Appendix 3. Increasing Revenue from Real Property Taxes

International Monetary Fund. Fiscal Affairs Dept.
Published Date:
October 2013
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Recent years have seen a dramatic increase in interest in boosting revenue from property taxes—the term being shorthand here for the recurrent taxation of immovable property—in places as diverse as Cambodia, China, Croatia, Egypt, Greece, Ireland, Liberia, and Namibia.73 How much more revenue can property taxes contribute in the longer term? Why has there been this upsurge of interest? And what are the key challenges for reform?

Revenue potential

Recurrent taxes on immovable property now yield fairly modest amounts in most countries: the average revenue from recurrent property taxes in high-income countries is about 1.1 percent of GDP (5.5 percent of total taxes), and that is more than 2½ times the amount in middle-income countries (0.4 percent of GDP, 2.1 percent of total taxes). But there are huge variations in revenue raised within the two groups (Figure A.3.1).

Figure A.3.1.Distribution of Yields from Real Property Taxes, 2009

Sources: IMF, Government Finance Statistics; Organisation for Economic Co-operation and Development; and IMF staff estimates.

These large disparities in tax yield doubtless reflect differing degrees of popular opposition to the use of such taxes and technical constraints in their administration—but they also signal a large potential for enhanced utilization. The highest level of revenue found in middle-income countries, which could be taken as an ambitious general revenue target for these countries, is about 1 percent of GDP, or 2½ times the current average. Among high-income countries, a number raise more than 2 percent of GDP from recurrent taxes on property (Canada, France, Israel, Japan, New Zealand, the United Kingdom, and the United States) and a few of these (Canada, the United Kingdom, and the United States) raise even more than 3 percent of GDP. For high-income countries, a target of 2-3 percent of GDP is a realistic long-term goal.

The rationale for increased use of property taxes

The impetus to reform is country specific, but in most cases reflects revenue needs as well as efficiency and fairness considerations. (A few countries, particularly in Asia, have recently increased property taxes74 substantially in an attempt to quell strong property price appreciation).

Property taxes, in the form of recurrent taxes levied on land and buildings, are generally considered to be more efficient than most other taxes, primarily because of the immobility of the location-specific attributes reflected in property prices: a pleasant summer house by the lake is hard to put in an offshore bank account. Studies of the growth hierarchy, discussed in Section 2, have indeed generally found taxation of immovable property to be more benign for economic growth than other forms of taxation, in particular compared with direct taxes (OECD, 2010b). Importantly, however, the efficiency case is stronger for taxing residential property than that for taxing business property—consistent with the general principle of avoiding taxes on intermediate inputs—except insofar as this serves to correct externalities or as a rough form of payment for services. In all cases, of course, the timing of any property tax reform should take into account market conditions.

Intergovernmental issues commonly loom large in reforming property taxes. To the extent that the quality of publicly provided local services is reflected in property values, allocating the revenue and design of the tax to a subnational level of government—as is common and is widely recommended—can improve accountability and the effectiveness of political institutions. This may also call for some adjustment of intergovernmental transfers, as well perhaps as agreeing on minimum and maximum rates to limit tax competition (undercutting others) and tax exporting (shifting an undue part of the burden to nonresidents).

The incidence of the property tax—who bears the real burden—has been intensively debated, with a growing consensus that the tax burden is borne predominantly by those with middle and high incomes. The progressivity of the tax can be enhanced by a variety of measures intended to reduce or eliminate tax liabilities for low-income owners of property (for example, by taxing only properties valued at or above some threshold amount). To the extent that the property tax is truly a benefit tax, however, with the amount paid an accurate reflection of the value of services received, it would have no distributional impact.

Implementation challenges

Implementing a modern market-value-based recurrent tax on land and buildings is a challenging task, requiring substantial up-front investment in administrative infrastructure. Key requirements include establishing a comprehensive cadastre (fiscal property register) and recording physical coordinates in addition to ownership and property value data. This is a data-intensive exercise that typically requires extensive cooperation and exchange of information among a number of entities (including tax authorities, local governments, courts, and geodetic agencies). To ensure the buoyancy and fairness of the tax, an effective valuation system is required that accurately tracks market values through regular updates.75 Although the development of effective computer-aided mass appraisal systems has facilitated the valuation process considerably, many practical issues remain, including lack of well-qualified property assessors in many countries. Finally, effective enforcement of the property tax is lacking in many countries, partly because the tax may be politically unpopular, but also because of historically low yields and the adverse incentive effects that may result from a mismatch between who is assigned the responsibility for tax collection and who ultimately receives the revenue.

Although there are strong economic arguments for strengthened immovable property taxation, careful planning and execution, combined with improvements to the basic administrative infrastructure—and, in many cases, strong political will—are essential for successful property tax reform.

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