David Curry

What is the government going to do about the taxation of land? It has not been short of advice. Martin Wolf, the Financial Times commentator, has made his views known in unequivocal terms. He argues that taxing land rather than development is "moral" because "owners (as owners rather than managers or developers) contribute nothing to land's value. It is efficient because taxing land distorts nobody's choices. On the contrary, a tax on site values encourages owners to use what they own more efficiently".

Wolf quotes approvingly the recital of advantages of a land value tax given by economist John Muellbauer of Oxford University. These include a captive tax base; encouraging development; establishing a direct relationship between the cost of holding undeveloped land and the value of alternative uses; and the capture for the public of an element of the value public expenditure has added to the land through the provision of infrastructure.

Muellbauer also argues that a well-designed tax would encourage development in the less prosperous parts of the UK. He would halve the business rate and levy a land value tax – which would need to be below 1% a year - to plug the gap. Wolf himself concludes: "The taxation of property is a mess. National land-value taxation is a part of the solution. It is both fair and efficient. It should be adopted."

There are plenty of other ideas being beamed at the Treasury. One is to establish the additional value planning permission brings to land, and then deduct from this sum a charge for the amenity value of the land were it to remain undeveloped and the cost of the additional infrastructure and congestion development would entail. The developer would get the green light provided it met these charges. A variation on this would be to auction planning permissions with the reserve price reflecting the costs of lost amenity, infrastructure and congestion.

The current vigour of this debate stems, of course, from the Barker review's advocacy of a charge on the planning gain from developing land. The problem with a levy on the potential value of land is that the ability to realise that value is determined by the planning process. An owner could argue that it was unfair for him to pay a tax because of the dilatoriness or inefficiency of the planning system. In fact, Barker argues that the windfall gains made on land sold for development are a sufficient incentive to bring land forward and that the planning system rather than lack of incentives is the real cause of the slow pace of residential development. Barker also dismissed a tax confined to land that was considered suitable for development for reasons of unfairness, and because it might create perverse incentives. On top of all that, the practical problems of valuing and taxing land in the UK's complex economy loom large.

The government, having accepted the Barker review conclusions, will stick cautiously with its recommendation for a planning gain supplement designed to capture a "fair" share of the windfall gains for the exchequer to fund social housing and promote housing supply without creating a disincentive for development. Barker pointed out that such a tax needed to command a national consensus otherwise the possibility of an incoming government repealing the measure could itself cause land to be withheld from development.

It is difficult to see the circumstances in which the government could command an all-party political consensus on such a high-profile tax issue. It has, in any case, put the matter out for consultation until after the anticipated date of the next general election. If it were returned to power, its best hope would be implementation early in its term so that by the time of the subsequent election the tax would be comfortably up and running. Since the Conservative party is looking increasingly allergic to the whole Barker package, an uplift tax will not feature in Tory planning for government.

Meanwhile, the parliamentary passage of the planning bill is finally over after cliff-hanging dramas in the Lords. The tariff mechanism will now become part of the planning system, although how it will work is still opaque. The legislation contains only enabling clauses, and work is now in hand to deliver practical operational guidance. However, this is not scheduled for completion until the back end of next year. In the interim, the government is intending to put out revised guidance to offer a few signposts as to the direction of travel.