The Community Infrastructure Levy is a destructive raid on local development

February 10, 2012 3:49 PM

The reason house prices are so unaffordably high and commercial rents are so crushingly heavy is because development isn’t taxed heavily enough. That’s the logic of the new ‘Community Infrastructure Levy’ (CIL) being imposed  by local councils on people hoping to develop their property. The levy is intended to finance infrastructure required by new development. Merton Council, for example, states what the appropriate charge should be in its draft charging schedule:
the ‘appropriate balance’ is the level of CIL which maximises the amount of development in the area. If the CIL charging rate is above this appropriate level, there will be less development than there could be, because CIL will make too many potential developments unviable. Conversely, if the charging rate is below the appropriate level, development will also be less than it could be, because it will be constrained by insufficient infrastructure.

So, because the proposed levy is not going to be zero, the Council obviously thinks that the extra Income Tax, Corporation Tax, Capital Gains Tax, Business Rates, stamp duties and Council Tax receipts the development would generate is not enough to fund necessary infrastructure. Presumably, the bureaucrats who wrote it think there are potential developments out there which developers do not currently believe to be viable because the levy isn’t yet in place.

The borough plans to introduce no levy on office and industrial development, however. Only residential and retail developments will be lucky enough to enjoy the new tax. Retail developments will be hit with a £100 per square metre levy anywhere in the borough whereas residential developments will be subject to one of three levies, depending on where it is. £42/m2 in the least affluent third, £140/m2 in the middle and £385/m2 for new homes in the most affluent third of the borough.

If the levy is supposed to finance infrastructure, why would the that required infrastructure per square metre of floorspace developed cost nine times as much in one part of the borough as another? If the levy is set at the level which "maximises the amount of development in the area", why would developers only find it profitable to develop with a tax nine times as onerous as that in the other section of the borough? And is it really only retail and residential developments which need infrastructure – don’t offices and industrial developments benefit from infrastructure, too?

The answer is that the levy is an attempt to squeeze cash out of development and into town hall coffers. Buildings, obviously, do not require infrastructure. It is, to say the least, highly unlikely that building big expensive houses in the rich part of town requires nine times as much revenue per square metre to fund the additional NHS GP surgeries or local public transport infrastructure as the typically much smaller homes in the poorer part of the borough. The assessment produced by the Council’s consultants possibly ‘captures’ a more honest account of the rationale:
we test the these different developments without CIL, to see if they are viable in their own right and how far they produce a surplus value, or overage, from which CIL may be extracted. Secondly, we consider how much of this estimated surplus value (where it exists) should be captured through CIL.

Merton’s proposed rates are significantly higher than those recommended by the independent consultants, too. In all three areas they have proposed the levy should be 40 per cent above the recommendation (£42, £140 and £385 instead of £30, £140 and £275 per square metre).

The Community Infrastructure Levy is proving to be little more than a naked cash grab by councils like Merton’s that will do little more than take off the pressure to stop wasting money while hitting development hard and with it all the jobs and prosperity it creates. Councils should look harder for savings from waste and factor in new revenues from existing taxes on additional residents and businesses to fund infrastructure projects. Hard pressed taxpayers and homebuyers simply can't afford the job losses, higher taxes and higher rents that the CIL will create.The reason house prices are so unaffordably high and commercial rents are so crushingly heavy is because development isn’t taxed heavily enough. That’s the logic of the new ‘Community Infrastructure Levy’ (CIL) being imposed  by local councils on people hoping to develop their property. The levy is intended to finance infrastructure required by new development. Merton Council, for example, states what the appropriate charge should be in its draft charging schedule:
the ‘appropriate balance’ is the level of CIL which maximises the amount of development in the area. If the CIL charging rate is above this appropriate level, there will be less development than there could be, because CIL will make too many potential developments unviable. Conversely, if the charging rate is below the appropriate level, development will also be less than it could be, because it will be constrained by insufficient infrastructure.

So, because the proposed levy is not going to be zero, the Council obviously thinks that the extra Income Tax, Corporation Tax, Capital Gains Tax, Business Rates, stamp duties and Council Tax receipts the development would generate is not enough to fund necessary infrastructure. Presumably, the bureaucrats who wrote it think there are potential developments out there which developers do not currently believe to be viable because the levy isn’t yet in place.

The borough plans to introduce no levy on office and industrial development, however. Only residential and retail developments will be lucky enough to enjoy the new tax. Retail developments will be hit with a £100 per square metre levy anywhere in the borough whereas residential developments will be subject to one of three levies, depending on where it is. £42/m2 in the least affluent third, £140/m2 in the middle and £385/m2 for new homes in the most affluent third of the borough.

If the levy is supposed to finance infrastructure, why would the that required infrastructure per square metre of floorspace developed cost nine times as much in one part of the borough as another? If the levy is set at the level which "maximises the amount of development in the area", why would developers only find it profitable to develop with a tax nine times as onerous as that in the other section of the borough? And is it really only retail and residential developments which need infrastructure – don’t offices and industrial developments benefit from infrastructure, too?

The answer is that the levy is an attempt to squeeze cash out of development and into town hall coffers. Buildings, obviously, do not require infrastructure. It is, to say the least, highly unlikely that building big expensive houses in the rich part of town requires nine times as much revenue per square metre to fund the additional NHS GP surgeries or local public transport infrastructure as the typically much smaller homes in the poorer part of the borough. The assessment produced by the Council’s consultants possibly ‘captures’ a more honest account of the rationale:
we test the these different developments without CIL, to see if they are viable in their own right and how far they produce a surplus value, or overage, from which CIL may be extracted. Secondly, we consider how much of this estimated surplus value (where it exists) should be captured through CIL.

Merton’s proposed rates are significantly higher than those recommended by the independent consultants, too. In all three areas they have proposed the levy should be 40 per cent above the recommendation (£42, £140 and £385 instead of £30, £140 and £275 per square metre).

The Community Infrastructure Levy is proving to be little more than a naked cash grab by councils like Merton’s that will do little more than take off the pressure to stop wasting money while hitting development hard and with it all the jobs and prosperity it creates. Councils should look harder for savings from waste and factor in new revenues from existing taxes on additional residents and businesses to fund infrastructure projects. Hard pressed taxpayers and homebuyers simply can't afford the job losses, higher taxes and higher rents that the CIL will create.

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