LAND VALUE RATING FAQ

ed-dodson2FREQUENTLY ASKED QUESTIONS – Ed Dodson

What is LVR?

“Land Value Rating” is an alternative means of raising revenue to pay for public goods and services. Every parcel or tract of land – whether agricultural, timber, mineral or urban – has some potential annual rental value. This rental value is created not by any individual owner but by aggregate demand (i.e., the fundamental need we all have to occupy land and use natural resources). Under “Land Value Rating” this value would be collected, while exempting from taxation the value of all buildings and other produced assets owned by individuals or organizations.

Why should I support LVR?

The move to Land Value Rating will, for most households, be of immediate financial benefit. Most property owners own only the parcel of land beneath their residence. A large segment of the population owns no land at all. In time, the cost of acquiring land for residential homes and businesses will begin to come down, creating a far more affordable economic environment than exists today.

Would we be better off with LVR?

For centuries, one of Europe’s most important exports has been her people. When economic opportunity is limited, people make the hard decision to emigrate. Great landed interests across the continent saw to it that the funds needed to pay for government would come from sources other than from themselves. People who actually produce goods or provide needed services to others were and are today overburdened with taxation. A shift to Land Value Rating as a primary source of public revenue would relieve the productive sector of the economy of its heavy tax burden. Producers would be in a far better position to compete in the global economy, providing new employment opportunities for the people.

Why do you say taxes harm the economy?

The impact of taxes on the economy is best explained this way. The higher the taxes imposed on goods and services the less will be the supply of goods and services generated. When taxes are too burdensome on businesses, they pick up and move to where taxes are much lower. And, when businesses leave people who do so leave as well. Those left behind are the elderly and the unskilled, who must now be supported by a social welfare system struggling to find the needed revenue. Land Value Rating solves this problem because neither production nor profits are subject to taxation. One is merely required to contribute to the community the annual rental value of land held.

Why do you say LVR encourages the economy?

When owners of land are required to compensate the community for the privilege granted to them (i.e., to have exclusive use of part of the community’s land), they will develop the land to its highest and best use in order to generate sufficient revenue to cover the Land Value Rating charge, other living expenses, and whatever other desires they have. Imagine the synergy created when every owner of property is rewarded for what they actually produce rather than being allowed to sit on vacant land for decades or generations whilst the remainder of the population must compete with one another for living space.

How can you claim LVR is self-funding?

The need for land is a need shared by all of us. As our numbers increase so will the rental values of all forms of land. Market forces will determine how much anyone is willing to pay for the right to control locations in our towns and cities, farmland or lands that are best developed as wind farms – whatever the highest, best use might be. As we remove the burden of taxation from property improvements, from the wages of workers, from the profits of businesses, and from our commerce, land values are certain to rise. At some point in the future, it is entirely possible that all of the revenue needed by government will come for land values and Land Value Rating.

How can LVR prevent the next recession?

The causes of economic downturns – of recessions or even depressions – are complex, to be sure. What a close study of history reveals, however, is that at the heart of every such downturn is a crash of the property markets. The depth and duration of the crash is directly related to the rise in land prices. In turn, these “land price bubbles” are driven by intense speculation, worsened by imprudent bank lending practices. The next recession is, sadly, already in the making. The adoption of Land Value Rating may mitigate the harshness of the next recession but will not prevent it from happening. That said, only by the full adoption of the Land Value Rating system will the main cause of our boom-to-bust economy eventually disappear.

I cannot afford to buy a home. Why will LVR be good for me?

Affordability of a residential property is based on the relationship between several important factors: (a) household income; (b) household savings; (c) the price of the property; and (d) the terms of available mortgage financing. The adoption of the Land Value Rating system may not immediately bring down the land cost component of a residential property, but this is something we can expect to occur over time. What will occur is that some owners of land having no intention of developing will need to put the land on the market, in competition with others. Thus, developers will be able to acquire land at lower costs, enabling them to construct new and more affordable housing units.

I rent my home. Why will LVR be good for me?

Yes, but it may take some time, as developers begin to acquire land at lower prices and construct new apartment buildings. As the supply of rental housing increases, the owners of these units will compete with one anther for tenants, and this will tend to keep apartment rents affordable.

I own my home. Will LVR be good for me?

Yes. Even if the Land Rating System is implemented over a period of years, you are likely to experience a lower annual property tax bill. Of course, this depends on how much land you own and whether your property is located in a high-demand area or not. Most owners of residential property on small land parcels will experience a reduction on their annual property tax under Land Value Rating.

I cannot find employment. Will LVR help?

Land Value Rating does not produce overnight change. What it does do is get the dominoes falling in the right direction. Businesses will expand and begin to hire more people as more and more public revenue comes from Land Value Rating and less and less from other sources.

My community wants to buy land. How will LVR help?

Over time, Land Value Rating will bring down the price of land so that communities can acquire land for parks, schools, public transit rights of way, and other public amenities. Here is what happens in a market system. Every parcel or tract of land has some potential rental value. Even when the owner does not lease out land to others to collect this value, it is there. Market forces capitalize this real or imputed rental value into a potential selling price. Land Value Rating brings this value into the community treasury, leaving less to be capitalized. The result is that land prices will over time fall to low levels.

I feel dislocated and marginalised.  Would LVR help this?

People feel this way when they have little or no hope for a better life, for a better future. Land Value Rating does not promise immediate changes, but where it has been adopted – even in a moderate form – constructive changes have occurred and lives of many people have improved.

I live in a remote part. Why will LVR be good for me?

One of the great challenges to government in remote regions is finding the revenue to pay for even basic public goods and services. Land Value Rating will generate a good portion of this needed revenue, while encouraging the owners of land to use their land in a manner that provides employment to others.

I live in the city. Why will LVR be good for me?

Every city has a central business district and residential neighbourhoods where the demand for land is great. At the moment, most of this value is retained by the owners of land. Land Value Rating changes this dynamic in favour of the productive segments of an urban economy. You will gradually have more employment choices, more housing choices, higher wages and better benefits. Why? Because investment in job-creation and economic activity will be encouraged and the cost of leasing or acquiring land will begin to fall.

I run a business. Why will LVR be good for me?

If you own property, including land, your building value and other business equipment will no longer be subject to taxation. Your financial obligation to the community ends once you have satisfied your Land Value Rating payment. If you lease the building in which you operate your business, your “landlord” will find it difficult to increase your leasing fees each year because of the competition from other landlords. If, over time, other taxes are reduced or eliminated, your profit margins will certainly benefit.

I am an employee. Why will LVR be good for me?

Wages and benefits offered to people who work for others is based on supply and demand. What Land Value Rating gradually achieves is a situation where there is always a greater demand for people than the number of people in the workforce. In short, Land Value Rating is key to the elusive full employment society.

I am a farmer. Why will LVR be good for me?

Fewer and fewer actual farmers today own the land they farm. Farmers pay an annual ground rent to a landowner, then pay taxes to the community on the value of any buildings and farm equipment they own, and on the revenue generated by the sale of crops. When crop prices are high, the landowner will demand a higher ground rent. Will the landowner’s ground rent charge be reduced when crop prices fall? Under Land Value Rating, the annual rental charges rise and fall with changes in the market rental values of land. Whether the farmer owns or leases land, others assets and income will be outside the tax base.

How does LVR bring disused industrial sites back into productive use?

We should not expect miracles. In some former industrial cities, the current highest, best use of vacant land is “urban agriculture”. Investment tends to occur in the neighbourhoods with easiest access to the central business district. What is called “infill” development will begin to occur in these neighbourhoods, increasing outward from the center over time. Some manufacturing businesses will return, those needing large tracts of land to operate will eventually find newly abandoned locations desirable. That said, location decisions by manufacturing business are based on many variables. Executives are looking for both quality of business environment and quality of life assets provided by the community and region.

Public services are struggling. How will LVR help?

Initially, Land Value Rating will provide the revenue needed to maintain existing public goods and services. Over time, the revenue base will increase to support investment in new amenities and services.

People in my town tend to die early. How will LVR help?

We know that the health of people is closely related to household income, education and general economic security. Land Value Rating stimulates economic growth in a manner that encourages sustainable use of land and natural resources. When adequate public revenue is available to pay for high quality education and health care, as well as clean air and clean water, people live longer and in better health.

My town has poor schools and health services. How will LVR help?

Land Value Rating will generate a significant increase in public revenue over time. How they public revenue is used is a decision for citizens and public officials. Hopefully, there will be a shared recognition for investment in quality education and health services among the list of desired public goods and services.

I live in a gated community. Why will LVR be good for me?

Land Value Rating will be good for you if you care about the well-being of your fellow citizens. You enjoy privileges without having to compensate your fellow citizens. All that you are being asked to do is to pay your fair share of the costs of government based on the value of the landed privileges you enjoy. You then have the choice of whether to continue treating your landholdings as a gated community, or generating revenue by putting the land to a higher economic use.

Where did LVR come from?

For most of history, governments collected “ground rents” from those who were granted use of land. As land ownership became privatized and the political power of landed interests grew, less and less public revenue came from ground rents. Yet, there have always been efforts by civic-minded leaders to return the source of public revenue to its original, and fairest, source. In the modern era, the arguments are found in the writings of many political economists and moral philosophers, including Adam Smith. During the late 19th century, Liberals in Britain (influenced by the American writer Henry George) began a serious campaign to reintroduce the full collection of ground rents. They almost succeeded early in the 20th century with what was called “The Peoples’ Budget” under Lloyd George’s leadership. Labour later added Land Value Rating to its platform. Thus, the agitation to adopt Land Value Rating has been a long and arduous campaign to finally bring about a full implementation of a just system of property rights and public revenue.

Why are there different names for LVR?

The concept is often referred to as “Site Value Rating.” Others use the term “Location Rental Charges.” In the United States, economists and policy analysts generally use the term “Land Value Taxation,” or “Site Value Taxation.” Also, in the United States, where a growing number of local governments impose a higher rate of taxation on assessed land values than on assessed improvement values, the term “Two-Rate Property Taxation” is used.

Why do you claim LVR is not a tax?

If one accepts the definition of taxation as the public taking of private property or earned income, the public collection of the rental value of land is not taxation. The reason is that the rental value of land is not produced by individuals; it is, by definition, public revenue (much of which is now being privately retained).

What are ‘deadweight losses’?

This term refers to the negative impact on the production of goods and delivery of services causes by the imposition of taxation.

What is the ‘unearned increment’?

As population increases and the demand for access to land increases, the rental value of land also increases. To the individual owner of land, this is an “unearned increment” that should be publicly collected under the Land Value Rating system.

What is so bad about living off ‘unearned income’?

For the individual who enjoys this source of income, the benefits are very real. If one owns a large enough tract of land or valuable enough parcel of land in a city, the unearned income – the annual ground rent payment received – may be sufficient to live off of without having to produce any goods or provide any services. The issue is a moral one. Should any person have the right to claim what others produce without themselves producing anything of value in exchange?

What is a ‘rent-seeker’?

This term is used by economists to describe economic behaviour that seeks financial reward or advantage without the delivery of compensating value. While its use today has been focused on the financial markets (e.g., derivatives, collateralized mortgage obligations, etc.), investment in land is also a primary “rent-seeking” activity. As owners of residential properties, we do not generally think of ourselves as land owners. Yet, what increases in value over time is not a house but the land on which our house sits. The value of a housing unit is, with rare exceptions, the cost to replace the house, less whatever depreciation has occurred.

Why link land ownership with social responsibility?

A fundamental moral principle to consider is that the earth is the birthright of all persons equally. No one is able to survive without access to land and to the planet’s natural resources. For those of us who believe in human rights, how land is owned and utilized is a fundamental moral and social question.

Who was Adam Smith and why did he support LVR?

Adam Smith is described as the father of political economy. He authored what was the most influential treatise on the subject written in the 18th century, titled “The Wealth of Nations”. Smith understood that the rental value of land existed independent of what owners did or did not do to improve the land they held. He wrote that this rental value was uniquely appropriate as a source of public revenue. Less than a century later, Smith’s views were echoed and expanded on by another Scot, Patrick Edward Dove.

How does LVR help tackle pollution, global warming and the misuse of resources?

Land Value Rating by itself is not a panacea. But, it is essential for the processes of change to achieve meaningful results. When individuals are required to compensate societies at the full potential annual rental value of landed assets they control, they will have every incentive to use those resources wisely. This does not eliminate the need for sound environmental regulation, however. Government could impose a “zero pollution” on production, which would tend to lower what potential users are willing to pay in rent for access. However, in exchange for lower rental payments received, governments would no longer need to allocate financial resources for environmental cleanup and land remediation.

How does LVR reduce crime and addiction?

To the extent Land Value Rating stimulates full employment, the instinct of people to cooperate with one another, to live in harmony with one another, will expand dramatically. Moreover, to the extent addition is related to individual depression and the absence of hope for a decent human existence, addition to drugs, alcohol, tobacco and other harmful behaviours can be expected to decline dramatically.

How does LVR address radicalisation and war?

This is perhaps the most difficult of questions to address. The primary reason for all wars is the conquest of territory and control over needed natural resources. We remain even today tribal in our allegiances. Progress is in part defined as a lessening of the cultural differences between peoples. Colonialism and imperialism attempted to impose external domination over conquered peoples, leaving a legacy of hatred that cannot be easily erased. Two forces are working in to the interest of human progress. One is migration and the formation of new, pluralistic societies. This takes time, at least several generations for common cultural norms to evolve. The other is the expansion of trade and commerce between peoples, which increases understanding and cooperation, lessening the potential for disagreement to cause war to occur. What Land Value Rating will do is create a welcoming environment for newcomers because the economy of scarcity will be replaced by an economy of plenty. What Land Value Rating will also so is stimulate trade and commerce to the benefit of all participants and not simply the one percent who today derive much of their income and personal wealth as beneficiaries of “rent-seeking” privileges.