What Is a Land Value Tax? a Land Value Tax (LVT) Is an Ad Valorem Levy on the Unimproved Value of Land, Normally Paid on an Annual Basis by the Owner of the Land

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What is a Land Value Tax? A Land Value Tax (LVT) is an ad valorem levy on the unimproved value of land, normally paid on an annual basis by the owner of the land.

Unlike most property taxes, LVT disregards the value of any improvements made to the land, including any buildings, plant or machinery located on the land.

What Determines Land Value? The value of land depends predominantly on two factors: the location of the land and its permitted uses.

Its permitted uses – whether a factory, offices or houses can be built on it - are determined by the planning system.

The value of location depends on numerous factors, such as:  Access to and quality of infrastructure; including roads, rail and broadband.  Access to and quality of local services and amenities; including schools, hospitals and shops.  Environmental factors, such as noise and air pollution.  Strength of local labour markets.

The Rationale for a LVT All of the main factors that determine the value of unimproved land are outside the control of the landowner. They are determined, instead, by the actions and decisions of wider society – such as decisions regarding infrastructure investment1 and public service provision2. For this reason, it may be

1 For example, Ahlfeldt (2013) estimates that the Jubilee line extension of the London Underground led to an aggregate increase in land values of almost £716million in 1999 prices and excluding non-residential properties. 2 For example, Wang et al (2015) conclude that the number of bus stops within walking distance of a property is positively associated with the property's observed sale price. equitable for the returns to land to be taxed, so that they are shared by wider society rather than captured solely by the landowner.

Correspondingly, a LVT is likely to be economically efficient. Taxes in general change the incentives that people face, and hence their behaviours. For example, non-domestic rates can reduce the incentive for businesses to invest in plant and machinery3, and hence reduce the aggregate level of investment in the economy. In contrast, the supply of unimproved land is fixed and so an increase in taxation on unimproved land cannot influence the amount of land available.

For these reasons, LVT has drawn widespread support from across the economics profession. Its most distinguished supporters have included Adam Smith4, John Stuart Mill5, Milton Freedman6 and James Mirrlees7.

LVT in Practice It is important to note that, despite the widespread support for a Land Value Tax amongst many economists, such tax regimes are rare in the real world. Forms of LVT exist in Denmark, Pennsylvania in the USA and Victoria in Australia.

The Current Local Tax Regime in Wales At present, there are two main forms of local taxation in Wales. Non-domestic rates (NDRs) were introduced in 1990, and Council Tax (CT) in 1993. Both are examples of property taxes, but have significantly different features to a LVT.

There has been criticism of the current local tax regime in Wales. NDRs have been criticised for discouraging business investment, whilst CT has been criticised for its lack of progressivity. The system as a whole has been criticised for being overcentralized and for reducing the ability of local authorities to grow their own tax bases and boost their local economies8.

3 As an example, Tata Steel’s NDR bill rose by £400,000 a year after completing a £185m rebuild of a blast furnace at Port Talbot in 2013. 4 “The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents and the ordinary rent of land are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them.” Adam Smith - Wealth of Nations (1776), Book V, Chap. 2, Art.1. 5 “Landlords grow rich in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.” John Stuart Mill - Political Economy (1848), Book V, Chap. 2, Sec. 5. 6 “So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.” Milton Friedman - Professor of Economics, University of Chicago, speaking in 1978. 7 “There is a strong case for introducing a land value tax. In the foreseeable future, this is likely to mean focusing on finding ways to replace the economically damaging business rates system with a land value tax.” The Mirrlees Review. Tax By Design, Chapter 16 Conclusions. 8 See, for example, the 2016 report of the Independent Commission on Local Government Finance Wales. A Local LVT for Wales The Welsh Government has commissioned Bangor University to complete a “Technical assessment of the potential for a local Land Value Tax in Wales”.

The main purpose of this assessment is to provide an initial appraisal of the practical viability of a local Land Value Tax in Wales, and to identify the further work that would be required in order to deliver such a policy.

The project will identify how a framework for LVT could be designed so as to be compatible with the current institutional, political and economic environment in Wales. This will encompass considerations such as:  Which tiers of government might set the rates for LVT, noting the importance of democratic accountability and that the revenue raised must be used to fund principal local authorities;  The potential for differential treatment of non-domestic and domestic land;  What reliefs, exemptions or limitations might apply under a LVT regime;  Collection mechanisms;  Links to the planning system;  The relationship with other taxes that people and businesses pay in Wales;  Transition from the existing local taxes to a new regime;  Valuation mechanisms and revaluation requirements.