Land and Property Tax

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LAND AND PROPERTY TAX

A POLICY GUIDE

LAND

AND

PROPERTY

TAX:A

POLICY

GUIDE


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Land and Property Tax:

A Policy Guide

Copyright United Nations Human Settlements Programme(UN-HABIA), 2011

HS Number: HS/081/11EISBN Number(Volume): 978-92-1-132375-7

Disclaimer

Te designations employed and the presentation of the material in this publication do notimply the expression of any opinion whatsoever on the part of the Secretariat of the UnitedNations concerning the legal status of any country, territory, city or area, or of its authorities,or concerning delimitation of its frontiers or boundaries, or regarding its economic system ordegree of development. Te analysis, conclusions and recommendations of this publication do

not necessarily reflect the views of the United Nations Human Settlements Programme or itsGoverning Council.

United Nations Human Settlements Programme (UN-HABIA)P.O. Box 30030, Nairobi 00100, Kenyael: +254 20 762 3120Fax: +254 20 762 3477www.unhabitat.org

Cover Photos UN-HABIA

Acknowledgements

Mohamed El-Sioufi and Clarissa Augustinus provided substantive guidance in developingthis publication. Additionally, Robert Kehew, Claudio Acioly and Gwendoline Mennetrierhave made important suggestions throughout the process of preparing this publication, whichhave improved the final product. We are also grateful to the participants at the 2009 WarsawConference on Land and property taxation who recommended the development of a policyguide on land and property taxation.

Principal author: Lawrence Walters

Contributors: Remy Sietchiping and Solomon Haile

Editing and layout: Roman Rollnick, Eirik Sorlie, Remy Sietchiping and Paul Odhiambo

Sponsors: Norwegian Government and SwedishInternational Development Cooperation

Printing: UNON, Publishing Services Section, Nairobi,ISO 14001:2004-certified.


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Urban cityscape in Tirana, Albania. Photo UN-HABITAT


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CONTENTS

Abbreviations Vi

Foreword 1

Executive Summary 3

1. Introduction 9

2. Rationale for a tax on land and immovable improvements 11

3. Land and Property Taxes and Fees compared 13

3.1 One-time fees and taxes 13

3.2 Land rents and land leases 17

3.3 Annual LPT 18

3.4 Summary 18

4. Relationship between local practices, capacity and the LPT 19

4.1 Land and property rights 19

4.2 Land and property rights and tenure registration 20

4.3 The market for land and property rights 23

4.4 The capacity of government agencies 23

4.4.1 Monitoring taxable land and property 24

4.4.2 Valuation of the base 24

4.4.3 Billing and collecting the tax 25

4.4.4 Appeals 26

4.5 Corruption 26

4.6 Summary 28

5. The LPT revenue identity 31

5.1 Defining the base for the LPT 32

5.2 Setting the tax rate 32

5.3 Coverage 32

5.4 Valuation 33

5.5 Collection 34

5.6 Evaluation of the LPT system 34

5.6.1 The taxpayers perspective 34

5.6.2 Tax administration 35

5.7 Summary 35


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6. Defining what is taxed and who must pay 37

6.1 Drafting the LPT Law 37

6.1.1 Define what is taxable 38

6.1.2 Identify who is responsible for paying the LPT 39

6.1.3 Determine the process for setting the LPT rate 40

6.1.4 Assign the administrative functions 40

6.1.5 Assign the tax revenue 41

6.2 Defining the frequency and classes of taxable land and property 41

6.2.1 Location 43

6.2.2 Land use 43

6.2.3 Theory and Practice 43

6.3 Defining who must pay the tax 44

6.4 Defining what is included in taxable land and property 44

6.5 Exemptions 46

6.6 Summary 48

7. Options for determining taxable value and setting rates 49

7.1 Valuing the tax base 49

7.1.1 Capital Market Value 50

7.1.2 Annual Rental Value 54

7.1.3 Valuation bands 56

7.1.4 Cadastral or formula value 57

7.1.5 Area and location 58

7.1.6 Summary of valuation options and the way forward 63

7.2 Rate Setting 63

7.2.1 Fixing the number of LPT rates 64

7.2.2 Differential rates on land and immovable improvements 66

7.2.3 Taxing the least advantaged 67

7.2.3 Other rate-related issues 67

7.2.4 Rate setting authority 69

7.2.5 Summary and the way forward 70

7.3 Summary 71


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8. Administrative policy issues and options 73

8.1 Sharing responsibility and dividing tasks 74

8.1.2 Role for central or regional authority 74

8.2 Administrative Practice 76

8.2.1 Coverage: Land registries and cadastral management 76

8.2.2 Self-assessment 78

8.2.3 Valuation 80

8.2.4 Billing 84

8.2.5 Appeals 85

8.2.6 Collections 87

8.3 Summary 89

9. Estimating revenue potential 91

9.1 Estimating national fiscal potential 91

9.2 Estimating local revenue potential 94

10. LPTs as a tool for economic development and social policy objectives 95

10.1 Economic Development 95

10.1.1 Generating extra revenue through the special district 95

10.1.2 Changing economic incentives for investment 97

10.1.3 Tax forgiveness and public subsidies 97

10.1.4 Taxes and long-term funding 101

10.2 Social objectives 102

10.2.1 Making the LPT more progressive 102

10.2.2 Protecting specific classes 103

10.3 LPTs and informal settlements 105

11. Summary and the way forward 109

11.1 Four practice and capacity perspectives 110

11.2 Revenue identity perspective 111

11.3 Step by step 115

Glossary 117

References and further reading 122


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ABBREVIATIONS

EDA Economic development area

FAO Food and Agriculture Organization of the United Nations

GS Goods and services tax

HLCLEP UN High Level Commission for the Legal Empowerment of the Poor

IGAC National Geographic Institute in Colombia

LP Land and Property ax

m2 square meters

OECD Organization for Economic Cooperation and Development

RAES Annual property tax based on rental value

RDA Redevelopment area

SII Servicio del Impuestos Internos, the Chilean Internal ax Service

IF ax increment financing

UN-HABIA United Nations Human Settlements Programme

VA Value Added ax

ZCS Zona caracteristicas similares, the Chilean designation for property zones


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FOREWORD

For cities and towns to become effective engines of economic growth,land has to be seen as key factor in wealth creation and nationaldevelopment.

Using a step-by-step approach Land and Property ax: A Policy Guide,explains the process of initiating, developing and sustaining a land andproperty tax system. It also carries many useful examples and optionsfor designing land-based taxes and what needs to be considered in theirimplementation. It addresses questions such as why land and propertytaxation are important, especially as a source of local revenue.

It shows how an efficient land and property taxation can foster infrastructure and services in cities.We all know that land is immovable. Buildings and other immovable improvements on the land aredifficult to hide. Tose who benefit most from public investments wil l likely pay taxes. Tus taxes onland and improvements can capture part of the increased land values which often result from publicinvestments and improved public programmes.

Tis publication also explains many of the land taxation systems in use. It draws an importantdistinction between those systems representing one-off taxation, fees or charges, and those levied onan annual basis. Te one-off taxes and fees are applied when something about the land changes such as ownership or a different use for the land, and when rural land becomes urban land.

Land and Property ax: A Policy Guide says that one-time taxes and fees are best used to fundspecific projects, whereas the annual taxation can be used to fund continuing services or tounderwrite modest debt levels.

Te added value of this publication is the way it shows how well managed land and propertytaxation can contribute to the improvement of local communities. Given the political will, policiesand administrative procedures adapted to cultural views of property rights, to the ways in whichthose rights are accepted in the community, to the realities of local land and property markets andadministrative capacity, can produce a fair and stable tax system. Indeed, such a system can yieldbetween one and two percent of GDP on an ongoing basis.

I am convinced that by giving local authorities autonomous revenues, land and property tax canfoster improved local accountability and responsiveness.

Tis Guide, intended for government officials and community leaders at all levels, provides manyuseful ideas for implementing taxes based on land and property.

Dr. Joan Clos,Executive Director,UN-HABIA


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The city of Shanghai, China invested heavily in property development ahead of the2010 World Expo. Photo UN-HABITAT/Julius Mwelu


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EXECUTIVE SUMMARY

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EXECUTIVE SUMMARY

his guide provides government officialsand community leaders at all levels withalternatives for implementing taxes

based on land and immovable improvements.Te discussion includes the reasons why landand property taxes (LPs) are often an importantsource of local revenue, what the options arefor designing such taxes and what needs to beconsidered in their implementation.

Te case is put forward that land and propertyconstitute an important base for mobilizingrevenue to meet local needs. Land is immovable.Buildings and other immovable improvementson the land are difficult to hide. Tose whobenefit most from public investments will likelypay a larger share of the tax. axes on land andimprovements can capture part of the increasedland values that often result from publicinvestments and improved public programs. Bygiving local authorities autonomous revenues,LPs can foster improved local accountabilityand responsiveness.

Te various types of taxes applied to land andimprovements are described, with an importantdistinction drawn between those LPs thatrepresent one-time taxes, fees and charges andthe annual LP that yields on-going revenue.Te one-time taxes and fees are applied whensomething about the land changes, such asownership or land use. Te annual LP appliesto all taxable land. One-time taxes and fees arebest used to fund specific projects, whereas theannual LP can be used to fund continuingservices or to underwrite modest debt levels.

FOUR PRACTICE AND CAPACITYPERSPECTIVES

o be effective, implementations of LPs needto be informed by, if not constrained by, fourconsiderations.

1. Te LP system should reflect and besensitive to the accepted institutions andtraditions related to land and propertyrights. If land is seen as an economiccommodity in the local culture, andindividual private ownership is accepted,then the incidence of the LP should fall onland owners, and sanctions should includethe governments right to seize and sell theland (eventually) if taxes are not paid. On

the other hand, if land is viewed by thelocal culture as fundamental to achievingbasic human rights, or if private ownershipis foreign to the culture, then it will likelybe more practical to make the occupants ofland responsible for paying the tax. In suchsettings, tax administrators need to be ableto use a combination of public exposure, thedenial of taxpayer services and the pursuitof other taxpayer assets besides the land ifthe taxes are not paid. A national taxpayer

identification system is of great value insuch situations.

2. Implementing the LP requires a fiscalcadastre and the LP system mustreflect the realities of the current formaland informal systems for registeringand acknowledging rights to land andproperty. If such rights are publicallyrecorded and actively enforced by the

judiciary, then the fiscal cadastre can be

built around the legal cadastre orgrundbuch(land book). But if many properties are notformally registered, then the fiscal cadastreshould be used as an intermediate step thatland holders can use to document and havetheir tenure claims recognized. Te fiscalcadastre will not help much with resolvingboundary issues or in resolving competingclaims to ownership, but it can be usedto link taxpayers to parcels of land anddocument that linkage, thus contributing

to a broader land inventory. In this, theinterests of tax administrators and taxpayersare closely aligned.


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3. Since different design options existdepending on the extent and maturityof urban land and property markets, it iscritical that careful attention be paid tomarket conditions in different locations

and for different types of property.In those areas and for those propertieswhere real estate markets are active andinformation on market transactions canbe obtained, valuation approaches basedon capital market value, annual rentalvalue or an approach tied closely to markettransactions should be used to establishthe tax base. If real property markets existbut information is not readily available orif staff capacity is limited, a banding or

cadastral value approach should be used.And if markets are limited, an approachbased on the physical characteristics of theland and buildings should be used.

4. Te administrative capacity of governmentagencies must be carefully considered indesigning the LP and the administrativeprocesses for its implementation. Tebest strategy is to divide responsibilitiesfor administering the tax between at leasttwo levels of government. And cooperationbetween government agencies that haveinformation critical for the efficient andeffective administration of the LP isessential. If local resources are limited, thenthe design of the LP must be as simpleas possible and some compromises will beneeded on equity issues. For example, ifland and property markets are quite activebut local administrators either do nothave access to quality market data or do

not have the expertise to process the dataappropriately, it makes little sense to plana market-based LP system. Far betterto start with a system based on readilyidentified property attributes (such as landarea, building area and location) that canbe administered effectively and then buildboth the system and the local administrativecapacity over time.

THE TAX REVENUE IDENTITYPERSPECTIVE

Another way to view the policy and administrativeissues related to LPs is through the lens of therevenue identify introduced in Section 5. Terevenue identity consists of five elements:

the tax base,

the tax rate,

the ratio of properties on the fiscal cadastreto the total number of properties,

the ratio of taxable property value recordedin the fiscal cadastre to total actual propertyvalue and

the ratio of taxes collected to taxes billed.

Te eventual revenue received by the governmentis the product of these five elements. It isconsequently important to consider the policyand administrative options for each, but thechoices should be informed by knowledge of thefour local considerations: rights related to landand property, the formal and informal systemsfor registering those rights, market conditionsand administrative capacity.

Defining the base Defining the base for the LPinvolves three policy decisions.

Will the base include land only,immovable improvements only or both?It is administratively easier to tax land only.If there is adequate administrative capacityto obtain and maintain the additionalinformation required, both land andimprovements can be taxed. Tere are alsostrong economic arguments for taxing landonly, and a land-only tax may be the mosteffective way to extend the tax to informalsettlements.

Will the value of the tax base be linkedto capital market value or propertyattributes? If real estate markets are fairlymature, there are good reasons to link taxablevalues to market values. But if real estatemarkets are not complete and reasonably

well functioning, the better approach is to

link taxable value to property attributes suchas size and location. Administrative capacityshould also play a role in this decision.


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Community members construct their own houses in Borei Keila, Cambodia.Photo UN-HABITAT/Suzi Mutter

Linking taxable value to market value isadministratively much more demanding.

And if access to land is generally viewed asessential to human rights there will likely bea preference for basing the LP on propertyattributes while viewing property rights aseconomic commodities will tend to favor amarket value approach, other things beingequal.

Will land owners or occupants beresponsible for paying the LP?Here all

four of the perspectives factor in. If propertyownership is well accepted, then taxingowners will likely be preferred. If individualownership of land is not widely accepted,the tax obligation should fall on occupantsor those who have beneficial use of the land.If formal property right registration systemsare well established, then taxing owners maybe preferred. In areas with incomplete formalproperty registration, occupants and users

will likely be easier to identify. Tis will be

true as well if land and property markets arelimited. And without individual ownership

and strong property registration systems itwill generally prove to be administrativelyeasier to tax occupants and users rather thanowners.

Setting the tax ratewo policy decisions arecentral to setting the LP rate.

Will tax rates be set locally or centrally?Local autonomy and accountability arguein favor of local rate setting. Uniformityand tax harmonization argue for more

centralized rate setting. Te best strategyis likely to be a mix of the two, with acentral authority establishing the range ofacceptable rates, and the local governmentselecting the final rate within that range.

Will there be a single tax rate or multiplerates for different types of property?

Administratively a single rate is stronglypreferred. Less information is required andthere are fewer opportunities for error witha single rate. If multiple rates are used, thenumber should be kept to a minimum.


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Managing coverageCoverage refers to theproportion of all properties that should beincluded in the fiscal cadastre that are actuallyincluded there. Te ability to complete andmaintain the fiscal cadastre will depend heavily

on how land-related rights are recognizedand enforced in a community and on theadministrative capacity of the governmentagency charged with managing the cadastre. Ifinformal acknowledgment of property rightsis common or formal registration of rights isfor whatever reason incomplete, then carefulconsideration should be given to the incentivesthat land holders may have for having somegovernment entity acknowledge possession oftheir land. In informal settlements, this may

be a desire to establish a legally recognizedclaim on the land. In other settings, it may bea desire to obtain specific public services. In allcases, administrative capacity will need to bedevoted to updating and improving the fiscalcadastre. Eventually, it may prove desirable tointegrate the fiscal cadastre with a broader landinventory or other land records.

Keeping values up-to-dateOne of thedemanding aspects of managing an LP systemis keeping the taxable values up-to-date andconsistent with the specified legal standard ofvalue. Tis is especially true if that standard iscapital market value, annual rental value or someapproximation of how the real estate marketviews a property. But even if the LP is basedon property attributes, those attributes changeover time. Land does not move, but land usechanges, parcels are subdivided and improved,and the perceptions of desirability change.

Tus consistent administrative resources andexpertise need to be devoted to monitoring andupdating taxable values. Te methods employed

will depend on the legal articulation of the valuestandard and on the administrative capacity ofthe agency charged with maintaining values.But if values are not updated regularly, therelevance of the LP over time will inevitablydiminish, both because the actual revenue willnot keep pace with growth in the community

and because the tax will increasingly be seenas unfair.

CollectionsIt will matter very little how the taxbase is defined, how rates and values are set or

whether a property is on the fiscal cadastre ornot if the LP is not collected. But the abilityto collect the tax will depend crucially on

whether taxpayers feel that the tax is fair, onthe administrative capacity of tax collectingagencies, on how land-related rights are

viewed in the community and on the politicalwill of community leaders. Administratorsmust be able to deliver tax bills reliably, hearand respond to inquiries from taxpayers, processformal appeals from taxpayers and follow upappropriately with those who fail to pay theirtaxes in a timely manner.

What incentives do taxpayers have topay the tax? axpayers are much morelikely to comply with the LP if theyfeel it is a fair tax and taxes paid result inimproved infrastructure and services in thecommunity. For taxpayers to feel the LPis fair, they must understand the basics ofhow the tax is calculated, and they mustfeel that they are being treated similarly totheir neighbors who have similar property.axpayers should be able to see the

connection between the taxes they pay andthe services they receive from government.

What sanctions are available to taxadministrators if a tax is not paid?If landand property rights are viewed as economiccommodities, then the ultimate sanctionthat a community can impose for non-payment of the LP is to seize the propertyand sell it to pay the taxes. While thisoption exists in a number of countries, it

is rarely actually used. And if land is seen asfundamental to human rights, seizing landis not a viable alternative. In such cases,other sanctions must be available, such aspublic exposure (which often creates peerpressure) and the ability to seize other assets.

Imposing sanctions for nonpayment of the LPis often politically difficult. A communitys mostinfluential members often own or control largeamounts of land, very valuable land, or both. Buteven if the sanction must be imposed on thosenot so influential, the political pressure can beextreme if the local press is reporting on familiesof limited means at risk of losing what little they


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have for non-payment of the LP. Te pressureto provide exemptions, rebates and other escaperoutes for taxpayers is very high. But such escaperoutes undermine both the fairness of the LPand its revenue potential. Systems can be put in

place to protect the most vulnerable in society,and to assure that taxpayers are treated fairly.But fair treatment does not equal low taxes.axpayers should be able to understand howtheir tax was calculated, to have their questionsanswered and to appeal when they feel an errorhas occurred. But they must also come to acceptthat the tax must be paid, and that will onlyhappen if political leaders and the judicial systemsupport the LP system. Support in this casemeans that community leaders should see that

the LP is administered fairly and efficiently,that there is a clear link between taxes collectedand the services and infrastructure that result,and that tax collection is fairly, uniformly andrigorously enforced. Ultimately, collecting theLP consistently is a matter of political will.

A STEP BY STEP APPROACH

Implementing or reforming the LP in a

country is a daunting task. Te legal, technicaland administrative considerations may seemoverwhelming. Te way forward can be brokendown into a logical series of steps, some of whichcan be carried out concurrently.

1. Begin by envisioning the desired outcome.Tis will require careful consideration ofthe four factors described in this guide,along with the desired policy goals, to assurethat general principles and guidelines are

adapted appropriately to local conditions.Essentially, this step involves answeringthe question, What will be the best LPsystem for our context?

2. Seek technical assistance. Most of thechallenges confronted in any given context

will have been encountered before in othersettings. Learning from others experiencescan reduce both the time and the cost ofthe reform effort. Seek assistance frominternational agencies and from othercountries, but be sure that those offeringassistance understand the local context.

3. Create the legal framework. Te LP musthave a sound footing in a well-crafted andappropriate legal framework. Te adoptionof the legal framework also signals that themost senior political leadership is willing tosupport the LP.

4. Identify the resources needed and build animplementation team. Te size of the teamand the available resources will determinehow quickly full implementation can beachieved. An effort should be made tobuild on resources and administrativestructures already in place. Te potential forinvolving the private sector in aspects of theimplementation should also be evaluated.

5. Start with one city or even one sector of a largecity. Secure the support of senior politicalleadership and community leaders in theselected area. It is better to limit the areainitially selected until the implementationteam is able to develop standard proceduresthat are effective and has a clear ideaof its capacity. Te size of subsequentimplementation areas can then be adjustedto fit the capacity of the implementationteam.

6. Build or improve the fiscal cadastre. Tisstep will involve a basic land inventory inthe city or sector selected, but the initialinformation collected should be kept to aminimum. Gather only the informationthat will be essential for administering theLP. Other information can be added later.Consider also using self-declaration or self-assessment processes, but these should besimple in design and will require a separateinfrastructure to provide assistance and

answer questions.7. Build public support. It is critical that the

public in the selected area understand whatthe reforms are intended to accomplish andhow the LP will work. Tis will requirepublic meetings, advertisements, meeting

with community groups and potentiallyother media and venues for explainingthe LP. Te explanations should includeexpressions of support from communityleaders, how the tax bill will be determined,

what the appeals process will be andimportantly how the money collected willbe invested in the community.


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8. Design the collection system carefully. Seek tominimize the compliance cost for taxpayersand the administrative costs of collection.Consider using utilities or other agents tofacilitate collection. Even if the initial cost

of collection is higher than desirable in thelong term, a high collection rate will fosterbroader acceptance of the LP.

9. Levy the tax. Be prepared to respond totaxpayer questions and appeals. Workclosely with local media outlets so thatthey understand and can help explain thechanges in the tax.

10. rumpet success but aggressively pursuetax avoiders. Te success of the reforms

should be widely publicized, but it is justas important to publicize the fact that non-payment will not be tolerated.

11. Spend the money collected according to plan.Te long-term success of the LP willdepend heavily on the publics perceptionthat the tax is fair and that monies collectedresult in improved infrastructure and localservices. People will accept the tax and payit if they can see the tangible improvementsin the community.

12. Move the implementation team to the next cityor sector. Repeat the process in the next area,adjusting the scale of the effort to meet thecapacity of the team. If possible, buildingmultiple implementation teams that canbe trained by the first may expedite overallimplementation.

Te take-away from this guide can besummarized by saying that the potential ofLPs to contribute to the improvement oflocal communities is quite high. o realize thatpotential requires first and foremost the political

will to do so. If that will exists, policies andadministrative procedures adapted to culturalviews of property rights, to the ways in which

those rights are acknowledged and defendedin the community, to the realities of local landand property markets and the administrativecapacities of relevant governments can produce afair and stable tax system that will yield betweenone and two percent of GDP on an ongoingbasis.

High-end and sub-standard properties side by side in Mathare, Nairobi, Kenya. Photo UN-HABITAT


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INTRODUCTION

1. INTRODUCTION

Land Policy:Te set of agreed principlesto govern ownership (or access to), useand management of land resourcesto enhance their productivity andcontribution to social, economic,political and environmental developmentand poverty alleviation.

(Framework and Guidelines on LandPolicy in Africa, 2009, pg. xiii)

his guide provides government officialsand community leaders at all levels witha discussion of the alternatives for taxes

based on land and immovable improvements.Te discussion includes the reasons why landand property taxes (LPs) are often an importantsource of local revenue, what the options arefor designing such taxes and what needs to beconsidered in their implementation.

Land policies, of which taxing policy representsone component, are widely recognized ascritical elements in broader social policies tolift the poor and secure sustainable vibrantcommunities. o cite just one example, a WorldBank policy research report states, Land policiesare of fundamental importance to sustainablegrowth, good governance, and the well-being of,and the economic opportunities open to, bothrural and urban dwellers - particularly the poor.(Deininger, 2003)

In every society, land policy is a complex webof social and legal institutions often the resultof centuries of social evolution. o isolate anygiven aspect of that web inherently runs therisk of focusing attention while overlooking keylinkages and important contextual factors. Bethat as it may, communities need the resourcesnecessary to improve infrastructure and services,and there is one often overlooked or at leastunderutilized tool that merits the attention ofurban policy makers and community leaders:taxes on land and property. o see why this isso, the next section presents the rationale forLPs. Section 3 compares LPs and definessome commonly encountered terms relating toLPs. Section 4 then argues that a successfulLP must reflect actual community practicesand capacities along four dimensions and shouldrecognize the pervasive nature of corruption inmany countries. Section 5 introduces the idea

of the LP revenue identity, or what the factorsare that influence how much revenue is actuallycollected from the LP. Section 6 describes whatshould be included in enabling law and discussesthe design options for defining taxable propertyand who must pay the tax. Section 7 continuesthe discussion of policy options with a discussion

of how taxable value can be determined and taxrates set. Section 8 focuses on administrativeand implementation issues. Te section alsodiscusses sharing responsibility between multiplelevels of government in order to better achieveboth equity and efficiency in administering theLP. Section 9 provides some basic approachesfor estimating the revenue potential of theLP. Section 10 describes how LPs can beused for both economic development and

to further social policy objectives, includingregularizing informal housing settlements andmaking the distribution of land more equitable.Finally, Section 11 summarizes the key pointsthat government officials and communityleaders should take away from this guide andsuggests the way forward for those interestedin implementing or improving an LP in theircommunity. Following Section 11 are a glossaryof key terms and a list of reference works citedalong with additional relevant readings.


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Settlement in Cotonou, Benin that could benefit from improved taxation policies.Photo UN-HABITAT/Malcolm Boorer


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RATIONALE FOR A TAX ON LAND AND IMMOVABLE IMPROVEMENTS

2. RATIONALE FOR A TAX ON LAND ANDIMMOVABLE IMPROVEMENTS

Definition: Te base of a tax is thevalue or amount that is subject to a tax.

Te base of the income tax is personal orbusiness income. Te base of the Value

Added ax (VA) is the price of the goodfrom one stage of the production anddistribution process to another leading toa final sale. Te base of the LP is tied toland and the immovable improvements(most commonly buildings) attached tothat land. As discussed later, the base ofthe LP can be defined in a number of

ways, but they all share the property ofbeing immovable.

Improving the living standards in anycommunity is most efficiently achievedthrough cooperative effort. Whether it

is infrastructure improvements or enhancedlocal services, it is often more cost effective forcommunities to act through their governmentthan to act as individuals. In many instances,it may not even be possible for individuals toaccomplish what can be achieved throughcollective action. Such collective action requiresresources, and the purpose of this guide isto help government and community leadersunderstand the potential of land and immovableimprovements as a foundation for mobilizingsuch resources.

Local and national governments have severalreasons to consider land and property taxes.One of the rationales for the LP is that thebase is immovable. A tax on income requiresthat income be defined and reported, and thefailure to fully report income often contributesto the expansion of an informal economy.ax income heavily at the local level and highincome households are likely to relocate tonearby communities or other countries withlower taxes. A local tax on transactions such as

the Value Added ax (VA) or a Goods andServices ax (GS) is also likely to shift bothproduction and sales to other communities oreven other countries. But land is permanent. axland and it will still be in the same location nextyear. o be sure, a tax on land can influence howthat land is used. But, however it is used, thelocation will not change.

Because land is immovable and highly visible,it is in principle fairly easy to discover changes

in land use, new buildings, building expansionsor new subdivisions of land. Discovering theactual income of a household can be extremelydifficult. Monitoring sales subject to a VA taxalso requires sophisticated audits. Discovering anew home under construction or a new businessin a previously vacant structure is frequentlymuch more obvious to the entire community.

People who live and work in a communityobtain benefits from that community such as the

use of public roads and other public services. Ifa tax qualifies as a benefit tax the taxes paidby a household are roughly proportional tothe benefits that household receives from thecommunity. If the LP is well designed, those

who receive greater benefit from the communitywill pay more in taxes.

When a community invests in publicinfrastructure such as road improvements,improved water systems, better sewagetreatment facilities or the like, the community

or neighborhood becomes more attractive anddesirable. People are willing to pay more tolive in that community, and consequently landbecomes more valuable. Sometimes the increasein value is the result of land use decisions takenby the local government, such as grantingdevelopment rights on land that was previouslyfarm land. Sometimes the value increase issimply the result of population growth. Tepoint is that this increased value is not the resultof any investment made by the land owners

or occupants, but is a direct result of publicinvestment. Te concept of value capture isthat local governments should be able to capture


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part of the increase in private values to help payfor the public improvements that brought aboutthe increased value.

As stated at the HABIA Conference of 1976:

Te unearned increment resulting from the risein land values resulting from change in use ofland, from public investment or decision, or dueto the general growth of the community must besubject to appropriate recapture by public bodies(the community),

Te LP can be an excellent means to accomplishthis value capture. If the tax base is sensitive toand reflects public investments, changes in landuse or population growth, then the LP willcapture part of the increment in property valuefor governments.1

If local governments are to be responsive to localneeds and local priorities, at least some of theirrevenues must be under local control. Becausethe base is immovable and readily discoverable,LPs can provide a stable foundation for locallygenerated resources to meet local needs.

At the same time, LP foster transparency

and accountability in government. Citizensexpect to see the impact of the taxes they payin better infrastructure, improved services andother community improvements. When theydo see results that improve their lives, they aremore willing to pay their taxes and support localofficials. When the results are not apparent,support and willingness to pay erode. Moore andRakner (2002) note that as governments moveaway from more or less hidden taxes on importsand exports and toward direct taxes on residents,

there is likely to be a contemporary improvementin governance. As governments become moretransparent and more accountable, proponentsclaim that the quality of government willimprove (Raich 2005; Schneider 2004). Tereare few taxes more transparent than land-basedtaxes, which can lead to public outcries at taxtime, but certainly increases the accountabilityof government to the governed.

Economists have long supported a tax on landas the effective form of taxation along with

1 To be sure, private investment and community initiatives alsoresult in higher land and improvement values, and such increaseswill be identified and taxed as well.

taxes on consumption such as Value Addedaxes (V.A..). While economic theory is lesssupportive of a tax on immovable improvements,

practical considerations often make such atax desirable. (As will be discussed in section7.2.2, it is possible to reap many of the benefitsof a land-only tax while still imposing a tax onimprovements if desired.)

Economists find the LP attractive for tworeasons. First, a tax on land minimizes thedistortions created in the broader economy.2Second, public finance economists favor theLP because it increases the intensity of landuse and mitigates the incentives for urban sprawl

and land speculation.3 If it is costless to holdland without developing it, land speculators

will tend to wait for land values to increase,hoping for larger profits in future years. LPtend to discourage such behavior by making itmore costly to simply hold unproductive land.Likewise, large landowners will be encouraged touse their land more efficiently or sell idle land ifthey face an annual tax on their holdings.

Another potentially important attribute of the

LP is that, when designed appropriately, theresulting revenue tends to grow as the localeconomy grows. At the same time, because thebase is large, the burden on any given householdor business should be both manageable and fair.

Tis section has argued that land and propertyconstitute an important base for mobilizingrevenue to meet public service needs. Land isimmovable. Immovable improvements on theland are difficult to hide. Tose who benefitmost from public investments will likely pay

a larger share of the tax. axes on land andimprovements can capture part of the increasedland values that often result from publicinvestments and improved public programs. Bygiving local authorities autonomous revenues,LPs can foster improved local accountabilityand responsiveness. In the next section, the mostcommon LPs are introduced and compared.

2 For a more detailed discussion of this point, see Cohen andCoughlin (2005).

3 See for example Song and Zenou (2006) and Oates and Schwab(1997).


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LAND AND PROPERTY TAXESAND FEES COMPARED

3. LAND AND PROPERTY TAXES

AND FEES COMPARED

Tax/Fee What is taxable? What is the basis fordetermining the tax orfee?

When is the tax orfee collected?

Developmentfees

Market value of newprivate investment indevelopment

Cost of overseeing newdevelopment or mitigatingimpact of development onpublic infrastructure4

Once, at the timepermission to proceedwith development isgranted5

Estate tax Generally all land andproperty included inestates above a definedthreshold of total value

Value of land and propertytransferred as part of aninheritance

Once, following thedeath of the estateowner

Capital gainstax

Real property when sold Value of real property sold,less the original purchaseprice

Once, as part of theincome tax system

Transfer taxesand stamptaxes

Any transfer of registeredland title or other landrights to another party

Market value of realproperty transferred

At the time registeredland right is formallytransferred

Betterment tax Increment in real property

value due to publicinvestment or approvedchange in land use

Land and improvement

value after the change, lessland and improvement valueprior to the change

Once, at time of

investment or whenpermission to changeland use is granted6

Severance tax Natural resourcesextracted from land

Number of resource units(tons, barrels, etc.) extracted

Due once, when theextraction takes place;payable periodically

Annual LPT Privately owned orcontrolled land andimmovable improvements

Market value of landand property or Physicalcharacteristics of land andproperty

Due annually; payableeither annually,monthly or quarterly

TABLE 3.1TAXES AND FEES APPLIED TO LAND AND/OR IMMOVABLE IMPROVEMENTS

4 Infrastructure can be interpreted broadly. San Francisco, California requires developers to replace housing that is demolished as part ofcommercial development.

5 Development fees can be assessed as required cash payments or in-kind by requiring the allocation of land for public purposes such asroads, parks, schools, utility easements, etc.

6 Betterment levies can also be exacted in-kind. Property developers can be required to either transfer portions of the land involved to thelocal government or they may be required to invest in specific off-site improvements. In either case, the other aspects of betterment leviesapply.

Over the centuries and across the world,governments have tied numerous taxesand fees to land and improvements.

able 3.1 summarizes the taxes and fees frequentlyassociated with land and its development. All ofthe taxes and fees shown in the table are collectedin various countries, and thus each is an optionavailable to government and community leaders.Each also has advantages and disadvantages asdiscussed below.

3.1 ONE-TIME FEES AND TAXES

Development fees, impact fees, planningfees, etc., are among the one-time fees localgovernments charge. Tese fees are leviedgenerally by local governments to offset thecost of managing the development process orto mitigate the impact on the existing publicinfrastructure. Development and impact feeshave been applied to a wide range of impacts.

Te most obvious are roads, water, sewer and


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Urban Housing improvement scheme in Istanbul, Turkey.Photo UN-HABITAT

electric utilities. New growth often requiresexpansion of existing public infrastructure

systems. But that infrastructure can also includeservices. For example, in cases where newdevelopment is expected to increase the burdenon public education, education impact fees havebeen levied. Because these fees are intendedto offset the costs from new developmentexperienced by communities, a number of local

judicial systems have held that the fees assessedshould approximate the actual costs incurred.Under such limitations, it is difficult to realizea substantial increase in new local revenues

from development fees, though they may bean important source of funds to address thepressures of new growth. One limitation ofdevelopment and impact fees is that they tend tobe very cyclical, meaning revenues fluctuate quitedramatically with market conditions. In goodtimes, the fees can be quite substantial, whilethey may disappear altogether in recessionarytimes.

Te second type of one-time taxes listed in able3.1 and often applied to land and propertyis the estate or inheritance tax assessed as

wealth (including land and improvements) istransferred as part of an inheritance or estate. In

some instances a distinction is drawn betweenan estate taxwhich is levied on the total value ofa persons estate, and an inheritance taxwhichapplies only to property that is passed to an heir.In either case, the tax as it applies to land andproperty is assessed based on the market valueof the real estate. Often an exemption is grantedfor estates below a specified value. In the case ofestates heavily invested in real estate but lackingthe cash necessary to meet the estate tax, this taxcan prove quite burdensome for the heirs. Tey

may be forced to sell all or part of the real estatein a very short period of time in order to meet thetax obligation. One recent survey of 30Europeancountries found that only five had no inheritancetax.(AGN International-Europe, 2010)

Te capital gains tax is assessed on the profitsresulting from the sale of a property. Capitalgains tax differs from the inheritance tax in thatit applies to the sale of real property rather thanthe inheritance of property. Capital gains taxesare most commonly integrated with the incometax system. If an investor sells a property, then as


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Statutory titlerefers to a legally registeredownership claim or right that can also

be defended in the courts. In contrast,many property rights are communal orinformal.

part of completing the income tax filing for thatyear, a calculation is made of the net proceedsfrom the sale (sales price minus the amount

invested in the property), and the tax on thoseproceeds is paid with the income tax. Often, thetax rate on capital gains is lower than the rate onother income. It is also frequently the case thatthe rate varies with the length of time that theproperty is held, in an effort to reward long-terminvestors while penalizing speculators. Capitalgains taxes are often criticized as discouragingcapital investments though they are stillemployed in a number of European and other

industrialized countries.

ransfer taxes are assessed when the statutory

title to land is transferred to another party. Te

transfer tax differs from the capital gains tax in

that the capital gains tax is a tax on income (the

value of the sale, less the original investment),

whereas the transfer tax is a tax applied generally

to the total value of a land transaction and must

be paid in order to complete the transfer of title

to another party. It is often charged even if thetransfer is not the result of a sale.

ransfer taxes are common around the world.

Te tax is most commonly applied to the market

value of the real estate being transferred. able

3.2 summarizes the transfer tax rates in effect in

a sample of countries in early 2010. It is clear

from the table that there is wide variation in

transfer tax rates.

In considering the appropriate rate for thetransfer tax, policy makers should considercarefully the incentives created by the ratesselected. High transfer tax rates may discouragebusiness investment. And high transfer tax ratesare likely to encourage misrepresentation of salesprices by buyers and sellers, which underminesother aspects of the tax system. Perhaps mostdetrimental, if taxpayers perceive the transfer taxto be too high, they are less likely to register the

property transfer at all.Betterment levies are intended to allow thecommunity to capture part of the increased value

that often results when infrastructure is improvedor permission is granted to change land use.Betterment levies differ from development orimpact fees because they are an explicit attemptto share in the private value gain resulting from

the public action. Tey differ from annual LPsin that they are a one-time assessment andgenerally apply only to the increment in valueresulting from the public investment or thechange in land use.

In Denmark, for example, when farmland islegally transferred to an urban zone, a specialland development gains tax (frigrelsesafgift)requires payment of approximately 50 percentof the increase in value resulting from the

change in zoning. Similar land use changes inPoland can bear a tax of up to 30 percent of theincrement in value when the land is sold withina five year period. In Argentina, provinces andmunicipalities may finance certain public worksby contribuciones de mejoras (betterment levies)

when the improvements result in increasedland values. Rezk reports that as a rule, thegovernments identify certain categories ofbeneficiaries and share part of the cost of

construction among them in proportion toestimated benefit (Rezk, 2004, pg 285).

Betterment levies have a long history, but mostrecently they are seeing some resurgence inIndia. Under the own Planning Act, a numberof cities have adopted or are considering abetterment charge. Mumbai is only the mostcurrent city moving ahead with such a tax.Over the years, betterment levies have generallynot fared well. Tey tend to be politically very

unpopular and perhaps as a result, difficult tocollect in any sustained way. Mexico is just onecase where betterment levies are permitted but


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Region Country Transfer tax rate

South and CentralAmerica

Argentina ~2.5%

Brazil 2%Chile 0%Costa Rica ~2.3%Peru 3% - 9.5%Venezuela 0%

North AmericaCanada ~2%Mexico 2% - 5%United States 0% - 2%

Asia & Australia

Australia 5.5%Cambodia ~4%China 8% - 10%

Indonesia 5%Japan 2.5% -6%Republic of Korea 4.6% - 9.4%Malaysia 1% - 3%Philippines 0.5%

Europe

Belgium 10% - 12.5%Cyprus 3% - 8%Denmark 0.6% - 1.5%Finland 4%France 0.7% - 5.1%Germany 4.5% - 4.5%

Greece 19%, 9% - 11%, 1%Ireland 0% - 9%Italy ~10%Luxembourg ~10%Malta 5%Netherlands 6%Norway 2.5%Portugal 0.8% - 7.3%Spain 0% - 7%Sweden 3%Switzerland 0% - 3.3%United Kingdom 0% - 4%

Russia &former Soviet Union

Czech Republic 3%Poland 0%Romania 0%Russia 18%Ukraine 22.4%

Africa

Burkina Faso 8%Dem. Republic of Congo 3%Mauritius 5% - 15%Mozambique 2.4%Niger 1.5%

TABLE 3.2 TRANSFER TAX RATES: 20107

7 Sources: World Bank, www.Doingbusiness.org ; Taxand, 2010, Real Estate Tax Calculator; National Conference of State Legislators, 2010,Real Estate Transfer Taxes


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not widely used because of implementationissues. (Bird, 2004) Betterment levies assessedin-kind have been more successful. Tese in-kind

transfers may take the form of land transferredto local governments or off-site infrastructureimprovements required by local governments.

A variation on the betterment tax is beingimplemented in So Paulo, Brazil. In thisapproach, a local government agency identifiesthe amount and type of additional developmentthat will be permitted in a given area. Teagency then issues Certificates of AdditionalConstruction Potential (CEPACs) for that area,

and sells the CEPACs through an electronicauction. Te first auction took place in the

Agua Espraiada area of So Paulo in July 2004.One hundred thousand CEPACs were offeredat a minimum price of US$150. All were soldproducing US$15 million in revenue. Te income

was earmarked in advance to two infrastructureinvestments: the construction of a new bridgeand 600 affordable houses in a designated slumarea. Sandroni (2010) provides a more detailed

discussion of the multiple CEPAC auctions thathave been used in So Paulo.

Not all such auctions have been so successful.When the minimum auction price resulted inessentially an increase in land costs for developersas in the Faria Lima area, developers have beenless responsive. Sandroni (2010) concludes thatcountries attempting to replicate the So Pauloexperience should use extreme care. Te CEPACmechanism requires both a buoyant real estate

market and a robust financial market as well. Italso requires considerable expertise on the partof public servants.

Severance taxesare also one-time taxes, appliedto natural resources such as oil, coal, metals, etc.,that are extracted from land. Except for forestproducts or other renewable resources, oncethe resource is extracted, it cannot be replaced.Severance taxes are most commonly excisetaxes, meaning that the base for the tax is the

number of resource units extracted, rather thanthe current market value of those resources. Forexample, a flat-rate severance tax of a specified

amount may be applied to each barrel of oilextracted, regardless of the world price of oil onthe date of extraction. While severance taxes can

generate enormous sums in the short or mediumterm, policy makers should bear in mind thefinite nature of this type of resource, and shouldconsider carefully how best to use the revenue tobenefit future generations as well as the currentpopulation.

One of the principles of good fiscal managementis that one-time resources should generally notbe used to fund on-going services (or recurrentexpenditures in general). Hiring employees and

creating service expectations which rely on one-time or highly volatile revenue sources frequentlyresults in fiscal and political challenges. Most ofthe taxes discussed above would be consideredone-time revenues. A local government maycollect a development fee to help expand a road,but there will be no further revenues from thatproject to maintain that road or pay for streetlighting. ransfer taxes can be collected only

when the statutory title changes hands which

may be years apart. Betterment levies have faceda number of practical challenges around the

world and over the years, but even if collectedas designed, they come only once8. Reliance onone-time fees and taxes such as these means thatlocal revenues will at best be unstable and at

worst inadequate to provide a foundation for thefiscal needs of local governments. On the otherhand, one-time revenues can be an importantsource of capital for community improvements,especially as investment capital flows into acommunity from outside.

3.2 LAND RENTS AND LAND LEASES

In those countries where all land is publicallyowned, governments enter into long-term rentalor leasing agreements which grant to privateindividuals the right to occupy, improve and

8 Betterment taxes also cannot capture the increased valueresulting from broader changes in the community such asgeneral population growth, since they are tied to specificgovernment investments or actions.


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use land for a specific period of time. Teseleasehold interests are frequently transferableto other parties and can thus be bought andsold. In exchange for the right to occupy anduse the land, the lessee makes periodic payments

to the government. While these rental or leasepayments are recurring, it is important todistinguish them from a tax. Tese are paymentsmade for the privilege of occupying and usingthe land, and they do not reflect the serviceburden placed on the community. Whatever usethe lessee makes of the land, that lessee will alsouse public infrastructure and public services andthe cost of that public usage is not reflected in theland rents. Tis does not in any way suggest thatland rents and leases are unimportant sources ofrevenue in communities where they are used.Te resulting revenue can provide importantcapital for urban development. Te point here issimply that paying ground rent and paying a taxbased on land are not incompatible and such anarrangement does not represent double taxation.

3.3 ANNUAL LPT

Te only regularly recurring tax based on

land and improvements paid by landownersor occupants to support public infrastructureand public services is the annual LP. Whilethe discussion here focuses on an annual tax,there are numerous instances where the tax islevied once a year, but paid either quarterly ormonthly. Te annual LP has been designedand implemented in a variety of ways aroundthe world, and has existed in some places forcenturies.

All too often, however, it is not a strongcontributor to the resources available for urbanimprovement in developing countries. Teannual LP can be administratively complexand may stress the capacity of local governments.Te annual LP requires attention to bothpolicy and administration. Te annual LPrepresents the subject of most of the rest of thepresent publication.

3.4 SUMMARY

Tis section has outlined the principal methodsfor levying taxes on land and property inthe world. o be sure, labels change andimplementation nuances are many, some of

which will be highlighted in the examples whichfollow. But the basic concepts of LPs are fairlystraightforward. Land and property can be taxedeffectively when something about it changes,

whether that be ownership or use. axes relatedto changes in ownership include transfer taxes,estate and inheritance taxes, and capital gainstaxes. axes and fees related to changes in landuse include development fees, betterment taxesand levies, and the special case of severance taxes.

Land and property can also be effectively taxedif there is no change in ownership or use. In factit is important to consider such a tax since mostland will not see a change in either ownership oruse in any given year. An annually recurring taxon land and/or improvements can make a stablecontribution to public revenues if it is adapted tolocal conditions and capacities.

Residents of an informal settlement in Colombo,Sri Lanka. Photo UN-HABITAT/Suzi Mutter


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RELATIONSHIP BETWEEN LOCAL PRACTICES, CAPACITY AND THE ANNUAL LPT

he structure of the LP in a given contextshould reflect actual practices and localcapacities along four dimensions. First,

the LP system should reflect and be sensitiveto the local institutions and traditions relatedto land and property rights. Second, the LPsystem will need to accommodate the extent to

which such land and property rights are publiclyrecorded and actively enforced by the judiciary.Tird, different design options exist depending

on the extent to which land and property rightsare actively traded in reasonably efficient markets.Finally, policy and practice will be influencedby the administrative capacity of governmententities. Since each of these four dimensionsplays such an important part in determining thebest options for designing and implementing theLP, each merits a more complete descriptionhere. Te section concludes with a discussion ofcorruption and its impact on LP.

4.1 LAND AND PROPERTY RIGHTS

UN-HABIA has produced a very usefuldiscussion of land rights and land right securityin their publication Secure Land Rights for

All (2008), and the reader is referred to thatpublication for a more complete discussion ofthe points only summarized here. It is generallyagreed that property rights are most productively

seen as a combination of various elements,including the right to:

Occupy, enjoy and use

Cultivate and use productively

Restrict or exclude others

ransfer, sell, purchase, grant or loan

Inherit or bequeath

Develop or improve

Rent or sublet

Benefit from increased property value orrental income

Documented land rights may also facilitateother rights and opportunities, such as the rightto security of tenure, civic participation, accessto basic services or to bank credit. Tis bundleof sticks approach to property rights is usefulbecause it becomes immediately clear that theentire bundle may not be possessed by a singlegroup or individual. Different parties may holddifferent rights regarding the same parcel of land.Te most obvious case is land that is rented or

leased. Te lessee holds the right to occupy anduse the land for a specified use and often for aspecific period of time. While the lessee mayhave the right to sublet to another party, she doesnot have the right to sell the land and may nothave the right to change how the land is used.

Tere are also cases when countries recognizedifferent combinations of property rights. Forexample, in Tailand there are a range of legallyrecognized and recorded bundles of rights. Atone end of the continuum is the title deed

which is a registration of freehold ownershipincluding all of the rights listed above. Otherproperties may be held in perpetual useby a family and may be inherited by theirdescendants, but the land may not be sold inthe open market. In addition, some public landsmay be occupied through a temporary right touse which may not be transferred or inherited.In addition, Tailand has provided a number of

intermediate titling stages that allow occupantsto pursue a full title deed. Te result in Tailandis a legally recognized array of arrangementsrecognizing different rights obtained throughdifferent channels and representing differentcombinations of property rights. Te point issimply that what is meant by property rights willdepend on the particular historical, cultural andpolitical context.

For purposes of the LP, two views are

particularly important regarding propertyrights, and which dominates in a particularcommunity will have important implications

4. RELATIONSHIP BETWEEN LOCAL PRACTICES,CAPACITY AND THE ANNUAL LPT


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for the design of the LP. One view sees landas most fundamentally an economic commodity,and land rights in terms of economic potential9.

In this view, governments should seek toregularize and record land rights, especially

the complete bundle of rights representedby freehold ownership, so that land ownerswill have improved access to credit markets.While access to credit markets is an importantconsideration, it is at least as important torecognize that rights to land differs markedlyfrom land rights Increasingly, rights toland and property are seen as essential to theachievement of human rights. Access to land andsecurity of tenure are regarded as an importantmeans to achieve human rights, as defined by

international conventions. Te EU Land PolicyGuidelinesfurther argues that land titling is notalways the best way of increasing tenure security,and nor does it automatically lead to greaterinvestment and productivity. (EU, 2004, p 6)10

Access to land is an inseparable ingredientin a poor households ability to survive,earn, thrive and lift itself out of poverty11.

[Secure land tenure and rights to property] arefundamental to shelter and livelihoods; assuch, they are an important foundation forthe realisation of human rights and for povertyreduction. Secure land rights are particularlyimportant in helping to reverse three typesof phenomena: gender discrimination; socialexclusion of vulnerable groups; and wider socialand economic inequalities linked to inequitableand insecure rights to land (UN-HABIA,

2008a, p 3).

Importantly, tenure security in this context is inthe first place the right of all individuals andgroups to effective government protection againstforced evictions(UN-HABIA, 2008a, p 5).

Clearly, it is beyond the scope of this guideto attempt to resolve or even enter into thisdiscussion. Te perspectives are pointed out heresolely to make two points which are central tothe functioning of the LP. First, whichever

view is adopted does not affect the potential ofan effective LP to enable government officialsand community leaders to raise revenues neededfor public services and public investment.Second, the view taken on rights related to landand property will affect how the LP is designedand particularly how it is administered.

o give just one quick example here which willbe explained more fully below in section 8.2, ifland is seen as an economic commodity, then if

a household does not pay the LP, the ultimatecollection sanction is to seize the land and sell itat auction as happens (though rarely) in many

western countries. But if land is fundamentalto achieving basic human rights such as shelter,livelihood or food, then seizing land for non-payment of taxes is probably not an optionand other sanctions and incentives must beincorporated in the design of the LP.

So in designing the LP for a given community,

consideration should be given to how thecommunity historically and currently viewsland-related rights.

Which rights are held by whom will affectwho bears the tax obligation

Whether or not seizing land for nonpaymentof taxes is acceptable under the adoptedview of land rights will affect the design ofcollection efforts

4.2 LAND AND PROPERTY RIGHTSAND TENURE REGISTRATION

Secure Land Rights for All (2008a) alsoappropriately describes land rights as acontinuum ranging from informal land rightsat one end to formal and registered rights atthe other. In between fall a variety of differentsocially recognized bundles of land rights suchas customary rights, group tenure and leasehold

rights. Te same publication describes acontinuum of tenure arrangements. Land tenurecan range from freehold tenure which bestows

9 See Assies (2009), Borras and Franco (2010) and Payne (2001)for a more detailed discussion of the two main perspectives

being debated.10 See also FAO (2002)11 UN-HABITAT, 2008b, Housing the Urban Poor in Asian Cities,

Quick Guide 3, United Nations Human Settlements Programme


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12 It should be further noted that this simple distinction betweenlegal, extra-legal and illegal tenure oversimplifies the range oflegal, religious and social arrangements found around the world.

ownership in perpetuity with full rights to useor dispose of the land, all the way to a varietyof non-formal tenure systems. And there aremany different tenure arrangements that fall inbetween the two ends of the continuum.

In practice most of these tenure forms can befound in any given society. For example, theremay be private residences and farms, communallyowned grazing lands and state owned forests. Inmany contexts, communal rights may includerights to graze in the common pasture andexclusive rights to a plot of agricultural land anda residential parcel.

Te key issue for purposes of the LP is where andhow these tenure rights are recorded, if at all. Te

presence of customary tenure arrangements in acommunity may result in what some have termedextra-legal tenure. Tese are properties held notagainst the law, but the tenure is not protectedor recognized by the law. Local de facto tenureregulations are simply ignored by national law.Such extra-legal tenure can happen in societiesthat also have formally recognized or statutorytenure rights and illegal tenure, meaning thatthe properties are held in violation of the law12.

Tese are issues of importance for the LPbecause tax policy must define who owes the tax,tax officials must be able to deliver the tax bill tothe appropriate party, and they must be able tofollow up in the collection process. In Jamaica,for example, 48 percent of all land parcels donot have a registered owner. In some parishes thefigure is as high as 69 percent (Land ValuationDivision, Jamaica National Land Agency, 2010).Tis is not to say that the land is abandoned.Many people in the immediate neighborhoodknow exactly who owns a given parcel. Butthat ownership has not been recorded with thenational governments land registry. o be sure,there are ways to design and implement the LPin countries like Jamaica, but the methods mustbe adapted to the current property registrationsystem. An on-going challenge that Jamaicafaces is the difficulty of delivering tax bills andcollecting on taxes due when the land is vacantand the owner is unregistered.

Te lack of formal registration can emerge fora variety of reasons related to local history andpolicies. In Egypt, for example, prior to theirmost recent LP reform, 85 percent of the landparcels were not on the property tax rolls, yet theyhave had LP since the Ottoman Empire. Butin the 1950s, the national government limitedthe LP to urban areas, and created maps thatdefined those areas. Much of the developmentthat has happened since has occurred outsidethose defined urban areas with the result that theLP was never applied to new development.

In Latvia, the process of de-nationalizing landthat had been confiscated during the Sovietoccupation and privatizing buildings constructedduring the same period has never been fullycompleted. Te result is that a large number ofparcels do not have a registered title.

Te reasons for not formally registering titlesare often the same across countries: complexity,cost and failure to see the need. Te registrationprocess in places like Jamaica and Latviarequires that the land be described precisely,often requiring the services of a land surveyor.Documentation of ownership interest must beprovided, often difficult to provide if the original

Ways of harnessing land property value in SaoPaolo, Brazil.Photo UN-HABITAT/Malcolm Boorer


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acquisition was handled informally. In manyinstances, legal assistance is required to completethe necessary paperwork. When all is ready, aregistration fee and stamp duty must often bepaid before final approval and registration.

And many land owners do not feel the need togo through the process. If the customary tenureright is acknowledged by the community, theyargue, what is the value in registering with agovernment agency? Generally the response isthat a registered title provides greater access toformal credit markets. Access to credit couldprovide land owners with resources to improvetheir property or invest elsewhere, it is oftenargued. While this is sometimes true, and

assuming there is sufficient stable income toservice the debt, the idea of risking the familyland and livelihood by pledging it as collateralto a bank is quite foreign in some cultures. Evenif the idea of borrowing against family propertyis not objectionable, until a property owneractually feels a need to complete the registrationprocess, they are likely to defer going throughthe complex and expensive process of landregistration.

In some countries, such as Jamaica, it is alsocommon to bequeath land to the family asa whole rather than specific individuals inthe family. In such a case, registering all theownership interests may result in literally

dozens of registered owners for a given parcel.In countries that are transitioning from stateownership to private ownership, such as Latvia,de-nationalizing land and privatizing buildingsoften results in a land parcel and the buildingson that parcel being owned by different parties.

Te point of this discussion is that in manydeveloping and transitioning countries formalland registration systems are incomplete. Insuch a case, an effective LP should consider

what informal or customary tenure processesexist and how these might be employed inthe design and implementation of the LP.Careful consideration of the land and propertyregistration systems will influence decisionsabout:

Who owes and who pays the LP;

How the billing and collection systems willfunction.

Woman collects and records savings from members of a saving group in Mumbai, India.Photo UN-HABITAT


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4.3 THE MARKET FOR LAND ANDPROPERTY RIGHTS

Defining what it is that will be subject to theLP is also a function of how developed theland and property markets are in a country or

region. In many countries, the LP is appliedto the market value of land or to land and theimmovable improvements attached to the land.Market value is defined as the price agreed toby a knowledgeable and willing buyer and aknowledgeable and willing seller, neither of

whom are acting under duress. Te annual taxis then calculated as a percentage of the marketvalue thus defined.

Such a market-derived standard makes strong

assumptions about the existence and functioningof real estate markets. It assumes that:

Capital markets also function reasonablywell to finance real estate purchases;

Tere are an adequate number and qualityof supporting trades such as valuers(appraisers), estate agents, advertisingoutlets, etc., to assure the adequacy ofinformation for buyers and sellers;

Property rights and titles are well-defined,well documented and marketable; and

Tere are enough market transactions forall classes of property in various locations tobe able to reliably establish an estimate ofmarket value.

In many developing countries, such marketssimply do not exist. In some instances, suchmarkets may exist in major urban areas orfor certain classes of property, but not for all

properties or not in smaller communities. Forexample, the real estate market for upper incomeproperties in Cairo or Alexandria may be fairlystrong, but there may be no formal market forlow income properties in those same cities.

And in some instances, markets may be activebut informal. Land or housing are often boughtand sold in an informal settlement withoutregistering those transactions or seeking fundingthrough formal credit markets.

If there are active formal real estate markets in agiven area, then it is possible and often desirableto tie the LP to the market value of the landand improvements. But without active landand property markets attempting to base the

LP on non-existent or non-observable marketprices will simply lead to frustration and failure.On the other hand, there are very reasonableapproaches to establishing LPs that are notbased on market value, and many countries usethem. Tus, one key consideration in designingthe LP is whether there are active real estatemarkets in the community.

If there are active real estate markets, theLP should be tied to market value;

Lacking reasonably efficient real estatemarkets, the LP should be based on one ofthe non-market approaches described morefully in section 7.1.

4.4 THE CAPACITY OFGOVERNMENT AGENCIES

Te final consideration that governmentofficials and community leaders must evaluate

in developing or improving the LP is thecapacity of the entities that will be charged withimplementing the LP system. Dependingon the design choices made, an LP can beadministratively complex. Because the systemoften involves administrative discretion, thesystem can be fall prey to corruption andabuse as discussed more fully in section 4.5.Consequently, the ability of taxing authorities toefficiently and fairly administer the LP should

be weighed carefully. Often the best systemsinvolve shared responsibility between two ormore levels of government, each bringing to theLP system their own strengths. Te importanceof administrative capacity shows up most clearlyin four areas: monitoring land use, valuation,billing and collection, and appeals.


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4.4.1 MONITORING TAXABLE LAND ANDPROPERTY

One of the great strengths of the LP is that thebase (land) is difficult to hide and impossibleto move. Income can be hidden and those

who earn it can relocate. Retail sales can shiftto lower tax jurisdictions. Land by its natureis immovable, and buildings constructed onthat land are difficult to hide. But these verydesirable features do not mean that the tax baseis obvious and unchanging. Consider just a few

simple examples:

Outside of Cairo, Egypt, a parcel of landpreviously used for farming is converted toresidential use. Because authorization for

the conversion in type of use requires theapproval of the Ministry of Agriculture, thenew construction is non-conforming andtechnically illegal. No construction permitsare requested or issued.

Te ground floor of a residential building ina suburb of Porto Alegre, Brazil is convertedto a retail shop. Te owner of the buildingstill lives above the shop, but no city permitfor the conversion was obtained.

A family has a large residential parcel ofland in a smaller community in Jamaica. Ithas been the family home for years. Nowthe oldest son needs his own home. Tefamily allows the son to build a new homenext to the family home. No approval issought from the city and no constructionpermit is obtained.

Alternatively, rather than allowing the sonto build a separate structure, the family

decides to add on to the existing structure,doubling the size of the current home.

Tese are simple examples, but they are typicalof similar developments in many countries. Ineach case it is assumed that there is an approvalprocess in place to authorize the action taken,but that because of cost or bureaucratic delays,the landowner has elected to go ahead withoutformal approval. Ignoring the question ofenforcing land use regulation, the question for

the LP is how the tax authority will learn of thechange in land use or building structure? Tis isthe problem of discovery, and it is an ongoing

task in every jurisdiction that implements theLP.

Discovering new construction or changes in landuse is particularly difficult if the public agencyresponsible for determining the tax bill is a

central government authority, as it is in Egypt,Jamaica, Latvia, Cambodia, Ukraine and manyother countries. Te task of monitoring changesin the local community is best left to localgovernment officials, because local governmentofficials live and work in the general area and canmost readily detect changes as they occur. Butassigning discovery to local governments impliesthat local governments have the capacity and theincentive to effectively carry out the task.

4.4.2 VALUATION OF THE BASE

Whether the LP is based on the marketvalue of real estate, physical attributes andlocation of the property, or some other modelof value, someone must determine the taxablevalue of each parcel. Unlike the income tax ora value added tax where the taxable value isdetermined by something potentially directlyobservable, determining the taxable value ofland and improvements inevitably requires anadministrative judgment. Even if valuation is byformula, assembling the formula inputs requiresgathering and managing information, assessingthe relevance and accuracy of that information,and actually applying the formula. And whenthe valuation of a given parcel is multiplied bythe number of parcels in a community, provinceor nation, the task becomes daunting indeed.Computerization can help immensely, but that

too adds a layer of required technical capacityand expertise that may strain local resources.

It is frequently the case that higher levels ofgovernment are better able to attract, trainand retain the human capital necessary for themore technical aspects of valuing property. Forexample, in both Latvia and Jamaica, propertyvaluation is carried out by national governmentagencies. In Colombia, with the exception ofthe capitol Bogot and three other large urban

areas, the property valuation task is assignedto a national Geographic Institute (IGAC).Even in countries with large urban centers


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RELATIONSHIP BETWEEN LOCAL PRACTICES, CAPACITY AND THE LPT

and substantial local capacity, the valuation ofspecialized properties such as railroads, pipelines,electric utilities, ports and airports is frequentlyassigned to a higher level of government.

Even if valuation is assigned to the localgovernment, there is often still an importanttraining and oversight role for a more centralizedagency.13 Precisely because valuation ofteninvolves judgment, and the exercise of discretioncan result in mistakes or corruption, many ofthe best LP systems involve training, supportand quality reviews from a central agency.

Which agencies should fill this oversight rolewill depend on the structure of governmentin a given country. Te national governmentshould only retain this responsibility in relativelysmall countries which do not have sub-nationalgovernments that organizationally fall betweenmunicipalities and the national government. Infederal systems involving states, provinces or asimilar level of government, the role of oversightand training will be most effectively carried outby agencies at that level (see below for furtherexplanation). Te valuation tasks which can

appropriately be assigned to local governmentofficials will depend on the administrativecapacity of those local governments.

4.4.3 BILLING AND COLLECTING THE TAXAdministrative capacity also influences taxbilling and collection procedures. In Latvia, forexample, the tax due is calculated by the centralgovernment agency, but the local governmentprepares the tax bill, mails it to the taxpayer andcollects the tax. Tis arrangement can create someconfusion if the records of the central authorityand the local authority do not agree. Clearly,strong cooperation and good communication

are required.If local mail delivery is unavailable or unreliable,other means of delivering the tax bill must bepursued. In some instances, local governmentagents go door to door delivering tax notices.It may also be possible to contract with a localutility company for delivery of the tax notice.

And emerging technologies can make paymentof the tax much more convenient. In Kenya, forexample, the LP can be paid using cell phones.

Whatever the challenge in administering theLP, there is generally a practical approach that

will meet the local need. Te key is to anticipate

Surveying of properties in Freetown, Sierra Leone. Photo UN-HABITAT/Malcolm Boorer

13 See section 6.0 for a discussion of what is meant by a centralizedagency and for a more complete discussion of the points raisedin this paragraph


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the need, evaluate the resources available to meetthe need, and to deploy all resources to bestadvantage.

4.4.4 APPEALS

No tax system is perfect in either design orimplementation. Te LP is no exception.Errors will creep into the best databases. Clerks

will transpose numbers. Administrators willmisinterpret data. Mistakes will happen. Even ifthere is no error in a given instance, the taxpayermay feel that she is not being treated fairly for a

variety of reasons. Te design of the LP needsto include provision for taxpayers to appealthe amount of tax due, and the governmentadministration therefore must provide sufficientcapacity for such appeals. Ultimately of course,the taxpayer can appeal to the courts, but formal

judicial proceedings are nearly always veryslow and very expensive for all parties. And ifon careful review there is an obvious error, it ismuch better to resolve the discrepancy throughan administrative process rather than throughthe judiciary.

One of the ways for resolving LP appeals is toinvolve an independent panel of local residents

who are taxpayers but who are not employedby the local government. Such panels canobjectively evaluate the claims of the taxpayerand the evidence of the tax authority. Of coursethe decisions of the local panel should also beappealable to the judiciary if either party sochooses.

Te appeals process requires that localgovernments be prepared to receive appeals inan orderly manner, schedule hearings beforethe appeals panel, and record and act on thedecisions taken by the panel.

While the administrative tasks associated withthe LP are substantial, in a well-functioningLP they should not require the expenditureof more than 3 to 4 percent of the revenue

collected. Te percentage may be higher ifsome of the administrative tasks are contractedto private entities. But if such contracting can

improve the efficiency, fairness or collection ofthe LP, it may well be worth the additionalcost. For more discussion on the appeal process,

please see section 8.2.

4.5 CORRUPTION

Corruption, or the misuse of public office forprivate gain, is a pervasive problem in manycountries.14 Corruption in a governmentsrevenue system is particularly corrosive becauseit reduces net revenues collected, underminespublic confidence in government and ultimately

compromises the legitimacy of government.Public confidence and belief in the legitimacyof government are key factors in securing taxcompliance. Fauvell-Aymar examined politicaland tax capacity in 86 developing countries andconcluded:

Te more the government is legitimate, efficientand credible, the higher is its political capacity toensure tax compliance. A legitimate governmentis one that can count on willing compliance or,

at least, assent to its directives15.

Tis conclusion applies quite directly to LP aswell. Te overall relationship between control ofcorruption and LP revenues is highlighted inFigure 4.1. Tis figure summarizes IMF-reportedLP revenues from 78 countries. Te countriesare divided into four equally-sized groupsbased on their control of corruption index asdeveloped by Kaufman, Kraay and Mastruzzi16.

Control of corruption in this case means

measuring the extent to which public poweris exercised for private gain, including bothpetty and grand forms of corruption, as wellas capture of the state by elites and privateinterests (pg 3-4).

It is clear from the figure tha

Land and Property Tax

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