02 May 2010
What the report says …
Levying higher taxes on larger holdings discourages investment in land by institutional investors in rental housing. Land tax rates should be based on the value of a given property, so that the tax does not discriminate between different owners or uses of land.
Reflecting the principle that taxes for revenue-raising purposes should be on broad and immobile bases, increased use should be made of tax on unimproved land values.
Land value taxes should not include building values or be triggered by transactions as both of these can affect the use of land, which reduces the efficiency of the tax, and can be inequitable. Land value tax rates and thresholds should generally not be varied to achieve vertical equity objectives, which are better targeted through the personal tax and transfer system.
As land can shift in and out of the tax base depending on who owns it, it is unlikely that the tax will be fully reflected in lower land prices for residential property. The portion of tax that is not reflected in lower land prices is borne by investors through lower returns, or by their renters through higher rent. This means the tax, to some extent, has been passed forward to workers and the owners of capital.
Further, it is likely that, in the long run, much of the burden of the tax is shifted to renters, as rents adjust to ensure that investors achieve an adequate return. This may be inequitable, as renters generally have low income and wealth.
Several features of current land taxes, in particular their narrow base, make them less efficient and fair than they could be. By levying the tax at increasing rates on an entity’s total holding, land tax discourages large-scale investment in land, particularly for rental housing. Because owner-occupied housing is exempt, the burden of land tax on residential investment properties is probably borne by renters through higher rents.
Land tax should no longer be based on aggregate land holdings. As well as discouraging large-scale investment in the rental property market, this approach does not appropriately target the economic rent from land.
What the Urban Taskforce says …
State governments should take a hard look at themselves on the issue of land tax, following the findings of the Henry review. Developers holding land for re-development are bearing high land taxes, which are exacerbated by delays caused by the planning system.
