The Land Use Impact and Revenue-Raising Potential
of Site Value Taxation, with Reference to Australia

David Richards

[Reprinted from a reformatted and repaginated version
prepared by the author, 2000 / Part 1 of 2]

Introduction

Economists have been debating land value taxation ever since the Physiocrats proposed the impot unique at the very birth of their discipline over two centuries ago - and they are still deeply divided over its effects and significance. The Australian states have been implementing a variety of land value taxes for a century, and so furnish some of the best opportunities for resolving the economists' disagreements empirically. However, before examining the evidence on the ground we must first attempt to untangle the obstructing thicket of theory which they have woven.

The four leading questions asked about land value taxation (LVT) have been:

1. Would it promote efficiency in land use?
2. Would it promote equity in the distribution of income and wealth?
3. Would it raise significant revenue?
4. Would it promote growth, full employment and stability?

The concensus amongst economists today is to affirm the first two, deny the third, and remain agnostic about the fourth. But the qualifications (even outright contradictions) hedging about the affirmations are such as to give the impression that it is a fiscal blunderbus best left in the policy cupboard.

The fourth question has been treated by the author in his contributions to the first volume of The Sisyphus Syndrome. The other three are the subject of this chapter.

Frustrated by the intellectual deadlock in the economics profession over these questions, an American industrialist, who had stood for Vice-President of the US in 1924 specifically to lift LVT out of the cupboard, left a bequest which is used to fund a non-profit making educational institute to explore land policy issues - the Lincoln Institute of Land Policy, based in Cambridge, Massachusetts. In September 1991 the Institute organised an International Conference on Property Taxation and its interaction with Land Policy.

Amongst the papers presented were two on "current data on land taxation", one by Wallace Oates and Robert Schwab of the University of Maryland, dealing with Pittsburgh, USA,[1] and one by Kenneth Lusht of the College of Business Administration, Pennsylvania State University, covering Melbourne, Australia.[2] Both papers began by summarising the theoretical state of play on the impact of LVT. The inconsistencies which emerge between the two treatments - and with other economists whom they do not cite - provide an entry into this debate.

The question of efficiency: the incentive effect

A tax in proportion to the annual (rental) value of land, or to its capital (sale) value, has generally been recognised as avoiding distortion of markets, unlike many taxes. Thus, Dick Netzer wrote in 1966 for the Brookings Institute, in The Economics of the Property Tax,

Location rents constitute a surplus, and taxing them will not reduce the supply of sites offered; instead, the site value tax will be entirely neutral with regard to landowners' decisions, since no possible response to the tax can improve the situation, assuming that landowners have been making maximum use of their sites prior to imposition of the tax (quoted in Oates and Schwab, p.614).

It follows that substituting a tax on location rents for a tax which does reduce the use landowners make of their sites removes distortions in the economy. For example, replacing an ad valorem tax on buildings (as contained in most real property taxes), which discourages the supply of buildings, with one purely on land values, constitutes a change that "will result in a higher level of improvements to the land (e.g., a higher capital-land ratio). We will refer to this as the capital-intensity effect," write Oates and Schwab.

Turning to Lusht's paper, there is a reference to an "incentive effect of the use of the site value tax" due to the accompanying removal of a selective tax on a particular product (i.e., buildings): "The reduction in the tax on improvements shifts the supply curve by an amount equal to the tax reduction (Bourassa, 1987) decreasing price and increasing supply" (Lusht, p.519).

The presence of an incentive effect is intuitively appealing. It results from the removal of the economists' "excise effect" which produces a "deadweight loss" to society when a discriminatory tax is applied to a product (see Figure 1 - a). Enthusiasts for a shift of real property taxes to site value taxes stand by the slogan "untaxing buildings promotes building".

But some professors of economics have noted that buildings are a special case of the simple excise tax analysis.The supply of buildings is relatively inelastic - totally inelastic in the short term, by definition. This means that the supply curve in the short term is vertical and cannot shift. The construction industry has no power to raise prices for buildings by taking existing buildings out of use. An annual ad valorem tax imposed upon buildings cannot be shifted to customers immediately. So the prospective owners of buildings cannot offer as much for buildings with the tax as without it. The construction industry would have to cut back production for many years before an overall shortage forced up the market price of buildings significantly. Does this mean that it has to bear the whole of the tax, reduce output, and await the natural growth of demand?

Fortunately for builders there is a factor of production which is so specialised in supplying inputs to builders that it usually has very little exchange value without them. That factor is land. The supply of land is even more inelastic than the supply of buildings - even in the long run its stock cannot be reduced. So in the event of a tax related to building prices, all builders have to do to maintain the profits they require to keep them in business is bid less for building sites. They all face the same proportionate tax on their output; none of the firms is enabled by the tax to reduce its bid by a lesser proportion than its competitors without loosing customers. Landowners cannot take their sites to other markets where comparable prices are paid for uses not mediated by buildings or improvements of one sort or another. So they must accept the level of bids offered. The market prices of building sites fall by the capitalised amounts of the taxes the improvements are expected to incur over their lifetimes.

Professor Raymond Richman of the University of Pittsburgh caused a stir when he elucidated such matters, in a conference on fiscal policy and land values in 1970 sponsored by the Committee on Taxation, Resources and Economic Development (TRED). Noting that capital improvements to land are not totally elastic in supply, he concluded: "If this is true, the bulk of the burden of a tax on improvements, that is, the tax on capital, must be borne by the landowner and is capitalised." [3]

The main cause for concern was his deduction from this fact: capitalisation of the buildings tax into lower land values means that lower interest costs on the purchase price of land counterbalance the effect of the tax on builders' profits, so the rate of development is unaffected. Only in marginal areas where land prices are too low to absorb the full weight of the tax is development reduced.

At TRED's previous annual conference, Professor Mason Gaffney, now at the University of California (Riverside), presented a paper which included a lengthy explanation of why "all property taxes come out of land rent." [4] He went even further and suggested that taxes on buildings reduce annual land rent by more than the annual amount of the tax (p.191), other things being equal. But unlike Richman, Gaffney did not conclude that removal of the buildings tax has little effect on the rate of development; he went on to list at length (pp.192-206) the disincentive effects associated with taxing buildings. He argued that the removal of these mean additional upward pressures on land rents as the buildings taxes are removed.Econometric models [5] and empirical studies (see Lusht's below) have provided support for this view of the effect on land prices.

Gaffney's reasoning on the effects of the removal of buildings tax will be examined below. Meanwhile, Stephen Bourassa, postdoctoral fellow in the Urban Research Unit of the Australian National University, who was cited by Lusht in connection with the simplistic excise tax interpretation of the buildings tax, must be pursued on this point. In a sequel to the article cited, Bourassa provided a review of the theory of the impact of the land tax and mentioned two "incentive effects" resulting from the presumed accompanying buildings tax reduction:

The global effect is a reduction in the real rate of return to capital by the average property tax [footnote: reproducible capital tax, not land tax] rate.... [T]he excise effect, which depends on geographical variations in tax rates, with low tax communities having a lower cost of capital than high tax jurisdictions. Given the assumption of highly mobile capital, it is reasonable to expect that changes in tax rates will result in flows of capital from jurisdictions with high rates to those with low rates.[6]

Both of these incentive effects appear vulnerable to the Richman critique above. Capitalisation of the buildings tax into lower land values should protect real rates of return on reproducible capital. The average property tax rate across all jurisdictions reduces average land values. Local tax differences carve out local undulations in land values. Bourassa nevertheless claimed that his study of the data for Pittsburgh in the years 1978-1984 unearthed significant incentive effects. We shall return to this claim below.

Efficiency: the liquidity effects

(1) the timing effect

In their "overview" of land taxation theory, Oates and Schwab move on to "a second effect that is less widely appreciated."

In two important papers, Brian Bentick (1979) and David Mills (1981) have shown that in an intertemporal context LVT clearly is non-neutral. While the taxation of land rents retains the property of neutrality [because it lowers the net return at each point in time proportionately], the taxation of land value [i.e., capital value, anticipating future rents] changes the comparative returns of land-use projects with differing time horizons. In particular, LVT favors projects that yield their returns sooner ... it encourages the earlier development of unused parcels. We shall call this the timing effect.

LVT...taxes future returns in advance of their receipt. It makes it relatively more expensive to hold land idle in anticipation of future returns. As Mills (1981) shows, a development project, in order to be profitable, must promise a rate of return in excess of the market interest rate - but in the presence of LVT, it must, in order to pass muster, offer a prospective return that exceeds the sum of the rate of interest and the rate of taxation of land values.

LVT ... is a distortionary form of taxation (p.615).

It seems that Richman saw through this effect, too. As with capitalisation of the tax on improvements, capitalisation of the tax on land means that the developer pays less land price, hence lower interest charges on loans for land purchase (or foregone interest on own money), and more taxes, in equal amounts.The annual amount of the land value tax simply substitutes for the annual amount of the lower interest costs (see Appendix 1).

Gaffney confirmed this position: "It is widely believed that they [land taxes] speed up ripening [of land for development], but the belief has been wrongly rationalised. It rests mostly on assuming that land taxes are piled on top of interest costs of holding land. But land taxes are capitalised into lower values, and thereby supplant interest costs rather than supplement them." [7]

Land value is the net present value (NPV) of the optimal development project after all future taxes and developer's necessary profit and other costs are taken into account. It is the NPV of the project's expected flow of future revenue surpluses over costs.[8] It is the price that the developer of the optimal project must bid to secure land in a competitive market. The developer's target profit is a cost of production to be paid out at the completion of the project. Tax liabilities while holding land are also a cost. Expected revenue is reduced by anticipation of land value tax liabilities on the part of the developer's customers. Thus, anticipated land value taxes reduce the NPVs of projects and the price that developers are able to bid for land. They do not reduce the anticipated profitability of the projects themselves. In the presence of LVT, "to pass muster" a project does not have to promise a rate of return in excess of the market rate of interest to secure the developer's target profit. Instead, it is enabled to bid less for land by the fact that the NPVs of all competing projects are equally affected.

It makes no difference to the essence of the "timing effect" theory whether the tax reflects currently realisable rents or future rental values. Either, according to Mills' erroneous logic, would raise the required rate of return that the project would need to achieve, though the latter would do so more. Either would make it relatively more expensive to hold land wherever higher development possibilities are anticipated, though the latter would do so more. The continuum of "highest and best use" land rents (the basis of land rent taxation) rises above existing use land rents well in advance of redevelopment for a higher and better use (see Appendix 2).

The "timing effect" argument appears to have two unconnected strands tied together: a pull effect and a push effect.The supposed pull effect, or attraction, of earlier yielding developments depends on the rate of LVT supplementing rather than supplanting the investor's interest rate. The push effect involves a reduction in the capacity of landowners to hold out until investments have borne fruit. Bentick wrote that "a tax on market value causes taxes to be levied ahead in time of the returns on which the tax is based, creating a liquidity problem which cannot be solved by a perfect capital market." [9]

While it is true that taxing capital gains in land as they accrue causes a liquidity problem, it is not true that such a tax is "levied ahead in time of the returns on which such a tax is based." Capital gains form part of the total rate of return (the other part being annual income) as they accrue, not when they are eventually realised on sale (see Appendix 1; also Gaffney's 1970 paper, pp.183-187). Each year the capital gain accrual can be cashed in by sale of the land at market value. But even if that occurs in order to realise cash to pay a land value tax, that does not mean that development is hastened. For whoever owns the land will still find that the annual accrual of the NPV of the optimal development project from one year to the next (plus any existing use rent) still outweighs the annual return on land value that can be gained from the current optimal development; in other words, postponing development yields a higher return than does precipitating it (see Appendix 1). Developing prematurely lowers the market value of the site, given that the market anticipates development at maturity, and thus adds capital devaluation to lower income yield. Any existing land value tax regime cannot alter these relativities.

Given the apparently baseless claims for the "timing effect" of a steady or even increasing tax on land values, it is curious that Oates and Schwab should find the results of their preliminary empirical tests of the theory "encouraging: new building activity clearly picked up following the striking rise in land taxation in the city of Pittsburgh - and this increase in new building permits is not to be found in other cities in the region.... The results are in a sense, too good: it is difficult to believe that city property tax reform should by itself produce such dramatic results" (p.619).

Adding to that difficulty is the fact that their theory is not that the tax on land per se may have contributed to the increased activity, but that only that part of the tax on land values which distinguishes it from a tax on land rents contributed. They even stress that whatever incentive effects may flow from the removal of buildings taxes are ruled out in the case of Pittsburgh, for the situation in the period studied (1960-1989) was one divided by a sudden doubling around 1980 of the overall nominal rate of tax on land values (from about 1% to about 2%) accompanied by a slight increase in the rate of tax on structures (from about .07% to about .09%). "The tax rate on structures was not reduced - so what we are examining is a case of a dramatic increase in the rate of taxation of land in the city" (p.617).

These facts make even more curious Bourassa's claim, mentioned in the previous section, that his empirical "results for Pittsburgh indicated a significant incentive effect, but no liquidity effect" (p.107). In other words, he found that the non-existent reduction of the tax on structures is influential, while Oates and Schwab found encouraging preliminary support for the timing effect - a liquidity effect - of the increase in the tax on land values - and each denied the conclusion of the other.[10]

(2) The Cash drain effect

We have not finished with the "liquidity effect". In Lusht's "summary of theory" (and Bourassa "review of economic theory") the "liquidity effect" encompasses the "timing effect", but extends beyond it:

Assuming the supply of land to be inelastic, the supply cannot be changed in response to increased changes in the tax burden, and the tax cannot be shifted. Faced with an increased cost of holding developed sites, owners are encouraged to develop (p.519).

This is the timing effect, and therefore ignores tax capitalisation. If interest foregone on developed sites falls by the same amount as the tax increase, there is no increased holding cost. The statement also has a second aspect: it refers to a transition phase to higher LVT rates rather than a steady state. But again there is no reason why, in a perfect market with economically rational behaviour, the transition period should spur site development any more than other periods, despite the capital losses to landowners. It would not be to land developers' advantage to buy land in a falling market, for there would be no related increase in the profitability of building to override the losses in capital value.

Ironically, the extension beyond the "timing effect" depends upon tax capitalisation. In Lusht's words (p.519):

As the tax rate increases, the value of land decreases. In turn, lower land values encourage liquidity and development (Becker, 1969).

Bourassa's statement of the same point indeed furnishes a quote from Arthur P.Becker:

The benefit would be the equivalent of an automatic perpetual loan to the developer for purposes of land acquisition in the amount of the capitalized value of the land tax.

But to the extent that increased holding costs are illusory, so must decreased acquisition costs be illusory. If capital markets are perfect it makes no difference whether acquisition costs are borne in terms of annual land value tax bills, annual interest charges on loans for land purchase, or interest foregone on own money used for land purchase. Each is an opportunity cost of land ownership.

Only the title given to this group of effects -- "liquidity" -- provides a cluue as to why a tax on land values might be expected to stimulate development. There is an important difference between the three types of carrying cost of land which none of the authorities so far cited mention, other than Gaffney. Although the three costs are "economically equivalent", only two involve actual cash flow, and only one involves taxes. Gaffney has observed:

A common misuse of theory is the notion that people react to opportunity cost [alternatives foregone] as alacritously as to cash costs, because that is what "rational" people "should" do. This belief is a severe case of doctrine overriding observation.... A cash drain is what attracts the attention of any seller and moves him. [11]

A cash drain to the taxman is something to be avoided most of all! Gaffney observed that the motivated seller of surplus land is someone "subject to debt and/or property taxes." In his 1973 paper, he elaborated:

If money talks, the tax dollar outtalks the interest dollar, at least the dollar of foregone interest on equity, which speaks in a whisper.... According to the portion of tax theory that looks at marginal incentives and ignores the wealth and liquidity effects of taxes, land taxes are simply neutral, and in an important sense that is true.... In practice they accelerate renewal because they drain cash from holdouts waiting for high bids from builders.... The effect of a cash drain on a holdout far outweighs the effect of foregone interest on equity because the cash drain lowers his wealth and liquidity. The cash drain of land taxes also conveys information to many owners who are only vaguely aware that they are holding a resource of high salvage value to society. Land taxes build a fire under sleeping owners (p.133, italics added).

Equity ownership of surplus land is like ownership of Premium Bonds in the UK. They may not bring in any income, not even to stave off the ravishes of inflation - but there is always the chance of hitting the jackpot. The success of lotteries shows that it is natural to forego income regularly for just that chance. But there must be a limit to the cash haemorrhage -- especially to the taxman -- that owners of land surplus to requirements will put up with.

More generally, equity ownership is a licence to behave as an economically irrational person: to hold on to vacant land well beyond its ripe-for-development date, for example. Gambling spirit, inertia, ignorance and incompetence mean that much land is well past its optimal redevelopment date. Society is already suffering loss, and there are customers queuing up to put those sites to use. It only requires the introduction, or an increase, of taxation on land values tax to flush them onto the market. After the first flush, the flow should steady - but remain higher than before.

Land value or rent taxation of all landowners transfers the financial equity in land to the public sector. This is the "weath effect" that Gaffney referred to. So long as the stewardship of the financial equity transferred to the public sector does not produce decisions as economically irrational, from both private and social viewpoints, as those produced by erstwhile private, and to a large degree land-sated, stewards, then the economy will function more efficiently. Economically destructive forms of taxation will be reduced, and sub-optimal land uses will be replaced.

The cash drain effect of LVT is purely to stimulate development which would otherwise be impeded or delayed by economically irrational decisions or imperfect markets. This does not mean that LVT is "distortionary" and only has the secondary virtue of distorting in the opposite direction to other distortions, tending to iron them out, as Oates and Schwab suggest (pp.620-621). Where it is efficient to reap cash rents - that is to develop - the cash drain will make the reaping necessary to conserve the landowner's other assets. Where it is not efficient to reap cash rents, the cash drain will not encourage developers to buy land for development. Undeveloped land will remain in the hands of owners who have sufficient liquidity to take advantage of the competitive investment opportunities, partly secured by land value tax payments, offered by market value gains as sites ripen for development.[12]

In the absence of LVT those investment opportunities would be the same, only the source of funds would be different. Rents foregone on alternative uses of the sites would be the effective source, rather than cash from sources of income unrelated to sites.[13] For the reasons stated above, the cash investments would have a higher chance of being economically rational. They would also be a component of a more equitable society, which in turn would be a more economically rational society.

(3) The redistribution effect

One aspect of LVT not mentioned in the theoretical overviews is its progressive nature. It is important that land taxes reduce land prices, because capital markets are not perfect and credit is rationed to those with greater credit-worthiness - the rich. So the rich have an unfair advantage in purchasing the fixed quantity of land. LVT reduces this advantage.

We have noted that in the absence of LVT rents foregone on alternative uses of ripening sites are effectively reinvested in additional capital gains from those sites. The wealth of those investors feeds itself. However, LVT requires that capital gains from vacant sites be "purchased" with cash, either from current income from labour or capital, or by liquidation of other assets.The sites themselves cease to provide the income invested.

The progressive effect of LVT is therefore compounded. Not only do the rich have less preferential access to land, but the land itself produces less private income for those who own it. A positive feedback circuit which polarises society in terms of income and wealth is weakened.

The mechanics that initiate the vicious circle were termed by Mason Gaffney "differential capitalisation":

Interest rates vary among people. They are regressive -- the poor pay more. Land taxes, assuming true assessment, are not regressive. Substituting taxes for interest therefore undoes the effect of regressive interest rates. It hits the rich owner harder than the poor ... increases the bidding power of the poor for land, causing them to encroach on lands held by the rich (1973, p.131).

As with the cash-drain effect, this has the effect of removing distortions in the market which delay development and cause sub-optimal intensity of land use. The effect is not uniform, but subtly dependent upon place. Enthusiasts for LVT claim that it "forces land into use" and thus physically intensifies land use (apart from where, as a consequence, it relieves demand pressure towards the external margins of land uses). But Gaffney pointed out that the effect is not a simple plus or minus. The effect is equalizing as among classes. Land taxes let the poor, who live crowded on poor land, live less crowded and move to better land. They lower density for the poor by raising it for the rich, who own most of the land (1973, p.132).

As a rule, both the physical and the economic intensity of land uses are higher in poorer than in richer areas. But the overall effect of equalization alone is unpredictable. If the increase in LVT revenue is at the expense of revenue from taxes on buildings, however, the overall effect should be higher physical intensity, due to removal of delays in redeveloping (see Figure 6).

Efficiency: the incentive effect re-visited

Despite capitalisation of taxes on building values into lower land values, there is still theoretical room for the operation of disincentive effects, hence incentive effects from switching to direct taxation of land values.

As with the effects of LVT, the effects of taxes on construction are more subtle than appear at first sight. They are dependent on time and place. Appendix 2 presents the necessary background for understanding them. It shows that the primary effect of buildings taxes is to delay the replacement of buildings, both as they wear out physically and as they become obsolete economically. The latter point is specified in the appendix, but the former also deserves elaboration.

A tax on building value delays replacement of an existing improvement in the same land use category as before. With the market value and optimal-use value of the site both rising at the same rate, as the economy grows, challenger and defender buildings will be battling it out in terms of the annual land rent they can provide. A fully depreciated existing building will cease to earn income sufficient to cover even the rental value of the land, and gradually the existing use land rent will decline. The optimal building for the site, meanwhile, will continue to offer a rising land rent to the site owner. A tax that bears proportionately on land rents does not change the competitive situation (unlike in the special case discussed in footnote 12). However, a tax on structures bears down on land rent maximally with the optimal building and not at all with the valueless building, with the result depicted in Figure 7. Renewal of the structure on the land is delayed for many years, production equal to the value of the squandered land rents is aborted, and revenue that the government might have raised by taxing land rents instead of buildings is lost.

Builders may not be concerned about the buildings tax if it lowers what they must bid for building sites -- but landowners are. They are aware that de-intensification of land use targets, both physically and economically, may raise bids simply by reducing the taxes on construction values more than the project surpluses which enable the bids. Builders will therefore have to adjust the physical capital content of their projects downwards to pass muster. Referring to figure 6 in Appendix 2, it is apparent that the potential for reduction of taxes on buildings relative to revenues is greatest at the external margins of land use bands, where construction costs are highest in proportion to property values. The overall effect will therefore be to lessen the slope of land values, and reduce the delays of redevelopment dates. In aggregate, the physical intensity of land use will be reduced by a mixture of two alternative means -- larger gaps in the land use pattern or lower intensity of use between the gaps.[14]

Thus the response to a tax on capital is to substitute land for capital, and knock out marginal uses.

Ironically, an implication of attempts to brand LVT as encouraging quick pay-off developments is the need to retain building taxes instead. Apart from delaying development, these encourage quick pay-off choices where development does occur. Acting like higher mortgage interest rates, less durable buildings are built because future returns do not enable present high interest rates to be paid.

The question of equity

Considerations of equity are intimately bound up with considerations of efficiency, so we have already explored the main equity issues as we have attempted to unravel the efficiency implications of land value taxation.

It has become apparent that part of the effect of LVT is to prise land from the hands of the relatively wealthy. We have called this the "redistribution effect". Another effect of LVT is to shift sites into the hands of those with sufficient liquidity to handle with the "cash drain effect". The latter influence appears at first sight to be at odds with the former, and accounts for the irony that LVT is commonly thought to be regressive. However, the fact that many landowners hold most of their wealth in the form of illiquid land does not make them any less wealthy; only less able to find the cash to pay taxes if they choose to consume the rental income from their wealth in the form of owner-occupied living space, or to invest it in the form of vacant sites.

Both difficulties for landowners are soluble. In the first case, the owner may move to a lower value rented accommodation and let his or her own property. The land value tax would then be paid out of cash income, as would be the accommodation rent. The individual would be no less wealthy;[15] he or she would simply be paying the same taxes as others who own equally valuable land. In the second case, footnote 12 suggests that an interim land use should usually solve the cash flow problem. If that is impossible, perhaps due to planning law, then premature development is the individual's short run solution. As this harms both society and the individual owner in the long run, agreement over interim solutions is probable.

These special cases should not be allowed to distract from the larger picture, which is that the proportion of land value in real property assets tends to be proportional to the wealth of the owner, and the proportion of real property assets per se in wealth tends to be proportional to the wealth of the owner. The relatively poor live in -- may even own -- houses the value of which is mainly in the buildings; the relatively rich occupy mainly land value. A tax on buildings is therefore regressive, and a tax on land value progressive - at its introduction and after.

This wider picture is confirmed by the evidence of choices that have actually been made wherever communities have been given the chance to choose directly between property taxes based on land values and those based on building values. Australia and New Zealand both inherited the British rating system which taxed the imputed rental value of occupied properties, and hence the existing use value of buildings and land. However, many parts of those countries enacted legislation from the 1880s onwards to allow ratepayers to change the basis of rating on a majority vote. In New Zealand 80% of local authorities had changed over to rating of land values by 1985; in Australia 65% had done so by 1976. In Melbourne, Australia, half of the 56 local government areas were rating site values by 1989, 70 years after the option had been introduced. Approximately 25 attempted changes have been defeated by petition and popular vote, but most of these have been attempts to change back .[16]

Robert Hargreaves of Massey University, New Zealand, noted in a paper for the 1991 Lincoln Institute conference that "the popularity of the land value system in New Zealand can be attributed to the fact that it tends to favour residential ratepayers...[hence] the majority of taxpayers." In the residential sector the ratio of land value to improvements value is lower than the average for all sectors, so the sector as a whole benefits from a revenue neutral shift to land value rating.[17] Moreover, most homeowners within the sector probably benefit more than the average homeowner.

Kenneth Lusht noted somewhat disparagingly about property tax changes in Melbourne that "the pre-vote debates have been highly emotional, with emphasis on the relative 'fairness' of the taxing systems rather than their developmental impacts" (p.527) Such an attitude is understandable given the purpose of his study, and his frustration that because existing study of land use patterns in Melbourne had been conducted mainly by land tax enthusiasts, it "consistently (and predictably) supports the notion that site value tax stimulates development, the tone tends to be exhortatorial and the quality of the methodology at best uneven" (p.521). However, it overlooks the possibility that "fairness" is itself a factor affecting development patterns, and suggests a lack of awareness of the larger issues that were responsible for the introduction of LVT in the first place - in Melbourne, in Australia as a whole, and indeed in many places around the world around the turn of the twentieth century.

The original settlement of Australia was mainly a mercantilist project; the establishment by Britain of self-supporting naval bases to safeguard its commercial interests in the Pacific. The dumping of convicts was an ancilliary activity. The interior of the continent was of no relevance to this enterprise, which displayed, in the words of Dr J.F.N. Murray, an Australian valuer of global reputation, "an almost complete disregard of the value and potentialities of land, and of the fundamental principles applicable to its allocation and use." [18] Theories of uniform price, and grants of free land, led to sporadic settlement, with settlers fanning out to select the areas most suited to immediate use as opposed to long term development.

This was the veritable apogee of the "timing effect": areas would be selected "for their immediate response to a minimum application of labour and capital." [19] And it was the result of a diametrically opposite policy to allocating land on the basis of cash payments related to its long term value. The only notional qualification for the receipt of land was the possession of sufficient capital to use it. All grants in the early nineteenth century carried a quit rent determined by area, not by quality. Later, land came to be sold at a uniform price of one pound per acre, and then with uniform minimum prices at auction."[T]he uniform price led those with speculative tendencies, or who possessed special information, to pit their knowledge or estimates of the future trends of the market prices for land, against those bidders who were concerned only with the probable future incomes to be derived from farming ... [aided] by the exceptional facilities for obtaining credit which were available." [20]

Edward Gibbon Wakefield's infamous land settlement scheme of the second quarter of the nineteenth century completely overlooked the possibility that the land of Australia might not be of uniform character. He relied on setting a price per acre for land release -- uniform within each colony -- which was sufficient to prevent labourers from obtaining land too soon, and thus reducing the supply of labour at low wage rates, but not too high to prevent them from purchasing within a reasonable time, thus filling the public coffers, funding further immigration, and providing a demand for labour.

The combination of earlier land grant and later land famine policies produced the "squatter" problem of the second half of the nineteenth century. The original "squatters" overran Crown lands outside the areas granted or offered for sale, were then converted into nominal fee-paying licencees or tenants by a pragmatic government, and finally offered their holdings at one pound an acre -- the outer areas of which they did not buy but became the de facto owners of anyway.[21] Along with purchasers and grantees they were occupying for pastoral purposes huge areas of land which included the "eyes" of the country (its waterholes) and much of the most fertile land. Latecomers to the colonies were forced to accept an urbanised future, "shut out of their rightful patrimony" (Peter Burroughs [22]).

This was the setting for the birth of land value taxation in Australia: a bitter realization of injustice on the part of the urban masses. As early as 1854 the Melbourne Argus began a campaign demanding that the government "unlock the land" and impose a land tax. Public policy was also set on fostering an agricultural industry, which required closer settlement.

After 1860 the governments of the colonies were faced with another problem that made land taxation look tempting: "revenue from the sale and rental of land had been diminishing as the areas of unalienated useful land decreased.... In 1877 the Victorian Parliament enacted a provision for the imposition of a tax on pastoral land to vary with the capacity of the land to carry sheep."[23] This was the forerunner of the State land taxes. By 1915 every State in Australia was levying an annual tax on the "unimproved value" of land.

LVT was thus originally introduced throughout Australia because it was popularly thought to be effective in promoting more efficient and equitable land use, and raising revenue.

In 1910 the Land Tax Assessment Act became law, introducing the first direct tax to be levied by the federal government. "The objects of the tax were stated to be the breaking up of big estates and provision of funds for defence purposes."[24] The former objective was challenged unsuccessfully in the High Court in 1911. The Federal land tax was abolished in 1952 as the result of a move to secure sole authority to tax incomes to the Federal government. In exchange the States claimed most of the revenues from unimproved values that had been going to the Commonwealth through their own land taxes. Both were levied at steeply progressive rates, and only on properties above a high minimum unimproved value (5,000 pounds in the case of the Federal tax, 1910-1952). That was deemed a necessary part of the attack on big estates and the promotion of smallholdings and home ownership. In reality, it undermined the aims of the taxes.


Part 2