Pictured above – a Danish kindergarten paid for in part by Danish property taxes on Scottish land.

The Scottish Government is consulting on the future of the the non-domestic rates (business rates) regime. The consultation closes this Friday 22 February 2013. Business rates are a land and property tax paid by the occupiers or owners of certain types of land and premises used for business. I have blogged before on the inadequacies of the business rates regime here, here and here.

My response can be downloaded as a pdf here and is reproduced below.

PROPERTY TAXES

The system of non-domestic rates is a land and property tax applied to (most) land and property that is used for business purposes. Like other land taxes (council tax, stamp duty land tax etc.) it should be designed on a set of principles that reflect what a land tax is supposed to achieve.The Scottish Government is currently in the process of reforming non-domestic rates, stamp duty land tax and has announced its intention to review the council tax.

All of these plans represent a fairly comprehensive programme of property tax reform. And yet none of these them appear to be informed by any clear set of principles that should underpin why and how land is assessed for taxation. The challenge for reform of property tax is to develop a system that is;

  • coherent, principled and fair
  • treats all land on an equal basis
  • eliminates inefficient allocation of land
  • eliminates speculative gains arising through unproductive activity
  • promotes affordable access to housing and other vital land-based assets.

In this context, it is disappointing to note that no account appears to have been taken of the significant review of the UK taxation system led by Professor James Mirrlees, a Scottish economist, Nobel prize winner and member of the Scottish Government’s Council of Economic Advisers.

The Mirrlees Review concluded that non-domestic rates should be abolished and replaced by a system of land value taxation. (1) The Review observed that,

The economic case for a land value tax is simple, and almost undeniable. Why, then, do we not have one already? Why, indeed, is the possibility of such a tax barely part of the mainstream political debate, with proponents considered marginal and unconventional?

This is such a powerful idea, and one that has been so comprehensively ignored by governments, that the case for a thorough official effort to design a workable system seems to us to be overwhelming.

The economic case for taxing land itself is very strong and there is a long history of arguments in favour of it. Taxing land ownership is equivalent to taxing an economic rent—to do so does not discourage any desirable activity. Land is not a produced input; its supply is fixed and cannot be affected by the introduction of a tax. With the same amount of land available, people would not be willing to pay any more for it than before, so (the present value of) a land value tax (LVT) would be reflected one-for-one in a lower price of land: the classic example of tax capitalisation.

Owners of land on the day such a tax is announced would suffer a windfall loss as the value of their asset was reduced. But this windfall loss is the only effect of the tax: the incentive to buy, develop, or use land would not change. Economic activity that was previously worthwhile remains worthwhile. Moreover, a tax on land value would also capture the benefits accruing to landowners from external developments rather than their own efforts.

The Review concluded by recommending that,

“There is a strong case for introducing a land value tax. In the foreseeable future, this is likely to mean focusing on finding ways to replace the economically damaging business rates system with a land value tax.” (my emphasis).

In an analysis of land value taxation for the Scottish Green Party, I noted that businesses are currently disproportionately taxed on the land and property that they own and/or occupy. Under a system of LVT, business premises would enjoy a 63% reduction in their tax bill with the burden more evenly shared among all those who own land and property. (2)

I therefore suggest that the Scottish Government do two things.

1. Set this review of non-domestic rating in the context of a wider review of land and property taxation.

2. Adopt the recommendations of the Mirrlees Review and replace non-domestic rates (and I would argue Council tax too) with a system of land value taxation.

RELIEFS AND EXEMPTIONS

Notwithstanding the above, if the system of non-domestic rates is to continue, then there needs to be reform of the reliefs and exemptions. Two in particular stand out.

The first is agricultural land. It is unreasonable and unfair that some of the wealthiest owners of land in the UK such as the Duke of Westminster, Duke of Buccleuch and Sheik Mohammed bin Rashid al Maktoum (the ruler of Dubai) pay no business rates on the land they own whilst local shopkeepers, publicans, ambulance stations, fire stations and business premises have to pay 45p in the pound of the rental value of their business premises.

It is further irony that some owners of sporting estates and agricultural or forestry land do pay local taxes. There are around 290,000 acres of land in Scotland owned by citizens of Denmark. This land is subject to Danish property tax at 1% on the value up to DKK 3,040,000 and 3% of the value exceeding this amount. At a rough estimation this should yield the Danish tax authorities around £1.5 milion per year to pay for kindergartens and health centres for Danish citizens. Yet these landowners pay no tax to any Scottish authority to help to pay for public services. (3)

The second is empty industrial buildings. On 28 November 2011, the former co-op building at 120-130 Morrison Street caught fire and resulted in the largest blaze in Glasgow for many years with over 100 firefighters and 16 fire appliances in attendance. The building is owned by Straben Developments Ltd of Belfast who bought it in 2007 for £4.2 million. As an empty industrical building its rateable value is £300,000 but it receives full relief on business rates. This has saved the owner aroudn £675,000 in tax over the past 5 years. And yet the owner still expects Strathclyde Fire and Rescue to put out the fire, Strathclyde Police to police the incident, the Scottish Courts to provide the means to resolve any disputes arising and Glasgow City Council to absorb the costs and inconvenience of having an empty derelict site in the heart of the City. (4)

The system of non-domestic rates is a land tax on non-domestic land and property. It should thus apply to all non-domestic land and property including sporting, agricultural, forestry and empty industrial property.

WHO PAYS?

Non-domestic rates is explicitly a land and property tax. It is therefore open to question why it should be paid by the occupiers of business premises at the rate of 45% of the rental value in addition to the 100% rental value they pay to the landlord. Whilst non-domestic rates contributes towards the costs of local services, it is essentially a national property tax.

The consequence of good local services and amenities is higher land values and thus higher rents. The occupier pays the costs of this in higher rents and higher business rates but the landlord receives all the benefit in higher rents and higher capital value of their property.

Non-domestic rates should be paid by the owner and not the occupier.

(1) Quotes taken from Mirrlees Review Tax by Design, Chapter 16 The taxation of land and property

(2) A Land Value Tax for Scotland, 2011.

(3) The Danish tax authority SKAT report that property tax paid by Danish owned property in the UK in 2011 totalled DKK 5.5 million (£635,000). Since my estimate for the tax due on Scottish land is £1.5 million there is probably quite a bit of tax still to be collected. SKAT is running a campaign to identify Danish owned land in foreign countries and encourage Danish taxpayers to declare what they own.

(4) See further information in previous blogs here and here.

Simon Pia, writing in today’s Scotsman, provides a welcome reminder that property tax in Scotland is in a mess with politicians of most persuasions (he quite rightly excludes the Scottish Greens & their LVT proposals) have avoided this thorny issue in an attempt to curry populist favour with the electorate. Now I believe in democracy, so why is it wrong that politicians should adopt policies popular with the electorate?

Well in this instance, the council tax freeze was implemented as part of the appeal of Labour and the SNP in a Scottish Parliament election. But the Scottish Parliament does not have the power to set council tax rates. In order to implement its promises following the 2011 election the SNP had, in effect, to bribe local authorities to accept the freeze or face cuts in revenue. This corruption of democracy is made possible by the lack of any constitutional protection for local government’s autonomy – a point elaborated on recently by David O’Neil, the President of COSLA. In short, central government has virtually unfettered freedom to interfere in the affairs of local government even to the extent of abolishing it.

So, if local authorities wish to freeze the council tax – fine. But the Scottish Government should have no power to do so or to appeal to voters in national elections on the basis of this brazen interference with local government’s freedoms and powers.

If, in next year’s Federal elections in Germany, Angela Merkel were to appeal to voters in Lower Saxony by promising to freeze their local taxes, she would be up in front of the Supreme Court for breaching Article 28(2) of the German constitution which entrenches the rights of Länder and Municipalities to regulate their own affairs and set their own tax bases. Scotland’s Holyrood parties don’t need to worry about such a fate.

As Simon Pia argues, we need to sort out property taxation. On the face of it the Scottish Government is very active in this area.

It is proposing reform of Stamp Duty Land Tax.

This afternoon in the Scottish Parliament is expected to pass the Local Government Finance (Unoccupied Properties etc.) (Scotland) Bill which will allow the reduction of certain exemptions on business rates.

Tomorrow it will launch a consultation on the future of business rates.

It is committed to a review of the council tax in this Parliament.

But the problem with the Government’s approach is that it is piecemeal. All these reviews are being conducted in isolation from each other. Land and property taxes are far too important to be dealt with on an ad-hoc basis and need to be considered as a whole in relation to the role of land in the economy.

In a previous post, I highlighted the absurdity of an empty industrial building in Glasgow whose owners have avoided over £600,000 in business rates over their 5 years of ownership. When it caught fire in November 2011, Strathclyde Fire and Rescue were expected to put the fire out at great expense and risk to their staff. Strathclyde Fire and Rescue, unlike the property developers that owned the building do pay business rates – over £2 million in just 1 year.

Under the Local Government Finance (Unoccupied Properties etc.) (Scotland) Bill, empty industrial properties like this will continue to be exempt from tax despite their owners taking advantage of local services paid for by others.

Meanwhile, five-a-side football pitches, river-gauging stations, wind farms, lighthouses, ambulance stations and advertising panels on bus shelters are all liable to pay business rates. Public parks, diplomatic missions and cash machines in rural areas, on the other hand are exempt. So too is agricultural land and sporting rights which is why the Duke of Westminster who is one of the richest men in Britain pays nothing on the 95,000 acres he owns in Sutherland (though the estate office and a self-catering unit are assessed). Sheik Mohammed bin Rashid al Maktoum, the rule of Dubai also pays nothing on his 62,000 acre Killilan Estate. So whilst the pub, the filling station and the local hotel all pay their share of local taxes, most landowners pay nothing.

The OECD and the Mirrlees Review have both drawn attention to the benefits and importance of land taxes as far and progressive means of public finance.

Why do Scottish and UK politicians continue to duck the issue?

UPDATE 1235 I am grateful to Ed Iglehart for drawing my attention to this short article he wrote on the topic of local government. It includes a useful link to a report commissioned by the Scottish Office for the McIntosh Commission in 1998 – The Constitutional Status of Local government in Other Countries. Also, in response to a comment by Neil King, worth having a look at this presentation from the Norwegian Fire Service were fire and rescue is the responsibility of the municipalities which cope quite well with the responsibility.

29. August 2012 · Comments Off on Scottish Land & Buildings Transaction Tax · Categories: Finance & Money, Fiscal Policy, Housing, Land Reform, Politics

Scottish Government’s Council of Economic Advisers with Professor James Mirrlees 2nd from right.

The Scottish Government has been consulting on a replacement for Stamp Duty Land Tax (SDLT) – one of the devolved taxes in the Scotland Act 2012. The consultation closes tomorrow (30 August 2012) and I have submitted a response. Yesterday, I spent a stimulating afternoon as a member of a panel discussing property and land tax organised by the Scottish Policy and Innovation Forum where my personal highlight was hearing from Eugene Creighton, Head of Income and Capital Taxes in the Irish Revenue.

As has become the norm in Government consultations, we are invited to answer a set of questions. In the case of this consultation, I declined to answer these questions for the simple reason that they all assume that it is a good idea to replace SDLT with what is being called a Scottish Land and Buildings Transaction Tax. My view is that such a transaction tax should be abolished in its entirety.

I cite in support of my view no less an authority than Professor James Mirrlees, Scottish economist, Nobel prize winner and member of the Scottish Government’s Council of Economic Advisers. Professor Mirrlees led an exhaustive 5-year review of the UK tax system funded by the Economic and Social Research Council and the Nuffield Foundation.

Their view of Stamp duty land tax?

“Stamp duty is among the most inefficient and damaging of all taxes.

There is no sound case for maintaining stamp duty and we believe it should be abolished”(1)

The Mirrlees Review recommends the abolition of business rates, council tax and stamp duty land tax to be replaced by a Housing Services Tax and a Land Value Tax. (2)

My recommendation to the Scottish Government is to conduct a comprehensive review of property and land tax in Scotland rather than the present ad-hoc approach where stamp duty land tax, council tax and business rates are all subject (or soon to be subject) to separate ad-hoc reform processes. There are a range of issues that need to be addressed in addition to purely fiscal matters. These include the important question of local governance and who should be responsible for setting property tax rates.

I also think that the Scottish Government should pay close attention to the findings of a comprehensive review of tax led by one of their own economic advisers which recommends abolition of transactions taxes on land and property. For a full review of their conclusions read Chapter 16 of the Mirrlees Review Tax by Design especially sections 16.3 and 16.4.

UPDATE 31 AUGUST 2012

The above debate is closely linked to the debate on a wealth tax in the UK kicked off by Nick Clegg’s interview in the Guardian on Tuesday. In the Financial Times on Wednesday, former Deputy Governor of the Bank of England, Howard Davies, dismissed the practicalities of the idea but did advocate a land value tax as workable alternative.

UPDATE 2 NOVEMBER 2012

The responses to the SDLT consultation can be viewed here and an analysis is published here.

UPDATE 3 DECEMBER 2012

The Land and Buildings transaction Tax (Scotland) Bill was published on 29 November 2012.

(1) Press Release 14 September 2011
(2) For further details of Land Value Tax, see my October 2010 paper and other material under “Hot Topics/LVT in the main menu.

UPDATE 22 JANUARY 2013

The Land and Buildings Transaction Tax (Scotland) Bill is now being considered by the Finance Committee of the Scottish Parliament. I have submitted evidence. The Scottish Parliament Information Centre has produced a briefing on the Bill in which they make the important point (page 8 of the briefing) that the power that has been devolved to the Scottish Parliament is a power to levy a tax on transactions. I argue that we should abolish such a tax. Such an option is open to Parliament but it would have to raise the lost tax receipts from other sources which is why I argue for a proper review of all property tax and the introduction of a land value tax. That, however, is not going to happen. The Scottish Government are committed to this clumsy and complex tax that produces revenues that are unpredictable, necessitates a new bureaucracy and has been criticised by the Scottish Government’s own economic adviser, Professor Mirrlees.

UPDATE 28 MARCH 2013

The Finance Committee today published its Stage One Report on the Land and Buildings Transaction Tax (Scotland) Bill. My evidence and the views of Professor Mirrlees are dealt with under “Alternative Approaches” paras. 102 – 108. The Committee recognises that the Scotland Act 2012 requires any replacement tax for SDLT to be a tax on land transactions. The Committee has asked the Scottish Government whether it considered the findings of the Mirrlees Review in bringing forward a replacement tax for Stamp Duty Land Tax.

UPDATE 25 JUNE 2013

Scottish Parliament passes the Land and Buildings Transaction Tax (Scotland) Act.

UPDATE 31 JULY 2013

Land and Buildings Transaction Tax (Scotland) Act receives Royal Assent