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Tax Aspects of Domestic Resource Mobilisation – a Discussion of Enduring and Emerging Issues Land Tax. UN Financing for Development Office & IFAD Rome, 4-5 September 2007 M Grote National Treasury, South Africa. Forms of property taxation. 3 basic form of property taxation:

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tax aspects of domestic resource mobilisation a discussion of enduring and emerging issues land tax

Tax Aspects of Domestic Resource Mobilisation – a Discussion of Enduring and Emerging IssuesLand Tax

UN Financing for Development Office & IFAD

Rome, 4-5 September 2007

M Grote

National Treasury, South Africa

forms of property taxation
Forms of property taxation
  • 3 basic form of property taxation:
    • Tax based on annual or rental value of property – (estimated net rental value pa)
    • Tax based on capital value of land & improvements – tax based on assessed valueo of land & improvements
    • Tax based on site or land value:
      • Kenya, Australia, New Zealand, (South Africa), Taiwan land value system is the site system, excluding improvements such as factory buildings or houses or crops – narrow tax base necessitating higher tax rates
  • Ad valorem property taxes target ownership of fixed real estate:
    • Based on assessed value or a closely related proxy
  • Agricultural land tax (value of unimproved land in its agricultural use)
    • Not to disincentivise productive investments
    • Value does not include improvements such as fencing, drainage, dams
    • Opportunity costs
    • Hence, market value of the freehold without encumbrances & improvements
  • Urban property tax or ‘rates’ or site value tax is on market value:
    • Flat rate tax would tax value of building & land (total improved land)
    • Value of land & fixed investments/improvements
    • In urban context market value readily observable, determined by valuers based on active property market – close comparables (recently traded properties)
economic theory rationale for land tax
Economic theory & rationale for land tax
  • Arguments in favour of land tax (see H George, John Locke):
    • To provide for own-source revenues for local governments & land reform
      • Beneficial land market effects: lower entry price, stop under-utilisation of prod. land
    • Land taxes should not distort economic incentives (fixed supply of land)
    • Equitable, as it targets unearned income: Value capture – rent caused by public investment or inherent potential of land without investment/activity of landowner (benefit received principle)
      • Is progressive as owners of large properties must pay more (=ability to pay principle)
      • Automatically compensates for land value changes – if land value improves because of public infrastructure projects, value & tax increase commensurately
      • Addresses “free-rider” problem
      • Public sector may invest even more, thereby improving agricultural outlook
      • Targeting unimproved land may lead to productivity-enhancing investments
    • Disincentive to land speculation in both urban & rural areas
    • Assist in breaking up large farm units with accompanying increases in production – intensified land use (see Chile land reforms)
    • Relatively easy to administer (cannot hide land) – improves tax morale
  • Arguments against:
    • Local governments must rely on more than one tax
    • Valuation & admin could be challenging for low income countries
    • Land tax may intensify intensive land use with adverse impact on environment
administrative systems
Administrative systems
  • Valuation methods:
    • Area based land tax: measured land area adjusted by fertility of soil & location
    • Self-appraisal: taxpayer provides value assessment but under-valuation arrested with expropriation clause whereby govt. buys land @ declared value
    • Computer Aided Mass Appraisal: en masse valuations by relying on key statistical coefficients (both used in rural & urban areas)
    • Banding: assess properties according to 1 to 7 value bands in lieu of individual valuations
  • Collection should be done at local level:
    • Globally, taxation most efficient when tax collection & expenditure of these revenues executed by same level of government (subsidiarity/Tiebout principle)
    • Tax rate be set by local government (effective collection in SA already at 0.5%)
    • At this rate land tax capitalisation (=neg. impact on land values) will be low (in case of SA at 1% of land tax rate, land values will decline by 5%)
    • Communal areas without freehold rights should be exempted / fair assignment of shares
    • Tax relief for poorest cohorts: sufficiently high thresholds (admin expediency, phasing-in to improve acceptability BUT not for low agricultural produce prices)
    • Special relief measures or tax credits in times of drought / catastrophic events
other design issues or tax alternatives
Other design issues or tax alternatives
  • Value of uniform and up-to-date cadastre:
    • Choice of tax base for valuation informed by availability / verifiability of data
    • In cities choice between rental value, capital value, land value, market value
    • In rural areas: determined by land use potential (climatic regions, soil types, potential for crops’ multi-year cash flow potential)
  • International practices & justification for land taxes (World Bank, 2006):
    • Promoting urban renewal
    • Ensuring productive use of restituted land
    • Defining property rights – against which emerging farmers can borrow
    • Creating land valuation capacity (needed for Capital Gains Tax)
    • Ease in structural / redistributional reforms
    • Saving on assessment costs
    • Discouraging foreign absentee ownership
    • Arresting excessive speculation
    • Managing political pressures regarding unequal access / ownership of land
  • Policy question: revenue potential doubtful in Africa, given subsistence farming?
    • Land taxes generate up to 7% of total revenue in industrialized economies
current sa land redistribution reforms
Current SA land redistribution reforms
  • SA Government seeks to accelerate land reform program – progressive land taxes are one of instruments (next to distributing govt.-owned land)
  • Possibly extending property taxes as provided in Municipal Property Rates Act (MPRA) of 2004 to agricultural land – BUT relief for improvements
  • 2 options investigated:
    • Agricultural land tax conforming to requirements of MPRA – fast-tracking reform
    • Drafting new law specific to agricultural land, assigning tax collections to local authorities (service delivery) or national government (land redistribution finance)
  • According to MPRA total land surface of SA distributed across 237 local & metropolitan municipalities with mandate to levy property rates, however, only few collect currently from commercial farms
    • MPRA applicable to agri-land, taxing also improvement in support of simplicity?
  • Pre-1994 many municipalities did exempt agricultural land, other used regressive charging: first ha was taxed 100X more than 20th ha
  • Central govt. will impose uniform standards and cap annual rate increases
  • Currently, difficult discussion as to exempting certain lands or properties owned by govt.: dams, nature conservation sites, servitudes for power lines
what about betterment valorization taxes
What about betterment/valorization taxes?
  • Betterment taxes / special assessment apportion cost of public infrastructure investment to property owners benefiting from improvements
    • Levied for narrowly targeted public investment and charges limited to property owners who directly benefit from it
    • E.g., irrigation systems, new roads, urban renewal projects
  • Special form of betterment tax is valorization tax has been successfully implemented in Columbia, Mexico to improve urban infrastructure but with active coordination, buy-in and public selection / prioritisation of projects (greening projects, street lighting, public libraries, sewers
    • Projects are compared as to benefits & costs, public mostly affected can make input and be consulted on execution of project
    • Deepening of democracy ought to be encouraged
    • In early 1960’s Columbia’s valorization tax contributed up to 38.6% of total property tax collections
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