Land Development Tax or Equivalent Mechanisms

STATES OF JERSEY

LAND DEVELOPMENT TAX OR EQUIVALENT MECHANISMS

Lodged au Greffe on 23rd August 2011 by the Deputy of St. Mary

STATES GREFFE

2011   Price code: C  P.147

PROPOSITION

THE STATES are asked to decide whether they are of opinion

1. to agree  that,  to further  the  aim  of  a  fair  tax system,  a  land development tax or an equivalent charging mechanism or mechanisms of any kind should be introduced to raise revenue for the States from any significant uplift in the value of land when it is rezoned and/or when planning permission is granted;
2. to request the Minister for Treasury and Resources to bring forward for approval  the  necessary  legislation  as part  of  the  Budget  2013 proposals to give effect to the decision;
3. to agree that it is the wish of the Assembly that the proposals in paragraph (a) should also be designed to have the effect of capturing uplifts in the value of land arising between the date of this debate and the  coming  into  force  of  the  necessary  legislation  as  part  of  the Budget 2013 and to request the Minister for Treasury and Resources, having  sought  appropriate  advice,  to take  the  necessary  steps  to achieve this objective if possible;
4. to request the Minister for Treasury and Resources, in consultation with the Minister for Housing, to bring forward for approval a method for ring-fencing the revenue raised for the provision of affordable housing, whether for renting or for purchase.

DEPUTY OF ST. MARY

REPORT

NOTES:

A:

The Treasury has already done substantial work in this area.

I have read 2 reports by Oxera. The first is entitled "Which tax is best suited to Jersey's objectives?" dated February 2005, whose Appendix 2 is entitled "The use of land development taxes to raise revenue". I refer to this Appendix in what follows as "Oxera 2005".

The  other  is  entitled  "Further  analysis  of  land/development  based  environmental taxes" dated January 2008. I refer to this report as "Oxera 2008".

Both reports are reproduced in the Appendices to this report.

B:

The previous attempt at putting this proposition was ambushed by the Minister and his ally. The only changes to the proposition are that –

1. the year that the Minister should introduce this "painless" form of revenue- gathering is 2013, and
2. I have added paragraph (d) which says that the money should be allocated to support our efforts to provide affordable housing for our residents.

C:

The report is virtually unchanged – the arguments still stand and are as strong as ever. The main changes are from paragraphs 49 to 58.

Summary

1. This proposition is about basic fairness. When land is rezoned or receives planning permission, its value increases by between 80 and 200 times. This windfall gain goes only to landowners, and only those landowners whose land is developed.
2. These huge gains have been going to the owners of land for years. It is government policy which has created these astronomical land values, and it is administrative decisions and political decisions, taken as part of the Planning process,  which  decide  just  who  it  is  who,  in the   Deputy  of   Grouville 's memorable phrase, "hits the jackpot".
3. Like many other issues, this has been discussed for years. I believe it is high time that the government shares in that enormous windfall, so that the revenue can be used for the good of all Islanders. I have added paragraph (d) to make it more focussed – the revenue from the increase in land value will go back into providing rented housing or housing for purchase that is more affordable.

Introduction

4. I have long felt, and I am not alone, that this is an issue which deserved to be tackled.  But  the  immediate  spur  to action  was  the  Island  Plan  and  the 10 amendments to the Plan which sought to change the zoning of pieces of land, namely amendments 2, 4, 7, 10, 12, 17, 18, 29, 35 and 36. There was also Amendment 5 from the Deputy of St. Martin , which opened the door to health-related development in the countryside zone.
5. Most of these amendments sought to zone land for residential, commercial or community use, this last with "the associated development" needed to pay for it, presumably residential also. Two amendments sought to go in the opposite direction and would have had the effect of land passing from a Built-Up Area zoning to a Green Zone zoning (amendment 11) or reverting from a residential zoning to agricultural use (amendment 35).
6. This proposition is emphatically NOT about the rights and wrongs of any of these zoning proposals, or of any other zoning proposals or planning permits. It  is about  the  fact  that  in all  these  cases  the  land  involved  changes enormously in value, and the implications of this.
7. At the stroke of a planner's pen, followed by a political decision, a resident becomes  very,  very  wealthy.  And  in the  Island  Plan  debate,  we  States members have the power to make – or in the case of amendments 11 and 35 to unmake – millionaires.
8. I think any right-thinking and sensible States member must see that there is something quite wrong about this. It should make us feel distinctly uneasy, when  the  financial  rewards  of  getting  a  permit  for  development  are  so enormous and are going to the very few.
9. The situation is blatantly unfair, and cries out to be remedied. The existence of this huge capital gain is due to the policies of government.1 It is therefore entirely right and proper that a large percentage of the capital gain should revert to the government which created the policies which led to the uplift in value, to be used for the benefit of all the people of Jersey.
10. Members should also consider a wider point about the corrosive effect of these vast financial gains on the process of government in Jersey. They cast a shadow on all discussions and decisions concerning land use. Inevitably the question:  "who  owns  this  land?"  (in  other  words –  "who  will  become  a millionaire?") is bundled in with the question: "is this the right place to put this sheltered housing/retail outlet/etc.?" However much one might like to believe that the 2 questions can be held apart in people's minds, itis pretty clear to me that in practice they cannot.

1 These policies include an ever-increasing population, a supply of land restricted by planning

policies, and the presence of wealthy purchasers in the market in sufficient numbers to react to scarcity by simply opening their cheque-books a little wider. I am not in this proposition making any comment whatsoever about these policies, nor should the debate go there. I am just pointing out that as a matter of fact this is the policy environment.

11. Let  us  be  quite  frank  about  this.  The  sweet  smell  of  corruption,  or  the suspicion of corruption, is bound to be present when financial gains on such a scale are in the balance. I am NOT casting aspersions on those involved in any one decision, or indeed on those who brought amendments to the Island Plan. I  am just making  it absolutely  clear  to members  that  this  situation  is intolerable, it cannot be reconciled to good governance and it has to change.

Scale of proposal and potential yield

12. In Oxera 2005, page 57 we read –

"Calculations by the States of Jersey estimate the overall uplift in the value of land recently reclassified from agricultural land to housing development land. Although subject to some uncertainty, the overall uplift in value amounted to around £32 million. In addition, a second phase of potential rezoning in the future is estimated to create a further uplift in value of up to £18 million.

On  this  basis,  and  given  that  the  value  of  land  is  estimated  to  increase between 80-fold and 200-fold as a consequence of rezoning, there would appear to be significant scope for raising some revenues from the taxation of these gains. (Footnote: the uplift amount (80x or 200x) depends on whether the  land  is  reclassified  for  building  of  "Category A"  or  "Category B" properties.)"

13. On an uplift of £50 million a modest tax of 50% would yield £25 million over a period of years – a sum not to be sniffed at. And at this rate of tax the landowners would still receive an unearned windfall of £25 million.
14. I will repeat it: this windfall is entirely due to government decisions and government policy and it is entirely appropriate that the enormous financial gain involved should come back, at least in part, to government.

How and why land increases in value

15. On the first page of Oxera 2008 we read at paragraph 4 –

"The value of the land that is to be used for housing is determined by the difference between what the resulting house/flat etc can be sold (or rented) for and the costs of actually transforming the land into housing – i.e. the building and other associated costs. Housing land values prior to actually building the housing are therefore the residual of the price that can be charged for the finished housing and the costs of actually doing the construction (and paying for anything else that is required to make the transformation)."

16. In other words, if you take the sale price of the finished house and deduct the building  and  other  costs  of  making  the  house,  and  an  amount  for  the builder/developer's profit, then you get the value of the land as building land.
17. Members should note that the price of land does not "drive" the cost of housing. If it did, then it might be argued that a land tax could affect the end- price of housing. On the contrary, it is the end-price which can be achieved which determines the value of the land.

18. The end-price reflects scarcity, and the willingness to pay of enough people who are in the market for buying a house. This proposition is about finding a way to distribute a vast private unearned gain to the public good.

"Something must be done"

19. There is general agreement that these enormous gains exist and that they are grossly unfair.
20. "I am fully committed to the principle of re-distributing some of the windfall profits from land re-zoning."

Senator P.F.C. Ozouf , first (and therefore prepared) answer to oral question from Deputy T.M. Pitman of St. Helier , Hansard, 21st September 2009

21. "I think, clearly, we are all of one mind in this Assembly on wanting to extract the value out of the planning system."

Senator P.F.C. Ozouf , later answer to oral question from Deputy T.M. Pitman of St. Helier , Hansard, 21st September 2009

22. "Last July we rezoned 60 vergées of our countryside and developers made millions overnight on the back of that States decision. If we are hard up for cash, why did not Treasury bring in windfall taxes before that decision? The value of the rezoned field in my Parish alone changed from an agricultural field worth maybe £45,000 to a building development site now worth millions, yet the States derived not one penny in tax from developers over a transaction worth millions and millions and we sit back and claim to be so hard up for cash that we have to tax the pensioner on the already expensive bread and milk and tax them on keeping themselves warm in their homes. Is that fair? Can we understand why people are losing faith with this Government? The land development levy was promised years ago, both in the 2005 rural strategy and in the fiscal option strategy approved on 12th May 2005 and still we have nothing."

The Deputy of Grouville , in debate re GST exemptions, P.28/2009, Hansard, 31st March 2009

23. "I want to be very clear, I do not want to see new taxation, with the possible exception of a green field rezoning levy."

Senator F.E. Cohen, in debate re GST exemptions, P.28/2009, Hansard, 31st March 2009

24. And finally, in the Fiscal Strategy Review June 2010 Green Paper on personal taxation, there is no opposition in principleto the tax. Indeed the tax is listed as one of a number of options which is "under consideration" This proposition seeks  to move  the  land  development  windfall  tax  along  from  the  "under consideration" pile (and it is true that much work has been carried out on it) to the "being implemented" pile.

Practical issues – supply of land

25. There are 2 issues which might concern members. One is the fear that the supply of might land dry up. This is what Oxera have to say on this subject (Oxera 2005, A2.2.2. paragraph 3) –

"However provided the tax is credible[2] in the long term, and it still leaves some profit for the landowner, it is unlikely that a DGT (Development Gain Tax) would restrict the willingness of landowners to sell their land, and therefore, that of developers to bring forward new developments."

26. Of course this is not to say that itisdesirable for there to be a continuous stream of new developments. It just states the fact that a DGT (Development Gain Tax) would not in itself cause the supply of land to dry up.

Practical issues – effect on house prices

27. Some  members may fear that there would be an upward effect on house prices. However, this should not be the case. First, there is the competitive brake on prices which results from the fact that most of the housing market is a second-hand market, and this acts as a constraint on the prices which can be charged for new housing, even in Jersey! In Oxera 2008 we read (Oxera 2008, page 1, last paragraph) –

"In economic terms, new and second-hand housing are in the same economic market, which significantly limits the degree to which the price of new housing can deviate from that of existing (second-hand) housing. As a result, if the cost of new housing is raised by applying a tax to it, but the tax does not apply to existing housing, the price of new housing cannot rise to reflect the new tax. To do so would make new housing more expensive than second-hand housing and as a result there would be no (or much reduced) demand for such housing.

Assuming that the total volume of new housing produced does not change as a result of the imposition of the tax or levy, the final price of housing in general (including the new housing) would not be expected to change. As the non- tax/levy costs of actually constructing the housing would also not be expected to change either, the main impact of the tax/levy will end up in the price of land that can be used for housing, but where the housing has yet to be built."

28. And second, the astronomical price of housing in Jersey, whether second-hand or new, depends on: (a) scarcity; and (b) willingness to pay. And thisis what determines the price of land. The developer will estimate the price at which he/she will be able to sell any new housing, and will deduct an estimate of the total cost of building, and of the profit. What is left is the value of the land.
29. This value is a fixed amount. If the developer can get the land for less, than he will make a bigger than anticipated profit on the housing. He cannot pay more, or he will lose money on the eventual housing.
30. To make this point abundantly clear, I copy for members at Appendix 3 the second Appendix in Supplementary Planning Guidance (SPG) August 2010 about Affordable Housing which will/may be approved along with the Island

Plan  in  June.  This  gives  a  worked  example  of  a  hypothetical  residential development, and how the calculations actually work out, and it bears out what  is  said  above  by  Oxera  (see  section  headed  How  and  why  land increases in value').

31. At whatever point in the process the tax or levy is charged, the developer will factor in the tax in his/her negotiations with the landowner. The tax will always  effectively  be  paid  by  the  landowner.3 So  this  measure  will  not increase the price, itis already high due to other factors. All it will do is to ensure that some of the astronomical value of land comes back to government.

Implementation issues in recovering the uplift in land value

1. Landowner develops for themselves

32. If, say, a landowner builds a house on his own land, and spends £250,000 in so doing, the house is immediately "worth" say £600,000. When the house is first sold, that uplift of £350,000 will be realised and should be liable to tax. Evidence would need to be kept of the cost of building in order to assess the underlying value of the land. If evidence is not kept, then the cost of building would have to be on an assessed basis.

2. The levy must be predictable

33. Only then will developers be able to factor in the future levy or tax into their calculations and negotiations when buying land. Then the landowner ends up effectively paying the tax by being offered less for the land.
34. This requirement goes against the use of planning obligations as a tool to recover increases in land value. Oxera put it like this (Oxera 2008, page 8, paragraph 3.2) –

"However, several issues arise in the context of using planning gains as a tax measure to capture uplifts in land value. Unlike a land development tax, which is set in advance, the financial commitments imposed on a developer by a planning gain are likely to be largely unknown to the developer in advance, as they are decided on a case-by-case basis. At the time of purchasing the land from landowners (i.e., assuming that the developers are not yet in the possession of the land prior to re-zoning), developers therefore cannot fully factor the financial implications of the planning obligations into the bidding price. The uncertainty at the stage of land purchase results in planning gains being less likely to be effective in targeting the tax at the beneficiary of the planning decision (i.e., the landowner)."

35. States members are frequently told that planning obligations are the tool by which some of the uplift in land value is captured for the community. Unless the  cost  of  such  obligations  is known  in advance,  this  is  not  true.  The

3  This  is  true  in  a  "competitive  market"  What  happens  in  non-competitive  markets,  is

considered in Oxera 2005, page 60, section A2.3.2 and page 63, section A2.8. Very, very briefly, if landowners and developers have so much power that the market is not competitive, then they also have the power to pass on the tax to the end-user. But if they have that much power they are in a position to effectively "charge what they like" for housing anyway.

developer  cannot  pass  on  the  cost  of the  obligation  to  the landowner  by offering less for the land, because he doesn't know what that cost is. It is decided on a "case-by-case" basis.[2]

36. The only way for the charge to fall on the landowner where it belongs is for the cost of the obligation to be known in advance.

"Hope value"

37. Oxera write (Oxera 2008, page 3, footnote 5) –

"The increase in value may not all accrue to the owner of the land at the time the administrative decision is made. To the extent that such a decision is anticipated, previous owners of the land may have benefited by the inclusion of the anticipated probability of the land being reclassified in the price obtained in previous sales. (This is sometimes referred to as the hope' value of land.)"

38. Thus, when the land in question is finally rezoned or receives planning permission, then the uplift in value will be reduced by the amount of the hope value already realised in respect of that land.
39. Ideally, both the original increase in value and the later increase in value would be taxed. The same mechanism of rising land values due to zoning and planning decisions is operating in both.

Planning obligations

40. These have the disadvantage that at present they are not predictable (see above paragraphs 33–36) and therefore do not tax the landowner at the start of the chain. It can therefore be argued that they do indeed add to the cost of housing as it is the developer who has to stump up the necessary cash, and he cannot pass this cost on to the landowner in the form of paying the landowner less for the land.
41. When answering questions in the States, Senator Ozouf said this about Planning Obligations: "I cannot answer what the percentage of gain is because that is an issue to be taken on a site by site basis." (Hansard 21st September 2009, 4.10.2). This is precisely my point.
42. Also, whilst they have the advantage that they "avoid the administrative complexity of applying a tax" (Oxera 2005, page 62) they have the related disadvantage that it is difficult to maintain absolute consistency and fairness, and there is the potential for corruption. (see Oxera 2005, page 62).
43. The new draft Supplementary Planning Guidance (SPG), which will come into force if the Island Plan is passed, imposes a set obligation on developers that 12½% rising to 20% of housing on a site must be "affordable housing", or

arrangements made which are equivalent in cost to the developer to create such housing elsewhere.

44. This is indeed a set and predictable cost for each development but it is laughably small, and the effect on the underlying land value and hence the huge windfall which goes to the landowner as unearned income on selling their land is only slightly reduced.

"Super stamp duty"

45. This option appears to capture all the uplifts in land value in a simple and unavoidable manner. A record exists of all land transactions, including full details of the seller. This option would tax the whole value of the transaction. Or, in the case of a transaction affecting a piece of land that had already been sold, then what would be taxed would be the difference between the previous price and the price being paid currently. Some discussion of this option is at Oxera 2005, page 61, section A2.4.1
46. The duty should be arranged so that the windfall that is implicit within self- developed houses as at paragraph 32 above are also captured by the tax. In such cases the landowner has effectively sold the land to him- or herself in order to build the house.

The proposition

47. A few words about the detail of the proposition.
48. Paragraph (a) deliberately leaves itto the Treasury Department to come up with something workable. However, the intention is clear – to find a mechanism (or mechanisms) which catches the increase in value of the land. As I have shown in this report, Oxera have explained that if correctly designed this tax or levy should fall on the landowner, and should not affect house prices.
49. The reason that paragraph (a) talks of "a mechanism or mechanisms of any kind" is that it may be necessary to use more than one mechanism. For example, a "super stamp duty" may be the simplest way of capturing all windfall gains after the date of the budget from the sales of land, whilst a different temporary levy of some kind may be the best way to catch the increase in land value of land sold between the date of this proposition being passed and the date of the budget being passed. There may also need to be a different mechanism to capture the increase in land value when a landowner builds a house on his or her own land and then at a later date sells the house with the uplift built into the price (see paragraph 32 above).
50. With regard to paragraph (c), the intention is to capture all uplift in the value of land sold after the date of this debate within the new tax or levy mechanisms. It is absolutely essential to send a clear signal in this matter as predictability ensures that landowners carry the burden of this tax and not end- users, as explained in paragraphs 53 to 55. However, I recognise that there may be legal obstacles to achieving this objective, and this is written into this paragraph.

51. To make this clear, ideally land sale transactions, whether implicit (as in a landowner "selling" land to himself) or explicit (any normal sale of land) which have taken place between the date of the debate on this proposition and the 2013 budget should be captured by the mechanisms thought up by the Treasury and made liable, in some way or other, to a tax or charge. However, if some types of these transactions cannot be captured in these ways, for legal reasons, then that is allowed for in paragraph (c) as drafted. I would advise members to show healthy scepticism and to check very carefully, when the actual proposals come to the Assembly, if this argument is brought forward by the Treasury with respect to such transactions.
52. Why take this trouble to capture all these transactions? Because we must be seen to be whiter than white. We HAVE to remove the link between planning decisions and huge financial gains.
53. There is another reason for including paragraph (b). If we do not signal this Assembly's intention to capture all transactions starting immediately, then end-users (purchasers of property) may end up effectively paying the tax and not landowners.
54. This is what Oxera write on page 6 of Oxera 2008 –

"However,  where  the  tax  is  being  introduced,  without  being  correctly anticipated  by the  relevant  economic agents, some  or  all  of the tax  may effectively be paid by someone other than the owner of the land in its pre- change state. In particular, sale of land in anticipation of a re-zoning prior to the announcement of the tax is likely to be at a price that does not fully reflect the  tax  that  will  subsequently  have  to  be  paid.  As  a  result,  the  original landowner may receive, at the extreme, the full value of the anticipated uplift, while the subsequent buyer will incur the tax. As a result, it is possible that the subsequent buyer would make a loss on the actual development of the site to take advantage of the re-zoning."

55. It  is thus  essential  to ensure  that  the  relevant  economic  agents  know  in advance that this is coming, as only then will they factor in the new tax into their decisions, and only then will the landowner be the effective payer of the tax.
56. I have added paragraph (d) to the original P.90/2011. There is a massive problem with the affordability of housing in Jersey, as we all know. This affects Islanders as they try to get on with their lives, but it also affects the States, as it adds substantially to States expenditure.
57. First there are the amounts paid out in rental support of one kind or another. These payments are linked to the overall market in housing where prices are vastly inflated. Second, it affects the costs of acquiring and developing sites for  affordable  rented  accommodation,  as  shown  in R.31/2011  where development  subsidies  over  the  years  of  the  operation  of  the  Housing Development Fund totalled over £20 million (R.31/2011, Appendix 2).

58. It seems to me to be entirely reasonable therefore to use the revenue from this source – land value uplifts – in the same sector, namely housing. I do not usually support hypothecation of this kind, but in this case I believe itto be justified.

Conclusion

59. "The uplift in land value is not owing to the landowner's efforts in adding value to their land, but is the result of a public agency decision acting on behalf of the wider community. As a result, the decision of the public body acting on behalf of the community provides a windfall gain to the landowner.5 A levy (tax) on land windfall gains can therefore be justified on grounds of fairness, as it distributes (at least potentially) the benefit of that windfall gain more widely, and can be used as a policy tool to share, with the wider society, the otherwise purely private benefits of the decision. In addition, to the extent that (further) development at any particular place imposes external costs (e.g., congestion,  need  for  additional  investment  in  infrastructure,  etc)  in  the immediate vicinity or across a wider area, the use of any tax or levy can be seen as (partially) compensating those who are negatively affected by the change in the use of the land."

(Oxera 2008, page 3, second paragraph)

60. That is the clear objective statement of the situation. Put more bluntly, if we do nothing, then we are simply giving certain landowners a golden land-shake, which is hard if not impossible to justify.
61. 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. Secondly, even ifit was, even if the net yield was not a vast sum in itself, it would remove a gross unfairness in our society, and that in itself has value and is worth pursuing.

APPENDIX 3