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 • 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” • 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 • 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? • 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 • 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 • 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 • 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 …… • 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 • “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 • 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 • 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. • 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 • 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). • 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 • 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 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”
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 • 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 • 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 • 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”