Tax Aspects of Domestic Resource Mobilisation
– a Discussion of Enduring and Emerging Issues
Land Tax
UN Financing for Development Office & IFAD
Rome, 4-5 September 2007
M Grote
National Treasury, South Africa
Forms of property taxation
• 3 basic form of property taxation:
– Tax based on annual or rental value of property – (estimated net rental value pa)
– Tax based on capital value of land & improvements – tax based on assessed
valueo of land & improvements
– Tax based on site or land value:
• Kenya, Australia, New Zealand, (South Africa), Taiwan land value system is the site
system, excluding improvements such as factory buildings or houses or crops –
narrow tax base necessitating higher tax rates
• Ad valorem property taxes target ownership of fixed real estate:
– Based on assessed value or a closely related proxy
• Agricultural land tax (value of unimproved land in its agricultural use)
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Not to disincentivise productive investments
Value does not include improvements such as fencing, drainage, dams
Opportunity costs
Hence, market value of the freehold without encumbrances & improvements
• Urban property tax or ‘rates’ or site value tax is on market value:
– Flat rate tax would tax value of building & land (total improved land)
– Value of land & fixed investments/improvements
– In urban context market value readily observable, determined by valuers based
on active property market – close comparables (recently traded properties)
Economic theory & rationale for land tax
• Arguments in favour of land tax (see H George, John Locke):
– To provide for own-source revenues for local governments & land reform
• Beneficial land market effects: lower entry price, stop under-utilisation of prod. land
– Land taxes should not distort economic incentives (fixed supply of land)
– Equitable, as it targets unearned income: Value capture – rent caused by
public investment or inherent potential of land without investment/activity of
landowner (benefit received principle)
• Is progressive as owners of large properties must pay more (=ability to pay principle)
• Automatically compensates for land value changes – if land value improves because
of public infrastructure projects, value & tax increase commensurately
• Addresses “free-rider” problem
• Public sector may invest even more, thereby improving agricultural outlook
• Targeting unimproved land may lead to productivity-enhancing investments
– Disincentive to land speculation in both urban & rural areas
– Assist in breaking up large farm units with accompanying increases in
production – intensified land use (see Chile land reforms)
– Relatively easy to administer (cannot hide land) – improves tax morale
• Arguments against:
– Local governments must rely on more than one tax
– Valuation & admin could be challenging for low income countries
– Land tax may intensify intensive land use with adverse impact on environment
Administrative systems
• Valuation methods:
– Area based land tax: measured land area adjusted by fertility of soil & location
– Self-appraisal: taxpayer provides value assessment but under-valuation
arrested with expropriation clause whereby govt. buys land @ declared value
– Computer Aided Mass Appraisal: en masse valuations by relying on key
statistical coefficients (both used in rural & urban areas)
– Banding: assess properties according to 1 to 7 value bands in lieu of individual
valuations
• Collection should be done at local level:
– Globally, taxation most efficient when tax collection & expenditure of these
revenues executed by same level of government (subsidiarity/Tiebout principle)
– Tax rate be set by local government (effective collection in SA already at 0.5%)
– At this rate land tax capitalisation (=neg. impact on land values) will be low (in
case of SA at 1% of land tax rate, land values will decline by 5%)
– Communal areas without freehold rights should be exempted / fair assignment
of shares
– Tax relief for poorest cohorts: sufficiently high thresholds (admin expediency,
phasing-in to improve acceptability BUT not for low agricultural produce prices)
– Special relief measures or tax credits in times of drought / catastrophic events
Other design issues or tax alternatives
• Value of uniform and up-to-date cadastre:
– Choice of tax base for valuation informed by availability / verifiability of data
– In cities choice between rental value, capital value, land value, market value
– In rural areas: determined by land use potential (climatic regions, soil types,
potential for crops’ multi-year cash flow potential)
• International practices & justification for land taxes (World Bank, 2006):
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Promoting urban renewal
Ensuring productive use of restituted land
Defining property rights – against which emerging farmers can borrow
Creating land valuation capacity (needed for Capital Gains Tax)
Ease in structural / redistributional reforms
Saving on assessment costs
Discouraging foreign absentee ownership
Arresting excessive speculation
Managing political pressures regarding unequal access / ownership of land
• Policy question: revenue potential doubtful in Africa, given
subsistence farming?
– Land taxes generate up to 7% of total revenue in industrialized economies
Current SA land redistribution reforms
• SA Government seeks to accelerate land reform program – progressive land
taxes are one of instruments (next to distributing govt.-owned land)
• Possibly extending property taxes as provided in Municipal Property Rates
Act (MPRA) of 2004 to agricultural land – BUT relief for improvements
• 2 options investigated:
– Agricultural land tax conforming to requirements of MPRA – fast-tracking reform
– Drafting new law specific to agricultural land, assigning tax collections to local
authorities (service delivery) or national government (land redistribution finance)
• According to MPRA total land surface of SA distributed across 237 local &
metropolitan municipalities with mandate to levy property rates, however,
only few collect currently from commercial farms
– MPRA applicable to agri-land, taxing also improvement in support of simplicity?
• Pre-1994 many municipalities did exempt agricultural land, other used
regressive charging: first ha was taxed 100X more than 20th ha
• Central govt. will impose uniform standards and cap annual rate increases
• Currently, difficult discussion as to exempting certain lands or properties
owned by govt.: dams, nature conservation sites, servitudes for power lines
What about betterment/valorization taxes?
• Betterment taxes / special assessment apportion cost of public
infrastructure investment to property owners benefiting from improvements
– Levied for narrowly targeted public investment and charges limited to property
owners who directly benefit from it
– E.g., irrigation systems, new roads, urban renewal projects
• Special form of betterment tax is valorization tax has been successfully
implemented in Columbia, Mexico to improve urban infrastructure but with
active coordination, buy-in and public selection / prioritisation of projects
(greening projects, street lighting, public libraries, sewers
– Projects are compared as to benefits & costs, public mostly affected can make
input and be consulted on execution of project
– Deepening of democracy ought to be encouraged
– In early 1960’s Columbia’s valorization tax contributed up to 38.6% of total
property tax collections