“Labour says land value tax would boost local government budgets”

“Labour is considering a tax on land values as a way of boosting local government budgets, shadow chancellor John McDonnell has said.

In a sign of the party’s confidence about growing public interest in a fresh approach to managing the economy, McDonnell said cuts to council spending were so severe that it might now be possible “to have a rational debate”.

At the last election the Tories called the proposal, which was included in Labour’s manifesto as part of a review of council funding, a “garden tax” that could force home owners to sell up. The Greens and the Liberal Democrats are also interested in the idea.

A land tax, where a percentage of the value of the land is levied annually is popular with some economists, who say it is a logical approach to taxing individual wealth. But many politicians across the political spectrum are alarmed at the thought of introducing a new tax. A new tax on wealth that creates losers as well as winners would inevitably be a hard sell.

But McDonnell told the audience at the event organised by the Resolution Foundation, where he set out Labour’s plans to boost household incomes, that the crisis in the funding of local services may have opened a window of opportunity.

“I think we are at a stage where the decline in terms of funding to local government and the consequential effect on local services – many of them are in crisis – means, I think, that people are now willing to consider more radical solutions than they have in the past.”

Councils are hamstrung by government rules and cannot raise council tax significantly without a local referendum, which would be costly to run and would have an uncertain result. But the tax – introduced nearly 30 years ago to replace the unpopular poll tax – has not been uprated since then. It leaves many councils struggling, with too small a tax base to meet all their obligations.

Other councils are on the brink of catastrophe. Northamptonshire county council announced earlier this month that it could only afford to meet its statutory obligations. On Thursday the accountants KPMG, who audit the council’s budget, said it did not balance and was therefore illegal.

The local government association has said that by 2020 many councils would struggle to provide some public services, partly because of botched central government reforms. By 2020, central government funding will have been cut by more than 50% since 2010.

Council tax is regressive because it is levied on a notional value that has no relation to household income or to the market value of the property. However, unless it is regularly updated, a land value tax would share some of those weaknesses. But it would be directly related to the wealth of the homeowner and it would capture the rapid growth in house values that have been a financial boost to those who own property.

One council, Westminster, one of the richest in the country, is now proposing that wealthy residents pay a voluntary additional contribution, ringfenced to help offer improved services to rough sleepers and young people.

There is increasing support in policymaking circles for a land-value tax. Tony Blair’s thinktank, the Tony Blair Institute for Global Change, backed the idea in a policy paper published at the end of last year. ”

https://www.theguardian.com/politics/2018/feb/22/labour-says-land-value-tax-would-boost-local-government-budgets

2 thoughts on ““Labour says land value tax would boost local government budgets”

  1. A land value tax has the same disadvantage as council tax that it doesn’t necessarily relate to income or wealth. It would be fairer to tax capital gains on people’s main properties at the point of sale – it is scandalous that income is taxed and property gains are not.

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    • Martin, if only it was as simple as that. I don’t personally see it as “scandalous” that CGT is not applied to gains on your home, but then again I don’t have a dogma or rule it out either. But we do need to look at the practicalities…

      1. Applying capital gains tax when sell your house would be very detrimental to the property market. If people had to pay CGT when they sold, that would leave significantly less to fund their next home, and people would be much more likely to stay where they are and not move.

      2. It might be possible in theory to have some sort of scheme to roll over the CGT to a future time to keep the property market going, but if you do that there would have to be clear rules about when CGT becomes liable and given the huge number of potential scenarios where it should or should not be crystalised, this would be a nightmare that would likely become unenforceable.

      3. Equally, you probably could not apply CGT retrospectively because the costs of improvements esp. extensions would need to be offset and without having known in advance people may not have kept details of these costs.
      Applying CGT to people’s gains on their homes would have to be a long term project.

      We could, however, apply CGT to:

      a. Corporate gains – which would help avoid people using property ownership companies as a means of avoiding CGT on properties that are not main homes, and could also apply to other types of corporate capital gains.

      b. Mansion CGT – apply CGT to properties worth (say) over £2m (index linked).

      I also wonder whether buy-to-let landlords also pay CGT as they should – perhaps a crack down in that area would yield some additional tax payments.

      Or we could simply reverse the tax cuts for the rich and for corporations that have already been made – they were made on the basis of trickle-down, but this has not happened and the rich have simply trousered the savings.

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