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Property Tax Reform: Insights from Brazil, using the Municipality of Porto Alegre as a Case Study

Property Tax Reform: Insights from Brazil, using the Municipality of Porto Alegre as a Case Study. Claudia M. De Cesare. PhD Civil, MSc, Diploma, BSc Porto Alegre City Council, Brazil. UFRGS: CEEAP. Advisory Boarding – IPTI. Teaching Faculty - Lincoln Institute of Land Policy.

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Property Tax Reform: Insights from Brazil, using the Municipality of Porto Alegre as a Case Study

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  1. Property Tax Reform: Insights from Brazil, using the Municipality of Porto Alegre as a Case Study Claudia M. De Cesare PhD Civil, MSc, Diploma, BSc Porto Alegre City Council, Brazil. UFRGS: CEEAP. Advisory Boarding – IPTI. Teaching Faculty - Lincoln Institute of Land Policy cmdecesare@smf.prefpoa.com.br

  2. DOS DON’T OBJECTIVE The revision of some initiatives on property tax reforms in Brazil lessons/reflections INSIGHTS Practices & Attitudes BASED ON The Porto Alegre experience

  3. Program of Presentation IPTU Fiscal I. IMPORTANCE II. BASIC FRAMEWORK PROPERTY TAX III. CASE STUDY – POA’ Reform IV. INSIGHTS

  4. PART I IMPORTANCE OF PROPERTY TAX BRAZIL Total Tax Burden as a % of GDP 2002: >36% GDP Source: Rezende and other (1989); Villela (1991); Afonso(1992); Afonso (1993); From 1993-2000, BNDES (1993-2000); Inland Revenue (2001); Instituto Brasileiro de Planejamento Tributário (2002)

  5. Taxation Pattern in Brazil - 2001 Consumption -> regressive in nature % of GDP • Argentina: 1.47 • Uruguay: 1 • Colombia: 0.5 • Costa Rica: 0.24 • Mexico: 0,20 ... Latin America International terms • UK, Canada, US: > 2.5 – 3.3 • 1% -> common.. Poor performance as a revenue source Source: Inland Revenue

  6. Importance of Property Tax Revenue from local taxes: 31.7% of Local revenue revenue source • +/-9.5% of Local Revenue • +/-30% of Revenue from local taxes, 2nd most important Other aspects Contribute towards improving the knowledge about the territory, as long as the cadastre contains information on land use, property values, land ownership ...

  7. PART II GENERAL FRAMEWORK OF PROPERTY TAX Definition (IPTU) an annual tax on urban land and buildings • Local Government • 89.4% of 5.507 Municipalities (FGV 2000) Institution & Administration Tax Legislation • Brazilian Constitution/National Fiscal Code • taxpayer • tax base • general exemptions • Local legislation-> Chamber of Councilors • tax rate, additional exemptions, etc • any new valuation list -> Local Law political X technical decision

  8. Tax Policy – Major Features Taxpayer Owner, possessor or title-holder Tax base Market value, considering land and improvements Tax rates Progressive Single (uniform) Selective (differential) ≠ rate ≠ rate = rate f (use) f (area) f (location) f (classes of assessed value) - Simple (“KIS”) - more acceptable(?!) • land development • ability-to-pay • public equipment and service -ability-to-pay

  9. Statutory Rates Examples... = Effective rate??

  10. Tax Administration and Assessment Cadastre LEGAL city X REAL city: INFORMALITY !!! • Land areas already developed, but without building permits (illegally) • Property occupied by possessors • Building areas added without declaring them • Taxable basis is reduced • Potential for revenue collection is reduced Updating the cadastre -> High cost activity GIS??

  11. Assessment Method: ample use of cost approach • Common to identify inconsistencies in the valuation model • Sometimes, use of arbitrary factors • MRA -> Land values for cost approach • Lack of control over assessment performance • High political influence over AV-> Legislation • Long assessment cycles are also observed In general, poor assessment performance

  12. Standards • National standards for valuation YES • Specific standards for valuation for taxation purposes NO NO • Standards for ratio studies (assessment performance) Evasion Tax collection ratio > 80%: 13% of the municipalities (IBGE 2001) • No enforcement measures/no application • Fiscal policy or bad administration -> stimulate evasion • Strategy –> postponing the payment • Perception of unfairness Mix of reasons!!

  13. PART III Case Study: Property Tax Reform Experience in Porto Alegre (2 proposals) area: 470 Km2 (urban zone) population: 1.4 million or 2.900/km2 GDP: US$ 4.7 billion or US$ 3,531 per capita GINI index: 0.58 – High income concentration Labour Party (PT) in charge of Local Government since 1988 (won 4 elections), but without majority in the Chamber of Councillor Facts on Porto Alegre “World Social Forum” “Participatory Budget Scheme” Orçamento participativo

  14. Proposal 1 – IPTU’2001 Objective: • increasing fiscal equity • enhancing the importance of the tax as a revenue source • creating more efficient administration of the property tax Motivation: poor performance of the tax as a revenue source: +/- 20% of potential revenue II. need to increase public investment -> demands III. strong inequities in the tax burden distribution All possible problems ...

  15. AV • Assessment Performance – Basic Measures: MV -> SP Vacant Site Apartments Houses Median 27.11 17.72 30.64 -> Low assessment level COD (%) 69.72 59.65 62.02 -> Low degree of uniformity Why? -Long assessment cycle -> 10 years • Use of capping systems • Inconsistencies in the valuation approach • Strong pressure for reviewing exemptions: • Properties used for agricultural purposes • Environmental preservation areas

  16. Coverage of the cadastre • 26% of the residential property were out of cadastre (Census’02) Its updating -> HIGH COST • Tax evasion-> (2nd Stage) Collection Performance 74% of tax revenue expected Evasion -> high-valued vacant sites • Government’s perception on the unfair distribution of the tax burden Justify • Inherent regressivity of property tax -> tax levy= F(income) • Perverse income concentration/social inequality PT’s Flag Progressive rates

  17. Since there were many different problems in the current system, we decide to focus initially on three of them only: Project General valuation (Mass appraisal techniques) Progressive rates according to classes of AV Tax relief to properties used for agricultural purposes and preservation areas +... Other areas, such as updating cadastre -> covered in the next year Modifying taxes is not an easy task: losers X winners Team • Local authority members - valuers, property tax experts, and urban and environmental planner • University Neutrality

  18. Assessment – Stages of Work Sales Comparison Approach Definition of valuation technique -> MRA: no’black-box’ Data sample -> 10,000 sales Preliminary data analysis -> subsets of data, variables, hypothesis MRA models -> vacant sites, apartments, houses, offices and car parking spaces INNOVATIVE CHARACTER Study of segmentation variables -> homogeneous region Structure of the regression models -> non-linear regression models Validation of models (holdout sample)

  19. Validation (holdout sample) Offices, car parking spaces > similar to Apartments AV SP 25% of data BASIC MEASURE MEDIAN COD - % 27.1 -> 99.6 69.7-> 29.1 Vacant Sites Apartments 17.7 -> 99,9 59.6 -> 12.8 Houses 30.6 -> 102.3 62.0 -> 22.5 Visible improvement IAAO: COD- 10-15% Reduction of inequities

  20. New Rates for the Property Tax Progressive f (classes of Assessed Value) Gradual scale of progressivity (‘sliding rates’) Reduction in the statutory rates for the majority of units (increase of Assessment Level) CURRENT RATES 0.85 1.10 1.5 -> 6.0 % Lack of consensus

  21. Tax Relief • Exemption to up to 300,000 m2 • Reduced rates Agricultural purposes • Reserves • Defined in the urban plan • Need to be maintained preserved preservation areas Other measures -> More supporters, without significant financial impact Exemption according to AV, increased from R$ 5,000 to R$ 14,000 Exemption for pensioners, increased from 3 to 4 SW

  22. Financial Impact • Global impact: 10-15% in Revenue - moderated • Impact at the individual level- strong As a % of Properties: Exemption: 9% Tax reduction: 20% Tax increase up to 25%: 15% Tax increase25-50%: 14% Tax increase50-100%: 18% Tax increase > 100%: 24%

  23. Criticisms – Media scandals ?!?! Councilors/Associations: Black-box ?! Impossible to understand Economists: Why was not used a panel, a dynamic model !? Reliability of data sample was questioned Council of Economy: “Out valuers” Mistake in the work: Undertook without their participation! Independent (private) valuers: similar reaction

  24. Continued... Councilors/Associations: Fiscal fury (greed) – no need for $$ ?! Tax burden is excessive and unbearable From the potential losers: progressivity was confiscatory/unfair From the potential winners: silence Councilors + LA: Concerns on the impact at the individual level General criticism of lack of transparency Farmers/growers : ‘la tratorada´ a march by tractors in the downtown APPROVAL of the PROJECT -> IMPOSSIBLE

  25. Local Authority + Associations Approval of Proposal Proposal 2 – IPTU’2001 Major areas covered by proposal – less ambitious Project Assessment ->Adjustments in AV- 10.000 units Tax relief to properties used for agricultural purposes and preservation areas Initially -> Similar revolts, the same associations involved media exploitation again Councilors -> Announced in the media their future votes: “no” • Improved their understanding • Accepted minor suggestions • Assumed a political commitment for the next year – Committee Councilors -> “yes”

  26. PART IV Insights-> Practical Lessons DOS DON’T • Improving assessment - > challenges to be faced in political sphere • Ideally: Political Activities X Technical Activities -> LEGISLATION Rates - Structure Assessment -> politicians are not capable to evaluate them • Assurance of regular (short) assessment cycles by law • Standards for ratio studies – acceptable assessment performance in Brazil • Changing the paradigm: - Dealing step by step (participatory approach)... - More transparency in the process - (room for International support..) Adverse Political Atmosphere

  27. DOS DON’T • Polemic Issues. Ex. Progressivity: Look at alternative solutions and acceptability • Identification of tax limits and controversial policies -> Correct!! • Investigation of non-conventional solutions. Ex. Cadastre: Two strategies – surveying and self-”assessment (registration)” • Do not ignore other complementary/alternative revenue sources: - permissions for the use of public space – underground - transfers (sale) of building rights (Solo Criado) - negotiation for altering the building permits (when possible) for private land developments for low income families

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