Land Value and Community Betterment Taxation in Britain: Proposals for Legislation and Practice Nathaniel Lichfield and Owen Connellan © 2000 Lincoln Institute of Land Policy Working Paper The findings and conclusions of this paper are not subject to detailed review and do not necessarily reflect the official views and policies of the Lincoln Institute of Land Policy. After printing your initial complimentary copy, please do not reproduce this paper in any form without the permission of the authors. Contact the authors directly with all questions or requests for permission. Lincoln Institute Product Code: WP00NL1 Abstract Report II presents proposals for legislation and practice in Britain for what is generally termed land value taxation (LVT) that is taxing the land (as distinct from land and buildings in combination) for the benefit of the community. While open to various interpretations, in this Report it comprises the introduction of a series of taxes geared to annual exactions (LVT) value capture by capital exaction (betterment) and exaction for contributions to infrastructure financing (IF). It does not in this Report include recoupment of value to the community simply as a result of public ownership of property. The LVT proposals (Chapters 4-7) are preceded by a Context (Chapters 2-3) and succeeded by Related Issues (Chapters 8-10). Part I (Chapter 1) presents the Scope of the Report based upon its Terms of Reference. The Context for LVT is presented in Part II. First, we present the current situation of infrastructure financing in Britain, in order to show that the frontier of such financing is steadily being switched from the traditional approach, in that increasingly the cost of the infrastructure is being borne by the sector which makes profit from development as opposed to the public purse (Chapter 2). One particular instance is picked up, namely the practice of exacting ‘planning gain/obligation’ which is similar in intent to the US ‘impact fees’. This system is working badly in Britain and, following a review, our proposal is that it be replaced by exactions based upon the established practice of environmental assessment. Then we introduce the Recoupment of Betterment (Value Capture) by Capital Levy (Chapter 3). We give reasons for not returning to the three major efforts of earlier Labour Governments (in 1947, 1966 and 1975/6) to achieve such betterment. Instead we propose a continuation and enhancement of Capital Gains Taxation (CGT) which was introduced by the Labour Government in 1974, following an initiative by the Conservatives in 1973. In addition we support the suggestion for a new Greenfield Tax (GT) aimed at profits on the development of open land whose proceeds would be hypothecated for subsidy on “already developed land” within urbanised areas (brown land). Our proposals for an annual land value tax are presented in Part III. We start with a description of extant taxes that impinge on land ownership in Britain (Chapter 4) leading to a five country review of historically used systems and past proposals for Britain (Chapter 5) together with a review of possible options. Their evaluation follows (Chapter 6) before suggesting an acceptable solution (Chapter 7). We start with the conclusion that the traditional ‘Georgist’ exaction of a near 100% of economic rent at highest and best use would amount to the nationalisation of rental value and the right of owners to receive it, leading to the virtual disappearance of the land investment market. Several less drastic options are then reviewed: less than 100% tax on land rent, hope values dropped in favour of plan-led values, differential taxation of land and buildings, exclusion of some types of land ownership, incremental values over base dates, existing use values instead of “highest and best.” A synthesis of options is made to find a solution which we consider accountable to the current to Government and public opinion, that would be simple and cost-effective to administer. A transitional basis is envisaged moving from the shallow end to deeper waters as Government and public opinion permit, to ensure that the landowner bears the tax. This would take the form of an annual owner’s land tax that could be passed up through a hierarchy of ownership interests, starting with an apportionment as between land and buildings of rating assessments at the next revaluation. Concurrently, vacant land or some agricultural fringe land could also be taxed at highest and best use. Gradually over time the land portion of the rating assessment could be revised from existing use to future expectations of value, and ultimately the occupier’s tax on the buildings etc., element might disappear altogether, leaving the sole application of land tax as envisaged by the Georgists, but not as high as 100%. Having presented our proposals for Land Value Taxation including Capital Value Capture, we then introduce Related Issues in Part IV. First there is an extension of the discussion from our Report I (Part III) on how to make Land Taxation compatible with development planning, on the proposition that each on its own could be in conflict (Chapter 8). But this aim for compatibility reveals a weakness in the land market which could undermine a prime purpose in this Report, to ensure that Land Value Taxation and Value Capture should be borne by the land owners and not by the developers. Just because the regulatory system which has grown up under town planning (planning permits, environmental assessment, and charges etc) is time consuming, and the bidding for land leading to sale is often under pressure, the developers are led to formulate bids under some uncertainty as to the circumstances which should determine the amount of the bid. If so, the consequences could be unfortunate in the public interest, since overbidding for the land can put pressure on the developers to cut costs in their development proposals. Thus we propose (Chapter 9) an improvement via the landowner needing to provide more information to the development industry prior to the sale of the land, linked with the possibility of introduction of transactions via options. Here we make no firm proposals except that the matter should be investigated. Finally, in (Chapter 10) we pick up the requirement in the Terms of Reference for the Report that we have regard to political feasibility of our proposals in terms of the likelihood of their being adopted in Britain under the New Labour Government. On this we cannot draw clear conclusions since the Government has not included the topic in their election manifesto or subsequent programmes. Then we review the possibility of support for LVT from the other political parties (Conservatives, Liberal Democrats, Scottish Nationalists, Greens and European Union) and end with an account of how a shallow end approach can enhance political feasibility. Our proposal here is not to enter into any political campaign. Instead we hope that our Reports will offer a basis for discussion around the topic, both immediately and at the next election, possibly in the year 2002. About the Authors Nathaniel Lichfield Professor Emeritus of the Economics of Environmental Planning,University of London. Chair at Bartlett School of Planning, University College London. Visiting Professorships at University of California, Berkeley, and the Hebrew University, Jerusalem. Partner, Dalia and Nathaniel Lichfield Associates, Urban, Environmental, Economic Development Planning. Has practiced concurrently as planner and urban economist. In 1962, following posts in local authorities and central government, founded Nathaniel Lichfield and Partners, Planning Development and Economic Consultants. Left in 1992 to join Dalia and Nathaniel Lichfield Associates. Has been consultant in all continents: to central and local government, international organizations, new town corporations, local authorities and private sector. Experience in regional and town planning, implementation, new towns, expansion of existing towns, urban conservation, urban renewal and regeneration. In all has specialized in the economic and development aspects. Researched and published extensively over the entire range of planning and development economics. Pioneered work in economics of urban planning, land policy, economics of urban conservation and in particular the evaluation of projects and plans by cost benefit analysis planning balance sheet analysis/community impact analysis. Contact Information: Dalia & Nathaniel Lichfield Associates 13 Chalcot Gardens England’s Lane London NW3 4YB United Kingdom Telephone: 0044 (0) 171 483 0724 Fax: 0044 (0) 171 586 1212 e-mail: [email protected] Owen Connellan Owen Connellan is a Chartered Surveyor and Valuer who has specialized in rating and property taxation. He was engaged extensively in private professional practice and with commercial property organizations before subsequently pursuing an academic career. Currently he is a Research Fellow Kingston University, where he was formerly Head of School of Surveying, a Faculty Associate of the Lincoln Institute of Land Policy and a Member of the International Association of Assessing Officers. Connellan has written and lectured widely on real property matters in Britain and abroad. His present research interests include valuation methodology and the application of information technology to asset appraisal and property taxation. Contact Information: School of Surveying Kingston University Knights Park Kingston upon Thames Surrey, KT1 2QJ United Kingdom 42 The