Understanding land value tax (LVT)

An introduction

After hearing the minister for housing, Eoghan Murphy, declare the Government’s response to the housing crisis—namely changing planning regulations and restrictions for developments and the clear impact it would actually have—it reminded me of a small pamphlet that I picked up in Connolly Books back in 2008, Land Value: For Public Benefit, by Jerry Jones, which is the theme of this article.

In Ireland our cities and towns are littered with derelict sites and dilapidated buildings, while we continue with the outward sprawl of the greater Dublin area into adjoining counties and beyond, with its ever-increasing house prices and rents and its impact on the environment and on family life.

Eoghan Murphy’s answer, rather than solving the crisis, will more than likely make it worse, as easing restrictions will act as an incentive for developers to hold off building, as the value of land would increase because of increased density in housing units. It is clear that the minister is listening to those vested interests who want to see the price of land continually increase.

The recently established Campaign for Public Housing is quite clear on what it argues is needed: the building of universally accessible public housing. But what is our response to the hoarding and unproductive use of land by landowners, which has a direct effect on house prices and rents, a foundation-stone of our housing crises?

Note: Most of what follows is taken directly from the pamphlet. I have added my own initial thoughts and have placed it more in the Irish context.

Land value tax (LVT)

The first thing to note is that land, unlike labour and capital, is (relatively) fixed. While its supply is finite, it is more resilient to wear and tear: it can be used and reused for different purposes. A dump one year can be the site for a housing estate the next; agricultural land can be turned into residential land. Land that is built on is the most valuable of land: think of Dublin city centre compared with a field in Co. Longford.

The demand for land, with its limited supply, gives it its value. The demand and therefore its value depends on many factors, including fertility, its natural resources and natural beauty, its proximity to work, markets, and transport services (railway lines, motorways, airports), and its access to services (water, electricity, gas, shops, schools, hospitals, etc.). The use of the land—residential, commercial, or agricultural—will determine how valuable it may be.

The value of land is not created by landowners but by nature and by the community and society at large, through their economic and social activity. But land is largely privately owned, and it is the landowners and their associates (banks, estate agents, solicitors) who benefit from rising land values, at the expense of society as a whole. It is in the interests of landowners, therefore, to use their influence to direct policies that increase the value of land.

Introducing an LVT would make more efficient use of land, because landowners would have to pay the tax according to the value of their land; a rate would be set that would make sure that hoarding for speculation would become unviable. If a landowner could not make best use of the land in line with prevailing planning regulations they would have every incentive to sell it on as quickly as possible to someone who could make more economic use of it.

This would end the wastefulness of derelict land and decaying buildings standing empty for years on end that blight some districts. Furthermore, it would more or less end speculation in land, as it would become too costly to hold on to land for that purpose. By gradually raising the rate of LVT—and at the same time reducing other taxes—land ownership would begin to lose its significance.

The only point now of owning land would be to use it in a productive way. In other words, the income from land would derive solely from the particular economic activity or buildings on the land. There would be no gain simply from owning land, receiving economic rent, as now, which is at the expense of the rest of society.

How does it work?

The first thing that would need to be done would be to separate valuing land from developments on the land. Valuing land is less complicated than valuing buildings, because the only factors that need to be considered are location and potential use consistent with prevailing planning regulations. Modern technology, including computer-aided mass assessment and geographical information systems (GIS), can be applied by the authorities to track national land values.

A simple method of calculation (residual value) is to start off with the known market value of the property as a whole, then deduct the value of the buildings (estimated rebuilding costs for insurance purposes, adjusted for depreciation) to be left with the remainder, being the value of the land.

The authorities can then begin to “map” out land values. One such technique, known as “land-value-scape,” instead of showing contour lines on a map representing topography shows lines marking off localities and zones with equal land values.

Once it is operating, the recording and tracking of property sales throughout the country could be done continuously. More information and data could be incorporated in the series for refinement, to include such things as proximity to amenities, transport hubs, businesses, congested roads, etc.

The valuation of land needs to be conducted regularly, because land values can change considerably from year to year. These are affected by various factors, such as its use—residential and commercial being more valuable than agricultural. Changing from one use to another by the planning authorities can have a huge effect on the value of the site and also the surrounding area.

The demand for land, and therefore its value, is highly dependent on the health of the economy and on the availability of credit. We witnessed with the great recession the fall in demand for property and land, thus causing a fall in property prices and land values.

It must be said that in Ireland today we have a situation in which generally people don’t have access to credit (unlike the “Celtic Tiger” years). It is very difficult for a working family to obtain a mortgage, yet we have seen and continue to see increases in house prices and rents. (A further 20 per cent increase is expected between now and 2020.) What we have to consider here is that credit is available but it isn’t available for ordinary working people.

It is the wealthiest in society that have the means to purchase property, along with large foreign vulture funds and property companies, which are driving these increases, with their unique access to credit because of their wealth status and their ability to purchase land and property, which has also caused a huge shift from people owning their home to having to rent their home. We are witnessing a new wave of absentee landlordism.

Property-owners are accumulating more land and property and in effect, thanks to their own demand, they are increasing the costs for society, whose level of income cannot meet the continuous increases in rents and mortgage payments. The consequences of this are clear when we turn to our homelessness and housing crisis.

What happens to rent and property prices when an LVT has been introduced?

The higher the rate of LVT, the more this will tend to lower the market value of land, or its price, but it will have no effect on total land values, including the amount going to the community in the form of LVT, because the total value of the site is equal to the market value (what it is sold for) plus the rate of LVT (the amount of tax revenue going back to the community in spending).

In other words, the higher the rate of the land value tax the more is taken away from the landowner and put back into the community. If LVT was at 100 per cent, owning land for the sake of earning rent would be abolished. Even lower rates might have the same effect if the rate of return on land is lower than using the capital for real productive uses.

LVT and general tax policy

Generally speaking, people do realise that governments need sources of income to cover their expenses: the provision of services and amenities from which everyone benefits. However, different taxes have different effects, some tending to enhance economic activity and contributing positively to society, others having the opposite effect.

Having a tax system based on land value would encourage house-building and other productive activities, because not making optimal use of the land would be penalised. Rents and house prices would stabilise, as speculation would no longer be an option, and therefore house prices would not inflate to the position where people are becoming homeless; whereas if you just tax on development or on existing buildings themselves, this might not have the desired effect and might even be a disincentive to develop.

Clearly the main burden of tax is imposed on working people, but the benefits are captured by the landowners and the owners of the means of production (quite often the same people). But as the Government needs to raise revenue and cut expenses, it punishes the largest contributors of tax—working people—which has adverse economic and social costs, such as displaced families and communities, homelessness, mental health issues, and urban sprawl and its environmental impact.

Governments are very quick to tax goods where the impact of a price increase won’t affect its demand, such as tobacco, alcohol, and petrol; but the best example of a commodity whose supply is almost inelastic (not affected by variations in price or cost) and therefore a good candidate for tax is almost completely ignored by economists and governments, namely land.

If land is taxed according to its value—mainly determined by the demand for land—there would be no dead-weight loss (taxes that disincentivise people or society to work, invest or consume and therefore have an adverse effect on welfare). According to this argument, land should be the most heavily taxed item of all.

The advantages of tax on land value are huge. There is huge potential for a continuous revenue stream for government expenditure. This would allow the state to have the revenue to establish (among other things) an all-Ireland housing enterprise, dedicated to meeting the people’s needs in housing, from planning to completion, while also having the means to purchase lands.

In addition, an LVT is inherently a fair tax, because the value of a site on which the tax would be based is determined not by the owner or occupier but by its location, and the social and economic activities of society as a whole, which should be shared by all.

LVT is fairer because it is practically impossible to avoid. People do not end up having to pay more tax to compensate for those who evade it, which is becoming more and more of a problem globally. There is a whole “shadow economy” and a whole army of tax-avoidance experts geared to helping people and businesses evade tax. But you cannot siphon off land into an offshore tax haven.

In short, an LVT could become the core source of finance for public expenditure, which would be topped up by other taxes that also benefit society in various ways.

What we must be mindful of is not to replace a radical transformative strategy with a reformist one, based solely on LVT as a panacea for removing the class struggle in our day-to-day campaigns. What we can insist on within the short and medium term is that the state becomes an active purchaser of sites that become available because of the disincentive to hoard and its increased revenue from LVT in order to increase its share in the ownership of land and of housing stock, allowing it to become more of a price-maker, stopping the constant increases in house prices and rents and the endless housing and homelessness crisis.