Taxing agricultural land
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Taxing agricultural land. Malcolm Childress, David Solomon and Rogier van den Brink. What is a land tax?. “land tax” is a tax on the value of land, which is paid by the owner. Different from a property tax: land tax taxes the value of the land only

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Taxing agricultural land

Taxing agricultural land

Malcolm Childress, David Solomon and Rogier van den Brink


What is a land tax

What is a land tax?

  • “land tax” is a tax on the value of land, which is paid by the owner.

  • Different from a property tax:

    • land tax taxes the value of the land only

    • property tax taxes the value of the land and the fixed improvements made on it (e.g. a house, a farm building, and irrigation canal).


History the ideal tax

History: the “ideal tax”

  • long been considered an “ideal tax” by a wide range of scholars and politicians:

    • 17th century philosopher John Locke

    • 18th century revolutionary Benjamin Franklin

    • 19th century politician Henry George:

      • Hence the term “Georgists”, who want the land tax to be the only tax

    • Example from 1990:

      • several leading economists—including four Nobel prize winners—wrote to then President Mikhail Gorbachev, suggesting that Russia use land taxation in its transition towards a free market economy


Economic arguments

Economic arguments

  • does not distort economic incentives (because the overall supply of land is fixed);

  • fair, because it specifically targets unearned income (a rent):

    • the value improvements of land caused by public investment (owners are taxed on what was there originally—the potential of the land) and not an economic activity of the owner;

  • provides a disincentive to land speculation in both urban and rural areas; and

  • relatively easy to administer, because

    • it is impossible to hide land

    • Most rural communities have an idea of what land is worth


Does a land tax redistribute land

Does a land tax redistribute land?

  • Recall that the price of land in the market reflects:

    • Income stream from agriculture

    • Plus value as asset, hedge against inflation

  • Farmers can typically only afford to pay the agricultural value

    • So will be outbid in the land market by the rich

    • Need to remove all distortions favoring large farmers

    • Need subsidies for the poor

    • And a land tax can help, because it reduces the land price and its speculative value

  • See: Binswanger, Hans, Klaus Deininger and Gershon Feder. 1995. “Power, Distortions, Revolt and Reform in Agricultural Land Relations.” In Jere Behrman and T.N. Srinivasan (eds). Handbook of Development Economics. Vol. 3B. Amsterdam: Elsevier.


Does a land tax redistribute land continued

Does a land tax redistribute land?continued

  • In practice, it has not:

    • Usually rates set very low;

    • Low assessment values

    • Example from Brazil:

      • tax locally administered, and large landowners used their influence to evade the tax

      • Taxed “unused” land which is very difficult to define—hence easy to evade


Reasons for adoption of land tax very diverse

Reasons for adoption of land tax:very diverse

  • As part of land restitution: Estonia

  • As a form of land reform: Brazil

  • As a mechanism for defining property rights: Brazil

  • To create property valuation capacity.

  • Defuse transitional tensions: Eastern Europe

  • Build on existing fiscal systems

  • Discourage foreign absentee land ownership: Australia

  • Discourage speculation: Singapore, Jamaica

  • Low cost of assessment: South Africa, Kenya

  • Part of local economic development: Pittsburgh, Harrisburg, Queensland, NSW, Brazil

  • Equity: Australia, Denmark


International best practices

International Best Practices

  • Land taxes should be local:

    • rate-setting, discovery, assessment, billing and collection

    • They should be administered along with the urban rates

  • Basis of assessment should be simple and able to be monitored for consistency. All the following are suitable:

    • Area

    • Self Assessment,

    • Geographic Banding

    • CAMA

    • Community based value factor identification and application

  • It is most important to ensure that the base is capable of being fairly administered.

    • This may be more important than the choice of the base.


Best practices

…… Best Practices ……

  • There should be zero-rated thresholds, phasing in, “circuit breakers”, capping of increases,

  • Should be tailored to local agricultural circumstances in the municipal property rates policy

  • Assessment should not be index-linked to agricultural risk factors such as rainfall and commodity prices

  • Rate should be differentiated from the urban rate.

  • Rate should not be progressive (the base is already distributed progressively)

  • There should not be a tax on land market transactions.

  • There should be an accessible transparent appeal process.

  • There should be on-going monitoring of assessment quality to ensure sound administration


Defining land value

Defining land value

  • “market value”: value as if land was currently sold in the market without any duress by a willing seller to a willing buyer, unencumbered by any loans or other financial obligations.

  • “prairie value”: value as if there were no improvements or any geographical advantages relating to infrastructure or improvements.

  • “use value”: as opposed to “highest and best use” in situations where the value of the land includes the potential for future development, usually for urban residential use.

  • Agricultural land is often valued only on the current use, i.e. agricultural, not on the basis of potential future uses.

  • Use of its “rental value” will also achieve that objective


Area based land tax

Area-based land tax

  • In some countries, the land tax is not based on the actual land value of each individual farm, but on a standardized price per hectare, adjusted by a fertility or location factor.

  • This is in effect a simplified valuation, aimed at reducing the cost of assessment.

  • E.g. Namibia


Self appraisal

Self-appraisal

  • When the taxpayers themselves provide the assessment of the taxable value of the property, the process is known as self-appraisal.

  • It has an advantage in that it is simple to administer, as the cost of appraisal is shifted to the taxpayer.

  • In practice, taxpayers often have access to this information, having conducted valuations for other purposes.

  • Self appraisal gives them an opportunity to provide this otherwise confidential information voluntarily.

  • Under-appraisal is often discouraged by a provision that expropriation can take place at the declared value.


Community assessment

Community-assessment.

  • International experience: even in very remote areas, the local population has a pretty good idea of land values, even if these are not correctly reflected in legal documents.

  • For instance, local mayor (tribal chief) and agricultural extension agent know what land is generally worth.

  • This "community perception" is a promising avenue, which has been tested out successfully in several countries.


Banding

Banding

  • A method of lowering the cost of appraisal

  • Banding requires the assessing officer to assign each property to one of several value bands

  • Instead of performing a detailed valuation in each case.


Computer aided mass appraisal cama

Computer Aided Mass Appraisal. (CAMA).

  • A means of performing valuations en masse by determining the key value creating variables by statistical analysis

  • estimating values by applying the estimated statistical coefficients to locally collected data.

  • CAMA is reported to be much less expensive than conventional valuation.


Thresholds

Thresholds

  • Many jurisdictions place a minimum threshold of land value, below which no tax is charged.

  • Dual function: it both provides relief for the poor and lowers the cost of administration by avoiding the need to conduct a detailed valuation on a very large number of small properties.

  • Eases the transition when an area is absorbed into the tax base.


South africa municipal property rates act

South Africa:Municipal Property Rates Act

MPRA conforms to “best practice”:

  • Gives proper basis for taxing all real estate, including agricultural

  • Agricultural land is already part of the municipal tax base. (has been since “wall-to-wall local government”)

  • Allows differential rates

  • Requires certain reliefs, eg threshold, phasing in

  • Requires a properly consultative “rates policy”


But in the old transvaal

But in the old Transvaal….


How hard would it be to implement a land tax in sa

How hard would it be to implement a land tax in SA?

  • Effective rate can be very low, half to one percent

    • Half a percent on half of the land would yield significant revenue

    • Can differentiate between categories of land use.

  • Enabling legal framework is in place (MPRA)

    • But national guidelines needed, as per Section 5 (2) b of MFMA

  • Could be integrated with work on municipal financial framework


Namibia

Namibia

  • Land taxation rate is set at 0.75 percent of the unimproved value of the farmland

  • land values determined using a standardized metric per hectare and by accounting for the size of the farm.

  • Raises substantial revenue for land reform programs

  • reduces inefficient use of land

  • encourages an increased land supply and moderate pricing of agricultural land,

  • as well as to specifically defend against land speculation and foreign ownership:

    • charges an additional 0.25 percent of land value annually for every extra farm owned

    • charges foreigners a higher land tax rate of 1.75 percent rather than 0.75 percent


Implementation challenges

Implementation challenges

  • iso-value metric does not account for minor topographical variations that alter land values.

  • extra charges for additional farms do not account for the aggregate size of all farms:

    • an individual holding several farms with a total of 10,000 hectares could be taxed more heavily than an individual owning a single 15,000 hectare farm.


Conclusion

Conclusion

  • Economic rationale for land tax is sound, in theory and in practice

  • Administration is not as difficult as earlier observers had thought

  • Land tax can never be the only instrument to promote land redistribution

  • But should be seriously considered as part of the “package”


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