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Section 11: Property Tax Options Considered
1. In this section, we consider the second of the taxes which we concluded merited detailed further consideration - that is, a tax on property. We examine three property tax options, namely:
- Rateable value;
- Land value; and
- Capital value.
Rateable Value
2. Rateable value was the basis of valuation used for the former domestic rates system and is still used for assessing non-domestic rates. Rateable value assumes a rent at which property might reasonably be let in a free market. In principle, rateable values have advantages over capital values. They provide a direct measure of the annual value of occupation. They also tend to be less volatile than capital values, although volatility of property prices in Scotland has not been a particular problem in recent years.
3. However, there is a major problem with using rateable values for domestic property. The Scottish Assessors Association expressed concern about the robustness, complexity and cost of any valuations based on rental values. With the increased incidence of home ownership in Scotland and in the UK as a whole, there is a much smaller rental market than there was even forty years ago. So the relevance of a valuation based on assumed rental income is not clear to most taxpayers. While householders estimate the capital value of their home with a reasonable degree of accuracy, they are much less likely to calculate the rateable value of their home with any accuracy. This makes a tax based on rateable values more difficult to understand than a tax based on capital values.
Summary
4. We received very little evidence in support of rateable values being restored as the basis of valuation. For these reasons, we do not recommend this option.
Land Value
5. Land value tax (also known as "site value tax") has a long history and has been promoted assiduously by the Henry George Foundation, named after the 19th century economist and leading advocate of this form of taxation. We received a limited number of submissions, including from the Henry George Foundation and the Scottish Green Party, for the replacement of council tax with a land value tax.
6. The tax has two key features. The first is that the tax applies to the value of the land and not the value of any buildings on the land. The second is that is the owner of the land, rather than the occupier, who pays the tax.
7. The basic rationale of a land value tax is that taxing land encourages owners to ensure that the land in question is used to best effect, as the tax liability will be the same whether the land is left derelict or fully utilised. Its supporters argue that standard property taxes create a disincentive to developing land and improving properties, since those improvements will in turn be taxed. In doing so, advocates of land value taxation argue that it is more progressive than council tax, because it is applied as a proportion of value without the use of bands.
8. The Henry George Foundation described another purpose of land value taxation. It is that it can provide a means through which the community or government can tax the benefit that private land receives as a result of public or community investment. For instance, in many towns the value of homes has been enhanced by the presence of a good school or transport connections nearby. These services were paid for by government, not the local householders. Income received from taxing the enhanced value of the land owned by these householders reduces the tax burden on other residents, who have not benefited from these public investments.
9. We understand that more than 700 cities worldwide apply a land value tax in some form, including cities in Australia, eastern Europe and the US State of Pennsylvania. 196 However, it appears that the proportion of revenue coming from land taxes in Denmark, Australia and New Zealand has declined over the course of the 20th century. 197
10. Despite considerable evidence, there is no "ideal" model in operation that we could identify. That, and the absence of objective evidence on the effects of land value taxation in practice, has made it difficult for us to test the likely practical effects of the theoretical arguments in support of land value taxation.
11. Our consideration has focused on the following issues associated with a land value tax:
- Its effect on behaviours;
- Fairness;
- Public understanding of the tax;
- Its financial effects on households;
- Valuation issues;
- Taxing the owner instead of the occupier; and
- Transitional issues.
Effect on behaviours
12. Supporters of a land value tax argue that it would promote positive behaviour in encouraging the optimum use of land and investment. External changes that require planning permissions, such as house extensions and conservatories, could increase the value of a home. No additional tax liability would arise from such changes under a land value tax.
13. The advisers supporting Mark Ballard MSP when the Scottish Green Party gave oral evidence to us confirmed that land should be valued according to its "optimum permitted use". In relation to almost all domestic property, they accepted that its permitted use is for residential use.
14. Land value taxation has the advantage over current council tax in that it would be payable on vacant and derelict land.
15. While we agree that a land value tax attached to derelict land could encourage redevelopment, so too could other fiscal measures. This issue was the subject of recent consultation by the Scottish Executive (culminating in the Council Tax (Discount for Unoccupied Dwellings) (Scotland) Regulations 2005. 197
Fairness
16. It seems unlikely that people would consider as fair a situation where the same amount of tax was payable for two properties of different sizes, because they were located on identical parcels of land. Logically and economically, such an outcome might be reasonable but we think that most people would regard it as unfair.
Public understanding of the tax
17. This is a factor which impinges closely on the issue above. Taxpayers must understand how the tax operates if they are to accept the tax as being fair.
18. As discussed above in relation to domestic rates, capital values have the advantage of being clear, known and relevant to most householders. It seems that few householders would be familiar with the value of the land on which their home is located.
Financial effects of a land value tax on households
19. It is not clear that a tax based on a theoretical value of the site rather than on the property on that site would necessarily be seen as progressive by this publication at large.
20. In the absence of meaningful data elsewhere, we asked the Henry George Foundation if they could substantiate their claims about the financial differences that would arise from the introduction of a land value tax in practice. They produced a comparison between the average council tax bill and the average land value tax bill, by band and before the application of Council Tax Benefit. Figure 11.1 is an updated version of that comparison.
Figure 11.1: Comparison of average council tax and LVT bills by band198
Council Tax Band | Average Council Tax Bill (2006-07) | Average LVT Bill (2006-07) |
|---|
A | 753 | 254 |
|---|
B | 878 | 531 |
|---|
C | 1,004 | 770 |
|---|
D | 1,129 | 1,039 |
|---|
E | 1,380 | 1,463 |
|---|
F | 1,631 | 2,066 |
|---|
G | 1,882 | 3,707 |
|---|
H | 2,258 | 6,582 |
|---|
21. The Foundation acknowledges that the methodology used in these calculations is relatively primitive and unsophisticated, but they believe they are sufficiently robust and reliable for the purposes of this study. We have no evidence which either supports or challenges these results.
Valuation issues for land value taxation
22. A common feature of proposed, pilot and actual schemes elsewhere is the use of CAMA (computer-aided mass appraisal) system to record and value parcels of land. This is a tool that is not restricted to land value tax systems. For instance, the Valuation and Lands Agency in Northern Ireland is using CAMA for the purposes of revaluation as part of the forthcoming reforms to their domestic rates system.
23. At its simplest level, a land value tax could be applied through measurement of the area covered by the ground of a home. Even if achievable (see below), this basis of valuation would not be sophisticated enough to take account of factors that might influence the value of land locally, such as the provision of good schools or transport links locally or attractive topographical features. The inclusion of such adjustments, which are fundamental to a land value tax, will complicate the valuation process.
24. We understand that a number of possible methods exist that could be used for the valuation of land parcels for the purpose of a land value tax. However, we are concerned that no basis of valuation can provide the volume of direct and demonstrable supporting evidence as exists for capital values. RICS Scotland indicated to us that, while evidence will exist of individuals and developers acquiring land for residential development, analysis of these transactions may not be straight-forward.
25. In the absence of sufficient direct evidence of the values of land-only transactions, valuation for the purposes of land value taxation would have to use house sales data (this was the basis for valuation for a recent pilot project in England 199). This process would require building values to be identified and disregarded, with values relating to the size and location of the land being included in the valuation. This process would be subjective to some extent. We are concerned that it could generate a large number of appeals, because of the likely levels of public uncertainty about both the definition of land value and the way the valuation had been calculated.
26. There is concern over the valuation of buildings in multiple occupation or ownership. In this case, a value for the site of the building would be calculated, and this would then have to be apportioned among each of the occupiers in the building. Variations in value might occur from different uses within the building ( e.g. retail use on the ground floor, storage use on the first floor, residential use on the top floor). RICS Scotland stated to us that there is likely to be reasonably robust evidence for capital values relating to such properties, but evidence for site values or the apportionment of site values would be sparse.
Taxing the owner instead of the occupier
27. Advocates of a land value tax argue that, for the tax to act as a stimulus to optimising use of land, it should be payable by the owner of the land. While this distinction has no practical effect for owner-occupied homes, it would mean that land value tax in the rented sector would be payable by landlords instead of tenants. In practice it is reasonable to assume that sooner or later it would be added to the rent.
28. Collection of local tax may become more difficult. While occupied property does not move, its owners can. Unlike occupiers, owners are not always readily identifiable. Local authorities could face difficulties in pursuing payment from some landlords, short of taking formal action such as attaching a charge to the land.
29. If local taxation makes any contribution towards local accountability, it must be payable by people who live in the area served by a local authority and who benefit from the services provided. Under this principle, it is appropriate for a local tax to be levied on the occupier (or, in the case of second homes, on the person whose ownership prevents it being occupied by another person).
Transitional issues
30. Commentators who advocate the introduction of a land value tax have suggested that it should be introduced initially in pilot form. 200 This is not because of uncertainty amongst these supporters about the benefits of such a tax. To quote a recent report about how land value taxation might be implemented in Britain: 201
"Pilots will merely help develop and test the processes and stages necessary for a national implementation and prove that the benefits outweigh the costs."
Summary
31. Although land value taxation meets a number of our criteria, we question whether the public would accept the upheaval involved in radical reform of this nature, unless they could clearly understand the nature of the change and the benefits involved. Nor might they accept a situation where reform to local taxation was delayed in order to allow details of a replacement scheme to be tested by pilot schemes
32. However, we considered at length the many positive features of a land value tax which are consistent with our recommended local property tax (see section14), particularly its progressive nature.
Capital Value
33. Capital value is based on the market value of a property. Therefore it has the benefit of being clearly understood. There also is clear and considerable market evidence for capital valuations from the buying and selling of owner-occupied property.
Conclusion
34. Having considered both rateable value and land value as the basis for taxation, we concur with Layfield who recommended that any local property tax should be based on capital values.
35. In the following sections we consider against the criteria three models that use capital value as their basis. These are:
- current council tax;
- a reformed council tax; and
- the local property tax.
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