Progressive Taxation

Speech by Chris Huhne MEP delivered to the Town and Country Planning Association symposium on funding sustainable communities, 17 Carlton House Terrace, London on Tue 11th May 2004

There is still a conundrum at the heart of the British housing market. On the one hand, house prices in an area like the South East have doubled in the last five years. On the other hand, the National Land Use Database finds that 12,000 hectares of previously-developed land is available for residential use even in London, the South East and the East of England. The potential build total, according to the planning authorities, amounts to 360,000 houses , quite enough to stop the house price boom in its tracks. Moreover, a substantial part of this land is currently completely unused, being either vacant or entirely derelict. What accounts for this apparent failure in the housing market? What accounts for this paradox of unused and underused land amid soaring demand for it?

If we are to believe the Barker review of housing supply , it is all a question of the planning system. Certainly, that is part of the answer. Some of the Barker ideas for streamlining the system are worth taking forward. By comparison with continental countries and with the United States that have much lower population densities, our planning procedures are cumbersome and time-consuming. But I simply do not believe that it is all of the answer or even as much of the answer as the Barker review seems to think. Anyone who has been on the receiving end of a planning application knows that there is always a struggle between private and public interest even if all Nimbyist motives are put to one side, as they often are not. There are still issues about the proportion of affordable homes or key worker housing. About the proportion of planning gain that may be extracted for the local authority. About the provision of facilities such as playgrounds and leisure centres. About parking and road access. And it is also the case that developers are still more interested in greenfield sites than in taking on brownfield sites that may have problems with clearance, contamination and a less attractive neighbourhood. Developers are also more interested in new build than in renovation.

I do not believe that this reflects popular preferences, as opposed to the interests of developers in churning out standardised units. The implication of developing on greenfield sites, and just abandoning brownland, is surely that we ultimately arrive at the state of some American cities where vacant land can take as much as 45 per cent of the total area . Such a policy will gradually empty our cities - leaving decaying urban cores of the under-class - while suburbanising what remains of the countryside in the South of England. For many reasons - not least the provision of health, education, social and transport services - it makes sense to re-use urban land that no longer fits its first or previous use. Barker seems neutral between greenfield and brownfield, because the review entirely failed to take into account the social costs of providing infrastructure for greenfield development, and the social costs of decaying infrastructure in the dying communities it leaves behind. Urban densities in Britain are low compared with our continental peers - London for example has a density half that of Paris - even though the population density of England is among the highest in Europe. Public policy should be aimed at regenerating and reviving urban areas, and encouraging developers to bring forward more initiatives that will do so.

So my first disappointment with the Barker review is the analysis. My second disappointment is the prescription for tax changes. The Barker review rightly points out the enormous increase in land value that accrues to the land-owner once planning permission has been granted for formerly agricultural land. The price of arable land is given at £7,534 a hectare. The price of residential land per hectare is £1,230,000. The net gain from a simple administrative decision is thus £1,222,466 per hectare. No wonder that planning negotiations are often so fraught. The Barker solution is to introduce a planning gain supplement, which is a tax on the increased value, payable in order to receive the planning permission. Although administratively more simple, it is surprisingly similar to several previous attempts to impose development gains taxes such as the 1947 development charge, the 1967 Betterment Levy and the 1973 Development Gains tax followed by the 1976 Development Land tax all of which died through asphyxiation by their own complexities.

The essential problem with the Barker proposal, as with its predecessors, is that it gets the economic incentives wrong. Indeed, the Barker review itself implicitly admits that its tax proposals would reduce supply when it says 'taxation of anything tends to reduce its supply. However, in the case of land it is the restrictions of the planning system that are the main constraints on land use for housing. The effect of the package of measures in the review as a whole is expected to increase supply' . And the review is far too dismissive of another tax change which would, uniquely, get the incentives right. A tax on the value of land - or a site value rate - would levy the same amount whether the site was used to its full potential (as allowed by the planning authority) or not. If it was not developed, the landowner would have a regular charge to pay - a carry cost - that he or she does not have today, and would therefore have an incentive either to develop or to sell to someone who will develop it.

The significance of such a site value rate for urban areas would be enormous. Landowners would have an incentive to develop immediately sites that fell into disuse, limiting the possibility of spreading blight. They would also have an incentive to develop fully under-used sites. Another urban paradox is the frequent coexistence of very undeveloped sites alongside skyscrapers: single storey shops in the Tottenham Court Road in London, alongside the multi-storey Centre point. By fostering private activity, we would eliminate the need for state giantism - the solution of the Docklands Development Corporation in the East end of London, when decrepitude had gone so far that there was no alternative. Communities employing such a tax have an ongoing incentive to foster organic growth. And experience suggests that this organic patchwork of growth that urban dwellers like most, precisely because it involves a myriad of decisions of people thinking hard about the maximum use and enjoyment of their own property. Many of the most attractive historical cities - Venice, Amsterdam, Bruges, Paris - have this carefully woven feel to their development which is the exact antithesis of post-war new town planning or the Disneyworld attempts to recreate such a feel at developments like Poundbury.

And there is no doubt that site value rates - or land value taxes - have exactly the necessary effect. In the United States, they are known as split rate property tax because there is a high rate on the land value, and a zero or low rate on the capital value of the building on it. As John Norquist, the president of the Congress for the New Urbanism who was the acclaimed New Democrat mayor of Milwaukee from 1988-2003 said: 'It's been great for Pittsburgh. You almost can't find an empty lot in downtown Pittsburgh. They've done a lot of things wrong in Pittsburgh but one thing they did right was having this land value taxation so there's no incentive to have an empty lot'. The Pittsburgh experience has already spread to many other cities in Pennsylvania such as Philadelphia and Harrisburg, and other US states are looking at enabling legislation. Similar tax systems operate in Denmark and Australia.

If owners have to pay an on-going cost for holding onto land with potential, they are far less willing to hoard land. If introduced in the UK, this would also help to curb the single greatest cause of the instability of the UK housing market. In normal markets, a rise in price leads to an increase in supply. But in asset markets - including the land and housing market - a rise in prices may simply foment expectations of a further rise, and reduce the holder's willingness to sell. This then further reduces supply, and increases prices again. By introducing a carry-cost for land, there is a price for hoarding it. There may, of course, still be obstacles in the planning system. But at least there would be a clear incentive on owners to develop to the full extent allowed in their local plan. The Barker review implicitly assumes that developers want to develop every last thing we would want them to develop plus some, and that planners just get in the way. In fact, developers need incentives to bring forward plans that are socially valuable.

A further advantage of such a tax is that it captures the future gain from rising land values. These values rarely come about because of the individual efforts of a particular entrepreneur, but often arise because of social improvements such as a new train or underground line or better bus services. As land values rise, so too would tax revenues, helping to fund infrastructure. Indeed, it is arguable that urban areas have systematically under-invested in transport infrastructure because of their incapacity to reap some of the property value gains that arise from improvements.

By contrast, a Barker-style supplemental planning levy would be irrelevant in such circumstances, as it is aimed purely at planning permission for greenfield sites. However, the land value tax would capture much of the windfall gain from a change in planning permission that Barker aims to capture. If permitted use changed, the land value would rise, and so would the tax. Since it is an annual tax, it looks smaller than the once-off windfall gain tax. But its economic value - as a stream of income rather than a lump-sum payment - could be similar.

There are enthusiasts for such a land value tax who point out that it is also one of the few types of taxes that do not distort decisions. Almost any other tax - income tax, profits tax - has some effect on incentives. However, a land value tax is effectively a tax on economic rent: that payment made to a factor of production over and above what is necessary to keep it in its current use. Land cannot disappear. Its rent is pure surplus. And a tax on land rents has no effect on the allocation of resources.

However, it would be a mistake to attempt to impose land value taxes at a high rate. If people are not able to pay them out of their annual income, public resistance would be high . The only exception that I know to this rule is in Hong Kong, which by pure luck always leased out its land to its citizens, rather than selling it on a freehold basis. As a result, it resells leases when they revert to the state, and manages to raise a substantial part of total government revenue from such lease sales. In effect, Hong Kong has captured the entire rental value of its land, and this is one reason why it has been able to keep income taxes so low. Countries that do not start from this position cannot emulate it without arbitrarily confiscating the assets of those who just happen to have invested in land rather than shares or bonds.

A modest Land value tax would be a progressive solution to the biggest single problem in British economic policy. By taxing the hoarding of land, it would help to end the boom and bust in house prices that has occurred three times in thirty years, bedevilling the macroeconomic policies of successive governments. (The bust of the early nineties had far more to do with the house price boom of the late eighties than joining the exchange rate mechanism or any other familiar excuse). A land value tax would also capture the social gains made through infrastructure improvements, and thereby allow cities to invest more in their own better functioning. And it would encourage the organic growth of urban areas that are otherwise prone to depopulation and blight. Land value taxes are an idea whose time has come.