Efficiency: the liquidity effects
Efficiency: the incentive effect re-visited
Australian evidence on the
effects of LVT
The question of revenue
significance: the Australian
evidence.
Appendix 1:
Tax Capitalisation
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
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]
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.
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.
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.
Australian evidence on the effects of LVT
K.C.Taeuber, Commissioner of Land Tax and
Chief Valuer, South Australia, told the Lincoln Institute's International
Seminar of 1966 that closer settlement of primary production land in Australia
has been only slightly influenced by the incidence of the land taxes. He gave
four reasons:
1. Low rates of tax;
2. Avoidance of the steeply progressive rates
by subdivision of nominal ownership within families, or between corporations
owned by the original landowners.
3. Direct use of Crown lands for subdivision
the preferred policy;
4. Insignificance of land tax rates beside
5-10% per annum untaxed rates of capital gain in land values.[25]
Steeply progessive tax rates mean that rates
are very low at the bottom end. Add to
this a substantial minimum taxable value allowance and numerous other
exemptions and it is clear that the price of land cannot be reduced for the
majority of sites. The Collins
Commission's Review of the State Tax
System (1988) estimated the revenue worth of New South Wales' exemptions from
land tax (12 large classes, including the owner's principal home and the family
farm) at A$2bn per annum - equivalent to about half of the State's revenue, and
almost six times the land tax collected.
The State land taxes are concentrated in
their effect on the areas of highest land value. Taeuber went on to note that "there appears to be a ground
for qualifying the statement that property taxation is insignificant relative
to income taxation [and income tax deductibility of capital expenditures] in
its application to central city properties."
An empirical study [26]
by R.W.Archer for the Washington-based Urban Land Institute confirms this
conjecture. Archer studied the effect
of site value taxation (SVR) on redevelopment in the central business district
of Sydney in the 1960s. He chose the
Sydney CBD "because it is one of the few areas in Australia where site
value taxes are high enough to be an influential proportion of property values,
where the site value tax system as a whole is administered efficiently and
effectively, and where there has also been a large amount of redevelopment
activity.... [T]he municipal rate and the state land tax amount to about five
per cent per annum of site valuations [which] are full market valuations at the
time of valuation and have been made at six yearly intervals or less"
(p.38).
Archer's conclusion was as follows:
In the redevelopment situation the site value
tax system acts to increase the supply of sites for redevelopment... to
accelerate the status of marginal properties to the status of economic
redevelopment sites.... It has the greatest impact on those properties with the
greatest redevelopment potential.... [and] reinforces concentration of
redevelopment by stimulating the greater availability of sites in this area
(p.38).
He emphasised that "Site value taxation
can only encourage the redevelopment of a site when its redevelopment is
economically feasible; that is when the site value and improved value of a
property are similar" (p.36). Does
that still leave open the possibility of development before the economically
optimal moment? Not according to his
study: "Developers would seek to
obtain the maximum income from their redevelopment project as a safeguard
against the expected long-term rise in site values, site valuations and tax
charges" (p.41).
In the Sydney CBD it would seem that there
was no room for the existence of the vacant sites that are a prerequisite of
premature development. Properties
became ripe for development while the buildings were still valuable. Indeed, Archer diagnosed an "equity
problem" arising for owners of properties with a long transition period to
the status of redevelopment sites.
"Because the property's current use value is still greater than its
redevelopment potential-use value, it is not possible for the property owner to
redevelop or to sell the property for redevelopment. This dilemma can cause financial hardship.... Thus, the ratio of site to improved value
for one store rose from 52% percent in 1956 to 70 percent in 1962 and 86
percent in 1968, when it was paying 38 percent of its [gross property] income
in site value taxes" (p.36, 41).
If LVT's "timing effect" exists it
would trigger redevelopment in such a situation. But it cannot.
Archer diagnosed that the "cash drain
effect" was operating:
Probably the most important effect of a site
value tax system is the pressure on owners to sell their property for
redevelopment if they cannot or will not redevelop it themselves. This is accomplished by the cash outflow
required by the site value system. This
mechanism encourages the availability and use of sites ripe for redevelopment
and encourages early use of the most suitable sites since they attract the
largest tax charges. This facet of the
system also encourages the sale of properties for redeveloment and thereby:
1. promotes a more active and informed market
in redevelopment properties [which discourages speculation],
2. facilitates the amalgamation of smaller
sites, and
3. allows developers to expand their market
role in the redevelopment building market at the expense of single project
redevelopment by property owners (p.38).
This would appear to dispose of the claim
that LVT leads to premature and piecemeal development.
As for its credentials as a weapon against
land speculation: The study attempted
to find "person-firms buying redevelopment sites to hold out of the market
for later resale at higher prices. This
speculation would act to accelerate site value increases by reducing the
effective supply of sites. The author found no evidence of such speculation
activity although there were persons and firms operating as dealers in
redevelopment sites. These dealers were
anxious to resell as quickly as possible" (p.40).
The centre of Sydney is the showpiece of LVT
at work stimulating efficient land use in Australia. It is given little chance to work elsewhere due to the slightness
and inconsistency of its application.
There are, indeed, many measures specifically to narcotize the
stimulating effect of LVT. In
Queensland, for example, where all municipal rates are on unimproved value,
existing use value rather than highest and best use value is the valuation
standard. The Committee of Inquiry
which considered the rating system in Brisbane in 1989 noted that, apart from
making "a gift of... a substantial capital gain when they [owners]
subsequently sold their properties for market prices which reflected the value
of their more intensive use...[, t]he concession moreover negated the incentive
to put land to its highest and best use, whereas this was an intended effect of
rating on unimproved values" [27] They therefore made several recommendations
to rectify this situation.
Such concessional valuation practice is
widespread in Australia. It is regarded
as more reasonable to protect people from being compelled to move than to have
a discipline which fosters efficient and equitable land use. Since the 1920s, revenue has been almost the
sole purpose of land taxation.[28]
Archer considered a possible solution to the
"equity problem" which he identified in the Sydney CBD. The office redevelopment potential of large
department stores caused the land taxes to drive an increasing wedge into their
existing use property incomes before it was economic for the owners to actually
redevelop. The indignant companies
complained of the "intolerable and unjust burden of land tax on business
premises", presumably without mentioning the capital gains in site value
which were more than offsetting the tax inroads into current property - not retailing - incomes.
Archer toyed with the idea of recommending
current use value assessments until properties become ripe for development, at
which point assessors would switch to potential use valuations. But he decided that in practice that would
be complicated and confusing, and concluded:
"There would seem to be no way of curing this inequity without
undermining the usefulness of site value taxation in redevelopment"
(p.36). Yet that is the route that has
often been chosen - without the reversion to potential use valuation before
sites are redeveloped.
It is hardly surprising that the efficiency
benefits of LVT are not obvious in Australia.
The Australian dream is ownership of a detached home on a quarter acre
block. But over 60% of Australians live
in five coastal cities which are experiencing a population explosion. 80% of houses are single detached homes
designed for families, but only 30% of households are families. The federal housing ministry has become
concerned at the prospect of another 700,000 quarter acre blocks being added to
the fringes of cities over the next decade.
It calculates that providing public infrastructure for those low density
settlements would cost about A$6bn.Journey to work times would become even longer;
fuel consumption, already at least double that of the average European city,
even greater.
So the federal government launched a Building
Better Cities programme in August 1991, proposing to invest A$0.8bn over 5
years in medium density housing (6 or more per acre) and conversion of
redundant industrial or institutional land to housing.[29] Meanwhile, for the sake of
"equity" (financial?) for landowners, potential for subdivision of
dwelling sites continues to be explicitly ignored in many property tax valuations,
and rates of property tax everywhere remain immobile upwards.
Taeuber stated that the aggregate of property
taxes raised by State and local governments and ad
hoc
authorities for water and sewage works was "insignificant in comparison to
the other economic forces motivating land development in Australia.... In the
metropolitan areas of the cities of Melbourne and Adelaide, the boundaries of
local authorities levying taxes on each base [unimproved or improved values]
adjoin. It is impossible to distinguish
in any way, either on, or within, the boundaries any difference in the standard
or the degree of development between the areas." [30]
Advocates of LVT claimed to distiguish
differently, and it was to test this dispute rigorously that Kenneth Lusht conducted
his statistical enquiry. Melbourne
provided the ideal laboratory. In the
1980s 27 local government areas (LGAs) rated entirely on site value (SV,
defined as the market value of unimproved land, but including the value of
invisible improvements, such as drainage, deemed to have merged with the land),
28 rated entirely on net annual value (NAV, defined as 5% of the market value
of residential properties and "one year's rent" for other types of
properties), and one rated on both bases, with a higher rate on SV than on
NAV. Lusht presented a straight
comparison of data on these LGAs for 1986, excluding the LGA with the combined
rate and the NAV LGA which included the central business district.
Lusht also analysed data on the stocks of
residential improvements and of all improvements in 53 of the LGAs for the year
1984. 29 LGAs were counted as SV areas,
including the combined rate LGA, which was SV between 1922 and 1982, and
another that was SV from 1946 to 1983.
Three NAV LGAs were omitted - the one with the CBD and two that had
switched more than once.
Finally, Lusht compared the flows of new
housing, new industrial development and alterations and additions to
residential properties over five-year periods in the 1980s in the 28 LGAs (15
SV, 13 NAV) that had significant areas of vacant and developable land.
The main results were as follows:
1. Overall, the SV areas appeared to have
less capital value (improvement value) per acre, that is they had a lower physical intensity of land use. Analysis of the data suggested that there
was a 90% probability that SV rating in an LGA reduced the total value of
improvements per acre by between 1% and 9% (p.551).
2. Straight comparison of the average numbers
of industrial and retail establishments and occupied homes showed SV areas to
have 16%, 15% and 12% less units per urban acre,
respectively (p.534) - another indication of lower physical intensity of land
use.
3. Straight comparison of the average ratio
of assessed total property value (improved value) to assessed site value showed
SV areas to have a lower economic
intensity of land use. The ratios were
2.30 (SV) and 3.24 (NAV), implying economic intensities of 56.5% and 69%. Thus 43.5% of real property values were site
values in the SV areas, 31% in NAV areas (p.534).
4. Statistical analysis suggested that there
was no significant overall relationship (that is, not explainable by chance
alone) between SV areas and the value of residential improvements per
acre (pp.545-546). However, there was a
95% probability that the LGAs that adopted SV rating earliest (in the 1920s)
had a lower value of residential improvements per acre as a consequence. Limiting the acreage in the analysis to
residentially zoned land supported the pattern of an inverse relationship between
development and length of SV rating experience - the latest adopters (in the
1960s) even having higher residential improvements as a consequence - though
the zoned land exercise had low explanatory power.
5. Statistical analysis of 28 LGAs with unconstrained
land supplies between 1983 and 1987 indicated that there was an 86% probability
that higher numbers of permits were
issued for single family detached houses in SV areas. The association of SV areas with higher values of permits was weaker (p.559).
6. Analysis of the variation in residential
lot prices between the 28 suburban LGAs indicated that a combination of seven
variables, including two tax variables, accounted for about half the
variation. There was a 94% probability
that SV rating gave a residential land price premium of between 5% and 21% over
equivalent land in NAV areas; and a 90% probability that between 4% and 10% off
the property tax rate (a reduction, for example, from 8% to 7.5%) gave a 1%
land price premium (p.563-564).
7. Statistical analysis of the number of permits issued for new industrial
facilities and extensions in the same 28 LGAs between 1981 and 1985 produced
the strongest results of the study.
Seven variables were found which "explained" 83% of the
variation in the number of permits between LGAs, with each "significant at
the 1% level" (i.e., having only a 1% chance of randomly falling into the
same pattern).
One of these was SV rating. "Thus, the [average] number of new
firms and expansions of existing firms in site taxing communities was about
double the [average] number (24.15 versus 12.55) in capital value taxing
communities" (p.580). Another was
the effective property tax rate of either system: "For example, a community
taxing at the mean rate of .008 of value would attract, on average, about 18
fewer firms and additions to existing firms than would a community taxing at
.006 of value" (p.580). Lusht
commented that "The findings with respect to the site value tax are...the
first empirical confirmation of extant theory" (p.584).
8. Analysis as in 7. above, but for the value of permits issued between 1983 and 1987,
again produced "satisfactory" statistical results. The tax variables had the same associations
as in 7. above "though at slightly lower significance levels". One combination of variables explaining 80%
of the variation in the value of permits gave SV areas an 85% chance of
attracting between A$5m and A$19m more industrial development than NAV areas,
the average development attracted to all areas being A$21m. And it gave a fall in the effective tax rate
from .008 to .007 a 90% chance of raising the average value of permits per LGA
by between A$2.3m and A$5.9m (pp.582-584).
9. Analysis of the variation in average
industrial land prices between the 28 LGAs indicated no significant association
with either SV rating or property tax rates (p.587).
10. No significant relationship was found
between expenditures for residential alterations and additions in 1986 and the
effective property tax rate on improvements (p.597, 561).
According to Lusht these results were in line
with the "new view" based on LVT's hypothesised "timing
effect". He interpreted them thus:
the SV rating areas exhibited faster development after they switched away from
NAV rating, but lower physical intensities of land use overall, suggesting that
they had developed, or were developing, too quickly to the prejudice of long
run intensity. "In Melbourne,
there is no evidence that two to five decades of site value taxation has had a
positive effect on long-run development intensity" (p.553).
However, this interpretation has clear
shortcomings:
1. One of Lusht's four
"indications" of the new view was that "descriptive statistics
show that communities which tax site value only have on average a larger number
of retail and industrial establishments, and a larger number of residential
units" whilst having less capital value per unit of land, the implication
being that the average building is less valuable in SV areas (p.603). Closer attention to the table of descriptive
statistics shows that if the "existing acres in agriculture" are
stripped out, the SV areas in fact have a lower number of units in each of the
three urban land uses per urban acre than the NAV areas. The facts are as in 2. above. The capital value per unit of urban land was
not given.
Lusht mentioned that the 27 NAV LGAs in the
comparison included four that switched in the 1980s from SV. He supposed that, as they had more than
average industrial and retail units, they smoothed the true differences
(p.535). But that deduction cannot be
made. The four LGAs were all relatively
urban "cities" as opposed to relatively rural "shires";
they took with them higher than average proportions of urban acres as well as
urban units. Smoothing of urban units
per urban acre does not follow.
It would, indeed, be astonishing if the SV
areas, with 69% more urban area on average, did not have more buildings. To compare such a descriptive fact with the
synthetic "finding of less capital value per unit of land" is
meaningless. The latter
"fact" was the resultant of attempts to strip out the five or six
most likely sources of variation other than SV rating. Distance from the centre of Melbourne was
one, location south and east of the centre another.
2. Another of Lusht's "indications"
was "the consistently stronger association" between SV areas and the number rather than the value of permits
issued for new development (see 5, 7 and 8 above). For this to be an "indication" it must be assumed that
lower income households or smaller businesses are associated with less
intensive development. That is not the
case.
Two explanations were advanced for the
relative (not absolute) lack of stimulation by SV rating of more capital
intensive projects: the burden of property taxes may be less important for
higher income households (p.558); taxes may affect firms' location decisions
more than their decisions on size of investment once located (p.583). Neither of these implied that more capital
intensive projects are pre-empted by smaller
projects encouraged by the tax on land - indeed the
data was specifically garnered from LGAs which had plentiful supplies of vacant
and developable land. Rather they were
attempts to explain an apparent shortcoming in the "incentive effect"
of removal of taxes on buildings.
Somewhat inconsistently, the "incentive
effect" was called upon to explain another phenomenon - why SV rating
stimulates industrial building most, residential building least and residential
alterations not at all: "the most
capital intensive uses tend to avoid taxes on capital" (p.604).
That particular advantage of LVT over taxes on buildings appears to be
indisputable. The point is: it is
illogical to find evidence for the "timing effect" of taxes on land
in phenomena which are attributed to dilution of the effect of the removal of
taxes on buildings.
3. Lusht's third
"indication" was the finding (4. above) that the longest established
SV areas had the least intensive residential development. These LGAs, however, have other
characteristics which would be expected to hold down physical and economic land
use intensities. They tend to be the
most prestigious residential areas - to the east and south of the centre,
either not too distant or lining the east coast of Port Phillip Bay (Map 1,
p.529). The SV LGAs as a whole have 11%
higher median household incomes (p.534), and these would be the richest of
them.Old, rich residential neighbourhoods tend to resist subdivision. This fact is overridden in the statistical
analysis by the fact that areas east and south of the centre also attract more
additions to the residential area due to their relative desirability and
superior transport infrastructure (p.543).
We have argued that the "cash drain
effect" of switching to LVT on sleeping owners would produce a temporary
flush of development, and this is compatible with Lusht's conclusion of
"faster but not necessarily more intensive development per unit of
land."Theoretically, the effect on the "economic intensity" of
land use due to switching from SV to NAV categories is not clear-cut, but
physical intensity should be increased (away from the urban fringes) as
illustrated in Figure 6. Social factors
would seem to have dominated the pattern of intensity in Melbourne, however.
The "redistribution effect" may
have reinforced the social factors. We
have argued that it lowers the physical intensity of development in relatively
poor areas in the long run. Relatively
poor areas are more likely to vote for a switch to SV rating because they have
relatively high building value to land value ratios. Therefore, the areas which switch to SV rating see initial
flushes of redevelopment as the poor are enabled to acquire more land, but
redevelopment in the direction of lower physical intensity - detached bungalows
instead of apartment blocks.
But the main factor determining the decision
to switch from NAV to SV rating must be the presence of sufficient
non-residential property in an LGA to shift a significant proportion of the tax
burden off the predominant voter - the residential taxpayer. "The historic `in-to-out' movement of
the tax is consistent with this notion" (p.605). "In" in this statement does not refer to the centre of
Melbourne, however. The inner ring of
10 LGAs around the central LGA has remained almost exclusively NAV. This fact must
tend to bias descriptive statistics on intensity of urban land use in favour of
NAV areas.
Furthermore, inner areas were developed
before town planning constraints, the first of which were uniform building
regulations, post-WWI. More controls followed in
the 1940s and 1960s. There is less site
coverage permitted in the younger,
outer municipalities - which tend to be the site value areas. Differential
incidence of planning regulations may, indeed, be the crux of the matter.
Unusually low ratios of improvements to land
value in older, more prestige and hence more land-intensive areas may help
explain why the residential sectors in four of the most central SV LGAs failed
to resist switches to NAV rating, or dual rating, in the 1980s.
4. SV
rating has demonstrably had a significant intensifying effect in the industrial
sector, and this provides Lusht with his main "indication" of faster
development. But the problem with this
indication is that it does not touch the essence of the "new
view". It provides no evidence
that the areas currently developing fastest will prove to be the least
intensively developed half a century hence.
It only provides evidence that firms prefer SV areas, or that they find
land easiest to acquire in those areas.
The latter conclusion has one proviso. Lusht noted that firms are actively
discriminated against in NAV areas.
Their tax base is "one year's rent" of industrial property,
which was equivalent to 7-10% of market value in the 1980s (p.526), whereas
homeowners' tax base is 5% of market value, which was probably less than one
year's rent in the 1980s. In SV areas
all sectors have the same tax base. So
firms would be expected to prefer SV LGAs on this ground alone. However, the discrimination is less than the
bald figures suggest. 5% of market
value may not have been much less than "one year's rent" in the
residential sector. Certainly, houses
would have had considerably lower rent yields than factories, their imputed
rents not being subject to income tax or profits tax, amongst other factors.