Land Value Taxation

Head of Policy & Research at the Scottish Land Commission, Shona Glenn, looks at Land Value Taxation:

Land value tax has been hitting the headlines recently and everyone from Boris Johnson to Tony Blair seems to have an opinion, but what is it? Why are people getting excited about it and, most importantly, what could it mean for Scotland? These are just some of the questions that the Scottish Land Commission hopes to help answer.

The Scottish Government has asked the Commission to consider the potential for land value-based taxes in Scotland.

So what is land value taxation?

Fundamentally it is a tool for raising public revenue through an annual charge based on the rental value of land. What distinguishes it from other types of property tax, like Council Tax or non-Domestic Rates, is that it is based on the unimproved value of land, ignoring any property or infrastructure that might be on it. This means that land value taxes can be based on the value of land in its 'optimum use' (as assessed by a public authority) as opposed to its actual use.

The rationale for this approach is rooted firmly in economic theory. When economists think about tax the key question is about how it effects behaviour and what incentives or disincentives a particular tax creates to engage in productive or socially beneficial activity. Economists generally like the idea of taxing land because its supply is (relatively) fixed so, in theory, taxing it should not affect supply.

Some argue that whereas income taxes reduce incentives to work or corporation taxes reduce incentives to invest, taxing the value of land will not reduce the total amount of land that is available.

By putting a cost on holding land it is argued that land value taxes reduce incentives for land speculation and encourage land-owners to seek out more productive opportunities for under-utilised sites. In short, it is argued that land value taxes encourage land-owners to make better use of their assets.

Taxing land is also attractive for administrative reasons because – as land can’t be moved – land value taxes are very difficult to avoid or evade.

It is also seen as a way to reflect the fact that land values are significantly influenced by locational value created by wider society. Sites with good transport links, located close to schools, shops and other amenities tend to be more valuable than sites without such advantages. As these locational advantages are created by society, supporters argue that it is only right that society should benefit from the uplift in land value they create.

We are collectively at an early stage in discussing if and how land value based taxes might be appropriate in Scotland. A first step is to understand the potential range of approaches and to test the evidence for the claims made about the pros and cons.

Some see land value taxation as a potential replacement for Council Tax and non-Domestic Rates to help fund local services. This was one of three options considered by a cross-party Commission on Local Tax Reform established by the Scottish Government in 2015. Another option that has been proposed is a tax on vacant land that supporters argue could help to stimulate the regeneration of under-utilised urban spaces. Some commentators, making the link between land and natural resources more generally, suggest that land value taxation could even be used to encourage more efficient use of natural capital.

One important challenge associated with land value taxation is the issue of valuation. The principle of land value taxation requires valuers to assess the value of land separately from the value of any buildings or other assets that might be on it. This presents technical challenges, particularly in urban areas where vacant sites rarely change hands.

As with any type of public intervention in the market, land value taxation also raises important questions about unintended consequences. What could the knock-on effects of a land value tax be and how can we anticipate them?

These are some of the issues the Scottish Land Commission wants to explore in considering the potential for land value based taxes in Scotland.

It is reckoned that around 30 countries around the world have some experience of land value taxes of one form or another. We are starting work to understand how countries have used land value taxation to achieve relevant policy objectives and how they have overcome some of the challenges involved. We want to learn from their experience in assessing whether these approaches could help achieve a more productive, diverse and accountable pattern of land ownership and use of land in Scotland.

We expect to report to Scottish Ministers on the findings of this initial work in summer of 2018. In the meantime, we want to promote a wider discussion about the potential role of land value taxation in Scotland and we would welcome your views. You can get in touch by contacting the Commission directly.