The issue of rezoning land from agricultural use to housing or other commercial use is not just one local to Jersey. Other jurisdictions have looked to find mechanisms to claw back some of the “instant” change in value of the land.
One of the lessons we can see elsewhere, in Ireland and in the UK, is that rezoned land taxes often freeze development while the landowners wait for a change of government to repeal the previous legislation. This does not happen with other measures, such as Victoria's growth areas infrastructure contribution (which applies to mainly urban areas) or Vienna's land use controls which specifies that two thirds of the rezoned land must be used for what we would call affordable housing, but does not seek to tax the rezoning value of the land.
Ireland
The Irish Examiner (Jan 2019) notes that:
Once land is rezoned for housing — nominally in the interests of the common good — the landowner sees the value increase exponentially. The muck of agricultural land transforms overnight into the gold of housing land. In this, the property-owner reaps massive profits on the back on the alleged common good.(1)
Attempts have been made to address the issue in Ireland:
In 1973, following a detailed study of the planning process, High Court judge John Kenny presented a report to Cabinet. The main recommendation was that rezoned land should be valued at the agricultural value plus 25%. Apparently, the Kenny Report was passed around Cabinet, generated a few comments, and was then simply filed away. Garret Fitzgerald, who was a minister at the time, said years later that he couldn’t recall why the report had not been properly examined with a view to acting on it. For the following three decades, any time the matter was raised, the stock response was that there were constitutional problems with implementing such a regime. (1)
In 2004, a study of the Kenny Report by an all-party Oireachtas committee on the Constitution concluded, on foot of a surfeit of legal advice, that there was no constitutional problem with implementing it. et, despite now being told that there would be no constitutional problem with an overhaul of the system of rezoning, nothing was done. Finally, in 2009, on foot of the collapse of the housing market, the Green Party managed to convince its government partner, Fianna Fáil, to take drastic action. An 80% windfall tax was imposed on rezoned land. (1)
Then, once the show was back on the road in 2014, the Fine Gael/Labour Government dropped the windfall tax. The reasoning offered by Finance Minister Michael Noonan was that the tax had not generated any revenue. How would it, at a time when no houses were being built? The reality was that interests such as the Construction Industry Federation had lobbied hard for the change and Mr Noonan and his colleagues knew on which side the party’s bread was buttered. (1)
A Look at Vienna
However, in 2019, the Dublin Inquirer noted that alternatives were possible and looked at Vienna, which didn’t put a tax in, but restricted the land use so that two thirds had to be for subsidised housing:
Resurrecting the Kenny Report isn’t the only possible way forward, though. Ryan, of the Workers’ Party, said she would like to see a new zoning category that would specify that the land should be used for affordable housing – rather than just any kind of housing. “That means that the land would stay quite cheap and the city council would buy up the land in order to build public housing on it,” says Ryan. (6)
Cahill of NESC said that is something that has been done internationally. Vienna has struggled in recent times, he said, to keep its housing affordable. “They brought in a new zoning category called subsidised housing,” he said. “So when an area is zoned subsidised housing, for all the developments within that area, two-thirds of the floor space has to be subsidised housing.” (6)
The Case of Australia
In Australia, a windfall tax was also proposed in the state of Victoria in 2021. The leader of the opposition, Mr Davis, opposed it:
The Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 is an omnibus bill. There are a number of significant parts to this bill, and I am going to step through those bit by bit. The purpose of the bill is to impose a windfall gains tax on the increase in the value of land resulting from rezoning. (2)
The point I would make about this windfall gains tax is it is a dirty big tax on family homes. That is what it is—it is a dirty big tax on family homes. Developers will pay more tax, which will be passed through and increase the costs of new homes for young families. It is amazingly hard already. It is the case that the government’s new tax will seek to clobber every new development, including many that have gone through a significant process already, and they will take this 50 per cent tax on any increase in value that is alleged to have occurred through any rezoning process. (2)
Now, I note that there is a growth areas infrastructure contribution (GAIC) that is in operation in the growth suburbs already, and I note that the government seeks to impose this windfall gains tax everywhere else in the state. One of the amendments that we will move is that we will try and cap the level of tax at the same level as the GAIC. The GAIC is lower than what is proposed in this amendment here, and we will seek to cap it at that level. (2)
He goes on the argue that this will affect supply significantly:
There will be less supply coming through, and what supply does come through will be more expensive, and there will be a compounding effect of less supply allowing much greater increases than would otherwise be the case.(2)
In reply, Ms Terpstra noted:
As announced as part of the 2021–22 budget, the government is introducing a windfall gains tax on rezoning decisions that create a land value uplift of more than $100 000. Currently landowners can receive significant windfall gains when the value of their land increases due to government actions, including government decisions to rezone land. Existing state taxation mechanisms do not adequately capture a share of these value uplifts. The windfall gains tax will ensure a fair share of the value generated from government decisions to rezone land is invested into infrastructure and improved services which will benefit the wider community. (2)
The windfall gains tax will apply to rezoning decisions that create a land value uplift of more than $100 000. An effective tax rate of up to 50 per cent of the total value uplift will apply where a value uplift is greater than $100 000, ensuring rezonings with smaller value uplifts are not affected. Rezoning decisions before 1 July 2023 are not subject to the tax. For a rezoning with a value uplift between $100 000 and $500 000, the tax will apply at a marginal rate of 62.7 per cent on the uplift above $100 000, and above $500 000 a tax rate of 50 per cent will apply to the total uplift. (2)
Brendan Coates, director of economic policy at the Grattan Institute, wrote when the policy was announced:
This is a good move. It should reduce incentives for corruption when planning applications are decided. As a tax, collecting unearned windfall gains is extraordinarily efficient, so efficient it shouldn’t even be called a tax but a charge for a change in allowable land use, which is what it is. (3)
He also said that:
It’s a myth that charges for changes in land use raise home prices. Australian evidence suggests those lucky enough to own land before it is rezoned pay the charges rather than pass them on to eventual homebuyers, which might be why they object. And future developers will pay less for their land, because the expectation of windfall gains won’t be built into the price. (3)
The ACT Government [Australian Capital Territory]has charged 75% for land value uplift for three decades without scaring away developers. Tax hikes are rarely popular. But they will become increasingly necessary as states try to repair their budgets after the COVID crisis. (3)
UK – Some Pointers
A report on the Parliament site gives some useful comments:
Professors Crook, Henneberry and Whitehead noted three reasons why land values increase: infrastructure investment improving the attributes of locations; increased prosperity leading to additional spending on housing and other goods, resulting in higher land values; and planning consent making it possible to change use to carry out physical development. They explained that, in England, land values are explicitly captured only in the third of these cases. This involves capturing some part of the difference between the value of the land in its existing use and its market value in its proposed new use. (4)
Many also stressed the distributional argument for capturing land value: that it is not fair that such significant profits, arising in the main from public policy decisions, should accrue to a small minority of landowners and that those who are disadvantaged by development generally do not receive some element of compensation. The Town and Country Planning Association told us that, “this is principally an issue of equity”. The Royal Town Planning Institute agreed, telling us they believed there should be a fairer way of sharing land value uplift between landowners and the community. Similarly, the Centre for Progressive Capitalism asked us to consider whether it was fair for significant profits, arising from public policy decisions, to accrue to a minority of landowners, arguing that this was at odds with a fundamental principle of our economic system, which rewards productive economic activity:
The Committee in its deliberations around land value capture should seek to understand why it is that the current land market enables a handful of private individuals and investors to earn £9.3bn of monopoly profits each year due to the productive work of others and local authorities changing land use.(4)
The Centre for Progressive Capitalism estimated that landowners currently retain an average of 75% of the uplift in land values arising from the granting of planning permission.
Development charges and betterment levies in the UK
There have been a number of attempts since 1945 to introduce some form of national development taxation. Of those that are no longer in effect, or were never implemented in full, these included:
The ‘Development Charge’, introduced by the Town and Country Planning Act 1947, which was effective from 1948 to 1951. It imposed a 100% tax on the difference between the value of a property with planning permission and the existing use value;
The ‘Betterment Levy’, introduced by the Land Commission Act 1967, which was in force between 1968 and 1970. Payable on the sale or lease of the land, or following “material development”, the Betterment Levy was initially charged at 40%—due to rise to between 60% and 80% in subsequent years—of the development value when land was sold, leased or realised by development, although there were a significant number of exemptions and allowances.
The Development Gains Tax, introduced in 1973, and the subsequent ‘Development Land Tax’, introduced by the Development Land Tax Act 1976, which was in force between 1976 and 1985, and taxed the ‘realised development value’ land upon disposal. Local authorities were additionally given extensive powers of compulsory purchase through the Community Land Act 1975, with the compensation due to landowners being the market value less any Development Land Tax.
The Mandatory Tariff, which was proposed in 2001, but not implemented, and the Optional Planning Charge—a proposed flat fee as an optional alternative to a Section 106 agreement—which was only partially implemented in 2004.
The Planning Gain Supplement (PGS), which followed a recommendation in Kate Barker’s 2004 Review of Housing Supply that infrastructure associated with new development be financed by capturing land value uplift at the point at which planning permission for a proposed development is granted. The PGS was not implemented in part because of opposition from the industry and insufficient support from local authorities.
I t is relevant to note that each of these attempts were not as successful as had been hoped. Dr Peter Bowman and Andrew Purves told us these strategies had:
[ … ] failed due to the political nature of their implementation - by successive Labour governments - which meant that landowners did not put forward land for development, in the belief that a change of government would bring about a repeal, in which assumption they were correct.(4)
Deloitte told us that these betterment levies “stymied development, proven difficult to administer efficiently, and have been repealed within a short period of time”.(4)
Given the failure of previous efforts to implement systems to capture uplifts in land value, it is important to learn the right lessons to ensure that future policies have far greater success and are not similarly repealed within a short period of time. As highlighted by the GLA and TFL, it is clear that, to be successful, future taxes or charges on uplifts in land value will need to have cross-party political support.(4)
The Town and Country Planning Association highlighted that, “it is clear that a future betterment tax would have to be set at a socially acceptable level”.58 Hugh Ellis said that the ‘Development Charge’, introduced by the Town and Country Planning Act 1947, set at 100%, “was always bound to fail—if you set taxation rates at 100%, they tend to”, and that it had “effectively killed off the speculative market in land” The CLA argued that, where betterment taxes were set too high, “the rational course of action for most landowners was to do nothing and so avoid triggering an obligation to pay the levy”.(4)
They conclude:
Any new land betterment tax will need to allocate land value increases fairly between central government, local authorities and landowners, without undermining incentives to sell or risk holding up the development process. Consideration should also be given to a mechanism for the redistribution of revenues between high and low-value areas. Where new land value capture mechanisms reduce incentives for landowners to participate in the development process, local authorities will require effective CPO powers to ensure that communities continue to benefit from developments in their areas.(4)
Appendix: A note on the GAIC in Australia
The growth areas infrastructure contribution (GAIC) was established to help provide infrastructure in Melbourne’s expanding fringe suburbs. It is a one off-contribution, payable on certain events, usually associated with urban property developments, such as buying, subdividing, and applying for a building permit on large blocks of land. Generally, the GAIC does not apply to events involving land under 0.41 hectares
There are four trigger events for this: Transfers of title, Subdivisions, Building Permits and Significant Acquisitions. The GAIC is imposed when the first of these events takes place and affects the land until it is paid. Once fully paid, the GAIC recording over the land title is removed and the contribution will not apply to any subsequent GAIC events. The charge is not on the value of the land, but by the area of the land and is index linked.
References
(1) https://www.irishexaminer.com/opinion/columnists/arid-30900238.html
(2) https://www.govtmonitor.com/page.php?type=document&id=1914848
(3) https://www.sro.vic.gov.au/growth-areas-infrastructure-contribution
(4) https://www.architectureanddesign.com.au/features/features-articles/the-lesson-for-australian-property
(5) https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/766/76605.htm
(6) https://dublininquirer.com/2019/03/20/will-rezoning-industrial-lands-lead-to-affordable-homes
Ireland
The Irish Examiner (Jan 2019) notes that:
Once land is rezoned for housing — nominally in the interests of the common good — the landowner sees the value increase exponentially. The muck of agricultural land transforms overnight into the gold of housing land. In this, the property-owner reaps massive profits on the back on the alleged common good.(1)
Attempts have been made to address the issue in Ireland:
In 1973, following a detailed study of the planning process, High Court judge John Kenny presented a report to Cabinet. The main recommendation was that rezoned land should be valued at the agricultural value plus 25%. Apparently, the Kenny Report was passed around Cabinet, generated a few comments, and was then simply filed away. Garret Fitzgerald, who was a minister at the time, said years later that he couldn’t recall why the report had not been properly examined with a view to acting on it. For the following three decades, any time the matter was raised, the stock response was that there were constitutional problems with implementing such a regime. (1)
In 2004, a study of the Kenny Report by an all-party Oireachtas committee on the Constitution concluded, on foot of a surfeit of legal advice, that there was no constitutional problem with implementing it. et, despite now being told that there would be no constitutional problem with an overhaul of the system of rezoning, nothing was done. Finally, in 2009, on foot of the collapse of the housing market, the Green Party managed to convince its government partner, Fianna Fáil, to take drastic action. An 80% windfall tax was imposed on rezoned land. (1)
Then, once the show was back on the road in 2014, the Fine Gael/Labour Government dropped the windfall tax. The reasoning offered by Finance Minister Michael Noonan was that the tax had not generated any revenue. How would it, at a time when no houses were being built? The reality was that interests such as the Construction Industry Federation had lobbied hard for the change and Mr Noonan and his colleagues knew on which side the party’s bread was buttered. (1)
A Look at Vienna
However, in 2019, the Dublin Inquirer noted that alternatives were possible and looked at Vienna, which didn’t put a tax in, but restricted the land use so that two thirds had to be for subsidised housing:
Resurrecting the Kenny Report isn’t the only possible way forward, though. Ryan, of the Workers’ Party, said she would like to see a new zoning category that would specify that the land should be used for affordable housing – rather than just any kind of housing. “That means that the land would stay quite cheap and the city council would buy up the land in order to build public housing on it,” says Ryan. (6)
Cahill of NESC said that is something that has been done internationally. Vienna has struggled in recent times, he said, to keep its housing affordable. “They brought in a new zoning category called subsidised housing,” he said. “So when an area is zoned subsidised housing, for all the developments within that area, two-thirds of the floor space has to be subsidised housing.” (6)
The Case of Australia
In Australia, a windfall tax was also proposed in the state of Victoria in 2021. The leader of the opposition, Mr Davis, opposed it:
The Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 is an omnibus bill. There are a number of significant parts to this bill, and I am going to step through those bit by bit. The purpose of the bill is to impose a windfall gains tax on the increase in the value of land resulting from rezoning. (2)
The point I would make about this windfall gains tax is it is a dirty big tax on family homes. That is what it is—it is a dirty big tax on family homes. Developers will pay more tax, which will be passed through and increase the costs of new homes for young families. It is amazingly hard already. It is the case that the government’s new tax will seek to clobber every new development, including many that have gone through a significant process already, and they will take this 50 per cent tax on any increase in value that is alleged to have occurred through any rezoning process. (2)
Now, I note that there is a growth areas infrastructure contribution (GAIC) that is in operation in the growth suburbs already, and I note that the government seeks to impose this windfall gains tax everywhere else in the state. One of the amendments that we will move is that we will try and cap the level of tax at the same level as the GAIC. The GAIC is lower than what is proposed in this amendment here, and we will seek to cap it at that level. (2)
He goes on the argue that this will affect supply significantly:
There will be less supply coming through, and what supply does come through will be more expensive, and there will be a compounding effect of less supply allowing much greater increases than would otherwise be the case.(2)
In reply, Ms Terpstra noted:
As announced as part of the 2021–22 budget, the government is introducing a windfall gains tax on rezoning decisions that create a land value uplift of more than $100 000. Currently landowners can receive significant windfall gains when the value of their land increases due to government actions, including government decisions to rezone land. Existing state taxation mechanisms do not adequately capture a share of these value uplifts. The windfall gains tax will ensure a fair share of the value generated from government decisions to rezone land is invested into infrastructure and improved services which will benefit the wider community. (2)
The windfall gains tax will apply to rezoning decisions that create a land value uplift of more than $100 000. An effective tax rate of up to 50 per cent of the total value uplift will apply where a value uplift is greater than $100 000, ensuring rezonings with smaller value uplifts are not affected. Rezoning decisions before 1 July 2023 are not subject to the tax. For a rezoning with a value uplift between $100 000 and $500 000, the tax will apply at a marginal rate of 62.7 per cent on the uplift above $100 000, and above $500 000 a tax rate of 50 per cent will apply to the total uplift. (2)
Brendan Coates, director of economic policy at the Grattan Institute, wrote when the policy was announced:
This is a good move. It should reduce incentives for corruption when planning applications are decided. As a tax, collecting unearned windfall gains is extraordinarily efficient, so efficient it shouldn’t even be called a tax but a charge for a change in allowable land use, which is what it is. (3)
He also said that:
It’s a myth that charges for changes in land use raise home prices. Australian evidence suggests those lucky enough to own land before it is rezoned pay the charges rather than pass them on to eventual homebuyers, which might be why they object. And future developers will pay less for their land, because the expectation of windfall gains won’t be built into the price. (3)
The ACT Government [Australian Capital Territory]has charged 75% for land value uplift for three decades without scaring away developers. Tax hikes are rarely popular. But they will become increasingly necessary as states try to repair their budgets after the COVID crisis. (3)
UK – Some Pointers
A report on the Parliament site gives some useful comments:
Professors Crook, Henneberry and Whitehead noted three reasons why land values increase: infrastructure investment improving the attributes of locations; increased prosperity leading to additional spending on housing and other goods, resulting in higher land values; and planning consent making it possible to change use to carry out physical development. They explained that, in England, land values are explicitly captured only in the third of these cases. This involves capturing some part of the difference between the value of the land in its existing use and its market value in its proposed new use. (4)
Many also stressed the distributional argument for capturing land value: that it is not fair that such significant profits, arising in the main from public policy decisions, should accrue to a small minority of landowners and that those who are disadvantaged by development generally do not receive some element of compensation. The Town and Country Planning Association told us that, “this is principally an issue of equity”. The Royal Town Planning Institute agreed, telling us they believed there should be a fairer way of sharing land value uplift between landowners and the community. Similarly, the Centre for Progressive Capitalism asked us to consider whether it was fair for significant profits, arising from public policy decisions, to accrue to a minority of landowners, arguing that this was at odds with a fundamental principle of our economic system, which rewards productive economic activity:
The Committee in its deliberations around land value capture should seek to understand why it is that the current land market enables a handful of private individuals and investors to earn £9.3bn of monopoly profits each year due to the productive work of others and local authorities changing land use.(4)
The Centre for Progressive Capitalism estimated that landowners currently retain an average of 75% of the uplift in land values arising from the granting of planning permission.
Development charges and betterment levies in the UK
There have been a number of attempts since 1945 to introduce some form of national development taxation. Of those that are no longer in effect, or were never implemented in full, these included:
The ‘Development Charge’, introduced by the Town and Country Planning Act 1947, which was effective from 1948 to 1951. It imposed a 100% tax on the difference between the value of a property with planning permission and the existing use value;
The ‘Betterment Levy’, introduced by the Land Commission Act 1967, which was in force between 1968 and 1970. Payable on the sale or lease of the land, or following “material development”, the Betterment Levy was initially charged at 40%—due to rise to between 60% and 80% in subsequent years—of the development value when land was sold, leased or realised by development, although there were a significant number of exemptions and allowances.
The Development Gains Tax, introduced in 1973, and the subsequent ‘Development Land Tax’, introduced by the Development Land Tax Act 1976, which was in force between 1976 and 1985, and taxed the ‘realised development value’ land upon disposal. Local authorities were additionally given extensive powers of compulsory purchase through the Community Land Act 1975, with the compensation due to landowners being the market value less any Development Land Tax.
The Mandatory Tariff, which was proposed in 2001, but not implemented, and the Optional Planning Charge—a proposed flat fee as an optional alternative to a Section 106 agreement—which was only partially implemented in 2004.
The Planning Gain Supplement (PGS), which followed a recommendation in Kate Barker’s 2004 Review of Housing Supply that infrastructure associated with new development be financed by capturing land value uplift at the point at which planning permission for a proposed development is granted. The PGS was not implemented in part because of opposition from the industry and insufficient support from local authorities.
I t is relevant to note that each of these attempts were not as successful as had been hoped. Dr Peter Bowman and Andrew Purves told us these strategies had:
[ … ] failed due to the political nature of their implementation - by successive Labour governments - which meant that landowners did not put forward land for development, in the belief that a change of government would bring about a repeal, in which assumption they were correct.(4)
Deloitte told us that these betterment levies “stymied development, proven difficult to administer efficiently, and have been repealed within a short period of time”.(4)
Given the failure of previous efforts to implement systems to capture uplifts in land value, it is important to learn the right lessons to ensure that future policies have far greater success and are not similarly repealed within a short period of time. As highlighted by the GLA and TFL, it is clear that, to be successful, future taxes or charges on uplifts in land value will need to have cross-party political support.(4)
The Town and Country Planning Association highlighted that, “it is clear that a future betterment tax would have to be set at a socially acceptable level”.58 Hugh Ellis said that the ‘Development Charge’, introduced by the Town and Country Planning Act 1947, set at 100%, “was always bound to fail—if you set taxation rates at 100%, they tend to”, and that it had “effectively killed off the speculative market in land” The CLA argued that, where betterment taxes were set too high, “the rational course of action for most landowners was to do nothing and so avoid triggering an obligation to pay the levy”.(4)
They conclude:
Any new land betterment tax will need to allocate land value increases fairly between central government, local authorities and landowners, without undermining incentives to sell or risk holding up the development process. Consideration should also be given to a mechanism for the redistribution of revenues between high and low-value areas. Where new land value capture mechanisms reduce incentives for landowners to participate in the development process, local authorities will require effective CPO powers to ensure that communities continue to benefit from developments in their areas.(4)
Appendix: A note on the GAIC in Australia
The growth areas infrastructure contribution (GAIC) was established to help provide infrastructure in Melbourne’s expanding fringe suburbs. It is a one off-contribution, payable on certain events, usually associated with urban property developments, such as buying, subdividing, and applying for a building permit on large blocks of land. Generally, the GAIC does not apply to events involving land under 0.41 hectares
There are four trigger events for this: Transfers of title, Subdivisions, Building Permits and Significant Acquisitions. The GAIC is imposed when the first of these events takes place and affects the land until it is paid. Once fully paid, the GAIC recording over the land title is removed and the contribution will not apply to any subsequent GAIC events. The charge is not on the value of the land, but by the area of the land and is index linked.
References
(1) https://www.irishexaminer.com/opinion/columnists/arid-30900238.html
(2) https://www.govtmonitor.com/page.php?type=document&id=1914848
(3) https://www.sro.vic.gov.au/growth-areas-infrastructure-contribution
(4) https://www.architectureanddesign.com.au/features/features-articles/the-lesson-for-australian-property
(5) https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/766/76605.htm
(6) https://dublininquirer.com/2019/03/20/will-rezoning-industrial-lands-lead-to-affordable-homes
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