The US example pointing the way:
How the town of Harrisburg was turned around on the back of a change in the tax system
Morning Star : October 12, 2005 : Jerry Jones
Reproduced here by kind permission of Morning Star.
The government has just extended the Lyons Inquiry into Local Government Funding to review the structure of local government, and accountability for local service provision.
At present, 75 per cent of all local government funding comes from central government, so that local councils increasingly answer to Whitehall rather than local voters, which is one reason for the low turnout in local elections.
At the same time, the government has postponed the planned re-valuation of council tax, which is needed to reflect changes in relative house prices since 1991. It had been scheduled for 2007.
Is it too much to hope that the government is rethinking along the lines of my last column on local government finance (MStar April 27), which advocated a land value tax to replace the flawed and highly regressive council tax, and the national non-domestic rates levied on businesses?
These, in effect, penalise landowners who contribute to their communities by developing their land, while letting the owners of derelict, community-destroying sites off without any tax at all.
With a land value tax, on the other hand, landowners have to pay whether or not they are using the land productively. This provides a powerful incentive for bringing the land into productive use.
The government should consider evidence from the United States. Many local authorities operate a so-called split-tax system, in which buildings and land are taxed separately. Some bias it towards buildings and others towards land.
The evidence is that the more it is biased towards land, the more this benefits the local economy – as predicted by the theory of land value tax.
This is precisely what happened in Harrisburg, the capital of Pennsylvania, after it more than doubled the tax rate on land to 5.5 per cent of capital value in the early 1980s, such that it was three times the rate of tax on buildings.
In 1982, Harrisburg, with a population of 52,000, was listed as the second most run-down city in the US after East St Louis.
Since then, empty sites and buildings have been re-developed – with the number of vacant sites cut by 85 per cent – and the city authorities have issued 32,294 building permits, representing nearly $4 billion of new investment. In 2004 alone 1,865 were issued.
The number of businesses has jumped from 1,908 to 8,864. And over 5,000 housing units have been newly constructed or rehabilitated. Meanwhile, unemployment has fallen by 19 per cent.
Furthermore, crime has declined by 58 per cent and the number of fires by 76 per cent, which the authorities say are due to more employment opportunities, and the elimination of derelict sites, making vandalism less likely.
There is a list of 40 other positive benefits, such as improved public amenities.
In addition, the heightened economic activity has increased revenue, not only from land and buildings, but also from other taxes, thus benefiting public services.
The value of land and buildings has increased from $400 million in 1982 in today’s prices to $1.6 billion now.
This has enabled the authorities to reduce the rate of tax on land to 2.44 per cent, and that on buildings to 0.41 per cent. In other words, the bias towards land is now six to one compared with three to one previously, which will further enhance the trends that the city has already seen.
One constraint has been the fact that 47 per cent of the land in Harrisburg is occupied by state, federal, educational and charitable institutions, which, anomalously, are exempt from property taxes.
However, some of that lost revenue has been clawed back through charges on water, gas and electricity supplies, which are publicly owned – another lesson that we can perhaps learn from Harrisburg.
Meanwhile, another city in Pennsylvania, namely Pittsburgh, has gone in the opposite direction with its split-tax system. In 2000, it reduced the rate of tax on land to the same lower rate on buildings. Voters were persuaded that they would pay less tax.
In fact, for most, taxes increased, because the council had to raise the building tax rate to make up for the revenue lost through lowering the land tax. Within just two years, new construction fell by 21 per cent, and businesses were starting to move out of town, as predicted by theory.
Opponents or sceptics of land value taxation often assert that valuing land is problematic. In fact, buildings are more difficult to value because they are so diverse, whereas land value, at least in towns, depends essentially on location.
Indeed, in the US where split-tax systems operate, typically some 95 per cent of staff in valuation offices is employed valuing buildings, and only 5 per cent valuing land. And invariably, there are many more appeals against the valuation of buildings than of land, with authorities winning more appeals on land than on buildings.
Why it’s the tax king
Introducing land value tax (LVT) for local government should be considered only a first step. Eventually it should be expanded to raise revenue for central government as well – perhaps collected locally, and a proportion sent to central government. This would enable other more harmful taxes to be reduced.
The key economic advantage of LVT, as is evident from Harrisburg, is that it encourages enterprise, because the more income and wealth one generates for society, the less the tax burden.
The opposite applies to taxes on income and consumption – the more productive you are, and the more you provide a market for other people’s products and services, the greater the amount of tax you pay.
That is why replacing council tax by a local income tax, as advocated by the Liberal Democrats, the Scottish Socialist Party and the Communist Party, or by a sales tax, as advocated by some Tories, is wrong.
Land value tax is often confounded with a land development tax – or what the present government is calling a planning gain supplement – which ill advisedly it appears intent on introducing.
Superficially, it looks a good tax. Why should a landowner making a windfall profit as a result of gaining planning permission not pay tax? The problem is that it acts as a disincentive to develop the land.
The developer can simply sit on the land, watching its value go up, and wait for a new government to rescind the legislation, which invariably is exceedingly complex and expensive to operate.
That was the experience on the three previous occasions when a labour government introduced such a tax.
This would not happen with LVT, because unlike a development tax, which is a one-off, landowners have to pay the tax every year irrespective, and this will increase as the value of the land goes up. Developers therefore have every incentive to develop the land as quickly and as productively as possible.
Meanwhile, if the land is sold on to another developer at a large profit, this can be covered by capital gains tax, which could be made more progressive by charging higher rates on larger capital gains.
Some readers in the past have criticised my enthusiasm for LVT, suggesting that the goal should be the common ownership of land.
However, as LVT rates are raised – at the same time reducing economically more harmful taxes – until eventually all the economic rent from land is collected by public authorities, this comes to the same thing, especially as land use, in effect, is already nationalised a result of the 1948 Town and Country Planning Acts.
And this would pave the way for continuing to collect economic rent from the land according to its value under socialism when all of production is socialised and under common ownership, thus ensuring the continuing optimal use of land.
The economic benefits of LVT has led some enthusiasts – often known as Georgists, after Henry George (1839-97), author of Progress and Poverty, first published in 1879 – to advocate LVT as a replacement of all other taxes.
However, even in the 19th century, and certainly now, revenue would be insufficient to finance the needs of a modern state. Therefore, other taxes will continue to be required, albeit at lower rates.
Besides, with a broad range of taxes, each can be charged at a lower rate, thus lessening their burden, and reducing the incentive to find ways of evading them.
And if one is avoided, there is more chance of another catching the income instead. For example, a capital gains tax captures income reclassified as a capital gain.
Furthermore, some taxes can play an important role in managing social and economic policy. For example, progressive income tax in a highly unequal society such as Britain’s helps the tax burden to fall more fairly on those who can afford it.
And taxes on consumption, such as VAT and taxes on petrol, alcohol and tobacco, and environmental taxes, help reduce excessive consumption and conserve resources.