How a land value tax can pull local authorities out of crisis

Replacing business rates with land value tax could save small businesses money, and undo some of the cuts to local authorities.

Local government is in financial crisis. Non ring-fenced grants from central government have fallen from a little over £30 billion in 2010 to less than £5 billion in 2019. Over the same period, local authorities have been allowed to keep more business rates revenues, but for the overwhelming majority this has not even come close to fully compensating them. Across England in 2019/​20, local authorities would have needed an extra £19.4 billion just to provide the same level of services seen in 2010. By 2024/​25, this funding gap is set to grow to almost £28 billion. Councils are not even getting the support they need to simply stand still.

The starved ambition and resources for local communities has touched the lives of almost everyone. Hundreds, if not thousands, of parks, playgrounds, libraries and children’s centres have been sold off or closed down. Subsidies for local buses have been reduced by almost half. Vital public health services, such as support for alcohol and tobacco addiction, have been cut back to a level described as inadequate” by the British Medical Association. Homelessness prevention and support services have been cut by almost half, and we are about to enter another Christmas with almost 5,000 people sleeping rough just across England. Children’s and adult’s social care is becoming increasingly rationed and the Care Quality Commission report that unmet social care needs have grown despite the delivery of these services being a statutory requirement. The current situation is untenable and whoever forms the next government will have to find a solution.

At the New Economics Foundation (NEF), we have been looking at how reform to local taxation could help fill the funding gap. Business rates remain a tired, inefficient and outdated tax that is near-universally unpopular. It taxes the wrong people, for the wrong things, in the wrong places. The renters of commercial property pay the tax directly, while landlords with empty properties pay nothing for up to 3 to 6 months. Businesses are penalised with higher taxes for making productive investments and improvements to their place of work. And businesses renting a small, high street shop can pay more in tax than the warehouse owned by an internet giant.

Moving to a system of land value taxation could improve the fairness and efficiency of local business taxes, while also helping to reverse a portion of the funding cuts to local authorities. Unlike commercial property itself, the value of the land beneath it is largely beyond the control of its owner. The value comes mainly from the amenities and infrastructure in its immediate proximity, and the collective efforts of the communities that live and work in the surrounding areas. To tax land is therefore to tax an (often excessive) economic rent – accrued through the privilege of ownership, rather than by making a productive contribution to the wider economy and society.

The Greens, Liberal Democrats and Labour have, to a greater or lesser degree, all discussed the adoption of a land value tax in their 2019 manifestos. This reflects a lengthy and politically diverse discussion of land value tax in economic literature, but it also reflects the facts on the ground with regard to local authority finance, which is not a problem that can be ignored over the period of the next Parliament.

Using official government data, NEF has been simulating and stress testing different versions of a land value tax in England to increase local revenues, while also improving tax efficiency and fairness. Our proposals remain under development and will be published in our final report. Our recommendations will address the next government, whatever its political makeup – broken local economies will still be as broken the day after the election as on the day before, no matter who wins. And it is important to note that no party currently has a plan to fully restore funding to 2010 levels.

The election campaign to date has only skimmed the surface of the local authority funding crisis. But the idea of a land value tax has attracted some attention, for instance a recent critical piece in the Express newspaper. If nothing else, however, the article is an exemplar of how not to have a national conversation about local tax: either by missing the vital context of the local government austerity, or by basing analysis on inaccurate and inappropriate data.

The Express’ report implied that the distinguishing characteristic of land value tax is that it forces small companies to contribute tens of thousands of pounds more in tax. This is simply wrong. But in fact, the specific claims made in the piece were not just wrong, they were numerically impossible.

The article was based on an analysis that a shop paying around £10,900 in tax in the current system would pay around £38,130 under a land value tax. But the data used in the calculation comes from research on land value by the Investment Property Forum, which used an entirely different method to that used by the Valuation Office Agency (VOA) – who are the people that actually calculate the official value of property and land for the purposes of taxation.

For the reported numbers to be accurate, the value of land for the specific property would need to be more than £63,000. For a business paying £10,900 in the present system, this is almost double what we already know from the VOA to be the value of both land and property combined.

In actual fact, the median business with a current bill of £10,900 would see their tax fall by around £500 under our illustrative systems of land value tax discussed to date. Such a tax would still be revenue raising overall for local authorities, because many properties will have a higher share of land value (within the overall property and land value) than the median – including among much larger and more valuable properties, which make up the vast majority of total business rates revenue.

The article also missed the important point that NEF’s proposals would see any new land value tax paid by the owners of commercial property, not by the businesses renting – a shift that would remove more than a million small and medium enterprises from directly paying a tax on commercial property at all. And we have also suggested that the current relief, used to exempt landlords paying taxes on empty properties for the first few months, is instead used to permanently prevent an increase in tax for the minority of small businesses who own their own property, rather than rent one. This would be on top of retaining or repurposing the value of all other reliefs and allowances in the current system, including the relief for retail businesses – a further point that was also ignored in the reported calculations.

We believe land value tax presents part of the solution to the local government funding crisis and the 2019 election manifestos suggest there might be a political consensus emerging around this view. But with the crisis of local authority funding now becoming increasingly untenable, whatever the best technical solution, the problem is not one that the next government can afford to ignore. To the extent that they do it ignore it, communities will continue to pay the price.

Image: Unsplash

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