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Turning fields into taxes
Local Government Chronicle -
2 February
2006
Here we go again! Some ideas keep turning up like winter sore throats. This one has been round the course four times already. Now it is in its fifth manifestation. According to its enthusiasts it is Revelation. For its detractors it is closer to Apocalypse Now.
The little number in question is the Land Value Uplift Tax. It springs from Kate Barker’s report on housing. Gordon Brown has re-christened it the Planning Gain Supplement and sees it as a key instrument in the Government’s drive to deliver an extra 50,000 houses (to 200,000) a year by 2010. The main claim made for it is that it will jolt local authorities into a pro-development frame of mind and out of current mind-set hostile to development.
The key idea is simple enough. Land values rise massively when planning permission is granted. The Government estimates that mixed agricultural land is worth some £9,287 per hectare. Endow it with planning permission for industrial use and the value rises to £750,000. Hit the real jackpot – residential use – and the value rises to £2.5m. This huge windfall occurs simply at the stroke of a pen. So shouldn’t society gain some benefit from the profits so painlessly created?
A tax would be levied on the gain in value of land when development began. It would be small- at least at first- so as not to frighten the horses and a significant amount would go back to the council to finance infrastructure.
Finally, it is argued, it should replace the notorious Section 106 agreement- an arbitrary and inconsistently applied mechanism stained with the risk of corruption. In fact the Government has already said it will keep some form of Section 106 following intense lobbying from the social housing sector.
The critics are equally adamant in their scorn. This is not a way of accelerating development, they cry, it is a way of stopping it in its tracks. Landowners will sit on their property, the supply of land for housing will diminish, prices will rise in response and fewer houses will be built. Urban authorities will lose out given that the really big money would come from the designation of agricultural land rather than in urban areas with a much smaller uplift value on brown-field sites. A huge incentive for green-field development- and a wonderful advertisement for the Government’s environmental credentials!
And just how do you work out how much of the increased value of the land is due to a change in planning designation? And what about multi-phase developments- when would the tax be levied and how often? The only certain beneficiaries from a planning gain tax would be tax lawyers.
The introduction of such a tax would require cross-party support. Otherwise landowners would put development on hold until a change of government brought cancellation of the levy. Political consensus? Dream on!
What puzzles me is why, if he really wants a radically energised planning system and is prepared to have a huge fight to get one Gordon Brown has not gone for the much bolder option – a tax on the value of the site itself.
This tax would take the form of an annual charge on the value of a site, levied according to its status in the local plan, whether or not it was developed. Its advocates claim that it would bring idle or underused land into the best use for it, leading to an increase in supply and a decline in price.
Rather than capturing planning gain on one site at one moment, a land value tax would also recover value from neighbouring sites that had benefited from the development. Local authorities would collect more tax by the mere act of designation (or zoning) suitable land for industrial or residential development, thereby increasing its value even if no development took place. Landowners would have no incentive to hold sites back from development. Councils, in contrast, would have an incentive actively to pursue re-zoning.
The links between this proposal and the Lyons work into local government finance are obvious- though to what extent the two processes are “joined up” is not clear. What is certain is that the fifth version of the betterment levy already has a huge coalition arrayed against it. Stand by for an outpouring of unexpected admiration for the discrete charms of Section 106. Better the devil we know…….
© Local Government Chronicle
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