The 80% lien on the land will significantly delay the recovery of the land market, further reduce current market values, and act as a significant barrier to Nama selling the land. In addition to this tax, the Green Party now has a proposal for a ‘site development tax’, whatever that means. I fully support the concept of a land value windfall tax, but such a tax must be fair and practical in the way it works.
What is required in Ireland is carefully crafted comprehensive legislation to tax the improvement (an increase in value) of land rather than imposing ad hoc changes to our current piecemeal system. We need to step back and work holistically on how to integrate a land tax system with our urban planning system and stop applying ad-hoc and timely patches to what is a very complex issue. For several decades, many countries have tried various approaches to capture this improvement with varying degrees of success. We should learn from their experiences and choose a system for Ireland that is appropriate and workable.
The Dutch have a system whereby land is not rezoned unless first acquired by the planning authority. The improvement increased planning authority and is used to pay for services and other infrastructure, including schools, etc. However, the Dutch have, in parallel with their planning system, an elaborate land management process for subdividing and servicing the land and then doling it out to developers that includes CPO powers. Some US states have a system whereby the developer has to prepare an “economic impact analysis” when proposing a development plan and then has to pay all community costs related to their new plan, including schools, police , etc.
The British have had several attempts to capture improvements. The world-renowned bible of amelioration theory is the British Uthwatt Report of 1942. This proposed that all amelioration created by development would go to the state through taxes linked to the granting of planning permission. This proposal was incorporated into the UK Planning Act 1947, but was found to be unworkable in practice and was withdrawn seven years later. The British went back to the Uthwatt principles in 1967 and introduced a central land authority known as the ‘Land Commission’ which was supposed to acquire all development land at existing use value and then transfer it to development at a price that included most of the improvement. . The theory was great, but the execution was horrible.
After three years, the plan was scrapped because it was creating a shortage of new housing. Various other attempts at land taxation were attempted in the 1970s (Development Profit Tax in 1974, Community Land Act in 1975, and Development Land Tax Act in 1976). The British now have an ad-hoc negotiated upgrading system called Section 106, with agreements attached to the granting of planning permission whereby part of the ‘development gain’ is captured as long as it relates to ‘infrastructure’ and the affordable housing costs directly related to development They are currently seeking to modify and regularize this under a community infrastructure tax following the proposals of the Barker Report.
Our own Kenny Report from the 1970s proposed that all development land would be purchased by local authorities at existing use value plus 25%. This again was wonderful in theory, but was recognized to be impractical. Kenny’s concept was re-examined in 2005 by a Dail select committee, which reconfirmed its impracticality. The committee accepted the argument for value recovery/enhancement, but did not decide on a mechanism. Part of the detail of any new comprehensive tax system is that it must be integrated with our development levy system currently in place under our planning laws.
Levies are a form of improvement tax, but are intended solely to recover the actual costs of providing services. These work and work fine. We currently have a second improvement tax in the form of Part V of our Planning Act that requires developers to give up to 20% of their land for social housing at existing use value. This is now becoming a monster, requiring the state to buy homes from developers above market value.
I am advocating that instead of introducing an 80% CGT tax that would simply stop the land market and make Nama’s problem bigger, a comprehensive and properly structured improvement tax system be introduced. A properly structured improvement tax of 30% to 50% on the increase in land value and integrated with or replacing a system of levies would be a reasonable balance achieving the following:
* Ensure a supply of land but not stop the functioning of the market
* Capture not only improvement on land that is the subject of a new rezoning, but also land that may already be zoned.
* Ensure that the funds guaranteed by this tax are used to provide local services, including schools and other social infrastructure.
* Create a system that is accepted as fair by landowners, developers, politicians, and the public and that will stand the test of time.
However, the detailed design of a system will require extensive research. My suggestion is that the 80% tax proposal be suspended and a Peter Bacon-type report on the options, permutations and combinations for a workable land tax system be commissioned and then quickly implemented. Now is the time to do so while land speculation is at an all time low and minds are open for fundamental change.