Whats wrong with AAV?
Absurdity of Rating Improvements - what’s wrong with AAV?
A long history of destructive property taxes!
Windows were taxed in the UK, so people boarded up their windows, and became ill! France had its chimney tax, so people boarded them up too, smoking the residents. In the UK Midlands, a capital improvements tax led to the de-roofing of buildings. Absurd? Of course; but should we laugh at our forebears? Are we any wiser? AAV not only taxes chimneys and windows, it taxes the whole house!
Under Assessed Annual Value (AAV), anyone who erects a dwelling is penalized!
Then, the homeowner is penalized again whenever they improve their property.
- Establish paths—up go the rates!
- Build a garage – up go the rates!
- And a room – up go the rates!
- Install air-conditioning – up go the rates!
What's wrong with Assessed Annual Value?
Property value consists of two separate parts:
1. the land value itself; and
2. the value of the buildings and other improvements made by the owner.
- The AAV system fails to distinguish between the value of these separate parts. Rates are levied on the property as a whole - on land and all improvements
- AAV is a nominal figure only. It is the rent which a property might return to the owner. Since most homeowners do not rent out their house, it has no true basis.
- AAV is a relic of the time before values of land and buildings could be separated because valuers were few and less competent than now.
Disadvantages of AAV
- AAV penalizes the industrious homeowner. Those who have turned to renovations and extensions to avoid the outlay on new sites find that they must pay higher rates for their efforts.
- AAV rating is inequitable. Owners who have developed land to the desired community standard are liable for a higher proportion of the income of the municipality than the owners of undeveloped or underdeveloped land, although the services offered to each by the council are identical.
- AAV is arbitrary and unjust. The system has little or no relationship to services rendered by the local authority.
- AAV is unfair between ratepayers. The owner of substandard property, who holds land idle in the expectation of being enriched by the progress of society (causing his land to increase in value), not only holds society generally to ransom but his failure to effect improvements lowers the value of adjoining properties and so injures his neighbours.
- AAV encourages the holding of land for speculative purposes. There is very little levy on the unearned increment.
- AAV discourages improvements to property by imposing rates on improvements
Under AAV, rates fall disproportionately on developed properties, compared to vacant land. It costs nearly as much to maintain a road passed a vacant property as it does to maintain the same road passed an improved on.
- AAV incurs capital costs in serving unimproved properties, even though owners do not avail themselves of the available services.
- AAV is a direct negation of the principle of unimproved land value rating: that is, owners should pay proportionately to the value given to their sites by the community and not according to the value of their own improvements.
- AAV has no moral basis. It fails to distinguish between land and improvements.
Land differs from every other form of property.
- While houses are the result of man's labour, no-one made the land. It is nature’s free gift to all of us.
- Owners improvements upon the land should be completely free from local rates.
- When a person builds a house, the house is their private property because they built it. It does not belong to the community, and the community has no right to the house or its value.
- Under AAV, the home owner who erects a dwelling is penalised for doing so.
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Do we, as a society, need more houses?
Yes! We need to house our young people. So, don’t penalize people for building them!
When ratepayers know that the council will charge them rates only on the value of their sites and not on the value of their homes or other improvements, they respond by becoming improvement-minded. The building and construction industries are stimulated, and a higher level of activity is maintained. All of the Victorian metropolitan cities which adopted site value rating experienced higher construction activity (ref: Hutchinson studies).
Site Value Rating comparison
Compared with the above consequences of including building values in the rating base, the effects of rating site values alone are, respectively, as follows:
- There is no reduction in the supply of sites. But there is an increase in the supply of buildings as site owners attempt to derive income from their sites, for which purpose they usually need buildings (for their own use or for letting to tenants). So accommodation becomes more abundant and therefore more affordable (and, in the process, jobs are created in construction).
- Property owners who allow their buildings to deteriorate get no rate reductions to offset the reductions in rents and capital gains. So buildings are better maintained.
- Infill development is not penalized by higher rates, but is encouraged by the need to derive income from sites in order to cover the rates thereon.
- Owners who renovate homes for the benefit of disabled persons — or for any other reason — do not suffer any consequent increases in rate bills.
- Valuations of buildings are usually not needed, as most site values are calculated by spatial interpolation between other site values that are known from market transactions. If a site is sold with a building that is not immediately demolished by the buyer, a valuer may need to subtract the building value in order to establish how much of the sale price was site value, but only if there are not enough known values to permit interpolation.
The Local Government Act 1993, gives the option of using one of three rating systems to Tasmanian councils:
S 90 (3) A general rate is to be based on one of the following categories of values of land:
- The land value of the land;
- The capital value of the land;
- The assessed annual value of the land (including improvements).
In Tasmania, all municipal councils opt to levy rates on the AAV method. By comparison, all municipal councils in NSW and Queensland levy rates on the ‘Land Value’ method. Most ratepayer polls around Australia have found a majority favour the ‘Land Value’ method.
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Assessed Annual Value is a nominal figure only. It is the rent which a property might return to the owner. Since most homeowners do not rent out their house, it has no true basis.