1. Governance
January 22, 2016

Sadiq Khan’s muddle over tube fares shows why London needs land tax devolution

By Tom Follett

Sadiq Khan’s recent proposal to fund a four-year fare freeze for Londoners purely through efficiencies in the existing TfL budget rapidly had a number of holes picked in it.

Foremost among these is the gaping difference between the £450m of savings that Labour’s mayoral candidate claims to have found, and the £2bn that TfL say a four-year freeze would cost. In any case, many of his proposed savings, such as cutting back-office staff, are already accounted for by TfL in their plan to deal with the impending withdrawal of central government subsidy.

But Sadiq’s central point is correct: London’s tube fares are too high, especially for part-time and routine workers. They’re almost twice as high as in comparable cities.

Unfortunately for him, there’s room in the TfL budget for either a four-year freeze, or the investment program – but not both. The problem with Sadiq’s plan is that he’s looking for money in the wrong place.

The withdrawal of central government funding leaves London as the only major city in Europe without a transport network subsidised through taxes – a bizarre situation for something so vital in greasing the wheels of commerce.  The transport network unlocks billions of pounds of value for businesses all over the city, by providing access to huge consumer markets and a wealth of skilled workers, and in raising residential property prices. To properly and fairly fund the transport network, we need to capture this value.

The only way to do this is to start devolving powers over land and property taxes to the boroughs and the mayor.

There are three main areas where devolved taxes could fairly capture the value of the public transport network. First, the high value-added central London economy, the most productive in the UK, depends on public investment in transport to move customers and workers. London should have the power to raise business rates to account for this public contribution. It should also be able to keep increases in tax take due to rises in business value.

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Second, transport improvements increase the value of nearby property and land. Devolved powers over capital gains tax on property would allow London to earn back some of that increase in value – and a devolved tax on undeveloped land would ensure developers don’t just hold on to sites while their value increases.

The boroughs should also be able to make developers pay a levy on sites which the public sector has unlocked through infrastructure investment, as ResPublica argued last year in our DevoHome report.

Third, London’s economic attractiveness means it’s home to some of the most expensive properties in the UK – but currently even houses in the best locations don’t pay more than three times as much council tax as the poorest ones.

If decisions over council tax rates and bands were devolved to London, this could be fixed. Stamp duty could be devolved too, since London’s 13 per cent of the population generate 33 per cent of stamp duty receipts due to the number of high-value properties.

London does need lower fares – but not at the cost of a well-resourced transport network and capital program. Only by devolving tax powers to the city can we ensure that those who benefit most from the transport network pay for investment in it, and that fares are fair for all.

Tom Follett works on devolution policy at the think tank ResPublica.

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