Uplifts in land values: Land Development Tax or equivalent mechanism(s) (P.90/2011) – comments.

STATES OF JERSEY

UPLIFTS IN LAND VALUES: LAND DEVELOPMENT TAX OR EQUIVALENT MECHANISM(S) (P.90/2011) – COMMENTS

Presented to the States on 4th July 2011 by the Minister for Treasury and Resources

STATES GREFFE

2011   Price code: A  P.90 Com.

COMMENTS

The  Minister  for  Treasury  and  Resources  appreciates  the  sentiment  behind  this proposition and agrees that a land development tax warrants further review. However, for  the  following  reasons  the  Minister  for  Treasury  and  Resources  opposes  this proposition:

- it is completely impractical to design and consult on a form of land development tax in the time remaining before lodging the draft Budget 2012 in September, and

- as  the  Oxera  reports  indicate,  a  poorly-designed  tax  risks  creating  issues (e.g. increased house prices, reduced property development, etc.) whilst raising little revenue.

The Minister for Treasury and Resources commits to review the land development tax option as part of the wider review of tax policy.

Supporting analysis

In the report entitled "Which tax is best suited to Jersey's objectives?" dated February 2005, Oxera state –

"Overall,  there  appears  to  be  scope  for  the  introduction  of  a  DGT (Development Gains Tax1), in the form of either a direct tax or planning gain."

However,  in  both  this  report  and  the  follow-up  report  ("Further  analysis  of land/development based environmental taxes" dated January 2008), Oxera identify a number of issues which would have to be addressed before a development gains tax (or equivalent) could be brought before the States.

As the draft Budget legislation must be lodged by 27th September 2011, this gives a period of only 12 weeks (from the date of the debate) in which to address and find solutions to all of the issues raised by Oxera. The Minister for Treasury and Resources has  been  advised  by  senior  Treasury  officials  that  the  design  of  a  credible  land development tax within this timeframe is completely impractical.

The main issues identified by Oxera and which need further consideration 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 re-zoning/planning permission be subject to the tax?

1 Development gains tax is the term used by Oxera in their reports, land development tax is the

term used in the proposition.

- 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 re-zoning/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.

All of the above points will also determine the impact of the administrative burden and the complexity of the tax.

In paragraph 57 of the Deputy 's report it is stated that –

"The only serious argument against action is that it is difficult to do. In response to this I would simply say firstly, that I am not so sure that it is true.".

This statement is inconsistent with Oxera's conclusions, as evidenced by the points above and the following extract from the 2008 report –

"given that some of the detailed issues arise as a result of the interactions with the planning system itself, and the local market characteristics, it is possible  that  Jersey  would  need  to  develop  more  or  less  from  scratch  a structure that worked for Jersey.".

As Oxera indicate throughout both reports, in order for a land development tax to be successful,  it  must  be  credible  or  landowners  may  hold  back  sales,  planning applications, etc. In this context "credible" means that landowners believe that the tax is going to be in place for the long term and hence cannot be avoided through delaying their  actions.  It  is  essential  that  any  land  development  tax  is  well  designed (i.e. addresses all of the issues raised by Oxera) and forms part of a comprehensive fiscal framework rather than being introduced as a standalone, piecemeal measure.

Work  has  already  commenced  on  the  development  of  this  comprehensive  fiscal framework, including establishment in 2011 of the tax policy unit. The tax policy unit is conducting a review of Jersey's overall tax policy to ensure that it meets the needs of  the  Island  over  the  medium  to  longer  term.  Property  taxes,  of  which  land development tax is just one of a number of measures, are already being looked at as part of this review.

Finally, paragraph 13 of the Deputy 's report indicates that such a tax could raise £25 million  over  a  period  of  years.  This  is  clearly  very  attractive;  however  this calculation should be treated with extreme caution. Firstly, it assumes a tax rate of 50%; it is questionable whether 50% is the "reasonable rate" of tax anticipated by Oxera in  their  2005  report.  As  the  tax rate is  reduced, so is the  potential  yield. Secondly, this yield is calculated by reference to figures in the 2005 report which are out of date.

In terms of anticipated yield, Oxera acknowledge in their 2005 report that –

"it is reasonable to conclude that the revenue potential of a DGT, measured on an average per-year basis, is quite small".

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P.90/2011 Com.

This of course is no reason not to pursue such a tax. However, the figure quoted by the Deputy in paragraph 13 should be treated with caution and should not be considered to be certain or necessarily achievable.

It should also be acknowledged that progress has already been made in the area of Planning Obligation Agreements. Such 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. Planning Obligation Agreements also have the benefit of being able to focus on addressing the particular  externalities arising  out  of  a  development.  Put simply,  they  are  a firm mechanism to ensure that the impacts arising from development are mitigated, or to achieve measures to make development acceptable.

Planning Obligation Agreements have already been used in Jersey to achieve transport improvements and affordable housing, to great success.

The  revised  Island  Plan  has  extended  further  the  potential  scope  of  Planning Obligation Agreements, so that they can be used more often to deliver social housing and  other  benefits  to  the  community  (e.g.  public  art,  new  public  spaces,  etc.) Supplementary planning guidance on the use of Planning Obligation Agreements will be brought forward in due course now that the Island Plan has been approved. In particular the mechanism for affordable housing contributions will be brought before the States for endorsement by the end of 2011.

The  introduction  of  a  land  development  tax  alongside  Planning  Obligation Agreements would result in 2 measures which would impact on the value of land, this duplication and the potential issues it causes would need to be addressed before a land development tax could be introduced.

On the basis that it is not feasible to bring forward the proposals as requested in part (a) of the proposition as part of Budget 2012, it is not necessary to address part (b) of the proposition.