|ritain's use of our greatest natural
resource - our land - suffers enormous problems.
Social improvements such as the building of tram
or underground lines create vast increases in private
wealth and income, but these gains in value currently
accrue wholly to private property owners. The result
is that the public sector has little incentive -
and worse, no financial means - to invest. We systematically
under-invest in infrastructure.
The building of the Jubilee Line in London, it
is estimated, has added more than £13bn to
property values. The cost of construction was just £3.5bn
and the net gain nearly £10bn. Some £180m
was paid towards the cost of the line by the developers
of one small area affected by it: Canary Wharf.
The vast majority of landowners along the route
enjoyed a large windfall with no contribution whatsoever.
The second problem arises when public authorities
award simple planning permission for a greenfield
site. This can boost the value of a hectare of
land from £7,534 to £1.23m, according
to the Barker report. It is a gain created wholly
by society, yet almost all goes to the owner of
the land. If the local authority is savvy, it can
use Section 106 of the Town and Country Planning
Act 1990 to negotiate concessions from the developer,
but the process is random.
Faced with these problems, the Barker review recycled
one of the Treasury's old hobby-horses - the 'planning
gain supplement'. This tax on the increased land
value, payable in order to receive the planning
permission, is similar to several previous attempts
to impose development gains taxes such as the 1947
development charge, the 1967 betterment levy and
the 1973 development gains tax, followed by the
1976 development land tax. All died through asphyxiation
by their own complexities.
Planning Gain Supplement does nothing to help
fund infrastructure through existing built-up areas.
Any developer who sees gains in rents and values
as a result of a new Tube line can rest easy: the
profits would all still be theirs. The 'planning
gain supplement' would actually reduce the amount
of land coming forward for development, because
the profits would be lower than they are now. Yet
the priority, particularly in London and the south-east,
is to increase the amount of new housing, particularly
affordable homes for those on low incomes.
An alternative proposal - a tax on the value of
land, or a site value rate - would take longer
to implement, but would address the fundamental
problem, not its symptoms. If the land was not
developed, the landowner would have a regular charge
to pay - a carry cost - that he or she does not
have to pay today. He or she would therefore have
an incentive either to develop or to sell to someone
who would develop. By periodic revaluations in
rateable value, any rises (and falls) in land prices
due to changes in physical infrastructure, such
as new Tube lines, would be reflected in the tax
base and hence in rating income.
A land value tax would also tackle a large market
failure in many depressed urban areas. The National
Land Use Database finds that 12,000 hectares of
previously developed land are available for residential
use even in London, the south-east and the east
of England. According to the planning authorities,
360,000 houses could be built on that land - enough
to stop the house-price boom in its tracks. Much
of this land is now completely unused, being either
vacant or derelict. What accounts for this apparent
failure in the housing market, for this paradox
of unused and underused land amid soaring demand?
If we are to believe the Barker review, it is
all a question of the planning system. Certainly,
that is part of the answer. But what is also important
is that the market does not provide adequate incentives
for landowners and developers to redevelop in existing
urban areas. At present, many owners of urban land
allow it to fall into disuse or underuse because
there is no cost in failing to develop. The significance
of a site value rate is that landowners would have
an incentive to develop immediately sites that
fall into disuse, limiting the possibility of spreading
blight. Paying an annual charge for land, regardless
of what is built on it, concentrates minds wonderfully.
A tax on land values can dampen the cycle of boom
and bust in British property prices by discouraging
the hoarding of land during price upswings. It
can make a crucial contribution to the financing
of social improvements. It can shift private incentives
so that areas do not fall into unfashionable disuse
because of blight. It provides an incentive for
developers to bring forward plans that are tailored
to social needs. Where such taxes are applied,
there are higher levels of construction activity
and a better-looking urban environment.
These potential gains are not inconsiderable.
Land value taxes can hugely improve our cities
Chris Huhne MP is the Liberal Democrats’ Shadow