Today’s flare up over the ‘gifting’ of some $14M worth of concessions and inducements to Kalis and Myer to construct a new Myer Department Store in the Hobart CBD illustrates yet again the pernicious consequences of both poor ratings systems and individually justified inducements to invest despite those systems.
The problem is not that Hobart Council has paid an inducement to see Myer return to the CBD. They believe that they will receive a reasonable return on that inducement, and they are quite probably – but not certainly – correct in that belief.
The problem is twofold. Firstly, a rating system that increases charges when landowners and developers invest in their property, inherently acting to discourage development and best use. Secondly, the lack of a system that is capable of identifying the uplift in land values resultant from a specific development, enabling the distribution of community benefit to those who, through that investment have benefited the community.
It is more than time we renewed our rating system to serve us better. To avoid the problems that Hobart Council faces today (and other councils will continue to face into the future), the following features need to be put in place:
- A single system state wide, assessed by the state, levied by the local council;
- A system based solely upon land value, valued in a continuously manner;
- A system that accounts for and rewards activity that contributes to land value;
A land value tax, levied against land value alone, at a rate which is a fixed proportion (nominally one third) of the current cost of capital (i.e loan rate), on all land without exclusion within the state, satisfies point one.
In the Myer case, the proximate cause of half of the furor is that developing a site substantially increases the charges that will be levied on it by council. This is completely inverted from what it should be. Devloping a site should be encouraged, not discouraged. Charging rates based solely upon land value avoids this problem.
A system, incorporating data from each sale of land, and utilising expert action to assess on major changes that will affect that prices, on a continuing basis, is able to satisfy point two. There is simply no excuse in the modern age of information for land values to be assessed on anything other than a continuous basis, avoiding the major pitfalls and shocks associated with re-assessment every five years. Limiting this assessment to land only rather than land and buildings makes this process much simpler.
Given such a system, the effect of any development, above a certain scale on land values (determined by the level of statistical noise) can be measured by a process of deconvolution — mathematically recognising the pattern and extent of uplift over time and separating it out. The increase due to this represents a valid basis for both the assessment of the value returned by public works, and the value properly due developers for private works.
The other half of the Myer furor is over the council contribution to both initial costs and council effectively providing a guarantee of revenue. Estimates remain estimates, and guarantees often incentivise perverse outcomes not anticipated at the time of their establishemt. Possessing the capacity to assess community benefit after rather than estimating before the fact keeps all of this process above board. Furthermore, assessment for such uplift is then available for any development that impacts beyond the scale of statistical noise, rather than for a single entrant with leverage.
This is a simple outline, but does set out the major features of a system that provides incentives in the correct directions, and allows the more sensitive processes that reward significant developments to be handled in a manner above board .