Land Value Taxation in Scotland: Panacea or policy problem?

A land value tax is commonly promoted as a way of addressing the UK’s housing challenges. In this blog, guest author, Dr Edward Shepherd draws on a recent report by the University of Reading, which identifies the issues with implementing a land value tax in Scotland.

According to economic theory, land value taxation (LVT) has many benefits over other forms of land and property taxation. However, according to a report for the Scottish Land Commission by a team based at the University of Reading, although the theoretical case for the introduction of LVT is strong, there is a lack of empirical evidence that land value taxes have delivered the theoretical benefits attributed to them. This lack of evidence is due in part to the small number of comparable countries that have adopted a form of LVT. The report finds that this lack of take-up could be due to the technical and practical challenges involved.

In its purest form, LVT is a recurrent tax on landowners based on the value of land in its ‘highest and best use’ (HABU) excluding any improvements such as buildings or infrastructure. Economic theory suggests that because land in its natural state does not cost anything to produce it can be taxed without harm to economic efficiency or production. Furthermore, land values are the price of monopoly – landowners benefit from the fact that they own a scarce and minimally substitutable resource. Therefore taxing landowners based on the ‘unimproved value’ of land in its highest and best use is considered to be economically just and, according to some economic theory, in addition to raising revenue could also have a range of other benefits including:

  • encouraging the highest and best use of land by taxing land based on its HABU rather than its existing use;
  • capturing the uplift in private wealth that arises due to public effort (what J.S. Mill called ‘the unearned increment’);
  • encouraging a move to a more productive and diverse pattern of rural land ownership and use; and
  • stabilising the price of real estate by stabilising underlying land prices.

However, based on six international case studies (Queensland Australia, Estonia, New Zealand, Denmark, South Africa and Namibia) there is little direct evidence of these benefits having been realised in those countries. Based on these case studies, there are a range of technical and practical issues which policymakers would need to consider prior to introducing LVT. Some of these are listed below.

Land registration

LVT requires up to date and accurate information on all land ownership, including legally identifiable boundaries. Currently, Registers of Scotland does not currently have an up to date and accurate cadastral system of property registration.

The planning system

Scotland has a plan-led discretionary planning system, which is different from zoning systems that delineate permitted uses on an area-by-area basis, conveying development rights to landowners. In order for LVT to tax land based on its HABU (which may be different from the existing use), in theory the planning system would need to take on the task of clearly identifying the HABU of each plot of land so as to avoid the risk of numerous appeals. Zoning systems are common where LVT has proved to be most sustainable.

Valuation of land

Ideally, land should be valued based on comparable transactional evidence of land sales. However, such evidence may be sparse, particularly in urban areas. The valuer would therefore need to ‘strip out’ the value of existing improvements from a plot of land in order to arrive at its underlying unimproved value. Furthermore, where land is not in its HABU, the valuer would need to take a view on what that HABU is unless it is clearly specified through the planning system. These would be matters of judgement, may lack transparency and be open to challenge.

Under-utilised land

If an objective of introducing LVT in Scotland is to encourage the development of under-utilised land, this would only have potential where land has sufficient value. In areas of low land values or market failure, increasing the tax liability of land ownership may not encourage development and may not raise significant amounts of revenue.

Political challenges

The introduction of LVT is likely to result in a windfall loss for large landowners. Furthermore, LVT introduces the risk of increasing the tax liability of individuals who are asset rich but cash poor (e.g. single retirees). This could make LVT politically unpalatable and challenging to introduce.

There are potential solutions to some of these issues. For example, the tax liability of older retirees could be deferred until the sale of their land. Exemptions and transitional arrangements could be employed alongside careful tax design. However, the issues discussed in the main report point to the complexities and challenges of introducing LVT. These complexities are often under-emphasised by those who would promote LVT as a panacea. This is not to suggest that a form of LVT should not be adopted in Scotland in the future, but rather that further research is required before such a major change is introduced. However, irrespective of any decision on LVT there is scope for further reform of existing land and property taxation in Scotland to help achieve land reform objectives.

Guest author, Dr Edward Shepherd, is a lecturer real estate and planning at Henley Business School, University of Reading.

Views expressed by authors may not represent the views of CaCHE.


Date: January 28, 2019 12:03 pm


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