Back Matter

Appendix Table 1.

Property Taxes in OECD Countries, 2010

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Source: OECD Revenue Statistics 2011.
Appendix Table 2.

Property Taxes in Non-OECD Countries, 2010

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Source: GFS.
Appendix Table 3.

Property Taxes in High-Income Countries, 2010

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Source: OECD Revenues Statistics and GFS.
Appendix Table 4.

Property Taxes in Middle- and Low-Income Countries, 2010

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Source: OECD Revenues Statistics and GFS.

References

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1

The author is grateful to Michael Keen, Victoria Perry, Ruud de Mooij, Dora Benedek, Russell Krelove, Mario Mansour, Thornton Matheson, Martin Grote, Selcuk Caner, Peter Mullins, Victor Thuronyi, Riel Franzsen, and Lawrence Walters for constructive comments on an earlier draft. Kelsey Moser contributed with highly competent research assistance including the compilation of the underlying dataset on property tax revenue and the regression analyses reported in Box 2.

2

Although a distinction should be made between taxation of business and residential properties in respect of both their economic effects and revenue potential.

3

A paper by Cabral and Hoxby, “The Hated Property Tax: Salience, Tax Rates, And Tax Revolts”, suggests that the salience of the tax can explain differences in the level of property taxes across areas.

4

Such as, for example, transfer pricing provisions, a multitude of exchange of information arrangements (such as the EC’s interest directive and the Global Forum), controlled foreign company legislation, and thin capitalization provisions.

5

See, for example, Bahl, Martinez-Vasquez, and Youngman (2008) and (2010).

6

The main ones being GFS and OECD’s Revenue Statistics.

7

Capital transfer taxation is a buoyant tax handle in some countries (including in some non-OECD countries such as South Africa), but is also generally acknowledged to generate potentially large efficiency costs, and may, furthermore, have negative spill-over effects on the working of immovable property tax systems as discussed in Section IV below.

8

Net wealth and inheritance and gift taxes may rest on a sound rationale in their importance for redistribution from the wealthy (in particular if they apply exemption levels that are high enough to exclude the life-cycle savings of all but the wealthy), and as a useful “backup” to personal income taxes. But they may also discourage savings of the people to whom they apply, and—because of the mobility of their bases—taxation may induce people to move wealth abroad. They also require fairly sophisticated tax administrations, and some countries have scaled-back or eliminated net wealth taxes in recent years, while others have chosen not to introduce them in the first place (for example, Mexico, the UK, and the US have no net wealth taxation).

10

This fairly recent decline in the reliance on property taxes reflects in some cases a continuation of a much longer and stronger trend: for the US, for example, Wallis (2000) reports that while the property tax in 1902 constituted 73 percent of all local government revenues, and 68 percent of combined local and state revenues, these shares had dropped to 40 percent and 18 percent, respectively, by 1992.

11

Using GDP per capita in nominal terms in US$, see Appendix Tables 14. Unfortunately, the sample included only one low income country (Afghanistan).

12

Albeit with large variations within both groups.

13

Appendix Tables 3 and 4 also show that the yield of immovable property taxes on average represents about 4½ percent of total taxes in high income countries against 2.1percent in middle-income countries.

14

Although a large number of transition economies in recent years have implemented decentralization reforms, with devolution also of political decision making—a key element of which has been strengthening of property taxes, typically with some local autonomy to set tax rates (Bahl, 2009).

15

The data deficiencies referred to above do not allow empirical estimation of tax capacity for property taxes, defined as potential tax collections—or the tax ‘frontier’—in individual countries as determined by a variety of structural attributes (see Pessino and Fenochietto, 2010). ‘Tax effort’ then measures actual collections relative to estimated tax capacity.

16

While tax efforts are not necessarily lower in middle-income than in high-income countries, the well established positive relationship between a country’s ability to collect taxes and its development level (see Haldenwang and Ivanyna (2010)) would support the hypothesis that tax capacities generally are higher in high-income countries. If combined with an assumption that countries—within each income group—with the highest property tax ratio also exhibit the highest tax effort, provides the rationale for the simple calculations made here.

17

Bahl and Martinez-Vazquez (2008) conducts simulation experiments for developing countries based on improved collection and assessment ratios, and also arrives at a significant potential for improved property tax collection.

18

However, present levels of taxation particularly in developing countries render this distortion less of a concern (Bahl, 2009).

19

If a property asset yields US$1,000 in untaxed return and the discount rate is 5 percent, its market price in a competitive market will be US$20,000. If a tax of 20 percent is introduced, the (net-of-tax) return will fall to US$800, and the market price to US$16,000 assuming an unchanged discount rate. The (net-of-tax) rate of return will thus remain unchanged at 5 percent for new buyers. This in principle also applies to business properties, although the effect may be more complex if other taxes are affected (for example, if the tax is deductible for CIT purposes).

20

A ‘pure’ benefit tax would in principle prevent tax competition among local governments. However, to avoid potentially harmful tax competition among local governments, particularly as the tax applies to business property, a number of countries set often narrow bands for allowed property tax rates.

21

See for example OECD (2008).

22

Some countries apply the tax to counter ‘speculation’ in land that lies idle or to induce land development.

23

While the use of capital transfer taxes raises broader tax policy issues, such as whether a capital gains tax is in place, the issue of better balancing transfer taxes with recurrent taxes on property is pertinent in many countries, and therefore mentioned here as an important policy objective.

24

The additional problems for valuation of property that may be induced by the use of property transfer taxes are discussed in section D below.

25

It has been argued that property transfer taxes could help dampen price volatility, but the effect is ambiguous and could be counterproductive when lower transaction volumes lead to higher volatility.

26

The use of tax and other policy measures in controlling house price boom-busts are discussed in an IMF Working Paper (WP/11/91) which provides insights on the pros and cons as well as implementation challenges of various policy tools—tax and non-tax—that can be used to contain the damage to the financial system and the economy from real estate boom-bust episodes.

27

There is, for example, renewed interest in strengthening property taxation in a number of countries in the Caribbean region as well as in the Baltic countries.

28

A brief account of historical property tax events in selected countries, including the UK and the US, is provided in Yongman (2008) who refers to the property tax revolts in the UK in 1990 (introduction, and subsequent repeal, of the poll tax) and in the US in 1978 (California’s Proposition 13), when unpopular value-based taxes were replaced with politically more palatable alternatives.

29

The incidence in developing and transition economies may be even less clear than in developed countries due to less developed capital markets and often ill-defined ownership rights.

30

The different incidence views are discussed in Sennoga, Sjoquist, and Wallace (2008) who also address the limitations to the new view and the benefit view when applied to developing and transition countries.

31

These deciles would include, for example, pensioners with low income but valuable property and newly self-employed with low income. Some countries address these particular problems by allowing property tax deferrals until a change in property ownership.

33

This is particularly important for local governments, which have lesser ability to absorb revenue shocks than do central governments with more revenue sources at their disposal. But it also implies that the property tax may be less powerful as an automatic stabilizer than other taxes illustrated here.

34

Tax on agricultural land may in some cases be a substitute for agricultural income tax.

35

African Economic Outlook 2010, AfDB/OECD (2010).

36

A good discussion of valuation methods is provided in Bahl (2009).

37

Bahl (2009), refers (p. 5), for example, to a study of Punjab province in Pakistan where bringing owner-occupied housing fully into the tax net would triple the level of provincial property tax revenues.

38

Kenyon et al (2012) provides a good account of the use of property tax incentives for business in the US, with a critical assessment of their effectiveness in promoting economic development.

39

ECORYS, “Taxation in Africa”, Rotterdam, May 2010.

40

Bird and Slack (2008).

41

One study estimates the revenue costs of exempting government property as equivalent to about 12 percent of collections in India’s 36 largest cities. Many countries, such as Kenya and Canada, charge a payment in lieu for property tax on government property and non-profit uses of property (Bahl, 2009, p. 15).

42

In the case of Windhoek, for example, the rates are 0.0734 percent of the site value, and 0.0379 percent of the house (improvement) value.

43

And particularly in developing countries, where the place of residence is often the same as the place of business, it can administratively be difficult to levy different rates.

45

It is a general experience that comprehensive and accurate registration of property and thereby close to complete coverage of the property tax base is a cornerstone of successful property tax reform, and is in turn crucially dependent on the sharing of data between key players (cadastral agency, property registry, courts, tax authorities, geodetic institutes, etc.).

46

Often because of lack of appropriate training programs or a significant gap in compensation between the public and private sectors.

47

Or more generally, the system applied for the upkeep of the cadastre, including coverage, titling, and valuation.

48

Which in some countries is adjusted for through increases in tax rates—a second best solution in view of the continuous changes in relative property values.

49

USAID (2010), pp. 107–108.

50

In a June 2010 judgment, Germany’s Federal Fiscal Court ruled that the continued failure to conduct a general revaluation of real property violates the equality principle of the German constitution, and that a reassessment of property values is necessary. The problem is that the German property valuation system has relied on assessments dating back to 1964 in the case of the states in the former West Germany and to 1935 in the case of the states in the former East Germany. It is up to the German municipalities to implement the decision (Tax Notes International, 2010, p.652).

51

It is an easy tax handle, with high compliance due to property buyers’ desire to acquire proper legal ownership documents, revenue collections can be very high with low administrative costs, in part because of much fewer taxpayers than under a recurrent property tax, and the tax may be progressive.

52

Another means of avoiding a property transaction tax is to register property in closed corporations such that, in the case of transfers, the object of the sale may not be the property itself, but the shares in the company (or interest in a trust) that holds the property. This would also deprive the cadastre of important market price information.

53

A tax that is expected, though, to be significantly reduced.

54

Remedial measures—proposed or adopted—to strengthen enforcement include moving collection points to banks, rewarding improved enforcement with higher transfers, and linking property tax payments with the provision of utility services.

55

See Bahl and Martinez-Vasquez (2008) for a good discussion.

56

Although elements of self-assessment (or ‘self-identification’) are also found in Hungary, Thailand, and Philippines (Bird and Slack, 2005).

57

A simple example may clarify this point: if both coverage and valuation ratios are at about 0.7 in a given country—not unrealistic assumptions in respect of many developing countries—the total yield of the property tax could potentially double through an aggressive program to widen coverage and update values, and—importantly—is within the existing legal and regulatory framework.

58

Estimates for Latvia indicates that administrative costs at the municipal level exceed 10 percent of revenues in about half of the local governments, and reach up to 36 percent (in addition to the costs incurred at the central government agency involved). However, these seemingly high ratios are affected, not only by ‘high’ administrative costs, but also by very low tax rates, and hence may not provide a generally applicable cost estimate.

59

See for example Mikesell and Zorn (2008), who discuss a variety of country experiences.

60

Such as, for example, in Denmark, Sweden, Northern Ireland, Spain, and Canadian provinces.

61

Eckert (2008) provides a detailed discussion of the construction and working of CAMA systems and its potential application in developing countries.

62

See IMF (2009) which also illustrates the point that property taxation is only one element in determining effective tax rates on property, interest deductibility and (non-)taxation of imputed rent and capital gains being others.

63

A well-known case in the US was ‘proposition 13’, an amendment to the Constitution of California enacted in 1978, which capped both property value increases (at 2 percent per year) and the tax rate (at 1 percent), but ‘capping’ is now in force in most US states (Lutz et al., 2010). Capping is also in place in other cities and countries such as Buenos Aires, Bogota, and Latvia.

64

Ihlanfeldt (2011) discusses the potentially adverse impact of ‘capping’ on housing and labor market mobility, and tests for these effects in the case of Florida.

65

Bahl (2009) refers to several such programs (p. 5).

66

A particular timing issue in this respect is that the government that takes pain in initializing reform may not be the government that also reaps the benefits of reform.

67

See Bahl (2009) for a discussion.

68

These elements are broadly applicable to both developed and developing countries engaged in property tax reform.

Taxing Immovable Property Revenue Potential and Implementation Challenges
Author: Mr. John Norregaard