3.1 Property tax is an annual tax on real property. It isusually, but not always, a local tax. It is most commonly founded on the conceptof market value. The tax base may be the land only, the land and buildings, orvarious permutations of these factors. For the purposes of this guide, propertytax is restricted to annual taxes and excludes one-off taxes on transfers, onrealised capital gains or betterment, or on annual wealth taxes.
3.2 Property tax has been in existence for at least threemillennia. It is common throughout the world and has often been the subject ofpolitical debate. The strengths and weaknesses of this type of tax are wellknown and possibly more widely understood than any other tax.
3.3 Several characteristics of property taxes have contributedto their declining relative importance in the 20th century. Themaximum yield presently achievable appears on the basis of experience to be lessthan 12 percent of total national tax revenues, although the actual potentialwill vary according to the specific structure and incidence of taxation withinany given jurisdiction. It is useful to understand these characteristics whendesigning a new tax or seeking to bring about improvements in existing systems.There is much to learn from the experiences of other countries.
Advantages
3.4 Advantages of the tax are clear and include:
It is technicallyand administratively possible to introduce and/or maintain in almost anycirc*mstances.
It is cheap toadminister, and it is possible to aim for a cost yield ratio of 2 percent orless.
It is verydifficult to avoid or evade, and collection success rates of 95 percent arereadily achievable.
It istransparent.
The publicunderstand the concept of market value (whether capital value or rental value)and therefore appreciate the basis of assessment.
In general thereis a good correlation between assessed value and the ability to pay.
If designedcorrectly the tax can be marginally progressive.
The revenue ispredictable and buoyant.
It is very wellsuited as a source of locally generated revenue for local governments.
Disadvantages
3.5 The disadvantages of property tax are less clear than theadvantages. The tax is not perfect and is often not popular; although it shouldremembered that there are no perfect taxes and taxation is neverpopular.
3.6 Some of the advantages incorporate hidden disadvantages.The transparency of the tax reveals any inconsistencies which may becomemagnified in public perception. These inconsistencies will be both those ofassessment (which are inevitable in a valuation list which may consist ofthousands or hundreds of thousands of assessments) and those of ability topay.5 Other taxes, such as income tax, are very much less consistentin practice but the public only know how the tax should work and not how it isactually applied in practice. Confidentiality hides the actual results. Withproperty tax the public see the tax system working with all its imperfections.In a similar way the difficulty of avoiding or evading property tax may make itunpopular. This is particularly the case in societies where the rich andpowerful are accustomed to manipulating the tax system for their own advantage.These persons tend to be the most articulate and politically influential and mayeffectively oppose or undermine the equitable operation of the tax at thepolitical level.
3.7 There is also a more subtle and less well-understoodshortcoming. The American war of independence was fuelled by the cry of "notaxation without representation". In some circ*mstances property tax can provide"representation without taxation" for a large segment of the population.Universal suffrage means that not every voter will be a property tax payer. Insome circ*mstances non-taxpayers may greatly out number taxpayers, which damagesthe democratic link between democracy and taxation at the local level. There isno sanction on non-taxpayers voting for high tax policies. The adverse effectsof this will be magnified if property tax forms the only part of total localrevenue over which the local authority has control. In this case, a modestincrease in total revenues may require large increases in individual propertytaxes because of the small number of tax payers.
3.8 There is also the problem of building "buoyancy" intoproperty tax. In theory buoyancy is a function of two mechanisms. The first ofthese is the revaluation of properties at regular intervals. The second is theincrease in the rate of tax to produce the needed revenue. Both are highlypolitical. In theory either one or the other could provide buoyancy. It istechnically possible to increase tax rates on an out-of-date valuation list.However, it is known from experience from many countries that the public do notunderstand and do not accept an out-of-date valuation list. Nonetheless there isalways resistance to revaluations and the more out of date the list, the greaterthe resistance. The biggest factor behind declining yields for property taxes inOECD countries and others is the failure to carry out revaluations.
3.9 The difficulties of implementation should not beunderestimated. Although the technical difficulties can be overcome, they canrestrict progress, especially in the early stages of implementation. Suchtechnical factors include:
The system isdependent upon a pool of technical expertise (of which there is often ashortage) to create and maintain a valuation roll, and to establish and conductthe appeals process.
Parts of theprocess can be time-consuming and expensive, for example, compiling acomprehensive list of rateable properties (especially where records are poor orincomplete, or where there are a large number of legal status issues),outsourcing services to the private sector, establishing a valuation tribunal,and administrative and infrastructure support (such as dedicated informationtechnology systems for both the valuation and the financial accounting systemfor the billing, collection, and enforcement procedures).
While it is truethat the public generally understands the concept of market value, confusiondoes arise in the relationship between 'rateable value' and setting the 'rate'.This is particularly so where revaluations take place after a long interval,and/or where there has been political unwillingness to increase the rate. Thisoften manifests itself in large numbers of ill-founded appeals.
Uses of property taxes
3.10 A source of local revenues. Throughout theworld property taxes are commonly employed as the main source of locallygenerated revenue for the good reason that there is no other major source oftaxation revenue that is exactly geographically defined. It is possible to uselocal income taxes and/or local sales taxes for generating local governmentrevenue but both have difficult administrative problems. Local revenue may begenerated from other sources, particularly rents from local government ownedproperties. In some cases, local income taxes are an important source ofrevenue. In many cases, however, property tax is the main source of revenue (andeven when local income taxes exist, it may be easier for a local government tomodify the property tax rate than to adjust the income tax rate).
3.11 As a primary source of revenue, property tax plays animportant role in decentralisation and the autonomy of local government. Fulldecentralisation of government incorporates the power to raise revenueindependently in addition to powers allowing local governments to use the fundsas they see fit (in accordance with the limits of their legal powers). Inpractice, local government autonomy is always limited. The duties of localgovernments are almost invariably such that it is impossible to discharge themwithout central government grants which detract to a greater or lesser extentfrom their independence. Increasing independent powers of raising revenuesthrough property taxes thus becomes important.
3.12 Support for other functions. 'Valuationlists' compiled for local government may be used by other bodies, particularlythose that can be termed "single function authorities" such as Water Boards.Water charges are commonly based on the assessed value in the valuation lists.Such procedures are very cost effective7 and may have a reasonablecorrelation with water usage in many circ*mstances (although cases do existwhere commercial and industrial properties have low water consumption but haverelatively high values). Drainage boards can also be funded by charges relatedto the valuation list, which has advantages over charges related only to thesurface area of the property.
3.13 Valuation lists may be used in transitional economies forother purposes such to establish lease rates on government owned land. Whereland markets are not yet developed, mass valuation results can also be used as abasis for establishing market values for properties. In addition, local bodiesmay have to take over functions previously controlled and administered centrally(such functions include local drainage boards,8 common grazingfacilities, and consolidation bodies9). They are not able to rely oncentral government funding and have to raise their own revenue. Depending on thetax rates and cost of collection, valuation lists may provide a fair and costeffective basis for doing so.
Rural property taxes
3.14 There are sound reasons for introducing or extendingproperty tax into rural areas:
Property taxprovides a basis for local autonomy and facilitates decentralisation
It provides arevenue base for single function authorities
It encourages theeconomic use of land10
It tends to reduceland and property prices thus facilitating access to land
Apart fromagricultural land and buildings, rural property tax may be applied tocommercial, industrial and residential properties located in ruralareas.
3.15 Almost invariably the benefits of rural property tax willbe local rather than national. It will be apparent in almost every country,including those in transition, that the extension of the property tax net intorural areas will have limited impact on the total national tax revenue. Therural tax base is very much smaller than the tax base constituted by the urbaneconomy. Frequently a national capital city and two or three other major citiesproduce a major part of the GDP. The relative size of the regional GDP gives agood indication of the magnitude of the tax base. Thus if for instance animproved property tax covering the entire country has a potential to produce 10percent of total tax revenues, the proportion arising from rural areas isunlikely to be more than 20 percent of this. Even in such circ*mstances therural property tax base will constitute only 2 percent of the national tax totaland be more proportionately expensive to administer.11
3.16 In most instances the above illustrative figures willoverstate the potential yield from rural areas. However, this does not diminishthe importance of a rural property tax. It is a vital part of decentralisation.It is not so much its size relative to the national tax base but its magnitudein relation to local revenues especially those locally generated revenues. Thisis why it is a vital instrument in improving rural livelihoods.
3.17 In most transition countries the issue of property tax inrural areas will be linked with agriculture. First, there tends to be acarry-over from the socialist period of the emphasis on primary industries. Manywill tend to believe that agriculture is more important in the national economythan is the case. Second, there may be a belief that exempting agriculture fromtax will reduce food prices although there is little evidence that it has everdone so. Economic theory suggests that the exemption tends to increase the priceof land relative to other assets and there is evidence that this is the case.Third, there can be an erroneous belief that access to land is facilitated byexemption from tax. In practice, tax relief causes the price of agriculturalland to rise and makes it more difficult for newcomers to gain access tofarms.
3.18 There are few, if any, sound reasons for exemptingagriculture from property tax. Most of those commonly proposed do not bringabout the desired result. Furthermore by exempting agriculture damage is done toperceptions of the role of the tax as a fair way of apportioning localexpenditure. It also renders it of little use for raising revenue for singlefunction authorities.
BOX 1
REVIEWING PROPERTY TAXES
Factors listed below may lead to governments reviewing thescope for introduction of property tax where it does not exist, or consideringthe scope for increasing taxation rates where it does, and examining theadministrative machinery with the purpose of making it more efficient.
Scope for increased yields: While many taxes are nowbumping up against ceilings created by economic factors, or internationalcompetition, or public acceptance, in most countries property taxes could yieldmore.
Probable ceiling: Although there is often scope toincrease the yield from property taxes there are few if any examples of propertytax accounting for more than about 12 percent of total tax revenue and this mayrepresent a limit of public acceptance. Property tax in most countries is muchless than this theoretical ceiling.
The relatively small size of the rural tax base: Therural tax base will always be comparatively small in comparison with the urbantax base. The importance of property tax in rural areas is of localsignificance. The benefits to the national economy are indirect.
Importance beyond its relative size: The importance ofa property tax covering rural areas is greater in political terms than might besupposed from the absolute size of the property tax yield. As the foundation oflocal government autonomy, and as a means of financing some single functionauthorities, there is sound justification for the introduction of thetax.
Administrative feasibility of property tax: The wideapplication of property tax and its long history shows that, if there issufficient political will, there are no insuperable technical or administrativeproblems to the introduction of property tax.
Political will: All taxes require politicaldetermination and public acceptance. The openness and transparency of propertytax mean that it is impossible to introduce the tax by stealth. Politicaldetermination is therefore essential. If there are political doubts do not wastetime and money considering the introduction of property tax.
Certainly! Property tax is a recurring levy on real property, commonly levied at a local level and often pegged to the property's market value. The tax can be based solely on land, buildings, or a combination of both. This tax has a history spanning millennia and is a widespread subject of political discourse globally. Its strengths lie in its operational feasibility and transparency, making it challenging to avoid or evade, with high collection success rates. The public usually understands the tax's concept based on market value, enhancing its predictability and correlation with one's ability to pay.
Advantages of property tax include its low administrative costs, difficulty to avoid, transparent nature, and potential for marginal progression in design. Its revenue is predictable and adaptable, making it suitable for local government revenue. However, challenges exist: it's not universally popular due to inherent imperfections. Transparency can magnify inconsistencies in assessments and the ability to pay, leading to public scrutiny. Wealthy individuals might influence the system to their advantage, eroding the tax's equitable operation.
Moreover, property tax can create representation without taxation, impacting democratic links when non-taxpayers outweigh taxpayers in voting populations. Challenges in maintaining buoyancy, achieved through regular property revaluation or tax rate increases, are subject to political resistance. Implementing property tax requires technical expertise and faces hurdles such as creating valuation rolls and managing appeals processes. Confusion can arise between 'rateable value' and setting the 'rate', leading to baseless appeals.
Property tax serves as a significant local revenue source, supporting decentralization and local government autonomy. It aids single-function authorities like water boards and drainage boards, establishing fair and cost-effective revenue bases. Extending property tax to rural areas supports local autonomy, encourages efficient land use, and aids in lowering land and property prices for better accessibility. However, its impact on national tax revenue from rural areas remains limited.
Agricultural exemptions from property tax might not yield the desired results and can distort perceptions of fairness in local expenditure apportionment. Governments often review property taxes for increased yields or administrative efficiency, but the tax's acceptance and limitations should be considered. Political determination and public acceptance are essential for successful property tax implementation due to its inherent transparency.
In essence, property tax stands as a viable revenue source for local governance but grapples with challenges in maintaining fairness, political influence, and democratic representation, particularly in balancing rural and urban taxation.
