Rates on Site Values don't punish home builders

Gill Vivian's story (‘Wrong’ rates ping home builder, POST, 15/8, p.7) neatly explains why local rates should be levied on “site values” — that is, values of land and airspace, including any attached building rights, but excluding actual buildings.

The present system levies rates on the combined values of land and buildings, so that owners are penalized for improving their properties and “upgrading the neighbourhood” (as Ms Vivian puts it), even if there is no increase in the use of council services.

The availability of those services is reflected in the locational value of the property. And the locational value is in the site value, not the value of any building, because a site has a location (and therefore a locational value) even if it is bare, whereas the value of a building is limited by the cost of construction regardless of location.

The site value reflects the availability of a service, not the actual use of it. But the mere availability of the service accounts for a substantial part of its cost. To cover that part of the cost through a charge on the site value is therefore economically efficient, and equitable under the “beneficiary pays” principle (and, to some extent, the “capacity to pay” principle). If we don't want to cover the entire cost that way, then the rest of the cost, which is caused by actual use of the service, should be covered by a charge for actual use. That too is efficient, and equitable according to the “beneficiary pays” and “user pays” principles.

None of these arguments call for taxes on buildings. Such taxes serve no purpose but to punish the construction, extension, and maintenance of accommodation, and to reward the owners of vacant lots and derelict buildings where nobody can live or do business. That's not very smart, especially in the middle of a national housing crisis and a global recession.

[Letter by Gavin R. Putland, rejected by the POST (Perth, WA), Aug.18, 2009. Posted here Apr.5, 2012.]