Would you rather tax gardens or jobs? The Site Value Tax debate

Firstly, could I suggest it might be more straight-forward to call this a “Property Value Tax” since “site” usually refers to the plot area on which development may or may not sit?

Secondly, I’d be very concerned that site or property value is inherently and utterly contestable. Presumably you are supposing that estimated current market values would be used (based on DAFT or whatever). But even from street to street within neighbourhoods, values differ greatly. The unintended consequence of PVT/SVT, in fact, could be to disincentivise good property maintenance and damage the national housing stock.

My simple suggestion, to be constructive here, is €1 per sq.m. House sizes are utterly incontestable and can be ascertained from sales information and planning files. Self declaration may even be possible with non-compliance policed by fines, incomplete title transfers, planning retention orders and such like. But to copper-fasten it, it doesn’t take long for a valuer, estate agent or surveyor to go out and measure up a house’s gross floor area.

€1 per sq.m has the virtue of being truly socially, economically AND environmentally progressive. The more modest abodes would be taxed the least; more efficient building and residential layout designs would be encouraged, and people would be incentivised to live closer to towns in more compact settlements.

And, since we’ve about 2m houses, and if we assume an average house size of 120sq.m. such a Property Gross Floor Area Tax (PGFAT) would raise about €0.25bn. Not enough? Well then it becomes €2 / sq.m. Or whatever. At least it would be fair and its unintended consequence, since every tax has one, might be to promote better, more sustainable, more compact and even friendlier neighbourhoods.

Hi David,
Thanks for the comment but I’m not sure if you’ve read the proposal fully. This is most certainly not a “Property Value Tax” – the example of the two sites in the city centre should have made that clear. This is very much a site/plot/land value tax – you pay on the land you own (not the buildings). Given your interest in the area, I’d recommend reading the report in full, which explains how to take account of variation within districts, as well as between the 4,500 districts analysed. Certainly for an interim SVT, though, those 4,500 districts would be more than detailed enough.

The point is taken on contestability. The key to a tax such as this is getting the right trade-off between simplicity and robustness. However, I must strongly reject the idea that a charge per square metre regardless of location would be “truly socially, economically AND environmentally progressive”. Imagine such a scheme applied to Ireland now:
– on social progressiveness, rural areas would bear the overwhelming burden of the taxation and these are the areas with lowest incomes and poorest public services. Site Value Tax is at least in some senses a wealth tax, as the bulk of wealth is tied up in real estate. This is a space tax, which has little or no correlation with wealth. Those who buy space where it is cheap (and cheap for good reason) get punished.
– on economic progressiveness, this system sends out all the wrong signals. Go back to the example above of the two adjacent site centre sites. Whereas a property value tax would somewhat skew the incentives and make it more attractive to keep useful land barren, this would completely shift the burden from useful but unused land on to people. Without being truly perverse, it’s hard to think of a property tax that sends out the wrong signals more than a square metre tax. Don’t forget: society actually wants people to build!
– on environmental progressiveness, this would effectively encourage sprawl. Why live efficiently when there is no reward for doing so? The system effectively says: let’s all have huge gardens. Given that we can’t afford that where land is expensive, let’s spread out. When all of these large plots are put together, they incur on society far greater costs on the provision of amenities and social services than if people are reminded via the tax system that land and its value are scarce resources that must be used well. Under this scheme, rural, urban… it doesn’t really matter – let’s sprawl.

Thanks Ronan, your proposal is smart and appears fair. The political economy bit will always tricky. The mobilisation over the kiteflying 100 euro charge gives some measure of the resistance to a ‘proper’ property tax that would levy 1000 euro pa on a nice suburban Dublin house. Your suggestion that politicians frame these issues in terms of rival unpleasantnesses one of which must be implemented is spot on.

Brilliant work Ronan!

If you set a 2% rate for the whole country but disturbed the tax to local coffers would this not leave Dublin with more money than it had before and Leitrim with much less.
Would individual local areas not need the power to set their own rate based on their wants/needs.

If that is the case would you not also need a more detailed analysis of Dublin rather than just saying it is all band 1 or 2 relative to the rest of the country. Would you not instead need 10 bands for Dublin itself to make the tax progressive.

It was good to see your article in support of SVT, but I would like to raise some fundamental issues.

First of all you say that ‘the SVT reflects current land value, not bubble-era values.’ Correct. So why, in the next paragraph do you suggest that ‘Bubble-era buyers’ could be given a tax credit? There is no need to do so.

And you also say that ‘Those with large plots of land but little income …’ SVT is not based on the size of a plot but on the annual rental value of the site. So a small site in the centre of Dublin will have a very high value whereas a large plot on the outskirts will have a much smaller – perhaps even marginal value. Under SVT marginal land will be exempt.

In the first paragraph you make it absolutely clear that SVT excludes the bricks and mortar structure and will be levied on the land value only. But then in your Case A / B examples you say that both sites have a value of £5m but the site with 100 apartments will pay a much higher tax than the vacant site. NO, NO, NO! SVT is on the land value – excluding all improvements. We want the owner of the vacant plot to build the most modern apartments with all modern services and charge the highest going rent. This is the incentive to bring the land into the maximum permitted planning use.

Finally (!) to those not familiar with SVT it is confusing to muddle SVT with property tax. Property is man made – the structure – and we want everyone to have as large a house with the best facilities available. It is the land value that, as you so rightly say, is created by the community that should be returned to the community for public services and infrastructure improvements.

And let us not forget that SVT is intended to replace taxes on wages and production and not be ‘another’ tax.

I will read your Smart Taxes report with interest.

Hi Mike,
Thanks for the feedback. Just to be clear, in the Site A vs Site B example, I was contrasting Site Value Tax with a full property value tax. As I hopefully explain clearly enough in the piece, with property tax the well-used site has a higher bill but as you point out with SVT, they pay the same.

The tax credit for bubble-era buyers is for political reasons not economic ones. With so many young families in negative equity and increasingly arrears, it’s unlikely any tax would pass that didn’t give them some recognition of their plight.

Hope that clears things up a little.
Ronan.

As a earlier commentator pointed out, land PRICES are contestable and inherently unstable. Land price is nothing more than the capitalisation of anticipated rental income.

Land RENTAL values, on the other hand, are not, and furthermore, for the purposes of a land value tax, the important thing is not that absolute values are correct, but that the values of all sites are in the correct relation to each other.

Since the tax must be paid out of rental income or imputed rental income, a tax levied on a rental value assessment is what is says it is ie that, say, 25% or 45% of the rental value is being collected as tax. Rental value assessment also avoids the absurd situation that the levying of the tax cuts into the tax base eg if 100% of rental value were collected, selling prices would be zero.

Nearly all discussion of LVT focusses on residential land. This is mistaken and gives rise to scare stories. Most land value is on land in productive use. But because the incidence of most taxation (including income tax nominally paid by employees) is actually on business, the value of land in commercial use is much lower than it would be if other taxes were phased out.

The issue of pensioners is a temporary one and easily dealt with through some kind of deferred payment scheme, plus a general rise in pensions. Though there seems to be a movement to push up the age of retirement, which is another way of dealing with the matter.

Henry,
Many thanks for taking the time to comment. One rather technical comment I would make in response is that the understanding of imputed rent varies systematically with land type (and location), hence there is a role for land values as well as rental information in determining relativities between districts. (The report actually uses an average of two average “prices”, one from prices and the other from implied rents, to overcome this.)

In particular, among residential properties, capitalization is – for reasons not yet known (but which I’m exploring in my doctorate) – much more aggressive the larger the home. If this reflects some underlying error in the calculation of imputed rent (i.e. if capitalization multiples is actually the same, but the measurement of rental services is wrong), this has significant implications for using market rents to substitute for imputed rents. If instead capitalization by homeowners is done by completely different rules to landlords/investors, this will also have implications for calculation of SVT: which rule do you use?

Regards,
Ronan.

We have got a lot of information on valuation eg here
http://www.landvaluetax.org/frequently-asked-questions/how-is-land-valued.html

This in turn links to the Whitstable valuations which can be regarded as a model.

Also this http://www.landvaluetax.org/frequently-asked-questions/how-does-planning-zoning-affect-lvt-valuation.html

and http://www.landvaluetax.org/download-document/152-annual-rental-valuation-by-the-residual-method.html

Land prices can certainly be used as ONE of the means by which evidence of rental value is gathered.

Ronan – thanks clarification re the site A / B examples. I didn’t look closely enough, and you do say ‘Under a full property tax …’ My apologies!

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