Saturday, July 3, 2004
Owen Connellan has published Land Value Taxation in Britain: Experience and Opportunities (Lincoln Institute of Law & Policy, 2004). The book resurrects the idea of a land value tax:
Land Value Taxation (LVT) is the policy of raising revenues by charging each landholder a portion of the value of unimproved land. The tax may be justified for both economic (because it does not distort market mechanisms) and fairness (because it is equivalent to a fee for protection of land ownership) reasons. It is a cheap (and therefore efficient) tax to administer because much less effort is required to track land ownership than to track income or sales transactions. LVT was an important part of the platform of the British Liberal Party and was advocated by Winston Churchill early in his career.
Here is the abstract of the book:
Attempts at introducing land value taxation (LVT) in the United Kingdom demonstrate a long and varied history. Land Value Taxation in Britain considers this history and how LVT may be particularly relevant at the present time. Owen Connellan, with contributing authors Nathaniel Lichfield, Frances Plimmer and Tony Vickers, explores past debate over different forms of LVT, the tax’s role in generating government revenue, and its practical operation, moral background and ethical rationale. The book concludes with a discussion of future prospects for LVT in Britain and elsewhere.
But why study land value taxation in Britain, especially when that country has yet to evolve a system of LVT that is generally accepted or workable? Britain’s experience with property taxation and expertise on property valuation make it an ideal case study. Only by examining the success and failure of past legislative and administrative attempts to employ LVT for the benefit of the community can policy makers draft more effective LVT proposals, not just in the U.K. and but also in other countries.
3 responses to “New Book on Land Value Taxation in Britain”
Back in the 1960s, while serving as general counsel to and a director of a fast growing medical device company, a fellow director who was on the faculty of Harvard Business School suggested that undeveloped and underdeveloped real estate should be highly taxed to encourage greater development that would benefit the economy. This idea never took hold. I wonder from time to time what the impact of such a policy would have been upon the environment. Farmlands, etc, get favorable property tax treatment in many U.S. communities interested in maintaining open spaces and keeping from being overdeveloped, subject to a continuing lien so that the community can get paid its fair share for decreasing taxes when the farm is developed and the owner cashes in.
Have any communities in the U.S. ever adopted such a high property tax policy on undeveloped and underdeveloped land? If so, how has such a policy worked out in practice?
LVT in a number of cities in Pennsylvania including Harrisburg.
Harrisburg Mayor Reed in a 1994 letter to Patrick J. Toomey said the following. “The City of Harrisburg continues in the view that such a land value taxation system, which places a much higher tax on land than on improvements, is an important incentive for the highest and best use of land in already developed communities, such as cities. […] Moreover, the same two-rate system tends to discourage real estate speculators and others who would be inclined under normal conditions to tie up land tracts that could otherwise be used for development purposes. […] With over 90% of the property owners in the City of Harrisburg, the two-tiered tax system actually saves money over what would be otherwise a single rate system that is currently in use in nearly all municipalities in Pennsylvania. […] I should note that the City of Harrisburg was considered the second most distressed in the United States twelve years ago […] Since then, over $1.2 billion in new investment has occurred here, reversing nearly three decades of very serious decline.”
See Plassmann and Tideman, A Markov Chain Monte Carlo Analysis of the Effects of Two-Rate Property Taxes in Pennsylvania 19 (1997), “This means that, for an average municipality, an increase in the adjusted tax differential of 1 mil will yield an expected increase in the total value of construction of 1.58%”.
LVT in Melbourne, Australia.
See David Roodman, The Natural Wealth of Nations 123 (1998) “In the twentieth century, Melbourne, Australia, has been one of the best laboratories for the study of shifts toward land value taxation. Half of the 56 local governments within the metropolitan area eliminated the building tax between 1919 and 1986 and increased the land tax. Today, not surprisingly, districts that do not tax buildings have more of them. In fact, they have population and housing densities half again as high as those with conventional property taxes, even after controlling for distance from the city center, amount of industry, and other relevant factors; the difference is greatest for districts that switched earliest. And more construction within the city limits has reduced pressure for expansion beyond.”
The essential difference between markets for land and markets for labor, capital goods or credit, is that the supply of land is nearly fixed. Labor, capital goods and credit are highly mobile and supply responds very quickly to increases in price. Conversely, price does not clear the market for land.
Because communities and societies fail to collect the rental value of locations via taxation, this rental value is capitalized into a selling price for control over locations. What that selling price is and how quickly prices rise in the face of expanding demand is, of course, subject to a long list of variables and externalities. Periodically (as with Japan in the late 1980s) land markets crash after becoming speculatively driven to the point that profitable development of locations is impossible.
The supply of land available for development and use is reduced by numerous set asides as well — for highways, for parks, for wetlands, and for other public services. When the effective tax rate on privately-held locations is lower than the imputed or actual rental value of locations, owners will tend to keep land off the market in anticipation of even greater speculative gains. Or, when the annual cost of holding land is very low, some owners simply ignore their landholders unless they receive competing offers from developers.
What the full taxation of land values (i.e., of annual rental values of locations) would accomplish is to put financial pressure on owners to develop land to its highest and best use based on market conditions (and land use regulations, such as zoning, height restrictions, densities, set backs, etc.). This would have a dampening impact on sprawl, since developers would no longer be forced to leapfrog over large areas of “expensively priced” vacant land close to population centers in order to find land on which to affordably construct housing, a process that has seen to the conversion of much fertile agricultural land into suburban communities and roadways to get from one to another.
The School of Cooperative Individualism maintains an extensive library of materials on this and other related subjects and also included an Encyclopedia on Political Economy with external links to relevant research.
Edward J. Dodson, Director
School of Cooperative Individualism