When You First Zone, that’s Your One Off Chance to Tax Land Value Capture

Fisherman’s Bend is a massive 485ha low density industrial area, next to the Melbourne CBD, and twice its size and along a massive loop in the Yarra River. It is the largest urban renewal area in Australia if not the whole Southern Hemisphere.

In 2012 the then Victorian Premier Matthew Guy overnight rezoned the land for high density development using interim planning rules the Victorian Government Possessed. Developers could not believe it. There was no masterplan, no framework for decontamination, no public transport, no road plans, no affordable housing, no community facilities.

The incoming labour government in 2015 commissioned a report on what had by then become a scandal. Though ‘confidential’ it naturally leaked like hell.

The former Victorian Coalition government’s signature urban renewal project delivered windfall profits to land holders but was unmatched worldwide for its failure to plan for transport and other key services, a scathing confidential report has found….[the report] It describes Mr Guy’s controversial 2012 rezoning of 250 hectares of the area as a “misguided” move that, without dramatic intervention, will result in “poor urban outcomes” for future residents and workers in the area.

the committee found there was no clear or publicly discussed rationale for the rezoning of so much prime inner city land, especially when Docklands was still growing, and other sites such as E Gate in West Melbourne were also earmarked for development.

…It found the rezoning of the land from industrial to ‘capital city’ gave a green light to residential developers before strict planning controls were in place. And it came ahead of a coherent strategy or proper funding to deal with severe land contamination issues, confirmed public transport options and even feasible road plans….

The rezoning of such a major urban renewal area ahead of detailed strategic planning was “unprecedented in the developed world in the 21st century”, the report says….

There was no plan to ensure infrastructure would be delivered “in time, or at all”, says the report, which found a proposed network of CBD-style streets and laneways was “simply unachievable”.

It was quite simply probably the worst planning decision in history. It created an enormously complicated mess to clean up. A rail link was cancelled as there was no means to finance it. Complex land value capture mechanisms were put in place but with so many consents in the bag they could not work effectively.

There were many lessons of course, of the need for public consultation, a masterplans, the need for a defining framework for transport, the fact that if you zone too much high rise you get scattered development, destroy land values across the city and raise risks that developers site on land as expected returns don’t realise. There was one lesson above all for the Victorian Government – when you rezone you capture land value uplift. And so they introduced a fixed charge per hectare capture mechanism for growth areas around the Melbourne Growth Area Boundary.

The mechanism for capturing uplift seems to be the model in the new planning act for a fixed charge for infrastructure. I don’t know if they did case studies. Lets hope they did. What is equally interesting is the Victorian Government got a taste for land value capture and now propose a tax of 50% on the value of uplift in all rezoned sites.

A fixed charge is the simpler mechanism to introduce as the existing agricultural use is so low. The GAIC – Growth Area Infrastructure Contribution is a fixed charge per Hectare, around 90-120,000 dollars per hectare, ringfenced to state level transport and pubic facilities. It can be offset by contributions of land in kind. Its not perfect, the rates are too low, as a charge per hectare not a charge per unit it is not linked to population. The denser you develop the less per unit you contribute. However the returns have tempted the government. They are staggering.

YearRevenue ($ million)
2011/1272.5
2012/1356.4
2013/1493.1
2014/15128.8
2015/16149.3
2016/17188.9
2017/18264.6
2018/19282.9
2019/20244.3
Total1480.8

Nearly one and a half billion dollars!

So a simple to collect charge on ‘greenfield’ new growth areas is naturally tempting, and would be ideal for new communities in the Arc unless complex issues requires a completely development corporation owned and led approach, in part or as a whole. The UK Government would we well advised to introduce a GAIC enabling clause in the new act. It would be simple and easy to introduce.

There is a more ambitious and long term system which I would recommend that the UK Government also introduce as an enabling clause to replace GAIC when and if full local plans for growth areas and specifying quantums of development in existing areas are adopted. That is a charge on a % uplift on the uplift of the land value when land is zoned.

This is what the Victorian Government is now proposing, charged at a 50% rate.

When governments make planning decisions to rezone ex-industrial land, or create new residential estates, property developers can make massive windfall profits overnight.

A new windfall gains tax on these profits will claw back an estimated $40 million a year, ensuring these gains are shared with the community and invested in public transport, schools and other vital infrastructure.

Developers and speculators will face a windfall gains tax of up to 50 per cent applied to planning decisions to rezone land from 1 July 2022, ensuring multi-million dollar overnight profits are shared with the community.

The total value uplift from a rezoning decision will be taxed at 50 per cent for windfalls above $500,000, with the tax phasing in from $100,000 – ensuring the vast majority of land holders will not be affected. Land subject to the Growth Areas Infrastructure Contribution will also not be affected.

Of course developers have squealed that it will add to house prices. Of course a tax or charge at the point of rezoning falls on the landowner not the developer.

Of course such a tax should nuanced. It could be a low annual charge on all zoned land, excluding all improvements such as development on land, a classic Henry George style land tax. Even short of this a ‘zoning’ tax can be nuanced to encourage redevelopment and reflect development cash flow issues. For example you could be required to pay say 25% of the tax on rezoning, then 10% of it every year and then the residual at the point units are ready to occupy.

Any such system though requires a key taxation baseline. Land value before zoning (existing use value), land value after zoning. The UK will face a unique situation in a modern developed economy, introducing a zoning system nationally. This is the ideal time to introduce a land uplift taxation system in whatever form.

Lessons internationally show this requires close integration between Plot, address and cadastral registration, taxation and mapping systems. Next year the completion of the digitisation of the Land Registry will enable this though. Huge amounts of work however is needed to align standards and land law. This one off opportunity will not come again. It is like the need to hit the launch date of the Voyager probes to make a grand tour of the solar system possible. This is why subdivision and zoning and handmaidens. Without controls on subdivision you have no idea who owns a plot and who is chargeable. Subdivision always happens before creating access to a plot by electricity and infrastructure, which is the ideal and easily monitorable chargeable event.

So my strong advice to the UK government, with my knowledge and consulting expertise on zoning, subdivision and cadastral systems globally is to introduce two simple enabling clauses in the new Planning Act. A quick and dirty growth areas now, and to enable the potential for a tax on zoning induced land value uplift later, details to be laid and agreed in secondary legislation to be laid before parliament later.

This issue also to my mind is the key rationale for a zoning system. The rationale in the newspapers runs like this. We need to build homes to form a property owning democracy, they will build capital and then vote Tory, it worked for Macmillan. Its a poor argument designed to affect the limbic regions of conservatives and alienate everyone else.

Firstly land is not capital. Though housing on land is. Macmillan built mostly Council Houses.

What matters though is reducing the proportion of real incomes going to unearned rentier income, though the twin measures of taxing unearned land value uplift and increasing housing supply. Then everyone gets better off whatever the tenure. Its a bad argument to appeal to wealth through house price increases. It is unsustainable in the long term and is simply a transfer payment from the young to the old. And of course when and if you build enough houses it vanishes. It is an argument you must overcome before you can achieve planning reform than one in favour of it.

The real argument is one of equity and boosting real income through taxation of land rather than through taxation falling on everyone, to know values before and after though you need zoning so lets have zoning. Thats a much better argument.

The conservatives could make this argument but won’t because of their Daily Mail type obsession with rising house prices, perhaps the next property crash will see change. Labour might but seem obsessed with focus groups not policy thinking. The Lib Dems seem determined to ape the Greens and become the home of Avocado Nimbys opposing reform and new housing.

Politico reports

The best way to thwart the NIMBY Avocado Alliance, have a progressive argument for reforming taxation to improve incomes to those left behind bey being unable to afford new homes.

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