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Wednesday, March 25, 2009:

Pure poison on land tax - Part II

By Gavin R. Putland

Ten days after publishing Sinclair Davidson's hit-piece on land tax, to which I recently responded, the Melbourne Age has followed up with “Land tax hike to hit tenants” (Mar.23), whose opening paragraph is:

TENANTS could be forced out of their offices as landlords pass on the cost of a massive rise in land tax.

Excuse me, but you can't “pass on” a tax bill to a tenant whom you've just evicted for incapacity to pay. Tenants who are forced out can no longer pay rent and therefore can no longer help their landlords bear the tax. If landlords must pay the tax regardless of whether they have tenants, they must seek and retain tenants in order to cover the tax. This necessity tends not to increase rents, but to reduce them. Therein lies the real reason why landlords hate land tax. So they campaign against the tax — by pretending that its effect is the opposite of what it really is.

If the evicted tenants are replaced by other tenants who can pay more, this is possible only because market rents have risen. If land tax were reduced or abolished, market rents would rise more because landlords would have less need to attract and retain tenants.

The mechanism by which sales tax feeds into prices does not work with land tax. A sales tax can be shifted onto the buyer because the tax is a cost of selling. The seller holds out until someone offers a sufficient price to cover the tax, and is able to hold out because the tax isn't payable until the item is sold. If the tax were payable whether the item were sold or not, some sellers would need to sell now in order to pay the tax, and the selling pressure would tend to reduce prices. That's how land tax works; the tax is payable whether the land is let or not, and therefore creates pressure to let, which tends to reduce rents. The tax cannot be shifted onto the tenant, because it is not a cost of letting the land, but merely a cost of owning it.

The article complains that “Businesses across the state are being hit by a charge that bears no apparent relation to their financial health.” Piffle. Land tax is levied on asset values, which are a critical element of financial health. Such complaints are often based on the fact that the tax doesn't rise with the volume of business. That's an advantage because it means that the tax doesn't deter business but rather encourages proprietors to do enough business to cover the tax.

This time, however, the reason given is different: “The contrast is due to a lag between valuations and assessments. Land tax is based on valuations taken every two years, and the last valuation was in December 2007, at the height of the property boom.” Does this mean landlords would be happier if valuations were up to the minute? Of course not, because then their tax bills would keep up with a rising market! In NSW, landlords have successfully campaigned for taxable values to be averaged over the last three years in order to reduce their bills in a rising market. So when the market falls, that's an excuse to cut land tax; and when the market rises, that's an excuse to cut land tax. Get it?

Knight Frank managing director Paul Burns,” says the article, ”... agreed that tenants on net leases would be the first to cop the extra charges.” Only because when the Victorian Parliament banned net leases — that is, leases requiring tenants to pay increases in land tax — it grandfathered existing leases and didn't cap the tax increases for the tenants. So these net leases, which are on the way out, and which continue to cause problems only because of a legislative stuff-up, and which existed in the first place only because landlords demanded them, are now being cited by landlords as if they were an argument against the very principle of land tax.

But he said competition for tenants would eventually see landlords absorb the cost.” For all leases except net leases, “eventually” means now. For net leases, “eventually” means when the leases are next renegotiated.

Then we learn that the Property Council of Victoria “wants the State Government to reduce Victoria's land tax rate from 2.5 per cent to 1.5 per cent to make it more competitive against other states.

In fact land tax is the only major State tax that is not subject to interstate competition. No matter how heavily the land of Victoria is taxed, not one square metre of it will flee across the border into NSW. Land tax doesn't drive away business, because it's not a tax on business. It doesn't deter prospective renters, because it isn't passed on in rents. It doesn't even deter those who wish to buy land for productive uses, because it is capitalized in the price: the higher the tax, the lower the price.

But the State Government, instead of explaining why land tax is not a subject of interstate competition, helps to spread the property lobby's false meme while pretending to stand up to the lobbyists: “A State Government spokesman said Victoria still had the second-lowest land tax rate in the country.

The article concludes with a sob story about the Brighton Philatelic Society, which is having trouble paying its $5800 land-tax bill although its real estate is worth more than $1 million. Any organization that can't pay an annual tax bill of less than 0.58% of its property value is making grossly inefficient use of an irreplaceable asset — a site — and should either use the site more efficiently or sell it to someone who will.

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