Business rates are broken. Should we start taxing land?

The Cotswolds, England. Image: Getty.

Organisations across the political, public and private sector are clamouring to reform business rates. They think the UK’s current business rates policy is outdated and problematic. Their contentions were reflected in the Treasury Select Committee’s recent decision to review the impact of the government’s business rate policy.  

The review could have profound consequences for businesses. But the issue will also resonate more broadly among those interested in urban and regional development, those charged with financing public services, and those concerned with the crumbling built environment and engaged in local wealth creation.

Is it any wonder that existing buildings depreciate in value when the government’s business rates retention strategy only rewards new property developments? Rather than business rates, might it be time to consider a land value tax?

The Need for Business Rate Reform

Business rates were originally devised as a property tax based on a periodic treasury assessment of rateable value. They are designed to be fair, consistent with economic conditions and supportive of growth and competition. But government policy makers have increasingly attempted to make them serve multiple objectives at once. In 2013, central government commandeered business rates to fund shortfalls in local government budgets through the business rate retention system.

Local income from business rates has effectively replaced the government’s previous revenue support grant. Now, not only are business rates expected to provide a tax system, they are also expected to counter the impacts of austerity and plug the gaps in local budget cuts. Annually, they are worth almost £30bn to the treasury.

Press attention directed at business rate reform has focused on the retail sector and the spectre of empty high streets. But although business rates are important to retailers, they are not necessarily the cause of the sector’s disruption. An array of micro and macro concerns afflicting the retail sector magnifies the cost of business rates, which are often relatively high for retailers that pay a premium for centrally located properties.

To reform business rates, we shouldn’t take our lead from one particular political agenda or sector. We should take stock of the current situation and unite various considerations and priorities. By working backwards, we could arrive at answers to how a new system of property tax could be implemented, keeping in mind the following considerations and priorities:

  • The need for transparency, legibility and simplicity;
  • Being responsive to micro and macroeconomic conditions and incentivising investment in property and business;
  • Being sensitive to the new world of work that favours leaner, hybrid business models that mix bricks and mortar and digital transaction interfaces;
  • Being sympathetic for how Business Rates fall on various property sectors and locations, including retail, leisure, office and industrial, all of which experience property tax in different ways and locations;
  • Tackling the perverse policy of empty property rates, which has helped to reward property vacancy and drive an industry of empty property rate avoidance techniques;
  • Demanding a sustainable local government finance system;
  • Capturing the value created by public spending on physical, social and knowledge infrastructure in local areas;
  • Harnessing the intrinsic but often varied wealth in local anchor institutions and supporting the principles of the foundational economy. 

But business rate reform isn’t the only answer. Land value tax has attracted growing interest as an alternative. In contrast to business rates, a land value tax is based on location, and levied upon the value of land (with or without the property upon it).

The central contention of a land value tax is that the value of land is defined by what is happening in the immediate location and broader region. Land value tax is often considered more progressive because it captures the societal value invested in a given location and can complement policy initiatives like local wealth building. This could remedy one of the central concerns with the business rates retention scheme, which strips out value created by local investment in a periodic national revaluation exercise – known as a “wash through”.

Yet we should be wary of viewing land value tax as a panacea for concerns with business rates. A great deal of land simply has no value and needs a certain degree of initial investment to ready it for further development. Similarly, reducing property tax will not help the high street if the demand to purchase certain products from bricks and mortar shops no longer exists. Nor is it clear how a land value tax would confront the new world of digital platforms that do not have physical footprints, or the reality of commercial businesses that switch use in quick succession. And any reduction in tax may capitalise into higher rents as property owners price-in the change.


A Very English Compromise

The economic and ethical argument for a land value tax is strong. However, the practicalities of moving to this system are not straightforward. Implementing a land value tax would require huge change to tax institutions, a national revaluation exercise using a new method of site appraisal, and a new valuation skill base. Perhaps the greatest obstacle will be political, with wealthy property owners unlikely to favour disturbance.

What we may end up with eventually is a Very English Compromise; a semi-permanent transition combining elements of land value, property and turnover-related tax. This balancing act would be similar in kind to the split-rate tax in North America, where land is taxed at a higher rate than property. This could include profits not easily captured in brick and mortar – for example the digital sales tax that chancellor Philip Hammond announced in the 2018 budget, which would aim to capture value from firms that shift sales and profits between jurisdictions.

The situation is complex and demands a partnership-based solution that unites businesses, property owners and government. Rather than distil the situation into different political agendas or budget silos, or examine it through simplified principles of supply and demand, we should find a consensual approach to land and property tax that encompasses business profitability, local public services, devolution and economic development.

Kevin Muldoon-Smith is a lecturer in real estate economics at Northumbria University. He tweets @muldoon_smith

 
 
 
 

Urgently needed: Timely, more detailed standardized data on US evictions

Graffiti asking for rent forgiveness is seen on a wall on La Brea Ave amid the Covid-19 pandemic in Los Angeles, California. (Valerie Macon/AFP via Getty Images)

Last week the Eviction Lab, a team of eviction and housing policy researchers at Princeton University, released a new dashboard that provides timely, city-level US eviction data for use in monitoring eviction spikes and other trends as Covid restrictions ease. 

In 2018, Eviction Lab released the first national database of evictions in the US. The nationwide data are granular, going down to the level of a few city blocks in some places, but lagged by several years, so their use is more geared toward understanding the scope of the problem across the US, rather than making timely decisions to help city residents now. 

Eviction Lab’s new Eviction Tracking System, however, provides weekly updates on evictions by city and compares them to baseline data from past years. The researchers hope that the timeliness of this new data will allow for quicker action in the event that the US begins to see a wave of evictions once Covid eviction moratoriums are phased out.

But, due to a lack of standardization in eviction filings across the US, the Eviction Tracking System is currently available for only 11 cities, leaving many more places facing a high risk of eviction spikes out of the loop.

Each city included in the Eviction Tracking System shows rolling weekly and monthly eviction filing counts. A percent change is calculated by comparing current eviction filings to baseline eviction filings for a quick look at whether a city might be experiencing an uptick.

Timely US eviction data for a handful of cities is now available from the Eviction Lab. (Courtesy Eviction Lab)

The tracking system also provides a more detailed report on each city’s Covid eviction moratorium efforts and more granular geographic and demographic information on the city’s evictions.

Click to the above image to see a city-level eviction map, in this case for Pittsburgh. (Courtesy Eviction Lab)

As part of their Covid Resource, the Eviction Lab together with Columbia Law School professor Emily Benfer also compiled a scorecard for each US state that ranks Covid-related tenant protection measures. A total of 15 of the 50 US states plus Washington DC received a score of zero because those states provided little if any protections.

CityMetric talked with Peter Hepburn, an assistant professor at Rutgers who just finished a two-year postdoc at the Eviction Lab, and Jeff Reichman, principal at the data science research firm January Advisors, about the struggles involved in collecting and analysing eviction data across the US.

Perhaps the most notable hurdle both researchers addressed is that there’s no standardized reporting of evictions across jurisdictions. Most evictions are reported to county-level governments, however what “reporting” means differs among and even within each county. 

In Texas, evictions go through the Justice of the Peace Courts. In Virginia they’re processed by General District Courts. Judges in Milwaukee are sealing more eviction case documents that come through their courtroom. In Austin, Pittsburgh and Richmond, eviction addresses aren’t available online but ZIP codes are. In Denver you have to pay about $7 to access a single eviction filing. In Alabama*, it’s $10 per eviction filing. 

Once the filings are acquired, the next barrier is normalizing them. While some jurisdictions share reporting systems, many have different fields and formats. Some are digital, but many are images of text or handwritten documents that require optical character recognition programs and natural language processors in order to translate them into data. That, or the filings would have to be processed by hand. 

“There's not enough interns in the world to do that work,” says Hepburn.


Aggregating data from all of these sources and normalizing them requires knowledge of the nuances in each jurisdiction. “It would be nice if, for every region, we were looking for the exact same things,” says Reichman. “Instead, depending on the vendor that they use, and depending on how the data is made available, it's a puzzle for each one.”

In December of 2019, US Senators Michael Bennet of Colorado and Rob Portman of Ohio introduced a bill that would set up state and local grants aimed at reducing low-income evictions. Included in the bill is a measure to enhance data collection. Hepburn is hopeful that the bill could one day mean an easier job for those trying to analyse eviction data.

That said, Hepburn and Reichman caution against the public release of granular eviction data. 

“In a lot of cases, what this gets used for is for tenant screening services,” says Hepburn. “There are companies that go and collect these data and make them available to landlords to try to check and see if their potential tenants have been previously evicted, or even just filed against for eviction, without any sort of judgement.”

According to research by Eviction Lab principal Matthew Desmond and Tracey Shollenberger, who is now vice president of science at Harvard’s Center for Policing Equity, residents who have been evicted or even just filed against for eviction often have a much harder time finding equal-quality housing in the future. That coupled with evidence that evictions affect minority populations at disproportionate rates can lead to widening racial and economic gaps in neighborhoods.

While opening up raw data on evictions to the public would not be the best option, making timely, granular data available to researchers and government officials can improve the system’s ability to respond to potential eviction crises.

Data on current and historical evictions can help city officials spot trends in who is getting evicted and who is doing the evicting. It can help inform new housing policy and reform old housing policies that may put more vulnerable citizens at undue risk.

Hepburn says that the Eviction Lab is currently working, in part with the ACLU, on research that shows the extent to which Black renters are disproportionately affected by the eviction crisis.

More broadly, says Hepburn, better data can help provide some oversight for a system which is largely unregulated.

“It's the Wild West, right? There's no right to representation. Defendants have no right to counsel. They're on their own here,” says Hepburn. “I mean, this is people losing their homes, and they're being processed in bulk very quickly by the system that has very little oversight, and that we know very little about.”

A 2018 report by the Philadelphia Mayor’s Taskforce on Eviction Prevention and Response found that of Philadelphia’s 22,500 eviction cases in 2016, tenants had legal representation in only 9% of them.

Included in Hepburn’s eviction data wishlist is an additional ask, something that is rarely included in any of the filings that the Eviction Lab and January Advisors have been poring over for years. He wants to know the relationship between money owed and monthly rent.

“At the individual level, if you were found to owe $1,500, was that on an apartment that's $1,500 a month? Or was it an apartment that's $500 a month? Because that makes a big difference in the story you're telling about the nature of the crisis, right? If you're letting somebody get three months behind that's different than evicting them immediately once they fall behind,” Hepburn says.

Now that the Eviction Tracking System has been out for a week, Hepburn says one of the next steps is to start reaching out to state and local governments to see if they can garner interest in the project. While he’s not ready to name any names just yet, he says that they’re already involved in talks with some interested parties.

*Correction: This story initially misidentified a jurisdiction that charges $10 to access an eviction filing. It is the state of Alabama, not the city of Atlanta. Also, at the time of publication, Peter Hepburn was an assistant professor at Rutgers, not an associate professor.

Alexandra Kanik is a data reporter at CityMetric.