The Institute of Revenues, Rating and Valuation is currently examining options for a new local taxation system, with its report expected this month. The Institute, which represents local taxation officials working in Scottish councils, will examine a number of key funding proposals, including plans to replace council tax with a domestic property tax in Scotland. 

This concept would see home owners pay an annual levy on their homes based on frequent valuation at open market value.  Unlike the current council tax system, property tax liabilities would adjust to reflect changes in the value of homes over time.  The detailed proposals for the taxation on the market value of Scotland's 2.2 million homes have not yet been disclosed.  But the implications of any taxation reform on the wider Scottish economy are worthy of consideration. 

Any system of local taxation, irrespective of how it is implemented, will face some criticism on the basis that there are inherent inefficiencies or iniquities for individuals who face new or increased tax liabilities.  While any proposal must be scrutinised to avoid iniquities for individuals or households, the wider impacts on the business and economy of Scotland should not be overlooked. One of the principal considerations in the introduction of any new system must be the manner in which that taxation will impact upon investment decisions.  A local property tax could make Scotland an attractive place for businesses to invest, but on the other hand, it could undermine the efforts made by industry and the planning system to deliver sustainable economic growth.

The issue is perhaps best highlighted in the context of the housebuilding industry.  If a local property tax has the effect of depressing land values as house buyers seek to minimise their local tax liability, then the immediate impact on the housebuilding industry is clear, as the value of the end product is diminished.  However, the economics of housebuilding are complex, and consequences of diminished land values more far reaching than a simple reduction in house prices.

A large proportion of the effective land supply in Scotland requires significant infrastructure investment before development can get out of the ground.  The forward funding required can be prohibitive, but particularly in the context of regeneration schemes, where remediation and other associated costs are higher.  At present, local authorities will be encouraged to review existing contractual arrangements in relation to provision of community infrastructure secured through planning gain, as those contributions which were agreed in the past cease to be affordable in the current economic climate.  There is a lack of certainty in the market for both local authorities and developers.  Ultimately, the effective planning of new development may be undermined where the economic conditions for investment are uncertain. 

Housebuilders responding to falling land values by seeking to reduce the sale price of their end product, could result in lower value, smaller new homes The possibility of fiscal policy indirectly resulting in a diminishing quality of housing stock is clearly at odds with aspirations of the planning system to promote sustainable place making and successful regeneration. 

Housebuilding is one of the key industries contributing to the Scottish economy. The Scottish Government recognises its significance and has sought to streamline the planning system to enable development to come forward more efficiently.  And yet, despite the significance of the industry in economic and social terms, we continue to experience a lack of cohesion in fiscal and planning policy to support its growth.  Is it time for us now to be more radical in our thinking to ensure that national fiscal policy is truly supportive of sustainable growth and is supportive of investment in Scotland?

Much has been made of the current housing crisis and the broader social and economic problems which arise from, and will continue to be created by, the inaccessibility of the market to first time buyers.  The current centre of debate on issues of land supply versus demand will not of itself address the deepening deficiencies in the housing market.  A holistic approach with greater co-ordination between financial and planning polices is required to restore confidence in Scotland as a place for inward investment.  The right economic conditions must be created to support and enable housebuilding to once again become one of the principal users of the planning system in Scotland. Whichever system of local tax prevails, it is clear that any proposal which has the potential to widen the gap between affordability and entry to the housing market or affordability and housing aspirations must be considered carefully.

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