Tony Vickers on Mansion Tax origins

1 Oct 2009

The origins of the "Mansion Tax", mentioned in Vince Cable's speech at Bournemouth last month, go back to early 2006, as a policy working group, the Lib Dem Tax Commission (TC), started serious work. Many Lib Dem MPs saw any continuing domestic property tax alongside "Axe The Tax" (i.e. scrapping of Council Tax) as (a) confusing for voters and (b) expensive to achieve.

The replacement of the regressive Council Tax with Local Income Tax (LIT) was a "sacred cow"! Vince sought ALTER's advice on how to proceed, tactically - making clear he personally, as an economist, was very much against more income tax and for much more LVT than was in Party policy then (merely Business Rates reformed to a site value base). He suggested we initially "focus on houses and other landholdings at the top end of the wealth distribution spectrum" to minimise the electoral damage and the overall cost. But "LVT is the Party's long term aim", he said in the first draft policy paper by the TC.

ALTER urged Vince (and the whole TC) to see LVT as a national (not local) tax, from the start. We suggested a low initial rate, exemption for low value (per hectare) land and sliding-scale tax-free "Homestead Allowance" (HA) for owner-occupiers. We said that if the HA is too high (i.e. above around £0.5m) it would not raise enough revenue to make the initial cost worthwhile. In the long term, LVT could be administered from within the income tax and corporation tax systems, as in Sweden with their property tax.

We also asked for local councils to be given the choice, from the start, to precept into the land-value tax base, as well as (or instead of) the income tax base. A motion "Choice for Local Revenue Raising" (drafted by ALTER) had been passed overwhelmingly at the 1999 Party Conference.

These ideas were put to the TC in Feb 06. However Vince and his Nuffield College Oxford colleague Professor Iain McLean (a witness called by the TC) expressed preference for local SVR, not national LVT. There was quite strong support for a mix of "progressive property tax" (moving quickly to a land-value base) and LIT for councils. But the TC could not agree.

Other rows (notably over dropping the 50% top rate income tax) loomed, so it was decided by the Federal Policy Committee (FPC), which directs all policy making, to defer detailed discussion of property tax until Year 2 of the TC. The Tax Policy Paper Fairer Simpler Greener which was debated at Sep 06 Conference contained a general discussion (very positive) about the role of LVT and other forms of economic rent as revenue. The Motion itself called for TC to "develop policies on land tax" in the following year. It reaffirmed SVR for commercial land. Needless to say, LIT was reaffirmed.

Fast forward to Jan 07, TC convened saw less of Vince and ALTER President Chris Huhne. Vince's "high value property tax" (=Mansion Tax) was formally proposed - but discussion was deferred to March, to allow the easier non-property bits of tax policy carried over from 2006 to be resolved.

At its Feb 07 meeting, for the sake of argument I agreed to look at reform of business rates as though we were not going to have a domestic property tax in the first Parliament. We easily agreed a more detailed set of proposals on SVR for commercial land, which included "national land valuation of urban areas". We'd achieve full SVR (i.e. scrap Business Rates) within one Parliament.

My speech in the 2007 Spring Conference debate on Regeneration set out the case for retaining a significant element of national property tax. ALTER prepared a detailed set of proposals on domestic LVT for the TC's March meeting, supposed to be all about domestic property taxes. They included enabling legislation in a first Parliament for LVT on all urban land. But the TC chair took it that domestic LVT longer needed to be discussed - since we'd agreed (in Feb) not to have it! I protested that the "agreement" was for the sake of argument then only. However a vote of those present for "next business" was won 7-1, with the result that no further discussion by TC of any LVT proposals for domestic property took place.

However Vince's Mansion Tax was approved, by a small majority, although I voted against.

Probably because many MPs were nervous - and they tend to vote in FPC en bloc - the Mansion Tax was dropped before the final draft of the Year 2 TC paper was published. ALTER submitted a Minority Report to the crucial FPC meeting.

In the Sep 07 Policy debate on Reducing the Burden, ALTER failed to get an amendment on domestic LVT onto the agenda - or even to have separate vote on the relevant lines in FPC's Motion.

Since then, with the Credit Crunch entirely changing the economic environment, we tried last autumn and again in March to get LVT back on the agenda at Conference "for the shorter term".

Vince's Mansion Tax speech came out of the blue, to ALTER as much as anyone. We are aware that FPC is still divided over those wanting to keep LIT and those wanting more "Green Tax Switch" - mainly to lift more out of income tax altogether.

It may that the desire uniting these factions - for the scrapping of tuition fees (unaffordable by Vince's calculation) - could persuade FPC to use a national LVT as a means of raising extra revenue. But it would be a bad idea to introduce LVT as a tax on top of other taxes, rather than a replacement.

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