Localism with a record of failure

Land taxes are on the political agenda again, but history suggests that they should be approached with caution

By Ian Packer

The new Coalition Government has been spelling out its policies in some detail.  But one area that remains intriguingly obscure is local government finance, where the Government only promises a ‘full review’. 

Part of the reason for this opaque declaration may be that the Conservatives and Liberal Democrats have very different ideas about local taxation. The Conservatives dislike the current council tax on the value of domestic properties, but have not spelled out an alternative, only proposing to freeze it for two years. The Lib Dems would prefer to trial a local income tax, but their manifesto also suggested that the way in which national non-domestic rates - the local tax on businesses - is calculated should be changed, so that it is based on the value of the land on which the firm operates, rather than the rental value of the whole site, including buildings. This proposal opens the way for the coalition to at least consider replacing some, or all, of the council tax with a form of land taxation. But would this be a good idea?

Land taxation has been proposed at various times for over 100 years and the arguments in its favour have often been rehearsed. Its proponents suggest it would be fair, as increases in the value of land (as opposed to developments on the land) derive from the exertions of the community, and the vagaries of local planning consent, rather than any effort from the landowner.  It would also produce little economic distortion, because even high levels of land taxation would still leave landowners with incentives to develop their land.  Land taxation would, therefore, provide a new revenue stream that would capture increases in private wealth, which derive from public, not private, activity. 

These factors make it preferable to the council tax, which tends to be regressive and rises with every improvement, let alone stamp duty, which penalises housing transactions.  Land taxation would also give landowners an incentive to sell or develop land, rather than keeping it economically inactive.  Possibly, this would not only produce more, and cheaper, housing, it would encourage development in poorer areas and damp down future artificial housing booms.

These arguments have received plenty of criticism, though.  The sceptics have pointed out the practical difficulties in the way of land taxation, including the cost of assessing the value of the country’s entire land surface and the complexities and possible legal challenges involved in the process, which would presumably need to be regularly updated.  Such a drastic shift in the basis of taxation might produce unforeseen fluctuations in the price of land, making it an unreliable stream of taxation and producing inequities between owners.  Some unfairness may also be inherent in land taxation – especially in the way it would increase taxation for those who are asset rich, but cash poor (the famous ‘Devon pensioners’).  Finally, if land taxation indiscriminately encourages more development, is this needed everywhere, especially in green belts and conservation areas?

The British experience of land taxation can shed some light on these debates.  In the last half-century, Labour governments have shown a persistent interest in introducing a form of land taxation.  However, in every case, rather than a general tax on the value of all land, they have concentrated on taxing the windfall gains from granting planning permission, or sometimes of land development itself, when the land was sold or the developer’s profit was realised.  The Development Land Tax (1947-53), the Betterment Levy (1967-71) and the Development Land Tax (1976-85) were all repealed by subsequent Conservative governments.  None of these measures could be deemed a success.  They were fantastically complex, full of anomalies, open to legal challenges and detested by landowners (and thus by the Conservative Party), as well as encouraging landowners to hold up land from development, producing shortages for building and little revenue. Labour finally gave up on this strategy when it replaced the similar Planning Gain Supplement it had proposed in 2005 with a Community Infrastructure Levy (2010), allowing local authorities to claw back from builders some of the cost to local services from new developments. So, a limited tax on land development can gain little support from the past.

But what about a general tax on land values? The nearest equivalent Britain has seen to this type of taxation in modern times is the three land taxes in the Liberal Chancellor of the Exchequer, Lloyd George’s 1909 ‘People’s Budget.’  However, the first of these, a 20 per cent tax on ‘unearned’ increases in land values, payable when land changed hands, was merely a forerunner of Labour’s later development taxes.  The second, a reversion duty of 10 per cent on the benefit gained by a landowner at the end of a lease, was a similar kind of tax.  Only the third, a tax on the capital value of undeveloped land, resembled a general tax on land values, and even this excluded all sites with a value of less than £50 per acre, parks, gardens and smallholdings. 

However, these land taxes could not be classed as a success either.  By 1913-14 they had collected a mere £0.6 million, while the (uncompleted) land valuation they required was estimated to cost over £2 million. The undeveloped land tax was the most productive, but it proved vulnerable to legal challenges and was halted altogether by a law case in February 1914.  Moreover, it had no success in stimulating housebuilding.  In fact, the land taxes probably contributed to a building slump by making some property owners feel insecure, alerting mortgagees to declining property values and making builders fear taxation of their profits.

So, if the Liberal Democrats are trying to push the coalition in the direction of land taxation, past experience suggests extreme caution is required.

• The issues surrounding a land tax will be the subject of a public debate at the University of Lincoln's Brayford campus from 10.30am to 3.30pm on Monday 28 June

27 May 2010

Ian Packer. Reader in history, University of Lincoln