid. 1 (P.19)

[7] Scottish Government “Overview of Evidence on Land Reform in Scotland” 2012 (P.32)

[8] LRRG Interim Report

[9] John Bryden – “Land tenure & Rural Development in Scotland” McEwen Lecture 27th Sept. 1996 (P.33-34)

[10] “A Fairer Way” Report by the Local Government Finance Review Committee (2006) Section 11

[11] http://www.andywightman.com/docs/Glasgow_LVT.pdf (Sections 3.10 & 3.11)

[12] http://www.andywightman.com/docs/oxfordshire_study.pdf (P. 9-10)

[13] “A Land Value Tax for Scotland” http://www.andywightman.com/docs/LVTREPORT.pdf

[14] “The Poor Had No Lawyers” Birlinn (2010); ISBN 978-1-84158-907-7

[15] “Tax By Design”