Photo by Alice Duffield on Unsplash

Compulsory acquisition and regulating what can be done on land are distinct but conceptually similar urban planning tools. However, while both may be regarded as justifiable incursions to property for the greater good, landowners are not compensated when their land is not physically acquired but made subject to an adverse rezoning plan or development restriction.

In a recent journal article, I argue that economic efficiency requires regulations and acquisitions to be treated similarly. Regulations which adversely affect land value should be compensable on the same yardstick as acquisitions. Conversely, regulations which enhance a site’s value – perhaps by increasing the permitted intensity of land use – are equivalent to the state granting the landowner more ‘property’, and at least some of such windfalls should be taxed.

In Australia, a distinction is generally made between compensable acquisitions and non-compensable regulations.

Under South Australian law, for example, the right to compensation is restricted to situations when the government acquires a legal or equitable estate or interest in the land, or when the government physically takes possession or occupies land. No compensation is payable where land is rendered less valuable by regulation. Furthermore, South Australia’s amendments to the Land Acquisition Act 1969 (SA) in July 2020 allow the government to acquire underground land without paying compensation.

Victorian law is similar, with an additional ground for compensation when the land is ‘expressly’ stated to be reserved or gazetted for a public purpose.

An economic approach to law

Legal doctrinal concepts based on justice and fairness are the traditional prisms through which law is viewed. Thus, Alan must compensate Bob if Alan causes attributable harm to Bob. However, this traditional approach does not seek to maximise net utility. The introduction of economic concepts to augment the study of jurisprudence allows rules to be constructed that seek to maximise efficiency.

A review of literature reveals three principles: (1) the power to compulsorily acquire enhances efficiency; (2) it is efficient to pay compensation; and (3) like physical acquisitions, it is more efficient to pay compensation for regulations than not.

Addressing the first principle, the price of land has two components: an objective component that is relatively easy to measure and a subjective component that is difficult to measure. For example, in South Australia, section 25(1)(g) of the Land Acquisition Act 1969 (SA) states in relation to compensation that ‘no allowance shall be made on account of the fact that the acquisition is effected without the consent, or against the will, of any person’. In interpreting that subsection, a Full Court of the South Australian State Supreme Court held that psychiatric injury stemming from having one’s land acquired is not compensable under this Act. Therefore, compulsory acquisition creates disutilities as landowners may have emotional attachments to their property and no statutory scheme may be able to fully capture these sentiments.

Thomas Miceli and Richard Posner point out that the power to acquire is justified on an efficiency basis due to the problem of holdout. When the state endeavours to acquire land for a public project, ‘individual owners whose land is necessary for the project acquire monopoly power in their dealing with the government’. This allows them to ‘hold out for prices in excess of their true (subjective) valuation of the land’ since it would be too costly or even impossible for the government to seek alternative locations or abandon the project. Since holdouts are a form of transaction cost which could very easily spiral uncontrollably, the state’s power compulsorily to acquire land at market value is the lesser evil on an efficiency scale.

Addressing the second principle, no or low compensation is tantamount to an arbitrary tax in respect of certain landowners. In contrast, compensation may be seen as a broad tax in respect of society in order to fund the development of projects that benefit the community. Posner explains it succinctly – taxes that take ‘a little bite out of many hides’ are more efficient than the compulsory acquisition ‘tax’ that ‘takes a big bite out of a few’.

Addressing the third principle, paying compensation for regulations that adversely affect the value of property will bring greater certainty to the property market. Furthermore, regulating land without compensation is an affront to the mirror principle because planning decisions, changes in land use or permitted density are not reflected in the land register. Given that regulating land and physical acquisitions are both, economically speaking, takings of property, then if it is accepted that paying compensation for compulsory acquisition is efficient, it may also be argued that similarly it is efficient to pay market-price compensation for regulations.

Windfall gains tax and concluding comments

From 1 July 2023, Victoria applied a windfall gains tax (WGT) to land that is subject to a government rezoning resulting in a value uplift to the capital improved value of the land where this exceeds $100,000. As enhanced land values are distributed arbitrarily – in the sense that not all landowners will benefit from uplift rezoning and such planning decisions are presumably not correlated with the identity of the landowner – taxing such windfalls smoothens out distortive, unearned gains so that the public also captures a portion of such value uplifts. At the same time, only a portion of the uplift is taxed because otherwise, there would be no incentives to develop or intensify land.

While restricting land use and compulsory acquisition can both be for public benefit, there is no utility in treating losses stemming from acquisition differently than losses stemming from regulation. Compensating for acquisitions while not compensating regulations which adversely affect land value is internally inconsistent because if it is accepted that paying compensation for acquisitions is more efficient than not, it cannot follow that not paying compensation for regulations which adversely affect land value promotes efficiency. Indeed, given the rational adoption of taxing windfall gains in Victoria in July 2023, perhaps it is timely to consider whether compensation and taxation for land regulations should also be correspondingly expanded in South Australia and beyond.

Leave a comment

Your email address will not be published. Required fields are marked *