A Primer on Property Tax E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 771

Veröffentlichungsjahr: 2012

Beschreibung

'The chapters in this book explore in detail the choices regarding both the structure and administration of the property tax, drawing on the extensive knowledge the authors have acquired in studying property taxes around the world. The chapters provide a wide-ranging treatment of the design choices and administrative tasks, both in terms of the breadth of design options and administrative tasks covered and the depth of the discussion.  The authors describe the range of design choices, discuss the associated issues and the advantages and disadvantages for each, and present the criteria to help choose among the options.’

From the book’s Foreword by David L. Sjoquist, Professor of Economics and Dan E. Sweat Scholar Chair in Educational and Community Policy, Georgia State University

Property taxation is a key element in providing a solid foundation and a stable funding source for basic public services.

Developing and implementing a property tax system is a complex task. This complexity is compounded by the diversity of legal, cultural and historical contexts of policymakers and tax administrators. The World Development Report (1999-2000), Entering the 21st Century puts fiscal decentralization at the top of the development agenda. This makes local taxation - and especially the property tax option - of critical importance to both tax and land policy, as well as the broader development agenda.

A Primer on Property Tax: Administration and Policy provides the reader with an analysis of issues surrounding property tax, including economics, law, public finance, decentralisation, valuation, GIS and property tax reform. A key strength of the book lies in the vast international experience of the authors and the book will provide for the first time material which is topical, cutting-edge and highly relevant to many of the disciplines involved in property taxation.

The authors examine the criteria applied to evaluate the strengths and weaknesses of property tax, discuss the main valuation methods and the economic principles underpinning them and review the legal and administrative aspects of property tax worldwide.

Leseprobe

Contents

About the Contributors

Foreword

Introduction

1 Property Tax: A Situation Analysis and Overview

Introduction

Role for property taxes

Importance of the property tax

Choice of tax base

Issues in assessment

Issues with property tax rates

Incidence of the property tax

Politics of the property tax

Future for the property tax

Summary

2 Value-Based Approaches to Property Taxation

Introduction

Overview of property tax bases

Value-based approaches

Concept of market value

Traditional valuation methods

Conclusions

3 The Politics of the Property Tax

Introduction

Unique characteristics of the property tax

Principles for designing the property tax

Characteristics of the property tax

Property tax revolts, tax limitations and tax relief

The politics of property tax reform

The property tax as a local tax

Conclusion

4 Administration of Local Taxes: An International Review of Practices and Issues for Enhancing Fiscal Autonomy

Introduction

Central administration

Independent local administration

The special case of property taxes

Conclusion

5 Establishing a Tax Rate

Introduction

What level of government should set the property tax rate?

Types of tax rates

Determining the tax rate

Who sets the rate?

Rate setting in practice

Conclusions

6 Property Tax Collection and Enforcement

Introduction

Policy and administrative determinants of property tax revenues

Definition of model variables

Common reasons for low rates of collection and enforcement

Designing an effective property tax collection system

Enforcing against noncompliance

Summary thoughts

7 The Tax Everyone Loves to Hate: Principles of Property Tax Reform

Introduction

Primary rationale for reform

Fundamental principles of reform

Strategic choices in reform

Policy pitfalls of reform

Conclusion

8 Legal Issues in Property Tax Administration

Introduction

Tax policy

Property taxation

Uniformity/equity/fairness/treatment of taxpayers

Conclusions

9 Tax Criteria: The Design and Policy Advantages of a Property Tax

Introduction

Independent and autonomous revenues

Adequate and stable revenue

Hedging the revenue bets

How broad is the tax base?

Financial support for infrastructure

Capturing the increased value resulting from public infrastructure

Immobile base

Benefit tax

Ability to pay taxes

Ease of compliance

Ease and cost of administration

Transparent taxes

Political acceptability

Subnational tax systems and horizontal inequity

Advantages of the property tax

Disadvantages of the property tax

Conclusion

10 Estimating Property Tax Revenue Potential

Introduction

Fiscal capacity and fiscal effort

Fiscal capacity

Estimating aggregate property value

Property tax capacity and effort in the OECD

Adjusting for undeveloped land

Estimating local revenue potential

Conclusion

11 Taxing Public Leasehold Land in Transition Countries

Introduction

Public leasehold systems

Land ownership and taxation

Land rent, property tax and tax incidence

Valuing public leasehold for tax purposes

Conclusions

12 Property Tax and Informal Property: The Challenge of Third World Cities

Introduction

The phenomenon of informal land occupations

Property tax performance in cities with extensive informality

The property tax as a tool for reducing informality

Conclusion

13 Non-market Value and Hybrid Approaches to Property Taxation

Introduction

Non-market valuation approaches

Other non-value approaches

Hybrid alternatives that use a form of value as the basis for the property tax

Flat-rate taxes

Conclusions

14 Computer Assisted Mass Appraisal and the Property Tax

Introduction

Concepts of CAMA and quality control issues

Mass appraisal techniques

Case study: MRA modelling

Conclusions

15 Geographic Information Systems and the Importance of Location: Integrating Property and Place for Better Informed Decision Making

Introduction

Conclusions

Index

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Library of Congress Cataloging-in-Publication Data

A primer on property tax : administration and policy / edited by William J. McCluskey, Gary C. Cornia, Lawrence C. Walters.p. cm.Includes bibliographical references and index.

ISBN 978-1-4051-2649-6 (cloth)1. Property tax. 2. Property tax—Law and legislation. I. McCluskey, William J. II. Cornia, Gary C. III. Walters, Lawrence C. HJ4113.P75 2013336.22–dc23

2012029010

A catalogue record for this book is available from the British Library.

ISBN: 978-1-405-12649-6

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books.

Cover design by Steve FlemmingCover image courtesy of iStockPhoto

About the Contributors

Claudia M.De Cesare is an adviser for the Secretariat of Finance in the municipality of Porto Alegre, Brazil. She is a member of the Teaching Faculty of the Lincoln Institute of Land Policy and a Member of the Advisory Board of the International Property Tax Institute (IPTI). She has written several publications on property taxation and valuation for taxation purposes, as well as working as a course developer and editor. Among other initiatives, she was the creator of the Capacity Building Program to Improve the Performance of the Property Tax in Brazil, coordinated by the Lincoln Institute and the Ministry of the Cities. She is a Civil Engineer, holds a Masters degree in real estate valuation by Universidade Federal do Rio Grande do Sul (UFRGS) and holds a Ph.D. degree awarded by the University of Salford, England.Gary C.Cornia is the Dean of the Marriott School of Management at Brigham Young University. He is the past president of the National Tax Association and has served as State Tax Commissioner in Utah. He has been a visiting Fellow at the Lincoln Institute of Land Policy and a visiting Scholar at the Andrew Young School of Policy at Georgia State University. He has published a variety of articles on state and local tax policy, decentralization and property tax. He received his Ph.D. from The Ohio State University.Peadar Davis is a Chartered Surveyor and lecturer at the University of Ulster, with specific teaching and research interests in valuation, appraisal and asset management. In 2009, he was awarded a Ph.D. by the University of Ulster, specializing in simplified property tax systems. He has been involved in research into property valuation, local government finance and property taxation policy in several jurisdictions including Northern Ireland, Kosovo, Uganda and Egypt. He previously managed a complex, mixed portfolio of office, retail (notably shopping centres), industrial and residential properties.Riël Franzsen is Professor and Director of the African Tax Institute, University of Pretoria. Previously he was professor in the Department of Mercantile Law at the University of South Africa. In 1990, he obtained a doctorate from the University of Stellenbosch, South Africa. He is a co-founder of the African Tax Institute (ATI), which was established in 2002 to undertake capacity development in the areas of tax policy and tax administration in the public sector in Africa. He is a member of the Advisory Board of the International Property Tax Institute (IPTI) and has acted as an advisor to The People’s Republic of China, Democratic Republic of the Congo, Egypt, Indonesia, Rwanda, South Africa, Tanzania and Uganda, as well the World Bank on especially property tax issues. He has acted as an instructor on property taxation for the IMF and the Lincoln Institute of Land Policy.Martin Haran is a Senior Research Fellow within the Real Estate Initiative at the University of Ulster. He was awarded a first class Honours degree in Business and Financial Management from the University of Ulster. In 2008, he graduated with a Ph.D. from the University of Ulster with specialisms in financial ­modelling. Principal research and teaching interests comprise business finance, economic competitiveness, real estate finance, financial modelling and investment performance. He has authored a number of industry and academic papers in the areas of real estate finance, financial modelling, real estate investment, regeneration, planning and property.Yu-Hung Hong is a Senior Fellow at the Lincoln Institute of Land Policy. He earned his Ph.D. in Urban Development and Masters in City Planning from the Department of Urban Studies and Planning at the Massachusetts Institute of Technology (MIT). At the Lincoln Institute, he focuses his research on issues related to property rights and obligations, land management tools and local public finance. He is a visiting faculty in the Department of Urban Studies and Planning at MIT, teaching budgeting, fiscal policy evaluation, urban public finance in developing countries and advanced public finance seminars.Roy Kellyis a Professor of the Practice of Public Policy Studies, Sanford School of Public Policy, Duke University. Previously, he spent 19 years at Harvard University teaching local government finance, tax analysis and project evaluation. He has over 25 years of experience teaching, designing and implementing reforms on ­fiscal decentralization, local finance and property taxation in Asia, Africa, Latin America and eastern Europe. He served as resident advisor in Tanzania, Cambodia, Kenya and Indonesia and has worked on property tax reforms in Albania, Argentina, Bahamas, Cambodia, Dominican Republic, Egypt, Indonesia, Kenya, Malawi, Mexico, Nepal, Poland, Russia, South Africa, Tanzania and Uganda.Harry Kitchen is Professor Emeritus in the Economics Department at Trent University, Peterborough, Ontario, Canada. Over the past 20 years, he has ­completed more than 100 articles, reports, studies and books on issues relating to local government expenditures, finance and governance in Canada and abroad. In addition, he has served as a consultant or advisor for a number of municipal and provincial governments in Canada, the federal government, foreign ­governments in Russia and China and private sector organizations.William J.McCluskey is Reader in Real Estate and Valuation at the University of Ulster where he received his Ph.D. in Real Estate Valuation in 1999. He has held various international positions including Visiting Professor of Real Estate at the University of Lodz, Poland, Professor of Property Studies at Lincoln University, Christchurch, New Zealand and is currently Visiting Professor in Real Estate at University of Technology Malaysia. His main professional and academic interests are in the fields of real estate valuation, developing automated valuation methods and property tax policy. In addition, he has been an invited instructor in real estate at the African Tax Institute and the Lincoln Institute of Land Policy: China Programme. He is a faculty member of the Lincoln Institute of Land Policy and founding Board Member of the International Property Tax Institute.Michael McCord is a Lecturer at the University of Ulster. He was awarded a BSc degree in the field of Geography and Economics from Queens University, Belfast. In 2010 he graduated with a Ph.D. from the University of Ulster. His main teaching and research interests comprise property market analysis, property ­statistics, spatial econometrics and financial modelling. In addition he has ­published several industry and academic papers.David McIlhatton is a research officer at the University of Ulster. He was awarded a BSc degree in geography, postgraduate degree in geographic information systems (GIS) and a Ph.D. in GIS and spatial modelling from the University of Ulster. He has actively researched in the area of GIS and real estate appraisal for a number of years demonstrating the real business benefits that linking location with data can bring to organizations. More recently, he has engaged in developing and implementing GIS based asset management tools for both academic and non-academic purposes. He is a member of a number of professional organizations, including being an executive committee member of the Association of Geographic Information.John L.Mikesell is Chancellor’s Professor of Public and Environmental Affairs at Indiana University. His research focuses on sales and property taxation, tax administration and revenue forecasting, and his textbookFiscal Administration is widely used in graduate public administration programmes. He has been a David Lincoln Fellow in Land Value Taxation with the Lincoln Institute for Land Policy and Senior Research Fellow, Peking University – Lincoln Institute Center for Urban Development and Land Policy, Beijing, People’s Republic of China. He holds a B.A. from Wabash College and M.A. andPh.D. in economics from the University of Illinois-Urbana.Frances Plimmerholds a Master of Philosophy degree and was awarded a Ph.D. in 1999. She was Research Professor at Kingston University until 2006 and with the Research Department at the College of Estate Management. She was the editor ofProperty Management from 1994 to 2010. She is a member of the RICS’ Research Advisory Board. She is the UK delegate and chair of FIG’s Commission 9 (Valuation and Real Estate Management). She has an international research reputation and written and presented widely on the subjects of valuation, property taxation ­compulsory acquisition and professional education and qualifications.Jay K.Rosengard is Lecturer in Public Policy at Harvard Kennedy School with over 30 years of experience in the design, implementation and evaluation of development policies and programmes throughout Asia, Africa and Latin America. His areas of expertise include public finance and fiscal policy, tax and budget reform, municipal finance and management, intergovernmental fiscal relations, banking and financial institutions, microfinance and public administration. He is currently Director of the Mossavar-Rahmani Center for Business and Government’s Financial Sector Program, which focuses on the development of bank and non-bank financial institutions. In addition, he is a Faculty Affiliate of both the Ash Center for Democratic Governance and Innovation and the Center for International Development.Enid Slack is the Director of the Institute on Municipal Finance and Governance at the Munk School of Global Affairs at the University of Toronto. Her research interests include property taxes, the finance and governance of large metropolitan areas, infrastructure financing and intergovernmental fiscal arrangements. Recent publications include A Tale of Two Taxes: Reforming the Property Tax in Ontario (co-authored with Richard Bird and Almos Tassonyi), International Handbook of Land and Property Taxation (co-edited with Richard Bird, 2004) and UN Habitat Guide to Municipal Finance (2009). Enid is a member of the Advisory Board of the International Property Tax Institute (IPTI).Martim Smolka is a Senior Fellow and Director of the Latin American and the Caribbean Program and Co-chairman of the International Department at the Lincoln Institute of Land Policy. He graduated from the Pontifical Catholic University of Rio de Janeiro with an M.A. and then was awarded a Ph.D. in Regional Science from the University of Pennsylvania, USA. He was a Faculty Member and Professor of the Urban and Research and Planning Institute (IPPUR) at the Federal University of Rio de Janeiro, a co-founder and president of the Brazilian National Association for Research and Graduate Studies on Urban and Regional Planning (ANPUR). He has authored many publications on the functioning of urban land markets and in particular informal land markets and their consequences to regularization policies, on intra-urban structuring and the dynamics of property markets in Latin American cities.Lawrence C.Walters is the Stewart Grow Professor of Public Management at the Romney Institute of Public Management, Brigham Young University, USA. His teaching includes courses on land and real estate taxation at the Institute for Housing and Urban Development Studies, Erasmus University, Rotterdam, Netherlands. He has over 40 publications on public policy and management topics, several of which have received national awards for excellence. He has just completed a property tax policy guide for developing countries sponsored by UN-Habitat and a book on managing ‘wicked’ environmental problems. He received his Ph.D. from the Wharton School at the University of Pennsylvania.Kurt Zorn is Associate Vice-Provost for Undergraduate Education and a Professor in the School of Public and Environmental Affairs (SPEA) at Indiana University Bloomington. He also serves as Indiana University’s Faculty Athletics Representative to the Big Ten and the NCAA. His research interests focus on state and local public finance, tax policy, transportation safety, economic development and gaming. He has conducted research, consulted and taught in the general area of tax policy and fiscal decentralization in a number of international settings including Egypt, Bosnia-Herzegovina, the Russian Federation, China and Taiwan and the United Arab Emirates.

Foreword

February 2012

The property tax is an important revenue source for local governments across the world, although the relative reliance on it varies widely. There are also ­substantial differences across countries in the structural and administrative components of the property tax. To operationalize the property tax requires a mix of choices regarding design issues such as: what property will be taxed – land, improvements, personal property; what is the basis of the tax – market value, rental value, area or something else; who will the tax be imposed on – owner or user; what will the tax rate structure be – a flat rate or rates that ­differ by value, type or location of property; and what options will be ­available to enforce collection, for example foreclosures. Developing administrative procedures involves addressing such tasks as: identifying the property to be taxed; determining the taxable basis of each property; identifying the ­taxpayer for each property; setting the tax rate or rates; invoicing the tax payer; and ­collecting the tax.

The chapters in this book explore in detail the choices regarding both the structure and administration of the property tax, drawing on the extensive knowledge that the authors have acquired in studying property taxes around the world. The chapters provide a wide-ranging treatment of the design choices and administrative tasks, both in terms of the breadth of design options and administrative tasks covered and the depth of the discussion. The authors describe the range of design choices, discuss the associated issues and the advantages and disadvantages for each and present the criteria to help choose among the options. Regarding administration, the chapters offer in-depth discussion of the administrative tasks and how they can be addressed efficiently and effectively. There is consideration of such extraordinary policy and administrative issues as the ­taxation of public leasehold property and informal settlements, the use of GIS technology and forecasting revenue capacity. Not only do the chapters provide extensive discussion of the options, they provide insightful discussions of implementation issues. The chapters are also rich in examples of the choices that have been made in various countries for each of these design issues and administrative tasks.

In Chapter 1, Harry Kitchen provides an introduction to, and an overview of, the property tax and an initial discussion of many topics and issues inherent with the property tax. Kitchen starts with a discussion of the role that the ­property tax should play in local government finance. Given the characteristics of the property tax, for example its relatively immobile base, Kitchen develops the argument that the property tax is the ideal tax for local governments. But, the primary focus of the chapter is on issues associated with the assessment of property and the setting of the tax rate. Determining the assessment involves a series of critical tasks. Kitchen discusses the importance of each of these tasks, the difficulties involved in accomplishing the tasks, the implications if the tasks are not appropriately carried out, and how the procedures actually used differ across countries. Kitchen then explores the issues associated with selecting the property tax rate structure (namely a flat rate, or rates that vary with type, use or value of the property), the tax rate (for example, which government should set the rate, should there be limits on the rate, etc.), and the economic consequences of these decisions. Kitchen provides a summary of the debate over the incidence of the property tax, namely the conflicting views that the property tax is a ­distortionary tax on capital or is a non-distortionary benefit tax, and the role of relief programmes in altering the distribution of the property tax burden.

The two aspects of the property tax that are perhaps most central to its implementation concern the choices over the types of property that are going to be taxed and the basis on which the tax liability is determined. Riël Franzsen and William McCluskey explore these key policy decisions in Chapter 2 in the ­context of value-based property tax systems. As Franzsen and McCluskey point out, there are many different types of property that might be included in the property tax base, many different ways that property value might be defined, for example, annual value, capital value, land value, etc., and alternative methods for determining market value. The authors provide an extensive discussion of the many issues associated with making decisions among these alternatives, along with a presentation of the advantages and disadvantages of each alternative. Franzsen and McCluskey explain the many conditions that must be ­present in order for a value-based system to be successfully implemented. To illustrate the options, the authors present many examples of the choice that specific countries have made.

Public finance economists and others who study the property tax have some ‘ideal’ system in mind that they use as a standard in evaluating existing property tax systems. It is not exactly earth shattering to note that to the extent decisions regarding the structure of the property tax are made by government officials who are influenced by the views of citizens; politics affects the policies associated with the property tax. In Chapter 3, Enid Slack considers the features of a good or ideal property tax system and describes how politics has resulted in a property tax that does not correspond to what students of the property tax ­consider the best structure. Slack explores why and how politics has influenced the design of the property tax and how its unpopularity has led to ‘property tax revolts’. Slack discusses the policy choices that have been made as a result of these revolts and the resulting implications for the property tax systems. As Slack points out, this conflict between what is considered the ideal system and what politics demands must be recognized in designing or reforming the ­property tax.

A major issue that countries face is whether the property tax should be administered centrally or locally. This is a very important question since it goes to the heart of fiscal decentralization and to the quality of tax administration. In Chapter 4, John Mikesell extensively explores the advantages, disadvantages and experiences with centralized and decentralized administration of the property tax. He first considers the reasons why centralized administration might be preferred, giving examples of how various countries administer the property tax. He then discusses decentralized administration, giving examples of countries in which local governments have successfully administered the property tax. Based on his analysis Mikesell concludes that local administration is preferred, but points out the major dilemma associated with decentralization of administration, namely, the presumed greater competency associated with the central administration offset by the lack of incentive for the central government to perform well since there are no revenue consequences. The solution, in Mikesell’s view, is to provide the training and technical assistance to local ­governments necessary for them to become competent.

Establishment of the tax rate or rates is a critical issue and involves addressing two questions. First, should the tax rate be set centrally or locally? Second, should there be one rate, or should the rate be allowed to differ between types, uses, ownership or value of property? These are the issues that Kurt Zorn addresses in Chapter 5, which also includes a survey of how these questions are answered in various countries. For each question, Zorn discusses the issues involved and presents the arguments for and against having the tax set centrally and having multiple tax rates. Zorn concludes that for fiscal decentralization to be successful, local governments need to have control over the property tax rate. Regarding the second question, Zorn comes down on the side of a one-rate ­system, pointing out how simplicity and transparency are compromised with classification systems.

Once the tax rate has been set, the next step in administering the property tax is the politically difficult one of collecting the revenue. Ultimately, the objective of the property tax system is the mobilization of revenue. Some see the key to collection being a mechanism for the enforcement of the collection of the revenue, e.g., penalties and ultimately foreclosure for non-payment. But in Chapter 6, Roy Kelly takes a much broader view of revenue collection and enforcement, positing that in performing all of the administrative steps, ­property tax agencies should view themselves as tax collectors. Kelly makes the case that the collection process should begin with property tax administration that is seen as efficient and high quality, that yields tax liabilities that are ­considered fair and equitable and that ends with the appropriate methods to enforce ­collection. Kelly identifies the steps that governments can take to improve the mobilization of property tax revenue, and provides rich details on how to design an effective property tax collection system, from assessing the tax ­liability to the process for seizing property for non-payment of the property tax. He also describes how various countries have done this, and points out the ­pitfalls to avoid in trying to implement such a system.

As Slack suggests in Chapter 3, scholars of the property tax can design an ideal property tax system but that actual systems differ from the ideal. Furthermore, changes come through reform of existing property tax systems rather than implementation of a new system de novo. Reforming existing tax systems is not a matter of waving a magic wand and transforming the current system into one that scholars consider the ideal. Jay Rosengard has thought deeply about not just what the characteristics of an ideal system are, but also about the practical aspects of reforming existing property tax systems. In Chapter 7, Rosengard explores how to go about reforming existing property tax systems, or in his words, how ‘to make an existing property tax less taxing’. Rosengard discusses the primary rationales for reform, namely improving fiscal performance, social equity, economic efficiency and administrative cost-effectiveness, and presents four guidelines that should be followed in conducting property tax reform, for example, simple trumps optimal. He also discusses the principal strategic choices that reformers face. To assist those who might engage in a property tax reform, he documents the frequent mistakes in reforming the property tax and the common elements of successful reform, and presents a review of what has been learned from several attempted reforms. Rosengard notes that while there is no formula for ensuring success in attempting to reform a property tax ­system, past efforts provide guidance to future attempts.

While it is common for students of the property tax to think in terms of policies and administrative structures and procedures, it is important to realize that the property tax must be enshrined in law. What the law says about what is ­taxable property, about the definition of property, about the rights of taxpayers and so on has important ramifications for the performance of the property tax, including the consistency of the application of the tax, its fairness, bureaucratic discretion, and so on. In Chapter 8, Frances Plimmer explores the issues associated with enshrining the property tax in law and the relationship between the law, regulations and the desired outcomes of the property tax systems, including fairness, behavioural changes, economic growth and so on. These legal issues include the definition of property, the meaning of value, the identification of ownership, the application of tax relief and the treatment of land occupied by squatter populations (a topic discussed in detail in Chapter 12). As Plimmer points out, all aspects of the property tax must be contained in law, they cannot be inferred and the legislation must be such that the tax achieves the desired outcomes. Getting the tax right starts with getting the law right.

While the first eight chapters discuss practical aspects of the design of the property tax and its administration, Chapter 9, by Gary Cornia, provides an extensive discussion of the principles or criteria that should be used in deciding on how reliant a government should be on the property, and used as guides in designing property tax policies and administration. The list of criteria that Cornia provides goes well beyond the typical list of principles for a good tax that includes equity, efficiency and simplicity. Cornia’s list adds such factors as the need for subnational governments to have a revenue source for which they can control the design and implementation; the need for revenue that is stable and permanent; and a tax that captures some of the benefits from improved infrastructure. These criteria are fundamental to decisions regarding the use and design of the property tax. Cornia develops the arguments as to why these criteria should be adhered to in designing or reforming the property tax, and ­discusses the advantages and disadvantages of the property tax in the context of the criteria.

The first nine chapters are concerned with relatively broad topics associated with the design, implementation and administration of the property tax. Chapters 10–15, on the other hand, each focus on relatively specific or specialized matters concerning the property tax. In the first of these chapters, Lawrence Walters explains how to estimate the revenue potential of the property tax. In a jurisdiction or country in which there are assurances that the value of taxable property is accurately measured, forecasting revenue or revenue potential is relatively simple. But in countries in which property escapes the tax net, or assessed values are not a reliable measure of actual property values, measuring revenue potential is much more complex and difficult. It is the task of estimating the potential revenue in such situation, both for the country and for local governments, that Walters considers in Chapter 10. After explaining the ­concepts of fiscal capacity and fiscal effort, Walters presents and discusses each of the steps – and the required data associated with each step – that are necessary to derive an estimate of the revenue potential of the property tax. Knowing the revenue potential of the property tax is important in evaluating the design and administration of the property tax, and thus the estimation methods that Walters presents are a key to the evaluation process.

Chapters 11 and 12 discuss the treatment of what might be considered unique property. In Chapter 11, Yu-Hung Hong considers the largely overlooked issue of the taxation of public leasehold property in transitional countries, while in Chapter 12 Martin Smolka and Claudia De Cesare consider informal property in developing countries. In transitional countries, it is a common practice to lease public property to the private sector. A major question is whether the government can impose a tax on such leased property. Consideration of this issue is complicated by the fact that there is substantial variation across countries in how lease payments are structured, including the relationship between the lease payment and market value, and whether the lease includes both land and improvements. Hong considers three significant issues associated with imposing property taxes on public lands and buildings that are leased to private firms and individuals. One of the basic issues is the conceptual consistency of applying a tax that is generally associated with private ownership of property to the lease of public property, and whether the public will find it acceptable and thus would actually pay the tax. The second issue is whether a tax on leasehold property would be borne by the private sector or would simply result in a reduction in lease payments. To address this question Hong presents a theoretical approach to the incidence of a tax on public leasehold property, noting that the answer depends on the extent to which the property tax is capitalized into the value of the leasehold property. The third issue that Hong explores is that ­taxing the ­lessee of public leasehold property requires valuing the lease and finding a way to establish taxable values using a technique equivalent to mass appraisal, an issue that has been given little previous attention. Hong notes that the value of the lease will depend on the terms of the lease, including its duration and whether rental value is based on fair market rent or the actual contract rent. Given the desire to use property taxation in transitional countries, Hong’s analysis of these issues is important.

Major cities in developing countries contain large informal settlements, which pose difficult issues regarding the application of the property tax since tenure rights are at best obscure and the state of improvements is in continuous flux. In Chapter 12, Smolka and De Cesare document that process and magnitude of the development of informal settlements and then explore the questions and issues associated with applying the property tax to these settlements. Smolka and De Cesare address the many facets of the most basic of questions, namely should these properties be taxed at all, given the presumptions that residents do not have an ability-to-pay and that determining the property’s value and assigning liability are impossible. Smolka and De Cesare explore the feasibility of taxing these properties and conclude that is both possible and desirable, and thus should be part of the property tax base. They develop the argument that a well-designed property tax system that is applied to informal settlements could be a part of a more effective urban policy. In particular, the tax revenue generated from the settlement could be devoted to the provision of infrastructure and public services in the settlements, which now receive little in the way of public services or government investments. In addition, the property tax could reduce the land distortions that are observed in informal settlements.

In the mid-19th century, state governments in the USA changed their property taxes from a mixed system of per unit and ad valorem taxes to one based on market value. However, over the past four decades alternative concepts of value have been adopted, such as value in use and acquisition value. And, as transitional and developing countries have adopted property taxes they have relied on non-market property tax systems. In Chapter 13, William McCluskey and Riël Franzsen explore non-market value property tax systems, describing each of the alternatives, discussing the advantages and disadvantages of each and providing details of how such systems function in several different jurisdictions. Non-market value systems, which include systems in which the tax is based on the area and/or the use of the property, are generally adopted when reliable market values are not available. The chapter also explores hybrid systems, for example banding and acquisition value systems, in which some monetary value other than current market value is used as the basis for the tax. While the major advantage of these systems is their simplicity, McCluskey and Franzsen point out the many drawbacks of such systems.

One of the primary objectives of property tax administration is to appraise property so that the resulting values closely reflect market value, and to do so in a cost-effective manner. The approach that is increasing being used to determine market value for property tax purpose is computed assisted mass appraisal (CAMA), which is the focus of Chapter 14, written by William McCluskey, Peadar Davis, Michael McCord, David McIlhatton and Martin Haran. The authors begin with a description of the main concepts that must be considered in using mass appraisal systems in general and CAMA in particular. There are many different modelling paradigms that can be used for property tax appraisal purposes. The authors explain each of these systems, which include automated appraisal systems including rule based expert systems, artificial neutral networks, fuzzy rule-based systems, multiple regression techniques, comparable sales analysis and adaptive estimation procedure. Multiple regression modelling is the traditional approach used in CAMA systems. The authors provide a real world example of the application of CAMA system that uses multiple regression modelling and discuss the issues that have to be addressed in using this technique.

Chapter 15 by Peadar Davis, Michael McCord, David McIlhatton and Martin Haran examines the use of geographic information systems (GIS) in appraising property. While most people who study property taxation have some sense of what GIS is, it is likely that few know how GIS can be incorporated in CAMA systems. This chapter assists in closing that gap, by providing an extensive discussion of the potential use of GIS in property tax appraisal and administration. After describing GIS, the authors explain how GIS can play an important role in CAMA systems. As they note, GIS systems are no longer just mapping methodologies, but now involve advanced analytical capabilities. Linking GIS and CAMA is not a trivial exercise, and the authors discuss the many issues associated with integrating GIS and CAMA. The authors describe the several benefits that GIS provides to appraisal systems, including increased efficiency and accuracy, and present an example that is helpful in seeing the benefit of using GIS in the mass appraisal of property.

David L. Sjoquist Professor of EconomicsandDan E. Sweat Scholar Chair in Educational and Community Policy Georgia State University

Introduction

William J. McCluskey, Gary C. Cornia and Lawrence C. Walters

For thousands of years, governments around the world have levied taxes based on land. It may seem odd, therefore, to include in the title of a book on property taxation the word ‘primer’. Surely by now, it might be argued, governments understand how land and improvements can be taxed to achieve policy goals without introducing unreasonable burdens, distortions or inequities. Unfortunately, as is amply demonstrated in the chapters in this volume, such is not the case. In fact, governments across the globe are in one of three circumstances: they largely ignore taxes tied to land; they struggle to maintain efficient and effective property tax systems in the face of dynamic markets and political resistance; or they face the even more daunting task of building an effective property tax system where no such system currently exists. Increasingly, countries are coming to realize both the revenue potential and the policy advantages of land-based taxes. The result is that the countries in the first set are probably dwindling in number, while the latter two sets are increasing in size over time.

One observable result is that the variability across countries in property tax collections as a percentage of gross domestic product (GDP) is much higher in wealthy countries than it is in other countries. To be sure, the average reliance on the property tax is higher overall in wealthier countries. But this higher average masks the fact that collections range from nearly nothing in countries such as Kuwait, Luxembourg and Switzerland to well over 2 per cent of GDP in countries such as Canada, France, the UK and the USA. The performance of the property tax in middle- and low-income countries is much more consistent, but it is, for the most part, consistently low. Yields well below ½ per cent of GDP are very common and yields above 1 per cent of GDP are rare indeed.

Without question, advocates and administrators of the property tax in industrialized countries face very different challenges from their counterparts in developing countries. The variation observed among the world’s wealthiest countries is certainly attributable in part to policy choices – many of which may have been made decades or even centuries ago. But such choices are also made in a context that is a product of the complexity associated with property tax policy and administration.

The basic idea underlying nearly all taxes on land is that the tax should be a function of the productive capacity of the land (and often permanent improvements). While historically capacity may have been measured in quantities of food or other commodities produced, it is now most frequently measured as capital market value (or some proxy), thus maintaining a clear conceptual link between taxable value and property productivity. But markets are dynamic and real estate values may move dramatically within short periods of time in response to changing market perceptions. Tracking these changes and incorporating them appropriately into estimates of taxable value are daunting ­administrative tasks requiring both human and financial resources and the political will to keep tax rolls up to date.

In many instances, these administrative functions are not carried out as ­effectively as they might be. As a consequence, official records containing key property information are not always complete and up to date. Even if records are current, dynamic market conditions, lack of resources and political resistance may combine to yield taxable values which are badly out of date and which no longer reflect current market judgments of property value. When property ­values are updated and taxes levied, those subject to the tax may launch time-­consuming and expensive appeals and public protests. And for a variety of political reasons, policymakers may choose to overuse tax exemptions that erode the tax base. Ultimately, effective administration of the property tax requires the sustained commitment of a country’s political leaders. Policy leaders must frame and sanction a sound and practical legal framework. They must commit sufficient resources to administer the system efficiently and effectively. Finally, they must uphold the administrative and judicial officials who are charged with levying and collecting the tax. The chapters in this volume describe best practice in both policy and administration, but these must be coupled with political commitment if the property tax system is to be seen as fair, and if it is to realize its potential as a revenue source.

The issues in middle- and low-income countries include all those facing more industrialized countries, especially concerns about the level of political support from senior political leaders. But their efforts are often complicated by additional unique challenges as well. In many instances, property rights are ambiguous by western standards, and formal systems for recording property rights are incomplete. Many such countries experience inadequate formal property markets and underdeveloped market-sustaining institutions (e.g. mortgage markets), limiting the ability to base taxable value on readily available market information. At the same time, many of these countries face rapidly increasing urbanization and growth in informal settlements. All too often, the resources to mount, reform or maintain a viable property tax system are severely lacking.

A recent UN-Habitat publication (Walters, 2011) stresses that implementing a practicable property tax system in such an environment should be informed by four considerations:

1. The system should reflect and be sensitive to the accepted institutions and traditions related to land and property rights. In this context, two distinctions are central. The first is whether land is seen as a tradable economic commodity or whether land is viewed as fundamental to achieving other basic human rights. The other important property right question is whether or not individual private ownership of land is widely accepted. Given any combination, it is possible to design a workable property tax system, but these distinctions will affect who should be obligated to pay the tax and what options are available to administrators in pursuing tax avoiders.

2. Implementing a property tax system requires a fiscal cadastre, and a practical system must reflect the realities of the current formal and informal systems for registering and defending land rights. In many cases, this will require a fiscal cadastre that is separate from the legal cadastre. There are examples where less formal fiscal cadastres have provided a path for landholders to regularize their interests and transition to fully registered legal ownership. The key is to link as closely as possible the interests of the administrators and the taxpayers.

3. The property tax system should also attend carefully to market conditions in different locations and for different types of property. As noted previously, in many less developed countries, formal land markets are underdeveloped. In such cases, attempting to base the property tax on market values can only lead to frustration and failure. But there are other options as discussed in Chapter 2 by McCluskey and Franzsen.

4. The system must be designed with a thought to the administrative capacity of government agencies that will be charged with implementing the property tax. Overall administration will likely need to be divided between levels of government and between different agencies, as suggested in Mikesell’s Chapter 4. And the information requirements for the system should be tailored to the resources available for administering the tax.

While the challenges of designing and implementing a property tax system are significant and vary somewhat based on the particular country context, ongoing tensions between certain aspects of the property tax and its administration also bear mentioning here. They are explored more fully in the ­chapters which follow. These tensions will arise in virtually every context and are not likely to be permanently resolved in any setting. Rather the balance must be revisited and renewed, perhaps with modifications, time and time again over the years.

The first such tension involves the balancing of administrative costs and operational effectiveness. The property tax is not a simple or inexpensive tax to administer. It requires expertise and judgment on the part of administrators. Even if governments employ private consultants to do much of the work of managing the cadastre, valuing property, generating tax bills and even collecting the tax, managing the system requires competent public employees with enough expertise to ensure that adequate quality is maintained. But there is always a temptation to increase the net yield from the tax by reducing administrative costs. Reassessment cycles are often delayed. Staff may not be as well trained as the job requires. Budgets for equipment and information sources may be cut back. In the short run, these may have both fiscal and political benefits, but they undermine the integrity and effectiveness of the system. Before long, values are out of date, cadastres are inaccurate, collection rates begin to fall and the system loses legitimacy in the eyes of the public.

A second source of tension lies in two competing political objectives. Public finance economists, including those represented in this volume, argue that ­transparency in a tax system leads to improved governance. Public officials are more accountable and responsive if the public understands clearly what the cost of government is and what each household is expected to pay. For this reason, the visibility of the property tax is often touted as one of its advantages. On the other hand, that very visibility often makes the property tax very unpopular, as Rosengard notes in his chapter. So there is a temptation to reduce the clarity of the property tax system by such practices as allowing valuations to become outdated or by using classification schemes that change the effective tax rate for different types of property. In the minds of some public officials, the property tax would be more politically acceptable to the public if it were less clear and visible. Thus, there is an ongoing tension between transparency and political acquiescence.

A third tension exists between the policy goal of promoting some degree of buoyancy in the tax system and a desire for certainty on the part of taxpayers. Faced with rising costs and expanding demands for service improvements, ­public officials are inclined to favour revenue sources which grow more or less automatically with the economy in a region. Failure to build in this buoyancy means that over time, the revenue source becomes less and less relevant as a foundation for funding services. Thus, property taxes based on escalating ­market values can be attractive because they yield additional revenue without raising the tax rate. The public, on the other hand, desires certainty. Businesses and households want to be able to predict with a high degree of accuracy exactly what their tax obligation will be in the future. Both businesses and households tend to favour stable valuations and stable tax rates. The tension becomes most clear and strident following revaluations or other significant adjustments in the property tax base. If public officials fail to adjust tax rates to hold revenues relatively constant, public protest is often the result. But even if rates are reduced overall, there may well be a significant tax shift between regions or property classes that affects some taxpayers much more than others. If this tension between a desire for buoyancy by public officials and a desire for stability by taxpayers is not recurring, it likely means that taxpayers have prevailed and the tax is losing relevance as a funding source.

The final tension to be mentioned is that between earmarking tax revenues for a particular purpose versus placing all funds in a common general fund. Experience suggests that public acceptance of a property tax is greatly enhanced if the public understands exactly what infrastructure or service improvements will result if the tax is paid. This argues strongly for earmarking the tax for those specific purposes. On the other hand, public finance theory tends to favour placing tax revenues in a general fund from which a broad range of public services can be funded. Such an approach grants to public officials greater flexibility in managing the affairs of government. In this instance, fostering public acceptance and support should perhaps trump finance theory more often than it does.

The chapters that follow are organized loosely around what some have termed the property tax revenue identity. This expression recognizes that the actual revenue collected through the property tax is a function of

how the property to be taxed and its taxable value are legally defined

how property is actually valued (valuation rate)

what the tax rate is

the proportion of the total property in a jurisdiction that actually appears on the fiscal cadastre (coverage) and

the actual collection rate.

Of these five factors, three are the result of administrative practices: the valuation rate, the coverage and the collection rate. Defining the tax base and setting the tax rate are largely policy considerations. In the chapters that follow, some authors approach particular elements in this revenue identity, such as rate ­setting or collection practices (Chapters 1–6). Others paint with a broader brush and focus on policy issues or structural design considerations (Chapters 7–10). Finally, some of the chapters focus on more specialized topics, such as ­computer-assisted mass appraisal or how property owned by the government but leased to private entities should be treated by the tax system (Chapters 11–15). In combination, the chapters present a rich and detailed understanding of property tax practices around the world.

This brief discussion has pointed out that when local history and conditions combine with the inherent challenges in designing and implementing a property tax, variations in policy choices and administrative practices are inevitable. That some choices and practices are superior to others has also become apparent over the years. The purpose of this volume is to introduce the reader to both the options and the better alternatives, where possible. Selection and implementation of strategies and techniques will of course require some degree of ­adaptation to local conditions. And it might well be asked whether when all is said and done, a tax that only raises 1–3 per cent of GDP is worth the effort and political fallout. If the property tax is seen as a national tax, the answer may well be no. Income and value added taxes quite likely have higher yields with fewer ­administrative challenges, but as a mainstay in local revenue sources, the ­property tax is a critical element. Our strong belief is that the property tax ­represents a key element in providing a solid foundation and stable funding source for basic public services.

Reference

Walters, Lawrence, 2011, Land and Property Tax: A Policy Guide. Nairobi, Kenya: United Nations Human Settlements Programme.

1

Property Tax: A Situation Analysis and Overview

Harry Kitchen

Introduction

Property taxation is the backbone of municipal finance in most developed countries, and has been for some time. More recently, it has played an increasingly important role in financing local government services in a number of developing and transitional countries. Over the years, and regardless of the country, property tax has not been without controversy on a variety of issues and it still faces substantial controversy on a number of fronts. Many of these are discussed in this chapter, which is separated into a number of sections. The first lays out the role that property taxes should play in financing municipal services. The second provides data on the relative importance of property taxes as a generator of local revenue in a range of countries. Then we note the base for property taxation in the same countries. The next section covers a number of important and controversial issues in assessment including the identification of property; the importance of establishing uniform assessment practices; the responsibility for assessment; the frequency with which it should take place; the importance of an appeals mechanism; and mass appraisal as an assessment technique. Then we look at a number of issues around property tax rates, in particular, responsibility for setting the tax rate; limits on property tax rates; variable tax rates versus uniform rates; taxation of business properties; exporting the tax on commercial and industrial properties; property taxes and urban sprawl; responsibility for tax billing and collection; and other land and property related taxes used by local governments. Then we turn to the often mentioned and frequently maligned incidence of the property tax and whether property tax relief schemes should be used to remove some of the alleged regressivity of the property tax. The final three sections cover Senior the politics of the property tax; some speculations on the future of the property tax, and a final summary.