This week the Saudi government approved a proposal to tax undeveloped land in urban areas. It is a policy that will radically shake up investment incentives and help resolve the housing shortage in that country. It is an exciting opportunity to see the Georgist playbook put into action.
The background to the new policy is a lack of affordable housing which, just like in the UK, has become a major social problem in the kingdom. After social discontent prompted uprisings elsewhere in the Arab world in 2011, the government announced a plan to build 500,000 homes over several years, earmarking some $67 billion of state funds for the plan. But progress was slow, partly because of the difficulty of obtaining land. Again just like in the UK much urban land in Saudi Arabia is owned by wealthy individuals or companies who prefer holding it as a store of value, or trading it for speculative profits, to the process of developing it. Some analysts have estimated 40 or even 50 percent of space inside big cities such as Riyadh, Jeddah and Dammam is undeveloped.
The Saudi cabinet’s new tax proposal aims to change that pattern by pushing more land out into the market, where it can be developed for housing. No details were given concerning the size of the tax, how it will be implemented, or its implementation timetable. An economic council will make proposals to the Shura Council, a top advisory body.
But the tax is politically sensitive because it may hurt the interests of influential people. Some investors fear a greater supply of land will force down its price, hurting the balance sheets of real estate development companies which own large land banks. Shares in major property developer Dar Al Arkan sank 6.5 percent the day after the announcement, while Emaar Economic City dropped 6.60 percent.
However at the same time shares in the construction and building supplies sector climbed on expectations that the land tax would stimulate more activity. Major builder Abdullah Abdul Mohsin al-Khodari and Sons gained 1.9 percent, Saudi Cement Co added 3.3 percent, and Red Sea Housing Services, a maker of modular buildings, rose 2.1 percent. The overall Saudi stock market index climbed 0.4 percent. Mazen al-Sudairi, head of research at al-Istithmar Capital in Riyadh, said rising prices and limited availability of land had dampened many areas of Saudi business activity, so the tax could have a broad, positive effect on the economy. This is in line with the expectations of those versed in Georgist economic theory – actual wealth creators including construction companies will benefit while rent seekers parasitic on the wealth created by others will loose out.
Sudairi said the stock market was also pleased by the signal that King Salman was moving quickly to address economic problems and push through long-delayed reforms. “The decision opens growth opportunities even to other sectors. Retailers, which mainly depend on leases, can now buy land and expand. Cement firms will grow with rising demand, and even banks will prosper as they will lend to those firms. Despite the drop in the real estate stocks, the market itself is up – people are optimistic about the economic reforms and the seriousness of current management in executing reforms,” he said.
However a tax on undeveloped land does not have all the benefits of a universal land tax applied uniformly in terms of land value. This is because there is bound to be ongoing wrangling between the revenue collecting authorities and land owners as to what exactly constitutes undeveloped land. If a down-town vacant lot is turned into a parking lot simply by erecting a fence, paving it over and installing a pay booth then it could be argued that the land is no longer undeveloped and therefore no tax is payable. However such a low intensity use would be far from optimal therefore the site would continue to be a drag on the economy and have much the same negative consequences as before. Perhaps parking lots will be declared non-exempt. But then what about old and deteriorating poorly maintained low density buildings occupying prime sites? Where will the threshold be placed? This would not be an issue under a universal land tax that would encourage the appropriate intensity of development across all locations in keeping with the value of each location. Hence it would result in benefits of a far higher order of magnitude than the charge on undeveloped land proposed by the Saudi government.
Nevertheless taxing land as proposed by the Saudis will have significant economic effects. These effects are the same whether the country is an absolute monarchy with woeful human rights record or a modern democratic state. So this unfolding experiment in Saudi Arabia is of great interest to Georgists the world over.
This post was based on a Reuters report written by Andrew Torchia and posted at CNBC
Update Nov. 2015: The tax plans have moved a step closer according to this Bloomberg article.