Taxing land: is it time to streamline the system?

This is the fourth in our series of blog posts considering our recommendations for new Welsh taxes.This week we look at the argument for introducing a land value tax.

There’s been plenty of talk of ‘Wales’ new tax powers’ of late (which, admittedly, we’re partly responsible for), but perhaps we should shift our focus for a moment to the powers we already have. Council tax and non-domestic rates (known more commonly as business rates) are both devolved responsibilities, and have far bigger revenue streams that landfill and land transaction taxes.

Council tax has been devolved since the National Assembly for Wales was established, but it has only been reevaluated once during this time (in 2003). Business rates were fully devolved to Wales in 2015, with the multiplier determined by the Welsh Government annually. Both taxes are collected by local authorities. Council tax revenue remains with them while business rates are pooled by the Welsh Government and then redistributed to local authorities as part of the local government settlement. Neither differ significantly from their English counterparts.

Should Wales take a new approach?

As I’ve mentioned, control over these taxes – which are both calculated on property value – is really quite important in terms of revenue.  Over £2 billion was collected by local authorities from council tax and business rates in 2014-15, both at a collection rate of over 97%. But while taxing property has its benefits (it’s hard to hide a house), taxing land may do more to stimulate economic growth and result in a fairer outcome where those with the broadest shoulders really do bear the biggest burden.

In its simplest form, a land value tax is a tax on the value of an area of land, and can be calculated as though the land were undeveloped or based on its annual rental value in some cases. It can also take into consideration how the land is used, and can be applied in combination with some sort of property tax.  It does not necessarily replace the requirement for a land transaction tax, as this currently operates as a separate tax on the transaction of a piece of land or property.

What ‘harms’ could it reduce?

Our work on taxes has looked at the potential for new Welsh taxes to alleviate or reduce social, economic and environmental ‘harms’ which are less obvious in the case for a land value tax than a pop tax or sunbed tax. We’ve identified the three areas below as ‘harms’ that are not effectively addressed by the current system:

Underdevelopment

There are concerns about the way in which land is owned and used in Wales, and what incentives there are for land and business owners to develop and invest in premises. The current business rates regime can lead to business owners receiving a higher tax bill if they invest in their premises, and can create an unfair advantage for certain types of business.

There is disagreement over whether land-banking is an issue for Wales, but a land value tax would certainly create an incentive for landowners to develop brown field sites.

 Building upwards rather than outwards

From an environmental perspective, a land value tax may be desirable for Wales as it could encourage building to go upwards rather than outwards, particularly for affordable accommodation as residents may have a lower tax liability. This would reduce the environmental impact of the construction sector.

Fairness

Last, a land value tax presents an opportunity to overhaul the current property tax arrangements and introduce a more graduated tax system that will mean that wealthier people will be required to contribute more. Not only will those living in areas where the land is worth more be required to pay more under the new system, but it will also result in greater redistribution from the wealthiest to those who are worse off. Also, if local authorities need to increase their revenue in future, a land value tax may be a more progressive of doing this than the current system allows.

Is this all starting to sound too good?

Yes, even putting aside the difficulties which may arise from Wales having a different property tax system to England, land value taxes are not without problems. Construction is an area that quite rightly has some very legitimate concerns about taxing land instead of property. Both large and small developers would be deterred by the suggestion that they would have to pay a tax on land they have purchased for development, which could have a severely detrimental effect on Wales’ construction industry. Arguably, if the tax is intended to boost development then land which is in the process of being developed should be exempt (with limitations!). The most optimistic have suggested that a land value tax would be better for small developers as there could be many more smaller plots of land on the market.

Taxing land may also present a big problem for national park authorities and the agricultural sector, which could both see their tax bill rise sharply if the correct protections are not put in place. Any form of a land value tax would need to recognise that we do not want all land to be developed, with the necessary exemptions written into legislation.

A carefully considered land value tax presents an opportunity for Wales to reform its two main property taxes – council tax and business rates – in such a way that would be fairer for those who pay it, encourage more development and in a more sustainable way. But if it were introduced great consideration would need to be given to exemptions and the National Assembly for Wales would need to undertake broad consultation, otherwise it poses a risk to some of the most fragile areas of our economy.

Nisreen Mansour is policy & research officer at the Bevan Foundation. 

Each week, we will be profiling our interim recommendations for new devolved taxes for Wales. To learn more about our work on devolved taxation, please click here.