Submission to Policy Commission on Economy and Welfare
Unified Business Rates (UBR)
UBR is a national tax on the occupation of non-domestic property. It is levied on the assessed annual rental value of the whole property (building and land). The tax is legally payable by the occupier. There are many exceptions and reliefs - most notably for empty properties and vacant sites.
Land Value Tax (LVT)
LVT is a tax on the ownership of land alone - potentially domestic as well as non-domestic. It is levied on the assessed annual rental value of the site only, used or not, and is payable by the freeholder. The tax may be local and/or national. No value, no tax. Reliefs and exceptions may be built in but they will not benefit the user, only the owner.
A Comparison
UBR is in effect two taxes – one upon structural value, the other
on land value. The tax on structural value is economically harmful; in essence
a tax on the production and use of buildings. It costs more to use them
and marginalizes the viability of a potential enterprise and subsequent
employment. It is like an annualised type of VAT. In 2000 this quasi-VAT
was 41.6% of value, one of our highest tax rates.
Renovation is also penalised, as the increased value of an improved building attracts a higher tax burden. Thus renovation and renewal are deferred and jobs put on hold.
The other part of UBR, the tax upon the value of the land is (like LVT) benign. Such a tax cannot be shifted or passed on in increased product price. All serious economists agree on this. It is like a ‘user fee’ - promoting the careful and efficient use of our natural resources. It promotes the optimum permitted use of the site in order to generate the income to pay the tax.
Clearly, both these taxes are in conflict. The structural element of UBR penalises improvements forever and squeezes out jobs. But by shifting all the burden onto land value, via LVT, the problem is turned on its head. Holding sites out of use or inefficiently utilising them is penalised. Investing in and improving them is not. So LVT is not just a means of raising revenue - it also promotes investment.
More Problems with UBR
Valuation assumes a good state of repair, but there are exceptions and there
is an extensive case law regarding the standards assumed. LVT ignores the
state of repair, so case law can be largely ignored. Tenants’ improvements
are also included in the valuation. Thus improvements are subject to VAT
and UBR. Not so with LVT.
The British system of property taxation has always been directed at the occupation of property. Taxing occupation is unusual in international terms and means responsibility and liaison with the tax authority falls upon the occupier. Notices of return must be completed by the occupier. Failure is a criminal offence. Hopefully, LVT will enable this obligation to be reduced.
Under UBR there are many exceptions, reliefs and remissions for various
uses or users. With LVT consideration need only be given to who owns the
site, as LVT is aimed at the owner, not the user.
A 50% rate is now mandatory after 3 months for empty property. This is a
welcome move towards an LVT-type policy by trying to force owners to use
their sites wisely but it still penalises owners who invest in the building.
But the 50% rate can be avoided by owners vandalising interiors, making
properties incapable of occupation. Not so with LVT under which a full site
rate would still be payable.
Nor are ‘half rates’ payable where the principal item of description
is land rather than buildings. So an open-air car park can escape ‘half
rates’ and UBR completely, but a multi-storey building cannot. And
now UBR no longer applies to rateable values of £1,900 or less. Why
not? All property needs to be used.
With UBR a ‘material change of circumstance’ can be grounds
to amend rateable values between valuations (but the term’s definition
is open to dispute) but not, more importantly, an economic change of circumstances.
LVT automatically adjusts to any fall or rise in land values as a result
of economic change within the area.
Why Else Tax Land?
Apart from the economic benefits, there are other reasons. Ethically, land
or any other part of the ‘global commons’ belongs to each and
every future one of us. So land value is ethically a public value, though
private possession is often preferable to achieve best use. Furthermore,
public expenditure which is financed from such public value helps reimburse
the dispossessed. LVT is thus an efficient, non-distortionary means for
the community to recover this net product of society.
How Does Land Get its Value?
Land has no production cost and is essentially fixed in supply. Its value
is created by nature and/or ‘nurture’. The value of a site can
be intrinsic, due to the mineral content, but is more usually due to locational
factors. Proximity to employment, markets, raw materials, power, labour
and a socio-economic infrastructure are vitally important. Beyond a certain
distance from these, the viability of the site becomes marginal and it will
have little value. It is all about what is going on and being done around
the site. Imagine a shop on a busy high street. Now imagine all the surrounding
infrastructure removed for a few miles or so. The site would be all but
worthless by comparison.
Neither intrinsic value nor infrastructure is supplied by the owner, so land value is truly a community value. Planning consent just releases latent value. And if land values fall, so will the amount of LVT which is levied.
What is Rent?
Pure (site) rent is the annual sum paid for the exclusive use of a site
or location.
It is the net annual product after workers and investors (and the taxman) have been satisfied at the market rate for wages and interest. It is the net product of society and, as mentioned, it is usually heavily affected by locational factors, so potential owners will pay more for some sites, for example where there is a high regular footfall, than for others.
The purchase price of a site is thus the price paid to enjoy the rental value in perpetuity. As rent has a tendency to increase with progress, land has become an item of speculation for its own sake. Taxing this stream of income will thus reduce the prices offered for a site.
Marginal Sites
These are sites where turnover or income is usually just about sufficient
to satisfy the return to wages and investment, plus any taxation attaching
thereto. They are thus low value sites. So anything which lowers turnover
or increases the cost of labour or investment, such as extra taxation or
compliance costs, can render a marginal site unviable or (submarginal) and
lead to business failure.
Thus the problem of the North-South divide is exacerbated by UBR but not by LVT; low value = low tax. Tax labour and you discourage employment, tax investment and you drive it away. Tax land and you make sure it gets put to best (planned) use.
Permanent Rate Relief
Low value or marginal sites are usually associated with rural and poor areas.
Local shops and post offices usually have a building value far in excess
of the site value, thus UBR taxes the investment proportionately more than
land value and tends to cause failure. This is seen in the continued viability
of high value city sites under UBR compared to low value rural/poor sites
where failure is common and where mandatory and optional reliefs and thresholds
have had to be built in. Little wonder that many small high street shops
are only viable if used by charities who may pay no rates at all.
The mandatory reliefs and discounts under UBR are an indictment of its weakness. ‘Single shop’ relief ceilings tend to create a type of poverty/viability trap. If you’re below the ceiling fine but go above it and you’re taxed in full. Conversely, LVT only taxes the surplus value, that is the rental value of land, which in poorer areas is low, nor is having more than one shop penalised. That is permanent rate relief - driven by the market and adjusted accordingly. Years ago, when a ‘rate-free holiday’ was given to enterprise zones the perceived effect was that rents rose. Thus the usual beneficiaries of rate reliefs are owners not occupiers.
Will LVT Raise Enough?
The tax base of LVT would of course be smaller than under UBR as a result
of ignoring the building values. To a certain extent this is offset by taxing
hitherto untaxed sites, but it would certainly mean a higher ‘rate’
having to be levied on site values alone, although the overall tax burden
for most businesses should be lower on a revenue-neutral basis.
Low value areas will see a decrease in tax base whereas high value city site areas will see an increase. Thus it is imperative, initially at least, that the majority, if not all, of funds are raised centrally, as with UBR and are paid out to councils on a per capita basis as now - the principle of Equalisation.
The 2000 year UBR revaluation produced a rateable value for England of £40 billion p.a. which was up by 25% on the 1995 valuation. At the rate of 41.6 pence, this produced a revenue of approximately £16 billion. In a 1990 estimate, D Richards MA put the commercial and industrial land value for all Britain at £28 billion. Based on this, an average LVT rate of approximately 65p might be needed to remain revenue neutral. However, that was an estimate and the actual annual land value can only be determined by a proper valuation.
In Alaska, resource rentals not only help pay for public expenditure, they also finance a citizen's dividend.
Is LVT Practical to Apply?
Yes - but that is not to say there will not be any valuation problems, just
as there are at present. Separating and valuing the land element of a property
can be done and indeed is currently done in many other countries. Shared
interests in land (leases and sub leases) can also be separated.
UBR revaluations are every 5 years. International experience suggests
this should be the maximum period. We would suggest shorter, perhaps annual,
periods now that IT can be brought to assist in mass valuations.
One way of moving from UBR to LVT could be the ‘Split Rate’
where the tax is shifted from building value to land value. This has been
used in some areas of the US and has proved a useful tool in municipal regeneration.
In 1980 Harrisburg, Pennsylvania was the second most distressed city in
the USA. After making the tax shift onto land values, it is now considered
one of the USA's highest quality of life cities.
Other Effects of LVT
As owners pay LVT regardless of whether the site is used and are not taxed
for improvements, we all benefit. Brownfield sites are forced into use,
thus relieving the pressure on greenfield ones. And by helping to inhibit
sprawl, LVT reduces the need for out of town infrastructure and pollution
caused by commuting that goes with it. Dereliction, long vacancies and wasteland
would also be penalised.
It is suggested that valuation would be based upon ‘existing use’
but there can also be scope for it to be based upon maximum permitted use
in cases where the planning authority considers it publicly beneficial.
Increasing interest rates has often been used as a tool to dampen an inflating
and speculative property market. But this also penalises valuable investment,
whether public or private by increasing borrowing charges. LVT would help
resolve this by targeting tax where it is needed to reduce and deter potential
unearned gains.
Planning Gain
All planning gain is about increased land values. Efforts in the past to
collect these unearned gains have failed. UBR does eventually collect some
of the gain and section 106 agreements do sometimes collect part of the
perceived capital gain. DETR figures show section 106s as councils’
third biggest source of revenue. There is concern that business is using
section 106 agreements to buy planning permissions from cash strapped councils.
Is this really the right way to go?
Even a ‘revenue-neutral’ LVT will capture more gain than UBR,
plus any future gains for future generations. Indeed, the LVT rate could
be increased to 90% for large incremental revenue increases. In fact, anything
less than a rate of 100% of value is effectively a gift from the state,
paid for by the people.
Planning gain is generally perceived as a capital value, instead of an annual
value, so taxation has tended to follow suit, penalising the developer rather
than the ‘planning gain’ owner. A tax on gain is a one-off fee
to enjoy all future annual values. But future values belong to future generations.
If tax policy reflected that, future infrastucture could be permanently
self-financing. That is just what LVT does.
Urban Renewal
Tax increment financing (TIF) to finance and recover public investment in
rundown areas has been mooted. The idea is that investment generates an
increase in property values and promotes new private development. The new
increased property values are then taxed to recover the investment - exactly
what LVT does.
But the American style of TIF involves only designated areas and the freezing of property taxes for up to 10 years or so before recovery begins. That means that owners benefit for 10 years while other ratepayers have to make up the shortfall.
Tax Shift Changes
LVT will help to revive town centres. It will help rural shops and post
offices survive. It will help delay the development of greenfield sites.
Public investment will, to a large extent, become self-financing. Occupiers
will not be responsible for payment. Payment will be payable directly or
indirectly by the freeholder.
Conclusion
UBR is a flawed tax policy. Hardly surprising as its roots are Elizabethan
and it was designed by landowners for landowners. By allowing any community-created
value to remain largely privatised, public expenditure is seriously compromised
by the nugatory effect of taxes upon effort and investment.
Failing to tax land values adequately can lead to increased mortgage debt and, by causing effort and investment to be taxed regardless of viability, is a primary cause of the widening gap between rich and poor. Failure to understand the law of rent is a partial cause of many inter-related problems. Understanding LVT means understanding the route to a better and fairer future.
LVT is more than just a means of raising revenue. It reclaims community created values, it promotes optimum planned use of land and does not penalise those who create the means to achieve a wealthier working society.
We urge the Government to replace UBR with LVT.