Land Development Tax or equivalent mechanisms (P.147/2011): comments.

STATES OF JERSEY

LAND DEVELOPMENT TAX OR EQUIVALENT MECHANISMS (P.147/2011): COMMENTS

Presented to the States on 21st October 2011 by the Minister for Treasury and Resources

STATES GREFFE

2011   Price code: B  P.147 Com.

COMMENTS

The Minister for Treasury and Resources, as with P.90/2011, opposes this proposition.

The comment presented in response to P.90/2011 still stands and is reproduced in the attached Appendix. The key differences between P.90/2011 and this proposition are, firstly, that of timing, and secondly the proposal to ring-fence any revenues raised for the provision of affordable housing. This does not however affect the main arguments previously set out by the Minister for Treasury and Resources.

In summary –

• The Minister has committed to a review of land development tax as part of a wider review of property taxation which is to be undertaken by the Tax Policy Unit. This will be included in the Tax Policy Unit's work programme in the next  2  to  3 years.  The  review  is  considered  an  important  one  and  will commence in early 2012. Until that work has been done it is not possible to say  that  a  land  development  tax  in  the  form  proposed  by  the   Deputy  is appropriate for Jersey.
• As Oxera acknowledges in the reports helpfully reproduced by the Deputy , Jersey's special circumstances would make it difficult to reproduce an existing tax used elsewhere. Any new tax would therefore be likely to have to be designed from scratch, with due consideration for Jersey's unique position and subject to a full consultation exercise.
• The  Minister  cannot  therefore  commit  to  bringing  forward  legislation  in Budget 2013 or at any time, unless and until it can be shown it is the right tax for Jersey.
• There is no urgency to enact measures because the 2011 Island Plan contains no new rezoning of green-field land for residential development that would deliver the significant uplift in land values to which the proposition refers.
• Nevertheless, the planning system approved in the 2011 Island Plan and in particular the increased use of Planning Obligation Agreements, is capable of delivering  additional  value  to  Island  residents,  in  particular  through  the provision of affordable housing. Oxera has recognised that from an economic perspective this has an effect very similar to a land development tax, in that benefits  pass  from  the  developer  to  the  community.  In  addition,  States Members will be aware that profits derived from property development are already subject to income tax at 20%.

Part (a) – commitment to a taxing mechanism

Although significant work has been undertaken by Oxera, it is clear from their reports that  further  substantial  work  would  be  needed to ensure that  such  a  system  was credible, effective and did not result in unintended consequences.

The main issues identified by Oxera as part of their review include (but are not limited to) –

the particular circumstances of the Jersey housing market need investigating to ensure that any land development tax would actually fall upon landowners rather than be passed on to private households through increased rents and sale prices;

how the tax would be introduced without creating distortions in the market;

what would constitute a taxable event, for example would sales of land which reflect a "hope value" of future rezoning/planning permission be subject to the tax?

how would the "taxable amount" be calculated such that the tax is only due on the increase in the value of the land that has been caused by the rezoning/ planning permission decision? and

when would the tax actually be payable, particularly if the sale of the land is delayed  until  some  point  in  the  future?  This  is  particularly  relevant  in situations where a landowner develops their own land and then lives in the property.

Part (b) – timing

Oxera has acknowledged that this is a complex matter. Detailed work must be carried out before a decision can be made about whether a land development tax or equivalent measure is the right answer for Jersey. It would be extremely difficult to undertake that work and then design, consult on, and legislate for a land development tax, one without equivalent anywhere else in the world, in the 11 months remaining between the debate on P.147/2011 in November 2011 and the lodging of the 2013 Budget in October 2012.

The  Minister  for  Treasury  and  Resources  has  committed  to  reviewing  a  land development  tax  as  part  of  a  wider  review  of  property  taxation  which  is  being undertaken by the Tax Policy Unit. Work will commence in early 2012. This review is considered an important and overdue one, and will be given priority. However, in light of the complexities involved, the Minister cannot commit to bringing forward a land development tax or equivalent charge either in Budget 2013 or at any time unless it is in the best interest of Jersey. Without fully undertaking a review of the wider issue of property taxation, which will take time, it is not yet clear that a land development tax or equivalent measure is the right way of dealing with the perceived problem.

Part (c) – retrospective nature of the tax or charge

In paragraph (c) of the proposition, the Deputy is effectively asking the Minister to introduce retrospective tax legislation – i.e. law which has effect for a period prior to the law coming into force. That is not a feature of Jersey tax legislation, and may have human rights implications which do not appear to have been addressed by the Deputy .

In addition, the 2011 Island Plan contains no new rezoning of green-field land for residential development that would deliver the significant uplift in land values to which the proposition refers.

Part (d) – provision of affordable housing

The   Deputy  suggests  that  the  funds  raised  through  the  introduction  of  a  land development tax mechanism should be ring-fenced and applied to fund the provision of  affordable  homes  for  individuals  on  low  incomes.  The  States  have,  however, recently approved the new Island Plan policies which seek to deliver a sufficient supply  of  affordable  housing,  relative  to  estimated  need,  over  the  next  10 years, involving the use of States-owned land and requiring a proportion of all residential development, above specified thresholds, to be affordable.

Planning obligations will continue to be increasingly employed to deliver affordable housing under the new 2011 Island Plan, which requires a proportion of all new housing, above specified thresholds from 2012, to be affordable. The thresholds set out in the Plan relate to the first 5 years of its operation (rising from 12.5% to 20%), when it must become established as a mechanism and yield results: the proportion of affordable housing yield for the remainder of the Plan period remains to be reviewed.

Supplementary  planning  guidance  on  the  use  of  planning  obligations  is  presently under  review.  Work  is  also  being  undertaken  to  enable  contributions  to  deliver affordable housing to be made in 2012 as set out in the Island Plan. The guidance that will do this will be brought before the States for endorsement in early 2012.

These agreements, as Oxera note in their reports, should have the same underlying economic affect as a land development tax (i.e. a transfer of value from landowners to the community) without the introduction of some of the administrative complexities associated with the taxation approach.

The Minister for Treasury and Resources urges States Members to reject all parts of this proposition.

APPENDIX