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The Lincoln Institute has supported the authors’ work on property taxation in South Africa for several years, and in February 2002 the Institute published Property Taxes in South Africa: Challenges in the Post-Apartheid Era. Edited by Bell and Bowman, the book presents major portions of their own work, together with chapters by several of their colleagues in the U.S. and in South Africa. This article provides an overview of seminars on property tax issues conducted by Bell and Bowman in South Africa in March 2002.
The end of apartheid in South Africa nearly a decade ago presented new opportunities and challenges to every aspect of national life, including fiscal issues. The government faced the task of extending the property tax to previously untaxed areas and adapting it to provide services through a set of radically restructured local governments. The final reorganization of local government took effect in December 2000, and the new governments now must develop comprehensive property tax (rates) policies.
Several key pieces of apartheid-era legislation had established the spatial basis for racial separation:
These policies greatly complicated efforts to amalgamate former white and black local authorities (WLAs and BLAs), with important implications for property taxation. Specifically, for local governments, the legacy of apartheid includes:
Post-Apartheid Local Government Structure
The dismantling of apartheid began in the mid-1980s and was essentially complete by the early 1990s. At the end of 1993, the Local Government Transition Act (LGTA) was signed by then-President de Klerk and, symbolically, by Nelson Mandela, leader of the African National Congress (ANC). The LGTA provided for short-, medium- and long-term transformation of local governments to create nonracial self-government. It created two-tier local governments in metropolitan areas, with powers and responsibilities shared between a geographically larger unit and two or more smaller units within the same area. The Municipal Structures Act of 1998, providing for single-tier metropolitan government, was implemented after the local elections of December 2000 as part of a general and final redemarcation of local governments that reduced the number of authorities from approximately 845 to less than 300.
Amalgamation of municipalities brought new areas into the property tax base, including former BLAs, bantustans and their associated rural R293 towns, but the residents of these newly incorporated areas had never before paid property taxes. Thus, it was necessary to develop the information and administrative infrastructure needed to value properties, determine tax liabilities, distribute tax bills to those responsible, and collect the taxes due, all in an equitable manner. Moreover, the new tax system had to overcome the psychology of payment boycotts, sometimes characterized as a “culture of nonpayment,” an important resistance technique used against the apartheid government.
Combining formerly taxed areas with different valuation rates or systems into a single municipality produces inconsistencies within the property tax roll of the amalgamated area, multiplying inequities among property owners with different effective tax rates. Both those new to the tax and those who historically have paid property taxes often question whether their tax shares are equitable and how the resulting revenue is being spent. In some instances, tax boycotts have occurred in former WLAs.
National Property Tax Policy
Although property taxation remains a local tax in South Africa, the 1996 Constitution authorizes central government regulation of property taxation. A national Property Rates Bill, scheduled for adoption in 2002, will replace current provincial property tax laws. Each locality now must adopt an explicit and comprehensive property rates policy.
Our seminars took place in this context of national legislation, municipal consolidation and municipal property rates policies. We collaborated with local institutions of higher education: Port Elizabeth Technikon in Nelson Mandela Metropolitan Municipality and the University of North West in Mafikeng Local Municipality. Seminar participants included current and former elected city councilors, newly enfranchised and long-time non-elected officials, and students and faculty of the educational institutions.
Nelson Mandela Municipality is one of South Africa’s six metropolitan municipal governments, the only local government within its geographic area. Its population and business center is the former city of Port Elizabeth. Principal property tax concerns raised at the seminar included: (1) unifying the tax rolls of the various jurisdictions making up the metropolitan area, since their valuation dates range over a number of years; (2) bringing former black local authority (BLA) areas into the property tax base; (3) deciding on the appropriate way to deal with rural (agricultural) land, previously not taxed but now part of the municipal area; and (4) accomplishing these things in a manner that is sensitive to the special circumstances of those with very low incomes.
Mafikeng, the capital of the North West Province, lies within the Mmbatho District Municipality in the former Bophuthatswana homeland near the Botswana border. Some property tax concerns raised at the Mafikeng seminar were the same as in Nelson Mandela Municipality. In addition, Mafikeng is wrestling with incorporating tribal (traditional authority) areas and the black urban agglomerations (R293 towns) of the former bantustan. Tribal areas present two special problems: property ownership is communal, not private; and the traditional authority structure remains in place, even though these areas now are included within municipal borders, creating a dual authority structure that further complicates amalgamation.
Key Property Taxation Themes
Policy Framework
New national legislation requires each local government to produce a property rates policy to address such issues as whether to include all real properties in the tax base; whether to apply uniform or differential rates to the many categories of property included in the tax base; and what form of property relief should be given, and to whom. If the property tax is to be a viable local revenue source, local rates policies must be guided by the following principles:
These fundamental characteristics of a property tax system provide a framework for restructuring property taxes in South Africa, with tradeoffs made through an open and transparent political process at the local level.
Monitoring
The property tax base is fair market value. Because most properties do not sell in a market transaction each year, however, estimating market value is the task of trained assessment professionals. Differences in location, depreciation and other characteristics make valuation partly an art, not strictly a scientific or technical endeavor. Uniformity relative to market value may not always result, even though it is required and the assessors follow the procedures intended to achieve that result. Thus, a system for monitoring valuation outcomes is needed, which may include three dimensions of assessment quality:
Formal assessment/sales ratio studies have not been done in South Africa, but we calculated simple ratios for several cities. The results in Table 1 indicate that assessment uniformity generally needs to be improved, since coefficients of dispersion across the case study cities are typically high and the price-related differentials are generally substantially above one.
Targeting Tax Relief
Although property taxation is a tax on value, it is paid out of current income, and thus may place an unacceptable burden on property owners with low incomes. Property tax relief is any reduction in tax liability. Indirect relief results from changes that take pressure off the property tax: reduced expenditures or increased revenue from alternative sources. Alternatively, direct relief comes from a change in the calculation of property tax liability.
Direct relief was the focus of our studies and the seminar discussions. In South Africa direct residential property tax relief typically is a uniform percentage credit, termed a rebate, which generally is 20 percent or 25 percent of gross property tax liability. The rebate approach has two limitations. First, most of the tax relief goes to those with the most expensive properties. Second, low-income property owners are still required to pay most of their property tax liability, which still could be burdensome relative to income.
While an income-based circuit breaker is our preferred approach for targeting tax relief to those in need, it would be extremely difficult to administer in South Africa because income information is not readily available, in part because of the extensive informal economy. An alternative way to target property tax relief to those most in need is to exempt a fixed amount of the base from taxation.
Table 2 illustrates the effects of moving from a 25 percent rebate to a R20,000 exemption (US$1,740). Under the partial exemption alternative, the lowest valued properties, including those hardest to value at this time, are removed from paying taxes, and net taxes are reduced on all properties up to about R100,000 (US$8,700). The aggregate cost of property tax relief under this approach is substantially reduced because each property receives the same exemption. Durban and Johannesburg now are experimenting with the partial exemption approach to property tax relief.
Dealing with Previously Untaxed Areas
As a result of the local government restructuring in December 2000, South Africa now has local governments throughout country. Three types of areas previously outside the property tax now are to be brought into the tax: former BLAs and R293 townships, agricultural areas and tribal areas. In the former BLAs and R293 townships property is being transferred to private ownership and these areas must be surveyed by the national Surveyor General to establish individual property boundaries and identifications necessary to administer the property tax. Different localities are at different stages in this process.
Property taxes were levied on rural agricultural lands in the past, but these lands have not been in the property tax base since the late 1980s. Bringing them into the tax base now poses two problems. The first is developing the property record information necessary for tax administration. The second is the question of how taxes on such properties should relate to taxes levied in the urban portions of a municipality, as farmers often provide themselves and their workers with services typically associated with local government. One possibility is use-value assessment of agricultural land, an approach endorsed by a national commission that reviewed the taxation of rural lands. Alternatively, differential rates for different categories of property are allowed under current provincial property tax laws and the draft national Property Rates Bill. If there is to be differentiation in effective tax rates, imposing a lower rate on market value assessments provides greater transparency and understanding of the tax and should be part of the local government rates policy.
Bringing tribal areas into the tax base presents another set of issues. First, given communal land tenure systems existing in these traditional authority areas, how does one establish ownership, a necessary condition for the application of property tax based on the principle of private property? Second, because there is no land market per se, how are estimates of market value to be made? Finally, given the two competing governance structures that now exist in tribal areas, how does one make the payment of a property tax acceptable to residents who did not previously pay the tax? These issues are clearly the most intractable ones that must be addressed in the newest round of local government reform in South Africa.
Conclusion
The property tax has been an important part of local finance in South Africa for centuries and is likely to play an increasingly important role in the future, as newly amalgamated local governments wrestle with addressing the legacies of apartheid and the requirements of new national property tax legislation. There is no single right answer to many of the perplexing questions surrounding the design and implementation of a local property tax, but it will continue to evolve to meet changing circumstances and needs.
Michael E. Bell is president of MEB Associates, Inc., in McHenry, Maryland. John H. Bowman is professor of economics at Virginia Commonwealth University in Richmond.
References
Bell, Michael E. and John H. Bowman. 2002. Property Taxes in South Africa: Challenges in the Post-Apartheid Era. Cambridge, MA: Lincoln Institute of Land Policy.
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The property tax in Indiana has long generated considerable public policy debate, centering on the methods prescribed by the state to determine property values. Most states use some form of market value as the assessment standard, but Indiana relies on “true tax value.” Indiana law defines this as “the value determined under the rules of the State Board of Tax Commissioners,” and it declares that “true tax value does not mean fair market value.”
A landmark decision by the state Supreme Court in December 1998 ignited new debate over Indiana’s property tax system. The Court ruled that the tables used in the 1995 assessment manual lacked “meaningful reference to property wealth,” did not contain “objectively verifiable data,” and violated the state constitution. Although the legal opinion contained language suggesting approval of the use of market-derived data, the Court fell short of mandating a system based strictly on market value.
Almost two years have passed since this ruling, but minimal progress has been made in implementing a more equitable and uniform assessment system. Policy makers have focused almost exclusively on the projected tax shifts, especially those to homeowners, under market-derived valuation methods, and have all but ignored the underlying inequities that plague Indiana’s assessment system.
This article reviews the essential features of Indiana’s property tax and assessment systems, describes recent reform efforts, and identifies critical reform issues, apart from the tax shifts, that need to be addressed.
Property Tax and Assessment Systems
Property Tax Revenues. In 1999, the property tax raised more than $4.6 billion, nearly all of it generated locally and used for local services, especially K-12 public education. The property tax is the largest revenue source in Indiana, generating more revenue in 1999 than federal funds ($3.8 billion), individual income taxes ($3.7 billion), and sales and use taxes ($3.4 billion). Together, these four revenue sources account for nearly 80 percent of total state and local revenue (see Figure 1).
Nearly 65 percent of the total property tax levy in 1999 was paid by the business community, including commercial, industrial, utility, and agricultural property (see Figure 2). Personal property accounts for about one-half of the total business property tax burden. Although Indiana’s constitution prohibits unequal property taxation, this relatively high business share demonstrates a de facto classification system that allocates a majority of the property tax burden to non-voting entities.
Local Administration. The primary assessing jurisdiction in Indiana is the township. Each of the state’s 1,008 townships elects either a full- or part-time assessor, depending on population; nearly 85 percent of these assessors are part-time. County assessors are elected in each of the state’s 92 counties. As a general rule, the county assessor has a greater role when townships have more part-time assessors, because the county assessor reviews both personal property and real estate assessments.
State Administration. The State Board of Tax Commissioners (Tax Board), the first property tax commission of its kind in the nation, is primarily responsible for promulgating assessment rules and regulations for both real and personal property. Additionally, the Tax Board hears property tax appeals, approves local government budgets, provides assessor training, and maintains a comprehensive local government database.
Assessment Standards. Real and personal property are assessed at one-third of true tax value (TTV). The TTV of improved real property is based on a cost approach, but neither the replacement costs nor the depreciation schedules are market derived. In fact, when compared to the market, Indiana’s TTVs vary widely, not only between property classes (i.e., residential, business, utility and agricultural) but within classes as well.
The TTV of personal property is based on original acquisition cost, but, like the TTV of real property, relies on depreciation schedules that bear little relationship to the market. Most business assets receive accelerated depreciation of 40 to 60 percent in the first few years. However, older assets are subject to a relatively high residual value of 30 percent of original cost. Business inventory also is based on its original cost and is subject to the same floor, but it receives a 35 percent assessment deduction.
Indiana law provides that the TTV of land is to be based on market value, but recent studies have found that land assessments are significantly less than market value. Residential land values are roughly 40 percent of market value. The TTV of farmland is based on a use value of $495 per acre, adjusted for soil productivity, resulting in an assessment that is also well below market value.
Assessment Cycle. Indiana employs two different assessment cycles. Personal property is self-assessed annually, while real property reassessment is both infrequent and irregular. The last general reassessment of real property took effect in March 1995. The previous reassessment occurred in 1989, and reassessments generally took effect every ten years before then. The next general reassessment of real property has been delayed from March 1999 until at least March 2002.
Assessment Reform
Major state reform efforts, whether in welfare programs, school funding or tax policy, tend be driven by either fiscal distress or judicial mandates, but the political process dictates the speed of reform. This same pattern holds true for tax reform to achieve a more equitable and uniform assessment system in Indiana, as policy makers have been slow to respond to judicial mandates.
Judicial Efforts. The Indiana Supreme Court’s 1998 decision in State Board of Tax Commissioners v. Town of St. John is widely considered to be the most significant judicial decision on taxation in the state’s history. The Supreme Court affirmed the state Tax Court’s decision that the 1995 real property assessment manual violated the state constitution’s requirement that the Indiana General Assembly provide for “. . . a uniform and equal rate of property assessment and taxation.”
The Supreme Court found these mandates of uniformity and equality were not met because the manual’s cost schedules were arbitrary, did not reflect actual construction costs, and were not based on “objectively verifiable” data. Unlike the Tax Court, however, the Supreme Court did not mandate a strict market value system. Rather, it ruled that any departures from market value must result in assessments that are “substantially uniform and equal based on property wealth.”
Because executive and legislative policy makers have been slow to respond to this mandate, the Tax Court has become increasingly assertive in the pursuit of an equitable assessment system. Recently, the Tax Court established certain dates for both the adoption (June 2001) and implementation (March 2002) of constitutional assessment regulations, required the Tax Board to submit monthly progress reports, and announced that an independent reassessment commissioner would be appointed if the Tax Board’s efforts were “deficient in any meaningful way.”
Executive Efforts. To carry out its duty to ensure uniformity and equality of property assessment and taxation, the Indiana General Assembly has delegated the development and oversight of the state’s assessment system to the State Tax Board, an executive agency under the governor. This agency has the unenviable task of creating a new assessment system that will likely cause considerable shifts in tax burdens. Delays have further politicized this process, and assessment reform and tax burden shifts have become the focus of the November 2000 general election.
The Tax Board has taken steps to comply with the Supreme Court decision. The Board’s 1999 proposed real property assessment manual incorporated market-derived cost tables for all property classes. Residential depreciation schedules also were based on the market, and the base value of agricultural land was increased from $495 to $1,050 an acre.
Unfortunately, other actions by the Tax Board and the inaction of the executive branch may have offset these improvements. For example, the proposed manual provided a residential assessment reduction, or shelter allowance. The Tax Board argued that basic shelter is not property wealth, since other assets cannot substitute for shelter. A shelter allowance was calculated for each county, ranging in value between $16,000 and $22,686, to be deducted from residential property assessments. This unique valuation method would reduce the predicted residential tax shift from 33 to 7 percent and could be considered a form of classification. Viewing this shift as unacceptable, the governor did not approve the 1999 proposed real estate manual, illustrating the highly politicized nature of assessment reform.
Legislative Efforts. Anticipating a major court decision, the 1997 Indiana General Assembly enacted legislation that many considered the first step toward significant assessment reform. It increased assessor training requirements, improved the local and state appeals process, and required the state to establish level of assessment and uniformity standards and to conduct equalization studies. Again, these improvements may have been offset by other legislative initiatives. The 1997 legislation allows township assessors to establish land values, an authority that previously rested with county land commissions. Current data indicates that these township land values are far from market values, and it is unlikely that the large number of part-time township assessors can establish more accurate land values in the future.
The recently enacted equalization legislation is also problematic. Most states equalize assessments in the first year that reassessment takes effect, to provide immediate mitigation for unequal assessment. Current Indiana law delays equalization for at least two years following the effective date of reassessment.
Conclusion
It comes as no surprise that projected property tax shifts have become the focal point of both assessment reform efforts and the 2000 general election. The highly politicized debate over “acceptable” tax burden shifts has distracted policy makers from addressing reform of assessment regulations. While market-derived assessment manuals represent a significant step, this alone will not result in a more uniform and equitable assessment system. Policy makers must also consider the following issues:
1. Taxpayer equity cannot be measured by interclass tax shifts at the county level alone. Assessment reform will produce dramatic intraclass and intracounty tax shifts, but these shifts have been discussed only as they relate to residential property. Yet, current data indicates that equally significant shifts will occur within other property classes, especially business property.
2. The current administrative structure of the state’s assessment system may not be compatible with an equitable and uniform assessment system. Restructuring the Tax Board could help insulate it from the political consequences of its oversight function. At the local level, policy makers should consider streamlining the roles of local assessors and identifying alternative assessment jurisdiction models based on population, parcel counts, and/or assessed value.
3. Adoption and enforcement of strict equalization standards may be the most significant step in the reform process.
4. The Indiana assessment community should take further steps to increase the level of assessor training and expand assessor qualification requirements. Policy makers also should consider appointment of local assessors by the county executive.
5. Indiana land assessments have been and continue to be well below market value. This underlying problem must be rectified through assessor training, more diligent state oversight, and implementation of the equalization process.
These issues must be addressed in order to remedy the inequities currently plaguing Indiana’s property tax and assessment systems.
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Frank Kelly and Jeff Wuensch are cofounders of the Nexus Group, an Indiana-based research firm specializing in property taxation. Kelly is also assistant professor of economics at Butler University and Indiana University; he previously served as the senior tax analyst for the Indiana State Tax Board. Wuensch previously worked as director of tax review at the Indiana State Tax Board and at the Indiana Fiscal Policy Institute. Kelly, Wuensch and Thomas Hamilton, assistant professor of real estate in the Department of Finance at the University of St. Thomas in St. Paul, Minnesota, are joint recipients of a David C. Lincoln Fellowship in Land Value Taxation from the Lincoln Institute. This article is based on their study of Indiana’s property tax system as part of their Fellowship project.
Total state and local revenue: Table/Chart 1 Sources are the Indiana State Tax Board and Indiana State Budget Agency Who pays the property tax: Table/Chart 2 Source is the Indiana State Tax Board.
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Numerous convergent trends motivated 40 academics and practitioners from 15 countries to meet at the Lincoln Institute in July 1998 to discuss recent land market reforms. First, the recognition that the world’s population is becoming increasingly urban and so the quantity of land converted to urban use is expected to rise significantly. Second, evidence that a major proportion of the world’s poorest households now lives in urban areas (e.g., 80 percent in Latin America). Third, the perceived sea change in the role of government shifting away from intervention and regulation toward more selective urban management. During the three-day workshop, participants presented papers and discussed the rationale behind recent legal and institutional reforms, the nature of the transition from customary or informal to formal markets, evidence for improved land market efficiency, and access to land for the poor.
Legal and Institutional Reform
Several participants made the case for institutional reform of land markets in different ways. Steve Mayo (Lincoln Institute) drew conceptual and empirical links between the performance of property markets and the macro economy. He noted that poorly functioning land markets influence wealth creation and mobility rates which, coupled with particular finance conditions, could aggravate macro-economic instability. Drawing data from the Housing Indicators Program he showed that the prices of raw and serviced land tended to converge with higher land prices, indicating larger land development multipliers at lower prices. He also noted a relationship between the price elasticity of the housing supply and the policy environment.
Although there is a perception that reforms toward ‘enabling’ policy environments are now widespread in developing and transition economies, Alain Durand-Lasserve (National Center for Scientific Research, France) observed the rarity of explicit reference to ‘land market reform’ in political statements in Africa. Indeed, he argued that the ideological underpinning for freer land markets was more advanced than the practice of establishing the prerequisites for effective and unitary markets. In practice, a number of papers indicated competing political agendas, legal ambiguity and diversity of progress in the reform process.
“The law can be reformed, history cannot,” said Patrick McAuslan (Birkbeck College, London) in discussing the role of the law as a necessary basis for effective land market reform. He described the evolution of the recent Land Act of Uganda, which seeks to establish a land market based on individual ownership. He commended the government for dovetailing the reform process with extensive public debate, but noted that drafts of the Act set up new contradictions in a century-long history of competing land relations between freehold, customary tenure and nationalized public lands. His paper outlined a series of ‘time-bombs’ left by colonial administrations and aggravated by post-independence governments, only some of which are addressed by the new legislation.
The inconsistent nature of reform appears to be particularly acute for the transition economies of Eastern Europe and Southern Africa. In Eastern Europe, the legacies of communism have led to inappropriate land uses and the assignment of non-monetary values to property. Legal changes toward land privatization, however, have been slow. Tom Reiner (University of Pennsylvania) argued that despite a strong normative case for privatization and latent demand in the Ukraine, current laws make no provision for freehold sale. He presented data to show that privatization would yield considerable macro-economic and fiscal benefits: direct sales revenue alone would amount to $13 billion, plus increased taxes and more efficient resource allocation.
In Russia, according to Jan Brzeski (Crakow Real Estate Institute), the emergence of land markets has been inhibited by a different understanding of the social role of property and turf politics. In Poland, where privatization is more advanced, he argued that reforms have been insufficient to overcome extensive resource misallocation. Assignation has taken place at symbolic prices without reforms to ground rents or property taxes, and with high transaction costs. Nevertheless, land market turnover is increasing faster than economic growth and re-sales represent about 25 percent of capital investment.
The1991 privatization program in Albania appears to have stimulated an active property and land market. Research by David Stanfield (University of Wisconsin-Madison) indicates substantial increases in turnover rates and increasing prices, but also extensive conflicts between pre-collectivization and post-privatization holders, contradictions in the many laws and errors in the new documentation. The research points to the relative ease of establishing frameworks for privatization but greater difficulties in allowing markets to function thereafter.
Lusugga Kironde (University College of Lands and Architectural Studies) described how shortcomings in the ‘planned’ allocation system in Tanzania meant that 60 percent of people acquired land through informal methods. This in turn denied revenue to the government since transactions were outside official sanction and in some cases well-off households received plots with a substantial subsidy. Michael Roth (University of Wisconsin-Madison) described a similar situation in Mozambique, where the legacy of state socialism is still felt in the level of government intervention and under-representation of freehold tenure.
In both countries, the assessment of reform was mixed. Tanzania’s New Land Policy (1995), while a useful step in accepting the existence of a land market and providing security to plots with customary tenure, has fallen short of removing the barriers to an effective land market. In particular, Kironde noted that the new measures concentrated decisions in a Land Commissioner despite a national policy of administrative decentralization. The policy offers no incentive to encourage the formalization of informal practices and no stake to ensure the compliance of important middlemen. In Mozambique, since the late 1980s, market-oriented reforms have produced unclear administrative responsibilities and uncertain land rights. One feature has been land disputes with households calling upon newly empowered producer associations to defend claims. The 1997 reforms attempt to guarantee tenure security, provide incentives for investment, and incorporate innovative ideas for community land rights.
In Latin America, reform has been less concerned with establishing markets per se and more with improving their function, especially land reforms motivated by largely rural concerns but which have important urban impacts. Rosaria Pisa (University of Wales) indicated that reforms in Mexico have created the necessary conditions for the privatization of community (ejido) land, but progress has been slow. Less than one percent of land has been privatized in five years due to other government interests and legal ambiguities that have established a second informal land market.
Carlos Guanziroli (INCRA – the National Institute on Colonization and Agrarian Reform, Brazil) argued that rural reform was producing land use diversity, especially through the survival of small family farms. Reform was also affecting Brazil’s urban land markets as capital switched from rural to urban areas, probably raising urban land prices. Francisco Sabatini (Catholic University) argued that the liberalization in Chile had not reduced land prices because landowners’ and developers’ decisions are influenced less by regulations and more by demand.
Overall, the consensus on whether reforms were producing unitary and less diverse land markets was unclear. Agents and institutions are proving to be very adaptable to new conditions, a point made for all three regions. Ayse Pamuk (University of Virginia) argued that, based on her analysis of informal institutions in Trinidad, researchers should look away from formal regulations as a barrier to land market operation. Instead, they should consider how social institutions such as trust and reciprocity were producing flexible solutions to tenure insecurity and dispute resolution.
Clarissa Fourie (University of Natal) described how user-friendly local land records could be merged with registries on marriage, inheritance, women’s rights and debt to produce a useful tool for land administration in Namibia. Nevertheless, she noted that the incorporation of customary practices into land administration to provide security of tenure would mean some adaptation of social land tenure systems. Pointing to research in Senegal and South Africa, Babette Wehrmann (GTZ, Germany) argued that customary and informal agents were flourishing and providing high-quality sources of market information.
The Formalization and Regularization of Land Tenure
Peter Ward (University of Texas at Austin) described the diversity of regularization programs across Latin America, where some countries consider it to be a juridical procedure and others regard it as physical upgrading. Regularization may be an end in itself (mass titling programs), or a means to an end (to develop credit systems). Ward argued that the differences among programs stem from how each government ‘constructs’ its urbanization process and represents this vision back to society through laws and language.
Edesio Fernandes (University of London) explained how Brazil’s Civil Code dating from the beginning of the century created a system of individual property rights that restricted the ability of government to regularize favela communities. The 1988 Constitution attempted to reform this situation by acknowledging private property rights when accomplishing a social function. Nevertheless, legal tensions within regularization programs have failed to integrate the favelas into the ‘official city,’ leading to some politically dangerous situations.
Under different circumstances, South Africa produced a regulatory regime that denied freehold tenure to black households or offered only complicated non-collateral permits to the few. Lauren Royston (Development Planning Alternatives, Johannesburg) outlined how the country’s Land Policy White Paper contemplates legally enforceable and non-racial rights, a wider range of tenure options and opportunities for communal property acquisition.
The two developing countries with the most extensive mass titling programs, Mexico and Peru, were scrutinized by Ann Varley (University College, London) and Gustavo Riofrio (Center for the Study and Promotion of Development – DESCO, Lima). Varley assessed two prevailing assumptions that run through the contemporary policy literature: that decentralization produces more effective land management, and that the regularization of customary tenure is more complicated than the regularization of private property. In Mexico, despite the rhetoric of decentralization, a highly centralized system has been increasingly effective in providing land regularization to settlements on ejido land. On the other hand, the regularization of private property is tortuously long and frequently produces poor results. She commented with some concern on the current trends in Mexico to convert ejido land to private ownership and to move toward greater decentralization.
Riofrio questioned the validity of the claims made for land regularization in Peru. He noted that in reality household interest in property title was quite low, not least because records are inaccurate and therefore offer less security than promised. Moreover, only an incipient housing finance market has emerged, based on the regularized properties. Households are wary of debt but are willing to borrow small sums for micro-enterprises and consumption secured on their housing.
New Social Patterns and Forms of Land Delivery
Would liberalization produce more segregated land markets? Brzeski noted that state planning in Eastern Europe has left a legacy of spatial equity and few informal land holdings, but that it would not last forever and planners need to take this into account in instigating reform. In countries with notable levels of social segregation, such as Chile, Colombia and South Africa, less predictable trends are emerging. Sabatini’s data indicated less spatial segregation in Santiago despite liberalization as intermediate spaces are developed, around malls for example, and as new lifestyles are reflected in ‘leisure home’ developments outside the metropolitan area.
Carolina Barco (University of the Andes) argued that new measures in Colombia, specifically the 1997 Ley de Ordenamiento Territorial, will allow the government of Bogota to capture land value increments and transfer these revenues to public housing and other projects. This process is still problematic, however, even in a city with considerable experience in the use of valorization taxes.
In South Africa, strategies to cope with the ‘land hunger’ of the post-apartheid city, especially the Development Facilitation Act nationally and the Rapid Land Development Program in the province of Gauteng, have offered fast-track land release but have performed less well against the principles of equity and integration. Royston explained that the result has been a large number of invasions and the speeding up of land delivery through local government on the urban periphery that does not challenge the ‘spatial quo.’
Changing the method of land delivery and government stakeholding has the potential to affect segregation and access to land. Geoff Payne (Geoff Payne and Associates, London) outlined the principles and practices of public/private partnerships in developing countries. Although much heralded in international policy, research in South Africa, India, Pakistan, Egypt and Eastern Europe has shown that such partnerships had undersold their potential.
Crispus Kiamba (University of Nairobi) outlined a transition in Kenya from government-sponsored schemes, which left the informal and formal circuits separate, to new approaches with greater NGO involvement, ‘group ranches’ and partnerships. In Mexico, too, partnerships are seen as one method to eliminate the cycle of illegality and regularization. Federico Seyde and Abelardo Figueroa (Mexican government) outlined a new program called PISO, which, despite numerous bottlenecks when compared to previous interventions (e.g. land reserves), was proving more effective.
Land Markets and Poverty Reduction
In my opening remarks I argued that most research on markets considered poverty as a legitimate context, but thereafter seemed more concerned with market operations than with how these operations might affect poverty. In the final session, Omar Razzaz (World Bank) outlined a proposal for linking land market operation to poverty reduction. The ‘Land and Real Estate Initiative’ aims to investigate ways to improve the liquidity of land assets and access to the poor through re-engineering land registries (improved business processes), developing regulatory infrastructure (the exchange-mortgage-securitization continuum), and accessing and mobilizing land and real estate by the poor. The appropriateness of this initiative generated considerable debate, which may help in refining ideas that could benefit the 500 million people living in urban poverty in developing countries.
Gareth A. Jones was the program developer and chair of the workshop.
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Most countries in Latin America today have become more urban than rural, and they are trying to develop their economies as integral parts of the global marketplace. This process introduces profound cultural and spatial changes, such as increased segregation and conflicts over the use of urban land.
There is a recognized need to strengthen citizen consciousness regarding the liberalization of markets and the withdrawal of state involvement in economic and planning schemes. This changing role of the state from “provider” to “enabler” creates a gap in addressing urban social needs. Participants suggested three approaches to simultaneously improve urban land management and provide for social equity.
First, basic tools to establish and support urban information systems. These include a monitoring mechanism capable of identifying agent and transaction data, including land prices; knowledge of the ‘life cycles’ of urban zones; and utilization of forecasting models capable of establishing the relationships of the local and national economies to the real estate market.
Second, urban policies to balance existing, often inconsistent, market mechanisms. For example, it is difficult to liberalize markets and at the same time impose limits on urban expansion, while trying to provide adequate land supplies to meet the needs of the working poor.
Third, recognition and support of positive actions by community groups and nongovernmental organizations to break patterns of class segregation, as well as efforts by municipalities to utilize instruments such as territorial reserves, progressive financing mechanisms, and improvements in administrative and fiscal procedures.
A major territorial planning problem in Latin America is locating the “edge” of the city, especially when land tenure and occupation respond on the basis of social need rather than legal procedure. Among the forms of urban property outside the rules of commercial law, the most important is corporately held land (ejido), which in Mexico occupies more than 50 percent of the national territory and forms part of all major metropolitan areas. The ejido impedes the natural growth of the real estate market and allows for the expansion of uncontrolled secondary (informal) markets.
To address these and related issues, leading academics and practitioners from the region met in Mexico in April to share their insights into the processes that influence urban territorial order and the instruments available and needed for effective public intervention to achieve social equity and territorial planning objectives. While the seminar participants remain uneasy about the long-term impacts of globalization on Latin America, they agreed that the arena for action, in the next few years at least, will be at the local rather than the national level.
Luis Fernando Alvarez is senior researcher at the Center for Metropolitan Studies, College of Architecture, Art and Design, University of Guadalajara, Mexico.
William J. Siembieda is professor of planning, School of Architecture and Planning, University of New Mexico. The seminar on urban land and territorial reserve issues was cosponsored by the Lincoln Institute and the Center for Metropolitan Studies at the University of Guadalajara.
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Proposition 13, adopted by a referendum in California in 1978, was the most notable in a series of relatively recent actions to limit the property tax in the United States, and many experts view it as a watershed in state and local public finance. The property tax in virtually every state is now limited to some degree by statutorily or constitutionally imposed base restrictions, rate limits or revenue limits. These limits have influenced the use of the property tax, and there is substantial evidence that the rate of growth of the property tax has declined. The mix of funding for local expenditures also has changed, as cities, towns, counties, school districts and special districts are relying more and more on user charges, special fees, franchise fees and local option sales and use taxes.
The limits on the property tax also have many policy and expenditure implications. There is evidence, significant in some cases and simply indicative in others, that the property tax restrictions have fostered a variety of policy outcomes in the delivery of services to citizens. Some of these tax limits have affected educational outcomes: reduced the number of teachers in classrooms, reduced the qualifications of individuals entering the teaching profession, and reduced student performance in math, reading and science.
The literature detailing the possible effects of property tax limits on local government also reports the following changes: reduced infrastructure investment by local governments, reduction in the rate of salary increases for public employees, and a shift to state-controlled revenue sources that has led to the centralization of power toward state governments (Sokolow 2000). In this context, property tax limits may reduce intergovernmental competition and the discipline on the growth in government that results. Few observers would disagree that Proposition 13 and its imitators in other states have resulted in substantial nonuniformity in the property tax system (O’Sullivan, Sexton and Sheffrin 1995).
These outcomes illustrate the competing tradeoffs that accompany property tax limits. Depending on individual perspectives these consequences could be considered a plus or a minus. Supporters of Prop 13 and its derivatives want lower property taxes and less government (at least for others), but it is unlikely they also want less government for themselves. David Sears and Jack Citrin (1982) have labeled this behavior the “something for nothing” syndrome.
Therese McGuire (1999) notes that among public finance economists the advantages of the property tax for funding local governments approach “dogma.” In an opinion survey of more than 1300 Canadian and U.S. members of the National Tax Association, 93 percent of the respondents with training in economics favored the property tax as a major source of revenue for local governments (Slemrod 1995). This result probably explains why the World Bank and other international advisory groups are spending significant sums of money and offering assistance to improve and implement the property tax in developing and transitional countries. However, it also presents an interesting dilemma: experts support the property tax but voters want to limit it. Why the conflict?
Advantages of the Property Tax
The property tax provides local governments with a revenue source that they can control and avoids the strings that normally accompany fiscal transfers from a regional, state or national government. The result is local autonomy that allows local governments to select the level and quality of services demanded by local citizens. The property tax is relatively stable over the normal business cycle and provides a dependable funding source to local governments that must balance their budgets. Stability is important for certainty in operating budgets and is critical in the financing of long-term debt obligations.
The importance of a stable revenue source has been painfully exposed during the recent economic downturn in the U.S. State governments that are funded by less stable revenue sources are scrambling to balance their current and future budgets by cutting services and increasing taxes and fees. The fact that the property tax is imposed on an immobile base and is difficult to evade also makes it an attractive source of revenue for smaller governments.
Political accountability is another important element of the property tax. A noted function of a responsive tax system is one that provides price signals, or political accountability, on the cost of government to citizens. Compared to almost all other taxes, the direct and visible nature of the property tax suggests that it scores relatively high in this regard. The case for political accountability becomes even stronger when zoning for land use is included in the discussion. Bruce Hamilton (1975) has demonstrated that the property tax, when coupled with local zoning, becomes a benefit tax that leads to efficient outcomes. The combination of property taxation and zoning is the way many public finance scholars describe the characteristics of local finance in the U.S.
Disadvantages of the Property Tax
On the other hand, the property tax is difficult to administer. It requires substantial administrative effort on the part of public officials to discover and maintain the property records of every land parcel. Even with effective methods to discover property, determining its taxable value has always been a challenge to public assessors. Unlike other sales taxes and income taxes, there is no annually occurring event to place a market value on unsold properties. Assessors must value property as if it had sold. Assessors also confront limited budgets and a finite number of trained experts.
Nevertheless, we want public assessors to value property, land and the improvements to land accurately, and to do so as inexpensively as possible. Fortunately, progress has been made in the technical area of property valuation. It is now common to find large and small taxing jurisdictions using statistically driven valuation processes to estimate property values based on carefully designed hedonic models. The technical advantages of statistically driven appraisal systems in terms of efficiency and effectiveness are substantial.
However, the advantage of accurate and timely property appraisals highlights what I believe is a fundamental problem with the property tax and why it receives such low marks from taxpayers and elected officials. When an assessor conducts a reappraisal, the outcome is likely to increase assessed property values. If there is no reduction in the tax rate that was applied to the old tax base, the local government that relies on the property tax receives a potential windfall. It is not surprising, then, that in such situations the assessor and the assessor’s office are quickly identified as the villains of the tax increase. More importantly, these circumstances are powerful incentives to not reassess property regularly and thus avoid the angry backlash of property owners and voters.
Public finance experts have an expectation that the assessor will follow the legal and professional requirements and value property according to state law and professional practice. But, because of the uncertain political outcome when property is revalued, the assessor may act in self-interest, understandably being more concerned about reelection or reappointment than in ensuring that property is revalued properly. A system has been created that requires a reappraisal process and penalizes any assessor foolish enough to ignore it, but over time such avoidance behavior can foster nonuniformity in the property tax.
Political Challenges and Full Disclosure
We have solved many of the technical problems of property appraisal but not the political problems. Nevertheless, I believe there is at least one viable response to the political challenges: states and assessors can adopt a process of truth-in-taxation or full disclosure. The logic of full disclosure design is simple. A chilling effect on property tax growth is posited to occur when the “real” causes of increased property taxes are exposed to property owners. Helen Ladd (1991) states that full disclosure laws “tighten the link between taxpayer voter demand and local budgetary decisions.”
The standard annual tax notice, common in thousands of local tax jurisdictions, does not create a similar chilling effect. A typical tax notice informs property owners about the assessed value of the property, often a modest percentage of market value, tax rates listed in mills, and the total taxes due. If any increases in the assessed value of properties are not offset by reduced tax rates, the new assessed values create additional revenue for the taxing authority. In fact, elected officials can honestly boast that property tax rates have not changed and thus avoid most of the responsibility for any tax increase. An analysis of the behavior of elected officials in Massachusetts found precisely this type of behavior following several cycles of increases in assessed value due to revaluations (Bloom and Ladd 1982).
A property tax full disclosure law generally proceeds in the following manner. Local taxing districts are required to calculate a rate that, when applied to the tax base, produces property tax revenue that is identical in amount to the property tax revenue generated during the previous year. The rate to accomplish this is often referred to as the certified rate; it is calculated by dividing the new assessed value into the property tax revenue from the previous year. The resulting rate is the rate that, when applied to the taxable value of the taxing jurisdiction, will generate the same amount of revenue as the previous year.
This process forces elected officials to reduce the property tax rate—or at least acknowledge that any increase is their choice. If the elected officials choose not to reduce the rate, a public notice must be given that a tax rate increase is anticipated. The public notice is generally carried in a newspaper with specific requirements about the size, placement and language of the notice. In some states a preliminary tax notice is also sent to the taxpayers before that actual budget is adopted, to announce when and where the particular budget hearings on the issue will be held.
Full disclosure laws are intended to create a system with opportunities for input on property tax rate changes and the subsequent size and mix of government, but not at the expense of informed outcomes (Council of State Governments 1977). Full disclosure laws have the aim of a process to inform citizens and limit the rate of growth in property taxes. Nevertheless, like the property tax, full disclosure laws have not enjoyed universal or even modest acclaim. Researchers hold full disclosure laws in such subdued regard that when studying the implications of property tax limitations they commonly classify states having full disclosure laws among the states having no property tax limits.
It is not surprising that many observers suspect that full disclosure laws have little influence on policy outcomes. In states with full disclosure laws, the property tax increases more rapidly than in states with legally binding limits. This suggests that, because full disclosure laws cannot prevent all growth in the property tax, the strongest antagonists of the property tax and the often single-minded opponents to any growth in government will never find the approach acceptable.
However, I believe that full disclosure laws, like property tax limits, have other positive unintended outcomes. They may facilitate improvements in the administration of the property tax because they create a climate that fosters more frequent property tax appraisals by elected county assessors and more thorough and rigorous intervention on property tax matters by state revenue departments. If I am correct, the result is improvement in property tax uniformity. If this posited outcome is validated, then full disclosure laws can and should be judged beyond their immediate role in controlling the rate of increase in the property tax.
Gary C. Cornia is a visiting senior fellow of the Lincoln Institute this year and a member of the Institute’s board of directors. He is also professor in the Romney Institute of Public Management at Brigham Young University and president of the National Tax Association.
References
Bloom, H.S. and Helen F. Ladd. 1982. Property tax revaluation and tax levy growth. Journal of Urban Economics 11: 73-84.
Council of State Governments. 1977. 1978 Suggested State Legislation 37. Lexington, KY: Council of State Governments, 125-28.
Hamilton, Bruce. 1975. Zoning and property taxation in a system of local governments. Urban Studies 12 (June): 205-211.
Ladd, Helen F. 1991. Property tax revaluation and the tax levy growth revisited. Journal of Urban Economics 30: 83-99.
McGuire, Therese J. 1999. Proposition 13 and its offspring: For good or evil. National Tax Journal 52 (March): 129-138.
O’Sullivan, Arthur, Terri A. Sexton, and Steven M. Sheffrin. 1995. Property taxes and tax revolts: The legacy of Proposition 13. Cambridge, England: Cambridge University Press.
Sears, David O. and Jack Citrin. 1982. Tax revolt: Something for nothing in California. Cambridge, MA: Harvard University Press.
Slemrod, Joel. 1995. Professional opinions about tax policy. National Tax Journal 48: 121-148.
Sokolow, Alvin D. 2000. The changing property tax in the West: State centralization of local finances. Public Budgeting and Finance 20 (Spring): 85-102.
