item0029£  598, 599

Flood Taxation
a bad idea

Faced with increasing financial requirements, it is not surprising that Government should try to dream up a new tax.  And "climate change" (in particular, winter flooding) is bound to generate new taxation ideas, like the climate change levy.   But to attempt to levy a new tax on flood-plains themselves would be cumbersome and counter-productive.  I would favour a new generic property-owning tax, and I argued for such an initiative this time last year (see Property Tax). 

For over a century, Governments have tried to tap the huge fiscal reserve of the country's land.  Many socialists of the late 19th century advocated the public ownership of all freeholds, with land leased by the State to all occupiers. This solution became embedded in 20th century communism, and still interpenetrates many Eastern European societies, as well as China.  But this idea was rejected by "Western" societies, which have retained the principle of the private ownership of land, with varying qualifications.  This reflects both the sheer political muscle-power of landowners (particularly in the UK), as well as a perception that State freehold land ownership is inconsistent with the more open, differentiated, liberal forms of society which are widely preferred.

Having rejected full State ownership, the political search for alternatives went on.  In 1947, the Labour Government nationalised all development rights in UK land.  Owners were entitled to use their land for its current purpose, but the State "bought out" all the value flowing from future change.  If that system had worked, a huge tax-flow would have been generated from post-War reconstruction, fiscal resources on a huge scale which would have opened up the option of much lower taxation in other directions.  But when Labour lost power in 1951, the Tories immediately dismantled that system, and allowed all post-WW2 profits to flow into private pockets. Labour tried again in 1966 to tax development profits (Betterment Levy) but that was systemically flawed, and was again repealed by the Tories, following their return to power in 1969.  But the Tories themselves were worried by this ancient loophole, and tried in 1971 to introduce their own Development Charge.  But that also failed, for the same reasons that a Flood Tax would fail.  Labour tried for a third time in 1976 (Development Land Tax) - that was an excellent system, but resulted in land shortages, because landowners avoided selling, expecting the political pendulum to remove the tax again.  And that is what happened, in 1980.

Specific charges, like a Flood Tax, merely have the effect of reducing the market value of development land.  Although it is being billed as a tax on housebuilders, a tax on residential development, it would be nothing of the kind.  It would be a tax on the wealthy owners of development land, because it would reduce the price that house-builders would be willing to pay for the commodity.  For high-demand areas, with land changing hands at high-prices, the Tax would have very limited effect - it would quickly become a price-tag, for being permitted to build in flood-plains.  But in areas of weaker demand, the tax could well depress prices to unacceptable levels, pressuring owners to go on strike - just as they did in the 1970s.  The unintended effect would be to prevent all development in flood-risk areas in zones of weaker demand, and reduce house-building rates - which are already unacceptably low.

The right solution is a low-rate annual tax on the ownership of all land.  Owner-occupiers making active use of their property for its planned purpose would be exempt, and subject only to Council Tax (see my own suggestions at Property Tax).  But everybody else should pay...