Land Value Tax: any Local Authority can impose it

Virtually all tax experts have proposed that England should adopt a Land Value Tax (LVT), and the proposal has cross-party support in Parliament. Perhaps that’s why the Localism Act 2011 now allows Local Authorities to implement LVT at the municipal level, which is where it is implemented in most countries. We have been so used to national government holding the purse-strings that this sudden introduction of local taxing power has not attracted as much notice as it should have. Now, though, at least one Local Authority has had confirmation from the Department of Communities and Local Government (DCLG) that the change from Council Tax to LVT is permissible. It is also easy.

Support for LVT

The UK (or at least England) is almost unique among developed countries in not having some form of property tax proportionate to the current value of land. The correction of this anomaly has wide cross-party support although only one national party (the Greens) has adopted LVT as party policy. The only other national party favouring local power to set taxes is UKIP, which implicitly opposes LVT by proposing a local sales tax instead. The 2011 Mirrlees Review by the Institute of Fiscal Studies, an in-depth analysis of the need for tax reform in the UK, strongly recommended LVT. The European Commission, in its analysis of the cause of the 2008 financial crisis, blamed the lack of such a tax for causing the housing bubble which contributed to the disaster. The wide advantages of LVT were described in the article below (see: Land Value Tax: Why wait longer?). What’s changed is that Local Authorities now have the power and the information technology to tax residential property using LVT, and to spend the proceeds.

Varieties of LVT

The main difference between the most common forms of LVT is between the one-rate and two-rate (also known as split-rate) approaches. Which is better depends on local conditions, particularly the existing state of development, which is why LVT is best implemented at Local Authority level. Apart from the merits, the one-rate system is simpler to implement.

In the one-rate approach, land and buildings are valued together, while in a two-rate system an attempt is made to value land and buildings separately and to tax them at different rates (land at a higher rate and buildings at a lower or zero rate). The simplicity of a one-rate approach is noted by Andy Wightman in paragraph 82 of his A Land Value Tax for England, a study commissioned by Green MP Caroline Lucas.  Wightman points out that the information needed for a one-rate system may be readily obtained from sales data; in any one neighbourhood the ratio of land value to building value is often constant (“never build the best house in the street”). Where land is 40% of sale value, levying tax on 40% of property value is equivalent to taxing 100% of land value. If in a nearby neighbourhood land is worth e.g. 70% of sale value because of proximity to parks or transport, then the same rate of tax levied on 70% of property value is also equivalent to taxing 100% of land value.

The two-rate approach, which allows for variation in building values on individual properties within a neighbourhood, has the advantage that it can maximise development or redevelopment which in the right circumstances can increase efficiency of use of land, reduce the cost of services like sewers and transport, and improve buildings’ energy efficiency. This is because when only the land is taxed, not the buildings, then the old adage “never build the best house in the street” is not so sensible and there will be a race to the top instead of to the bottom. This has led some US municipalities, notably in Pennsylvania, to adopt the two-rate system, taxing buildings at a very low rate. To purists the two-rate system with zero building rate may seem like the only proper Henry George-style LVT, but it should be noted that in areas where residential land is extremely valuable and is already developed to its maximum (e.g. City of Westminster) the two-rate and one-rate systems are equivalent or at least highly convergent because the ratio of residential building value to land value is small and constant. This fact and the simplicity of the one-rate system shows why central London councils should be the first to use their Localism Act freedoms to implement LVT. (see Reforming City of Westminster Council Tax)

How Local Authorities will implement LVT

England already has relatively high residential property taxes in the form of Council Tax and Stamp Duty Land Tax. It is hard to think of a better name than ‘Council Tax’ and a better IT system for implementing one-rate LVT than the well-established billing and rebate system in which every residential property is individually valued (but at an arbitrary and no longer realistic figure).

The key to converting Council Tax to LVT lies in the fact that although the relationship between different valuation ‘bands’ is fixed in law, Council Tax rebates are not and neither (under the new provisions of the Localism Act) is the overall amount of Council Tax collected. A simple majority vote in any Local Authority, secured at a referendum, is enough to increase all bands of the Council Tax and the total amount collected. If the same referendum also promises to give rebates to more than 50% of the electorate in the lower bands then it seems likely that it will pass. This may not work in a Local Authority with more than 50% of electors living in high-band properties, but such a situation is unlikely, and even then a “yes” is not impossible in the referendum. In the City of Westminster, some affluent Conservative voters have told me that they are not as proud as their Councillors seem to be of having the lowest Council Tax in the country. They feel that it is divisive and invites ridicule at a time of government austerity. They would welcome a higher rate because they would then feel, like the Queen after Buckingham Palace was bombed in WWII, that they could ‘look the East End in the face’.

As a simple example, if the top rate of Council Tax in the City of Westminster (pop. 241,000) were to increase to the level of the neighbouring Royal Borough of Kensington and Chelsea, and if 57% of electors were to be given a rebate not just cancelling out the increase but giving a £100 reduction, the net additional tax generated would exceed £4m p.a. (This assumes one elector per property which is a pessimistic assumption for this case). If the second-highest Band G were similarly raised to Kensington levels, the additional tax collected would be £28m. Obviously this is not LVT but it is a step in that direction; Local Authorities pursuing LVT would in reality attempt to base the rates and rebates on today’s property values.

What makes you think it’s legal?

Eric Pickles’ DCLG has confirmed that there’s no limit on an increase approved by referendum, and that Local Authorities may make refunds. An accountant who advises Local Authority Councillors received the following response:

“I can confirm that a local authority can set an increase in its relevant basic amount of council tax at any amount it chooses above the excessiveness threshold and that this would be subject to a referendum. If the electorate gives its approval in a referendum, the increase is confirmed. The authority must pay for the costs of any referendum it triggers and the result of the referendum is binding.

If an individual local authority wishes to give refunds to any residents and describe this as a ‘council tax refund’, then that is a matter for them, although this would not affect the Band D figure which appears on bills and would be entirely discretionary on the authority’s part. All local authorities must satisfy themselves that they are complying with legislation on calculating their council tax, issuing bills and conducting any council tax referendums.”

Yours sincerely,

Robert Crangle
Department of Communities and Local Government.

Can voters force the Council to do it?

A Local Authority can hold a referendum on LVT at any time it likes. It is only a matter of time before a gung-ho Council, not afraid of national political parties and wanting more power, will do so. Others will then wake up and smell the coffee. But can less-affluent voters force the pace and compel a lazy Council to hold a referendum to increase top rates of Council Tax above the 2% threshold? A precedent may be the procedure by which Kingston-on-Thames Conservatives are trying to force their Liberal Democrat Council to hold a Council Tax referendum. Kingston Conservatives claim that the 500 signatures on their petition will oblige the Local Authority to debate the advisability of such a referendum. It remains to be seen whether a debate leads to action.

Will it conflict with current national tax policy?

Yes, if LVT rises to levels seen in other countries. A change to LVT only makes sense if it is increased gradually while other taxes are reduced. The success or failure of LVT will determine haw fast national government can rebalance taxes as nearly all the experts recommend. A national ‘LVT tax credit’ could be a solution to patchy local introduction of LVT. In the City of Westminster many top band Council Tax payers don’t pay income tax or VAT and don’t even live in the UK. Many others are embarrassed by the low rate for the affluent. The additional tax is needed there for environmental improvements in pursuit of the new public health obligations taken over from the NHS under the Health and Social Care Act (2012).

Version 6

18 October 2013


City of Westminster Council Tax bands and numbers of properties (2011):
Council Tax Base report 12 December 2011

London Borough Council tax bands and charges 2013/14:

Two-rate Taxation of Land and Buildings:

Pennsylvania (c. 1999):

The Taxing Question of Land (film):

Kingston-on-Thames petition:

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