Land value tax has huge opportunities for better aligning incentives most efficiently using land. However, there are issues that land value tax would have to overcome ranging from financial impacts to politics.
Firstly, those who are asset-rich but cash-poor would be affected. Households would be levied on the land that their property sits on even though they haven’t released any of the equity from their property. Politically this is difficult because these people are often older and pensioners (who have high rates of voting turnout). However, this could be overcome by a combined phasing out of council tax, some single occupancy relief period for a certain number of years or asking for the full value of the tax when the house is sold (which the local authority could borrow against) – all provide some impact and would need exploration. The point here is that a transition period would need to be in place and that certain allowances made i.e. the choice between exempting groups from the tax or ensuring everyone is liable for the tax but revenue streams are distributed to groups acting as an exemption (e.g. revenue to those who own land but build affordable housing).
Secondly, it will impact on cashflow and income of consumers. Households will have to provide a contribution to the exchequer – money which they’d ‘normally’ spend on other items. This will have wider implications for the economy in terms of expenditure, portfolio spending and temporal choice but also in terms of income tax revenue.
Thirdly, it would be a tax on developers who own land which will increase their ‘costs’ during the development process. The concern would be that this stalls sites due to cashflow issues and/or they pass this on to the consumer. However, it would incentivise quicker build out rates. Furthermore, the money raised through this taxation could fund a variety of public goods such as infrastructure and affordable homes. Therefore, there is the potential to replace s106 and CIL (planning obligations) with land value tax.
Thirdly, valuing land without the property is difficult but not insurmountable. We currently do not have detailed enough land value by the right spatial level so a new model would have to be developed to estimate the value of the land. Techniques for this range from individual valuations to economic/mathematic modelling to daily self-valuation.
Fourthly, land value tax is not well known and would impact on many people – not a vote winner! However, this could be overcome by reducing taxation elsewhere such as council tax and business rates (for property taxation) to bolder areas such as inheritance tax and income tax.
Fifthly, is land value tax too bold? There are other property taxes that could be reformed – some which are arguable as politically difficult and some that could be easier.
One alternative would be to reform council tax which is highly regressive and has relief for vacant or second homes. Council tax is currently charged on property based upon 1991 property valuations. Since that time, not only have there been large changes to property prices across the UK, there has also been a huge divergence in those prices. There are two options – one is to change the bands on council tax which would see a huge number of people affected (often in marginal political seats) with most of the losers coming from more affluent areas. The other option is to increase the number of bands to incorporate the higher values (with the same effect as above).
Another would be to look into reforming stamp duty which is the charge on transactions (and buyers). Such a pro-cyclical tax policy means revenues decrease as the market cycle takes a dive. Also, council tax bands have not shifted in line with house price inflation making it less efficient. Moreover, taxing transactions taxes an efficient desirable action – people should not be put off from moving into more suitable housing.
Another would be to explore the reform of inheritance tax whereby the thresholds and rates reflect the increase in asset prices.
Or capital gains tax. This is currently only applicable to second homes and is often avoided by using efficient tax planning. Exploring the impact of capital gains tax (which many, including Kate Barker, have suggested) on primary property would be useful and may stabilise prices further.
The politics of this tax is the biggest stumbling block. Local politicians and authorities don’t have enough power of budget to lobby of it and it is politically toxic on a national level (one reason you only hear economists argue for it!). However, if this could be addressed and overcome, land value tax could be used – there just needs to be a worthwhile consumer and political offer.