"Labour (along with similar proposals from the Greens and Lib Dems) proposes to introduce a Land Value Tax. (LVT)—hereafter called the “garden tax”, which will be based on three per cent of the value of land for each property.
“For many homeowners this could represent a massive increase in their annual tax bill and force the sale of gardens in order to reduce bills."
Daily Express, 30 May 2017
Labour isn't committing to an extra tax on people's gardens. Its manifesto only promised:
"We will initiate a review into reforming council tax and business rates and consider new options such as a land value tax."
A Land Value Tax is a tax on the potential value of land itself, ignoring anything that's built on it. It isn’t being proposed as an additional tax, but as a potential replacement for council taxes and/or business rates.
Some media outlets have dubbed it a 'garden tax', as the Daily Express did.
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There's no reason to assume enthusiastic gardeners would be badly hit by switching systems
Since the value of land itself often boils down to its location, some fear that homeowners with urban gardens would lose out if council taxes or business rates were replaced by a Land Value Tax. The Economist noted the risk that “urban homeowners with gardens” would lose out, since “the tax will encourage them to build on them, which is good for the housing stock but bad for the environment”.
Media reports this week also cite a study by Oxfordshire County Council, now over a decade old, which found that “normally, the winners are those plots that have little or no garden and the losers are those where houses stand in large grounds and where maximum development is permitted by the planning regime”. The report also said that the balance of winners and losers from switching systems could be altered, depending on how the system was designed.
The devil would be in the detail. It's possible that a new system could account for the difficulties of home-owning gardeners by including exemptions for some kinds of residential property, for example, or protections for particular groups as the new system was phased in.
The government did similar kinds of things during the recent revaluation of business rates. It offered transitional protection and reliefs for specific types of business, like pubs.
3% is the wrong rate to be quoting (so is any other figure)
The Daily Express is wrong to say that Labour is proposing a Land Value Tax “based on 3% of the value of each property”.
This figure seems to come from a report hosted on the website of Labour Land, a campaign group which supports the idea of a Land Value Tax.
One of the report's authors told us that the estimates and the strategy explored in it weren’t endorsed by either Labour Land or the Labour Party. The report had been published in 2015 with the header “DRAFT Please do not quote without permission”.
3% would be the wrong figure to quote from it anyway, given that we’re discussing the potential impact on homeowners.
Its authors estimated that councils would initially have to set an average rate of 0.85% for owner-occupiers and 3% for industrial and commercial property. It suggested that different councils would set different rates, so that they collected the same revenue as they had through business rates and council tax.
The idea will probably be on the table at some point, whichever party comes to power
The business rate and council tax system have been widely criticised for being unfair and inefficient, and Land Value Tax is an idea that’s been around for over 150 years.
The idea has also been promoted by economists across the political spectrum, including the free-market Adam Smith Institute, the left-leaning Centre for Labour and Social Studies, the non-aligned Institute for Fiscal Studies and the Economist, a liberal magazine.
International organisations like the IMF and the OECD are also fans, as was the economist Milton Friedman, whose ideas underpinned Margaret Thatcher’s economic policies.
The Conservatives have also promised a review into the business rates system. So it seems likely that the idea will be considered in a review at some point, whichever party comes to power.
The idea is also put up for consideration in the Liberal Democrat manifesto and the Green party suggests a trial of the tax.
There would be winners and losers
There would be winners and losers from replacing Council Tax with a Land Value Tax, but that doesn't mean that you would necessarily lose out compared to the other options.
One option is continuing with the current system. At the moment Council Tax bands are based on property prices that are over 25 years out of date and charge people in smaller houses relatively more.
An alternative is reforming the current council tax system so that it reflects current property prices more accurately. That would also create a lot of winners and losers, in the same way that the recent business rates revaluation did.
The IFS think tank, which supports the idea, summarises that:
"Moving from a property-based tax to a land-based tax would also create numerous gainers and losers. This is politically difficult. But then a major revaluation exercise just to bring current [council] taxes up to date would also create winners and losers, which is perhaps why politicians have avoided doing it."