Resourcing public revenue

American Journal of Economics and Sociology, The, Nov, 2005

THE PROBLEMS AND issues identified in Chapter 1 and elaborated in the succeeding chapters are demonstrably real. They are not going away. Assuming a will to confront them, to what extent is remedial action possible? Is there any solution, or a complementary mix of solutions, which could resolve the central problem of "unjust enrichment" and all the consequential problems associated with private land value profits--and enable revenue for public purposes to be derived without recourse to taxes that penalise labour and enterprise and invite avoidance and evasion?

Some possibilities can be appraised and discarded. Draconian enforcement of town planning schemes could reinforce their integrity and eliminate irresponsible changes in land use, particularly in areas of environmental significance and on the urban fringe. It could be assisted by facilitating citizen-initiated court or tribunal proceedings to compel local government councils to implement and comply with their town plans. But it presupposes an unduly optimistic degree of commitment on the part of their political masters. More importantly, bona fide changes in land use would still have to be made from time to time to meet changing social and economic circumstances. More rigorous town planning would not of itself do anything to prevent windfall profits accruing to landowners.

This is not to say that town planning schemes could not be presented more intelligibly to the citizens whose communities they are intended to benefit. No Australian metropolitan plan has ever inspired as much public interest--and political commitment--as Sir Patrick Abercrombie's 1944 Greater London Plan, which appealed to the beliefs and aspirations of ordinary people and was written in language they could understand. Nor is it to say that there is necessarily anything wrong with developer-led, market-responsive urban expansion, provided it takes place within well-conceived strategic planning guidelines. But, whether town planning relies upon broad guidelines or detailed prescriptive controls, the town planning process will remain fundamentally flawed if planning permission confers unearned profits upon landowners.

A betterment levy could solve this problem. A monetary betterment levy (or an equivalent contribution of infrastructure) could capture the full amount of the increase in land value following planning agency approval of development applications or planning scheme variations permitting a more intensive use of land. This would preserve the integrity of town planning schemes, permit open public participation in land use proposals, mitigate the inflationary impact of land value increases, and safeguard environmental resources from speculative development applications generated by an expectation of land value profits.

In other words, a 100 percent betterment levy, or the equivalent in development contributions, would solve many of the problems where the circumstances involved a clear-cut and instantaneous change of land use. There are past and present examples of betterment levies in operation (currently in the ACT, and for several years in NSW in the early 1970s, and overseas notably in Johannesburg and elsewhere in the Transvaal). A betterment levy involves before and after valuations when land use changes take place. There are no major administrative problems, particularly where a system of rating on unimproved land value is already in operation (as in most urban areas in Australia and New Zealand). A 100 percent betterment levy would capture funds for community infrastructure (and for compensating "worsenment"), and to that extent it would relieve the pressure on other forms of revenue raising. It would also reduce the price of land. By eliminating the windfall profit otherwise accruing to the vendor, the price of land would be commensurately reduced. And while any proposal for a betterment levy would attract a Pavlovian response from the development industry, an established and predictable betterment levy system would in fact benefit developers by removing the uncertainty and unpredictability associated with the present practice of negotiating an arbitrary contribution of infrastructure with local government councils.

However, while the logic of a betterment levy is impeccable, a betterment levy does not solve all the problems. There are some circumstances in which unearned land value increases are not amenable to capture by a levy on the difference between before and after valuations. For example, an expectation of a change of land use may evolve over time so that, by the time the formal change is officially approved, the value of the land will have already increased in anticipation. At the time of formal approval the margin between the before valuation and the after valuation will therefore have narrowed and be considerably less. It will not reflect the true increase in land value. A typical case would be in an inner urban area where conversion of low density residential land occupied by detached houses to higher density residential land is likely to be anticipated before a change of use is formally approved by the planning agency. Thus, while a decision approving a change of land use from, say, residential to commercial or industrial may result in an immediate and readily measurable increase in land value, a decision approving increased intensity of an existing land use may only confirm an increase in land value that has already been in prospect over an unspecific time.