Use land taxes to eradicate urban blight

ScreenHunter_908 Jan. 17 13.54

By Leith van Onselen

The Australian today notes how the Federal Government is being urged to adopt a US-style scheme to turn areas of urban blight into productive sites and fund new infrastructure:

As the Coalition looks for ways to finance big projects, industry groups are pushing for a close examination of the system used widely in the US to redevelop old industrial areas, where governments provide financial support to projects in anticipation of extra taxes generated from increased economic activity.

Rather than the Government funding renewal projects directly, surely a simpler and more cost effective solution would be to implement a broad-based land tax (in exchange for cuts to stamp duties), in turn penalising land banking and vagrancy and encouraging the more productive use of sites?

A broad-based land tax would also help to make infrastructure investments self-funding for governments, since any land value uplift brought about through increased infrastructure investment (e.g. new roads, trains, etc) would be partly captured by the government via increased tax receipts. In turn, governments would be more likely to facilitate development, rather than act to restrict it in a bid to save on infrastructure costs.

Often the simplest solutions are the best.

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  1. You missed the bit where it said “governments provide financial support”.

    When it comes to entitlement mentality, nothing beats an industry group.

    Of course the land tax is a better idea. So is a carbon tax better than direct action. But with direct action, business gets paid.

    • Businesses who own their sites already pay land tax. Ken Henry actually recommended a reduction in their tax liability in moving to a per square meter rate from total holdings.

      State Land Tax exists. It is one of the very best bases available – ask Milton Friedman. Or Joseph Steiglitz.

      I don’t want to enrich government at the expense of the citizenry. I want taxes that do the least harm. We can’t afford to supply infrastructure to the outer suburbs because taxes fall on wages, not because this is a third world country.

      • DC is your preferred broadbased LVT collected by state or local govt?

        I like the idea of local authorities competing for LVT revenue by increasing land releases.

        Wouldn’t the easiest approach be simply expanding the existing local govt rates system?

        The states could reduce their funding to each local authority by the amount of stamp duty forgone in each local council area.

      • SLT is essentially the same instrument as local government’s Site Value rating method. Ken Henry observed in passing there is an efficiency available in combining the administration of both.

        Local government finances are a mess. They receive subsidies from both fed and state governments. This cockeyed system allows Stonnington Council (South Yarra, Toorak, Armidale) to correctly assert they have the second lowest rates in Victoria. Stonnington’s fully paid off community infrastructure helps too, but they still get fed and state subsidies.

        We know our federal financial architecture is opaque, denying taxpayers any form of accountability. It seems to me the good burghers of Stonnington could at least be self-funding.

  2. “where governments provide financial support to projects”

    If it walks like a subsidy and looks like a subsidy then it probably…?

    Makes about as much sense as Clive’s call to cut income taxes to increase consumption and GST revenue.

  3. It is an excellent idea and the legal framework required to make it happen is fairly straightforward.

    All it requires is for the government to allow a land owner to apply to have defined land brought within a special system of rates or charges that attach to the land regardless of any change in ownership.

    The legislation can provide whether the special rates or charges are payable to a government authority (state or local) or direct to a particular private party. It can also provide whether the rates are fixed or whether they float by reference to unimproved value of the land. Different strokes for different folks.

    With such a system a private developer could fund the development costs of the land or arrange a private bond issue. The government might itself decide such an investment would be worthwhile and fund it by issuing govt bonds.

    Any buyers of the land (and subsequent buyers) would know the size of the ongoing charges and thus the value they are willing to pay for the property would reflect that knowledge. Importantly, they would know that failure to pay the charges could result in the seizure and sale of the property just as happens when rates and other government charges on property are not paid.

    Naturally, the developer would still need to make intelligent and efficient investment decisions as buyers may prefer to buy land from a developer who made better decisions on what services to provide (and quality) that result in lower ongoing special charges and better quality facilities.

    Considering the desire for SMSF to access safe investments in infrastructure, investments in services for new developments where the income stream is secure are likely to be very popular.

    This is not a complicated idea.

    As it would be voluntary it will avoid the political problems of trying to introduce a system of land taxes on land that has already been developed. People can hardly complain if new land is sold at lower cost but with some ongoing charges for the first 20-30 years of ownership.

    Though as people become more aware of the benefits of the approach in bringing new land to market at lower up front cost to the first buyer the general resistance to land taxes might lessen.

    Importantly, once the legal framework is in place and familiarity increases government may offer buyers of existing property the choice of paying a lump sum of stamp duty or instead bringing the purchased land within the ongoing charge system.

    Surely, those bright young things at Macquarie Bank etc with their executive suites full of well connected retired political insiders could draft up some suitable legislation and get the ball rolling.

    Of course reducing the red tape and constraints on developing new land is an essential part of the process.

      • State Land Tax is very simple, and I am surprised at pfh’s complex dissertation.

        SLT cannot be avoided or evaded. It cannot be passed on to tenants. It is quite transparent.

        It is calculated on the market value of land, ideally annually (quarterly in a falling market is a good idea). When prices rise, so does the tax. When they fall, so does the tax. A powerful automatic stabilizer.

        An ideal solution is to simply exchange Stamp Duty for SLT. Stop taxing transactions and tax holding. The former is highly regressive and imposes substantial deadweight costs stifling labor mobility and the marginal propensity to buy and sell. (there, Escobar, a partial explanation)

      • Hmmm, 13 paragraphs is hardly war and peace but perhaps I tried to address too many issues at the same time.

        The idea of land tax is certainly simple but to suggest the politics are simple is wishful thinking. If they were we would not be still discussing stamp duties and listening to endless commentators claim there is no money to fund the development of new land.

        By introducing land tax gradually by first dealing with new land development (and by dealing with utility funding of new development at the same time) and the voluntary decisions of buyers may increase the complexity of the transition but a bit of complexity and a policy that happens is preferable to simplicity that sits on a shelf because thousands of owners of existing land owners (who have no stamp duty to pay) fear a land value tax.

      • Introduce land tax? No. Use the existing SLT, already calculated and collected. Just remove the exemptions.

        A form of the gradualist process you outline is currently being undertaken by the ACT government. We watch this transition with interest.

        Overall, the exchange of SD for SLT confers savings on all landowners except the owners of prestige sites (Melbourne’s leafy inner east).

        We avoided the GFC. Tax reform offers another step forward in prosperity and we can do it all by ourselves.

  4. This concept could be applied to the whole of the Northern Territory.

    Our economic development is being held back by excessive cost of housing (entry level is around $600k)

    Despite having millions of acres of land our government says that it has no funds for power, water, roads and sewerage infrastructure.

    Funds those costs and the NT will be able to increase its GST and tax base, creating a sustainable state, something the NT is not at the moment.

    The government has to invest if it wants to make money.

  5. Economically it would make sense but it is political suicide.

    I assume the land tax would apply to the “place of residence” which is currently excluded from land tax in NSW.

    The only way the government could get it through is by eliminating other taxes. Preferably the most inefficient taxes like Payroll Tax. Otherwise a broadening of the Land Tax base would just be seen as a politically unpopular tax grab.

    • Yes,

      Land tax is a hard sell because those that it will affect the most (large land owners) are also the ones who are most capable of campaigning that their personal pain is truly the pain of every man.

      A voluntary approach is more likely to avoid this very real political problem.

      Buyers of existing land can elect to move their purchase to a land tax approach and avoid paying stamp duty in the process. If the govt is hungry for a lump sum they can always sell the stream of land tax payments on the property for the required number of years.

      Some discount may be necessary to ensure that the buyer is likely to pay less in land tax over 20 years than they would by paying a stamp duty lump sum now.

      Developers of new land can elect to bring the newly developed land within in the system with the quarterly charges levied comprising a land tax component and a component for the payment for the utilities or services installed during development. The lower cost of new blocks of land will be a compelling selling point for developers.

      Eventually, they might consider expanding the system to other existing land on a compulsory basis (perhaps starting with deceased estates) but at least when they get to that point the mechanics will be in place and a significant proportion of the population will be familiar with it and less susceptible to fear campaigns.

      Chances are that relying on buyers keen to dodge a stamp duty lump sum and developers of new land will be sufficient.

      • Sounds like more complex regulations and a bureaucratic nightmare!

        But agree with your overall point that any increase in land tax will have to be offset with tax reductions elsewhere.

      • Compared to most of the hijinx that regulators dream up this would be at the easier end of the scale.

        Yes, off setting existing taxes is essential.

        One legitimate concern about land value taxes is that once govt get a taste for them they will develop an addiction to them. It will be critical to encourage competition between local government areas to ensure people can vote with their feet and move out of poorly run high taxing locations.

  6. Beyond solving urban blight, note that as owners get busy developing their sites that they had kept vacant or otherwise under-utilized, awaiting a higher offered price, they’d then attract investment and create employment. The new development in-fills cities, making walking, riding, and pedaling more efficient and cars less so. Good for the body and for the environment. Also, people’s demand for land in cities is so high, government could also easily fund a dividend. Policymakers could also delete other taxes, since they hobble production and drive down location values. More than just the policy of a city, geonomics could be the policy of an entire nation, emanating from