The time is ripe for property tax reform

There is no ‘silver bullet’ to solve the housing crisis, but the land value tax comes pretty close, finds David Adler

More than any Conservative government in modern history, Theresa May’s is serious about housing. It is May’s ‘personal mission’ to fix the ‘broken housing market’. Philip Hammond has vowed to do ‘whatever it takes’ to solve the housing crisis.

And yet – despite the big talk – the solutions they offer remain timid. Hammond’s announcement of a new inquiry into land ‘banking’ and ‘hoarding’ signals that the government may get serious about excess speculation – at some point in the future. But his budget failed to stray from the current policy framework: an expansion to the meagre housing budget and a few concessions to first-time buyers.

In fact, these reforms may well serve to make the housing crisis worse. Reduction in the stamp duty will likely inflate demand among first-time buyers and raise house prices, in turn. Such inflation not only hurts low-income tenants struggling to afford monthly rent. It also endangers macroeconomic stability more broadly.

It is time to get back to basics. There is broad appetite in the United Kingdom for fundamental housing reform. Rather than tinkering at the edge of the housing market, political leaders should seize the moment to implement changes for a more equitable, efficient, and sustainable housing market.

Our new report Home Truths takes up this challenge, developing a new progressive vision of housing policy. It sets forward five bold policies to tackle the housing crisis, balancing the aspirations of renters for daily security in their tenancies and homeowners for financial security in their homes.

Among these, we call for a ‘community reinvestment programme’ to fix the broken system of property taxation. For too long, the housing market has rewarded a small class of landowners at the expense of everyone else. While landowners reap large windfall gains from local house price inflation, renters have been excluded from these gains. And with council tax locked in at 1991 price levels, those renters have come to pay a higher percentage of their income each year than landowners in property taxes.

The system is unfair, but it is also inefficient. By taxing property development – through council tax as well as business rates and stamp duties – the current system discourages housing production while encouraging land speculation. This warped system of incentives is one of the chief underlying causes of the present situation.

The CRP introduces a single land value tax to replace these inefficient and ineffective taxes. Rather than tax the value of the property – as council Tax does – the LVT levies the value of the land underneath it, evaluated every other year.

The advantages of the LVT are twofold.

First, the LVT increases efficiency of the housing market by driving land toward its most productive use. Private ‘land banking’ today is highly profitable, in part because undeveloped land dodges property taxation. The LVT corrects for this, reducing incentives to speculate and encouraging landowners to build the homes that Britain needs.

Second, the LVT increases equity by reinvesting the gains from house price inflation back into the community. Under the current system of taxation, private landowners enjoy the fruits of public investment: a new transport system, for example, raises the value of local property, benefitting lucky landowners in the vicinity. The LVT can reclaim these private capital gains for public use, putting the money toward community facilities or further housing finance.

The politics of property taxation are, of course, complicated. Anxiety about a constituency of homeowning voters has played a key role in delaying efforts at housing reform. But the benefit of the LVT is the flexibility of its implementation. Policymakers can design the tax system to exempt primary residences, to keep their tax burden neutral, or to delay the implementation of the land tax until the point of death or sale. The politics, in other words, can be managed.

Hammond is right to say that there is no ‘silver bullet’ to solve the housing crisis. But the land value tax comes pretty close, simultaneously addressing the supply- and demand-side challenges of housing provision. Together with the four other key proposals in the report — which included stronger tenant protections, green belt reform, and a new social housing fund — we can finally set the housing market on firm ground and give a generation of young renters the opportunities they deserve.

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David Adler is a research fellow working on ‘renewing the centre’ at the Tony Blair Institute for Global Change

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Comments: 1...

  1. On December 6, 2017 at 11:36 am John Woods responded with... #

    It is always best to give a working example of how the tax would operate. We all pay Council Tax on 1991 valuations, established by surveyors driving down streets all over the UK at the time Council Tax was introduced by John Major’s government. The top rate was set at £350,000 at a time when Michael Heseltine’s estate was valued at £4 million (he formulated the tax). The rate was set at the sale value of the property and has not been increased since because all governments know of the furore that would be caused because of the increased sale value of most properties in the UK, especially in large cities.
    I agree with the concept of a LVT as it would apply to all land and property and would force the Registration of all land with the land Registry and we would soon find out who owns what in the UK.

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