Strengthening Municipal Fiscal Health in China

Since 2013, Zhi Liu has been a senior research fellow and director of the China Program at the Lincoln Institute of Land Policy, and director of the Peking University–Lincoln Institute Center for Urban Development and Land Policy (PLC). Prior, Zhi was lead infrastructure specialist at the World Bank, where he worked for 18 years, with operational experiences in a number of developing countries.

Zhi received a B.S. in economic geography from Dr. Sun Yat-Sen University (China), a M.S. in city and regional planning from Nanjing University (China), and a Ph.D. in urban planning from Harvard University.

LAND LINES: The Lincoln Institute recently initiated a global research agenda on municipal fiscal health. This effort arises from the recognition that a number of cities in the United States and in many other countries including China suffer financial hardship. What is the nature of municipal fiscal distress in China?

ZHI LIU: It’s very different from the financial troubles faced by cities in the United States. The two countries are at very different stages of urbanization. While the U.S. is highly urbanized, with more than 80 percent of citizens living in urban areas, according to the 2010 census, China is only halfway through the urbanization process. Today, 750 million Chinese citizens live in cities, accounting for 55 percent of the total population. By 2050, the urban population is expected to reach 1.1 billion, or 75 percent of the total population. Over the last two decades, with the exception of a few mining cities, almost all municipalities have seen rapid population growth and spatial expansion, generating a significant demand for public investment in urban infrastructure.

In China, the main sources of funding for urban infrastructure investment are revenues from land concessions and local borrowing from commercial banks, often using land as collateral. Urban land is owned by the state, and rural land is collectively owned by villages. The Land Administration Law stipulates that only the state has the power to convert rural land into urban use. This sets the stage for the municipal governments to take rural land for urban development through the land concession process. As it goes, municipal governments expropriate rural land, service it with infrastructure, and sell the land use rights to real estate developers. The compensation to farmers for the farmland taken is low, based on the land’s agricultural production value instead of market value for urban use. When the demand for real estate development is high, the land concession fees are bid high, and the municipal governments stand to collect a huge amount of revenues. For the last 10 years, revenues from land concessions have accounted for more than one-third of total local fiscal revenues.

Moreover, municipal governments further expand their financing capacity by using land assets as collateral to secure commercial loans from commercial banks. Before a recent amendment, the Chinese Budget Law did not permit local governments to borrow. However, most municipal governments bypassed the law by creating their own local financing vehicles—known as urban development investment corporations (UDICs)—that borrowed commercial loans or issued corporate bonds for the governments. The size of outstanding local debts has grown rapidly over the last few years, reaching at least one-third of the GDP now.

The land-based financing mechanism has helped municipal governments in China raise a significant amount of funds for capital investment. However, the success has also created incentive for municipal governments to rely on land concessions and UDICs too heavily. Today, China’s economy is growing more slowly than before, and the mechanism is running out of steam in many localities where conversion of rural land for urban use exceeds the real demand. Some cities have borrowed much more than they can repay, leaving them heavily indebted.

Many empirical studies, including some funded by the Lincoln Institute, find that China’s land-based financing mechanism is one of the main causes of other urban issues that we face today. Skyrocketing housing prices, growing local debts, excessive land-taking, growing tension between the farmers and municipal governments over land-taking, and widening gaps of income and wealth distribution between urban and rural populations are among the major issues.

LL: The international mass media has been reporting on these issues. How will China address them?

ZL: There is a high level of consensus on the root causes of the problems. In November 2013, the central government announced a set of reforms, and a few are directly related to urbanization policy and municipal finance. For example, the scope of land expropriation will be narrowed to the confine of public purposes, and villages are allowed to develop their land for urban use under the premise that it conforms to planning. The reforms also call for acceleration of property tax legislation; reform of hukou, the household residential registration system, to help farmers become urban residents; and government efforts to make basic urban public services available to all permanent residents in cities, including all rural-to-urban migrants.

LL: What are the implications of hukou reform on municipal finance?

ZL: The government is phasing out China’s longstanding hukou system, and the implications for municipal finance will be significant. Hukou was designed to identify a citizen as a resident of a certain locality, but for several decades the government used the system to control rural-to-urban migration. A rural hukou holder could not become an urban hukou holder without the government’s approval. Without urban hukou, a rural migrant worker is not eligible for public services provided by the urban governments.

Since the economic reform, the expanding urban economy has absorbed a large number of rural-to-urban migrant workers. Earlier, I mentioned China’s urbanization rate of 55 percent and urban population of 750 million. These numbers include the 232 million rural migrants who stay in cities for more than half a year. If they were excluded from the calculation, the level of urbanization would be just 38 percent. Due to their rural hukou status, however, migrant workers don’t have access to many services enjoyed by urban hukou holders, despite the fact that many have labored and lived in cities for years. Municipal governments determine the extent of many urban public services—such as public schools and affordable housing—according to the number of urban hukou holders inside the municipal jurisdiction. Phasing out hukou would significantly increase the fiscal burden to the municipal governments for public service provision. Some scholars in China estimate that the cost of providing full urban public services to each rural migrant would be at least RMB 100,000 (roughly $16,000 U.S.). The total outlays for all current rural migrants would be at least RMB 23 trillion (about $3.8 trillion U.S.).

LL: China is introducing the residential property tax. What is the status of that initiative?

ZL: The government is drafting the first national property tax law as part of the ongoing reform of public finance. China is one of only a handful of countries without a local property tax. The current taxation system relies heavily upon taxes on businesses and transactions, and very little upon taxes on household income and wealth. In a more urbanized China with a wealthier population who own residential properties, the property tax would be a more viable source of municipal revenues. Today, 89 percent of urban households own one or more residential units, and the value of those properties has much to do with urban public services. Property tax will allow cities to tax urban residential properties whose value would benefit from the improved public services made possible by property tax revenues. It should also fill part of the fiscal gap left by the expected reduction of revenues from land concessions. However, property tax will not be a major source of municipal revenues any time soon. It may take one or two more years for the National People’s Congress to pass the new law. It would also take perhaps two to three years for cities to establish the property database and assessment and administration system.

LL: It must be tough for cities to deal with declining revenues from land concessions without an immediate alternative—especially as they are coping with growing local debt, which has been widely reported. How will Chinese cities get out of this situation?

ZL: The situation is indeed tough. China’s economy is slowing down. The real estate sector is no longer as hot as it was in the last 10 years, resulting in lower demand for land and thus lower revenues from land concessions for municipal governments. Cities are now facing a fiscal gap. One possible way to fill the gap would be local government borrowing. However, as I mentioned earlier, many cities are indebted and have little capacity to borrow further. In fact, most cities in China do not have adequate capacity for debt management. The newly amended budget law permits provincial-level governments to issue bonds within the limit set by the State Council, but also closes the door on other forms of local government borrowing. Currently, the central government actively promotes infrastructure financing through public-private partnerships (PPP). While this is a good move, it won’t be sufficient to fill the infrastructure financing gap, as PPP is suitable mainly for infrastructure projects with a strong revenue flow. There are many other urban infrastructure projects that generate little or no revenues. In the long term, I believe that China should actively establish a municipal government bond market to channel funds from institutional investors to municipal infrastructure investment and enable local governments to access commercial loans based on creditworthiness. To do so, municipal governments need to develop institutional capacity on several fronts, such as local debt management, capital improvement planning, multiyear financial planning, and municipal infrastructure asset management.

LL: Is PLC’s work relevant to the current reform?

ZL: The PLC was jointly established by the Lincoln Institute and Peking University in 2007. By the time I arrived, in 2013, the center had developed its reputation as one of China’s premier research and training institutions on urban development and land policy issues. The center supports a number of activities, including research, training, academic exchange, policy dialogue, research fellowship, demonstration projects, and publication. We focus on five core themes—property taxation and municipal finance, land policy, urban housing, urban development and planning, and urban environment and conservation. Over the last few years, our research projects have touched upon land-based finance, local debts, housing prices, infrastructure capital investment and finance, and other topics relevant to municipal fiscal health. We have also provided training to Chinese government agencies on the international experiences of property tax assessment and administration. I would say that our work is highly relevant to the current reform.

Implementation of the new comprehensive policy reforms is generating considerable demand for international knowledge and policy advice in the China Program’s focus areas, especially property taxation and municipal finance. We plan to initiate a pilot demonstration project with one or two selected cities in China, to support the institutional capacity required for the development of long-term municipal fiscal health. Our team has started a study to develop a set of indicators to measure municipal fiscal health for Chinese cities. It is the right time for us to initiate this agenda in China.

The Lincoln Institute, with the Land Trust Alliance and the National Park Service Conservation Study Institute, is working with two dozen senior conservation practitioners from public, private, nonprofit and academic organizations across the nation to consider the grand challenges facing the North American land and biodiversity conservation community in the twenty-first century. The conservationists, who shared ideas electronically for several months prior to their March 2002 meeting in Cambridge, explored emerging and needed conservation innovations that may prove commensurate with the challenges. Organized by James Levitt of Harvard’s Kennedy School of Government, Armando Carbonell of the Lincoln Institute and Fara Courtney, an environmental consultant based in Gloucester, Massachusetts, the group exchanged ideas through presentations, case studies and working groups. E.O. Wilson, the distinguished author and biodiversity scholar at Harvard University, addressed the session and participated in the discussions. This article presents several highlights of that leadership dialogue on conservation in the twenty-first century (C21).

“We have entered the twenty-first century, the century of the environment. The question of the century is, how can we best shift to a culture of permanence, both for ourselves and for the biosphere that sustains us?” E.O. Wilson

The Historical Context

Ask almost any American concerned with natural resources, “How and when did we start practicing conservation in this country?” In most cases, the response involves the role of the federal government at the turn of the twentieth century under President Teddy Roosevelt. While Roosevelt and his close associate Gifford Pinchot do stand as giants in the history of conservation in this nation, the record shows that Americans have a remarkable tradition of conservation that stretches back at least to the early days of the Republic.

Individuals and organizations in the private, nonprofit, public and academic sectors have throughout our history brought landmark conservation innovations to life, and they continue to do so. They have focused their attention on sites that span the urban-rural continuum, from city parks to remote wildernesses. In the context of repeated waves of immigration and population growth, a chain of stunning technological advances and a pattern of long-term economic growth, American conservation innovators have acted creatively and often with considerable passion to protect and manage natural and scenic wonders, working landscapes, native wildlife and recreational open space for their own benefit, for the benefit of the public at large, and for the benefit of future generations.

Consider the history of the land trust movement. Thomas Jefferson set an early precedent for private and nongovernmental protection of natural beauty in America. In 1773, three years before he penned the Declaration of American Independence, Jefferson purchased a parcel of land known as Natural Bridge near the Blue Ridge Mountains. He treasured the parcel throughout his adult life, inviting writers, painters and dignitaries to visit the site and record its wonders. By 1815 he wrote to William Caruthers to say that he held Natural Bridge “to some degree as a public trust, and would on no consideration permit the bridge to be injured, defaced or blocked from public view.”

Some 60 years after Jefferson’s death, Charles Eliot, son of the president of Harvard University and a protégé of Frederick Law Olmsted, took another historic step toward the nongovernmental protection of open space. He proposed the formation of a private association to hold parcels of land for the enjoyment of the citizens of Massachusetts, particularly the less affluent residents of Boston who needed an escape from the “poisonous” atmosphere of the crowded city so closely associated with the technological progress and demographic turmoil of the Gilded Age. With a charter from the Commonwealth granted in 1891, that organization, now known as The Trustees of Reservations, became the first statewide nongovernmental land trust.

Eliot’s innovation has proved to be truly outstanding, a landmark conservation innovation that meets all the criteria for outstanding innovations in the public interest set out by the Innovations in American Government program at Harvard’s Kennedy School of Government. The notion behind the Trustees has proved to be novel in conception, measurably effective, significant in addressing an important issue of public concern, and transferable to a large number of organizations around the world. Furthermore, and critically important in the field of conservation, Eliot’s innovation has demonstrated its ability to endure and remain vibrant after more than a century. The Trustees’ current director of land conservation, Wesley Ward, emphasizes that nongovernmental conservation organizations will continue to be called upon in the twenty-first century to “provide leadership by identifying challenges, advocating effective responses and providing relevant models of conservation and stewardship.”

The Lincoln Institute played an important role in the resurgent growth of the land trust movement in the early 1980s, when it focused its resources as an academic institution on how an exchange of information among several dozen land trusts in the U.S. might strengthen conservation standards and practices throughout the entire land conservation community. Jean Hocker, at that time organizing the Jackson Hole Land Trust, remembers well the early discussions convened at Lincoln House by Boston-area lawyer Kingsbury Browne. She explains that emerging from those deliberations was the idea that “we ought to form a new organization called the Land Trust Exchange that could help us all do our jobs better.” Hocker moved to Washington, DC, in 1987 to run the group, which became known as the Land Trust Alliance (LTA). Under her leadership, the organization led the land trust movement into a period of rapid growth and enduring achievement. In 2002, there are more than 1,200 local and regional land trusts in the U.S. that have helped to protect more than six million acres of open space. Furthermore, the LTA’s annual Rally is a now a high point of the year for more than a thousand land conservation volunteers and professionals spread across the continent and beyond who convene to share their best ideas.

The Trustees’ long history of conservation innovation and achievement is paralleled by the histories of many other public, nonprofit, academic and private sectors organizations represented by C21 participants. Nora Mitchell and Michael Soukup of the National Park Service underscore the significance of America’s creation of the world’s first national park at Yellowstone in 1872, an innovation of worldwide significance that was in part the brainchild of two private railroad entrepreneurs, Jay Cooke and Frederick Billings. Laura Johnson, president of the Massachusetts Audubon Society, takes justifiable pride in the achievement of her organization’s “Founding Mothers,” two women who established the nation’s oldest continuously operating Audubon society in 1896 and catalyzed the campaign that led to the signing of the first international migratory bird treaty. Robert Cook, director of Harvard’s Arnold Arboretum, explains the pivotal role of that institution in the emergence of American forestry policy as far back as the1870s. And Keith Ross of the New England Forestry Foundation, who spearheaded the precedent-setting effort concluded in 2000 to place a conservation easement on more than 760,000 acres of forest land owned by the Pingree family in Maine, emphasizes that the family’s private forest stewardship practices date back to the 1840s.

Complex Conservation Challenges

Notwithstanding the conservation community’s collective record of achievement, the land and biodiversity conservationists at the C21 meeting foresee grand challenges of extraordinary complexity and difficulty in the coming 50 to 100 years. In the context of expected growth in North American and world populations, changes in demographic patterns and ongoing technological development, as well as systemic changes in climate and other earth systems, they express deep concern regarding myriad potential changes on the landscape. These may include the accelerating loss of open space; intensified landscape fragmentation; further degradation of wildlife habitat; alarming declines in the viability of a wide range of biological species; and potentially significant stresses to earth systems that provide essential ecosystem services. Will Rogers, president of the Trust for Public Land, notes, “from a conservation viewpoint, the pace of growth and development is rapidly running us out of time.”

The concern of many C21 participants regarding the potential impact of growing human populations starts with the straightforward projection of the U.S. Census Bureau that the population of the U.S. will grow from some 280 million Americans in 2000 to about 400 million by 2050. Beyond the numbers, it is critical for conservation planners to understand that the diversity of the American population is forecast to change significantly, with particularly strong growth in the ranks of Hispanic Americans and Asian Americans. Jamie Hoyte, an authority on conservation and diversity at Harvard University, explains, “one of the most significant challenges we face is broadening and diversifying the community of conservation-minded citizens. Those who advocate for conservation must do so in a way that speaks to people of all backgrounds and races, demonstrating an understanding of the needs of a broad range of people.” Robert Perschel of the Wilderness Society expands on the idea, advising that we need to “enter into a new dialogue with the American people … to touch the hearts and spirits and wisdom of our citizenry.”

C21 participants also pointed out that new conservation initiatives are likely to be launched in the context of continuing economic growth and personal affluence. For perspective, note that real U.S. gross domestic product (GDP) grew more than five-fold between 1950 and 2000, and many economists expect to see comparable growth in coming decades. To protect open space and biodiversity in the midst of such great affluence, conservationists will need to leverage the nation’s economic power. According to Chip Collins of The Forestland Group, “North America’s economic growth has helped fuel the loss of biodiversity. At the same time, North America has led the world in the development and implementation of conservation strategies in large measure because of the extraordinary growth and vigor of its economy. One of the great challenges will be to manage this seeming dichotomy by effectively harnessing the private sector and redirecting its immense capital power base toward constructive conservation initiatives. The private sector, in stride with its nonprofit, public and academic counterparts, must be a full and constructive partner.”

As in the past, new and increasingly powerful technologies are likely to continue to proliferate. While offering considerable social and economic benefits, the new technologies may also be closely associated with large-scale environmental disturbances. In the past half-century, for example, the spread of interstate highways has effectively stimulated the American economy but has also been associated with pervasive environmental disruptions such as urban and rural landscape fragmentation, the creation of unhealthy air quality conditions, and the generation of significant volumes of gases associated with global climate change. Similarly, more recently introduced networked technologies, such as the Internet and advanced wireless communications networks, appear to be enabling continued net migration of Americans to formerly remote and highly environmentally sensitive locations across the continent. Technology-related change is not limited to the U.S., of course. Larry Morris of the Quebec-Labrador Foundation explains that new communications and transportation networks are influencing where and how people live worldwide, from Atlantic Canada to the Middle East.

Biodiversity scientists E.O. Wilson of Harvard and Leonard Krishtalka of the University of Kansas point out that while emerging technologies may be associated with environmental disruptions in coming decades, the same technologies are also proving critical to advancing our understanding of the diversity of life on earth. Krishtalka explains that “researchers are now learning how to harness the vast store of authoritative biodiversity information in natural history museums worldwide (about three billion specimens of animals and plants) and integrate it with other earth systems data for predictive modeling of environmental phenomena.” Such a predictive model was recently built by researchers in Kansas, California and Mexico to examine the fate of a wide variety of Mexican species under a range of global warming scenarios. The outcome of this and similar studies should be particularly useful to organizations striving to prioritize land and habitat protection opportunities in ecosystems throughout the western hemisphere that may be facing significant disruption in future.

In sum, despite remarkable progress, conservationists are in no position or mood to rest. John Berry of the National Fish and Wildlife Foundation advises, “if our standard is that of the ancient Greeks, that is, to leave our nation ‘not only not less, but richer and more bountiful than it was transmitted to us,’ than we have not yet earned the laurel crown.”

A New Generation of Conservation Innovators

Inspired by the precedents set by creative American conservationists in the nineteenth and twentieth centuries, twenty-first century conservation practitioners are highly motivated to identify and implement new initiatives commensurate with the complex challenges of our day. C21 participants expressed interest in a wide variety of areas ripe for game-changing innovation, including the following.

Winning Hearts and Minds

Bill Weeks of The Nature Conservancy emphasizes that “the grandest challenge is to complete the task of getting the overwhelming majority of the public to care and act and vote like they care.” Rand Wentworth of the Land Trust Alliance agrees that conservationists should use the “tremendous power” of mass marketing to help create a national mandate for land conservation. Clare Swanger of the Taos Land Trust adds that the insight of mass marketers, but also of people living on the land, should be employed in such an effort. The outstanding question facing these conservationists is how to leverage modern marketing tools in a truly historic fashion. The aim would be to put together an effort comparable to the highly effective antismoking campaign of the last several decades, so as to build sustained momentum for the long-term protection and stewardship of “land for life.”

Building the Green Matrix

Addressing the multiple problems of open space consumption, loss of working landscapes, habitat fragmentation and biodiversity decline is a job that no single sector can tackle alone. Larry Selzer, president of the Conservation Fund and a proponent of smart conservation that balances economic returns with environmental principles, explains that effective action will require the cooperative efforts of landowners, policy makers and a wide diversity of individuals working across sectors. Furthermore, as Charles H.W. Foster of Harvard’s Kennedy School of Government points out, effective conservation efforts are at least as likely to take place at local and regional levels as at federal and international ones. Just how effective “green matrix” landscapes and organizational structures can be effectively assembled and maintained over the long term remains an area for thorough exploration and experimentation. Among other C21 participants, Peter Stein of the Lyme Timber Company, Jay Espy of the Maine Coast Heritage Trust, and Ian Bowles of the Kennedy School and the Moore Foundation are actively advancing the evolving art of assembling protected landscapes where economic and conservation goals can be pursued simultaneously.

Following Through with Stewardship

Achieving long-term conservation goals, of course, requires that once protection is gained for a given area a well-crafted stewardship plan, and in some cases an environmental restoration plan, must be conceived, agreed to by the relevant parties and then implemented. Getting this done has proved to be neither simple nor easy. Financing and organizing such stewardship efforts is too often overlooked during intense, short-fused campaigns to protect given parcels of land. Bringing a new level of attention and expertise to land and habitat stewardship and restoration efforts will be an ongoing challenge to the conservation community, particularly as its portfolio of protected lands grows in coming decades.

Fortunately, conservationists can point to some forward-looking stewardship efforts now underway. For example, Ralph Grossi, president of the American Farmland Trust, notes that the 2002 Farm Bill will provide significant levels of funding for USDA-sponsored stewardship efforts on agricultural lands. Similarly, Jaime Pinkham, a member of the Nez Perce Tribe in Idaho, offers eloquent testimony about how tribes can work with local, federal and other authorities to restore keystone species to entire ecosystems, as was accomplished with the gray wolf in the Northern Rockies. Still, there is room for a great deal of progress and innovation in this area.

Synthesizing Conservation Science

Conservation scientists E.O. Wilson, Leonard Krishtalka and Douglas Causey all underscore the argument that very significant progress can be made in the coming century to build large-scale syntheses in conservation biology and ecology. Wilson is particularly emphatic about the need to catalog all living species, a global work-in-progress that is only about 10-percent complete. The All Species Foundation that Wilson helped to form proposes to “complete the censusing of all the plants, animals and micro-organisms in the world in 25 years.” “Is this a pipe dream?,” asks Wilson, rhetorically. “No way,” he answers. “It is megascience backed by the same sort of technology drivers as the Human Genome Project. The important thing is to see the exploration of the biosphere as a crucial task.”

Gaining a comprehensive understanding of the biosphere and the ability to predict ecosystem outcomes under a variety of possible futures is indeed a grand challenge for conservation scientists. Kathy Fallon Lambert of the Hubbard Brook Research Foundation adds, “a complementary challenge is to find clear and concise ways to explain significant field and laboratory research findings to the general public and to key decision makers so that they can carry out policy debates with the best available scientific information.”

From our vantage point at the commencement of this century we cannot accurately predict just what future generations, 50 or 100 years from now, will judge to be our generation’s most significant conservation innovations, comparable to earlier creations of the world’s first statewide land trust or national park. We do know, however, that we face significant and complex conservation challenges, and our ideas for powerful innovation will only yield results if we act on them with great personal and organizational energy and intensity. There is no argument that the best time to begin such efforts is now.

James N. Levitt is director of the Internet and Conservation Project, Taubman Center for State and Local Government, Kennedy School of Government, Harvard University. His research focuses on the potentially constructive and disruptive impacts of new communications and transportation networks on land use and the practice of conservation, as well as opportunities for landmark conservation innovation in the twenty-first century.

The property tax in Brazil is an annual tax on urban land and buildings administered at the local government level. The tax base is derived from market value and is standardized across different local authorities, although procedures for establishing the tax base and rates vary considerably.

In the city of Porto Alegre, the cost approach is the method traditionally employed for assessing real estate property for taxation purposes. No legal requirement exists concerning intervals between valuations, and the last general valuation took place in 1991. In years without valuations, the tax base has been readjusted uniformly according to prevailing inflation rates. The property tax rates are progressive, with sliding rates for six classes of assessed values to insert an element of “ability-to-pay” into the system. The tax is calculated by the sum of each portion of the assessed value multiplied by the respective rate for that class. The maximum rate for residential property reaches 1.2 percent.

Analysis of the Current System

A recent analysis of the property tax system in Porto Alegre sought to provide a full examination of the relationship between assessed values and sale prices. Some of the results are summarized below.

Assessment level and uniformity

Residential apartments in Porto Alegre were assessed on median at only 34 percent of their sale prices, much less than the statutory level of 100 percent. Using the coefficient of dispersion about the median [COD] of the assessed value to sale price ratio as a measure of variability, the results showed a low degree of assessment uniformity (approximately 36 percent). In Brazil, there are neither local nor national standards for evaluating assessment performance. By comparison, a commonly accepted degree of uniformity for single-family residential property in the United States is a coefficient between 10 and 15 percent. Figure 1 illustrates the ample spread of the assessment ratios in this study.

Factors determining assessment inequity

To examine the simultaneous effects of the factors determining assessment bias, a multivariate model was used to investigate both vertical and horizontal inequities. The model detected a large number of factors causing systematic differences in assessment levels, including location attributes, building quality, building year, presence of elevators and similar variables. Vertical assessment regressivity was also identified.

Assessment method

It is plausible to assert that the method traditionally employed for assessing real property, that is, the cost approach, is a major cause of the lack of assessment uniformity identified in this study. Some theoretical weaknesses of the approach are associated with the extensive number of simplifications implemented by the local authority to make its application easier, and these adjustments are likely to have determined assessment bias. Inconsistencies with the standard cost model include the lack of connection between cost tables and the performance of the real estate market, and low correlation between the ad hoc depreciation rates adopted and the reduction in price caused by age, obsolescence, or deterioration of building structures. Furthermore, lack of systematic control over valuation performance seems to have contributed to the high inaccuracy of assessed values.

Time lags between valuations

The method used to make an overall adjustment to assessed values based on prevailing inflation rates for years without valuation has clearly contributed to the reduction of the tax base. For instance, properties were assessed on median at 38 percent of their sale prices in 1993, but only 27 percent in 1995.

Effective versus statutory rates of property tax

Rates for residential property are progressive according to six classes of assessed value. The effective rate results from the actual amount raised from property taxation, without regard to tax evasion, divided by the sale price. The statutory rate results from the expected tax that could be raised per property, if the tax were established on the basis of sale price, divided by its sale price. The effective rate is much lower than the statutory rate and represents on median only 0.17 percent of sale price.

Improper assessment practices have affected the distribution of the tax burden, not only because assessed values do not bear a consistent relationship to sale prices but also because many properties are classified incorrectly. The actual property tax revenue collected in the period under study represented approximately 25 percent of the potential revenue to be raised if assessed values were equal to sale prices.

Causes of Poor Property Tax Administration

Historical factors may help to explain the current poor administration of the property tax in Porto Alegre and its inefficient use as a revenue source. During the 1970s, large transfers of revenue from the central government and private estates to municipalities complemented the revenue raised at the local government level. Consequently, local authorities were not interested in collecting their own taxes, and taxpayers were used to paying insignificant property tax bills. The achievement of good performance in terms of valuation and an acceptable degree of assessment equity were secondary issues.

Recent financial crises combined with the urgent need for public investment in infrastructure equipment and services have stimulated some local authorities to improve their tax systems. However, due to the high visibility of the property tax and taxpayer antipathy, efforts to recover revenue and achieve assessment equity often result in tax revolts. Furthermore, changes in the tax base must be approved by locally elected members of the Chamber of Councilors. Whenever general valuations are planned, the Council members are responsible for supporting capping systems in the name of protecting the poor and retired taxpayers. However, the capping systems actually favor high-income and wealthy taxpayers because low-income and retired taxpayers can receive relief based on their income.

Since 1991, two proposals for altering the property tax base in Porto Alegre have been rejected by the Chamber of Councilors because the estimated value of some properties would have been adjusted over the inflation rate at the time. However, the existing vertical assessment inequity means that high-valued properties are the ones benefiting from poor property tax administration.

Recommendations on Revising Practices and Attitudes

Knowledge about the weaknesses of a particular tax system is fundamental for its improvement, and the analysis undertaken in Porto Alegre provides greater understanding of the current system, the degree of assessment inequity and its main causes. For the first time, the drawbacks and weaknesses of the system are both quantified and measured, including which properties are benefiting from the system and the amount of revenue being lost. Now Porto Alegre has the opportunity to improve its property tax system on the basis of accurate data rather than political expediency.

Several measures would contribute to the overall equity of the tax system while also improving revenue collection to provide the community with higher standards of living:

§ Reassessment of properties based on current market values using the sales comparison approach to assessing residential property, such as multiple regression analysis (MRA), artificial neural networks (NN), or multilevel modeling (hierarchical linear models – HLMs).

§ Systematic control over assessed property values, including testing before the release of the valuation roll to recognize and adjust for eventual bias in the estimated tax base.

§ Assurance of regular assessment updates.

§ Establishment of market adjustments to assessed values based on ratio studies for years without valuation.

§ Transparency in the administration of the property tax, especially in graduating the size of the tax burden, instead of overriding estimates of market values arbitrarily for this purpose.

§ A definition of minimum standards for assessment performance at the local or national level.

The achievement of property tax equity and the provision of a high standard of public services are common goals for politicians, the community, administrators and others. Public officials need to take advantage of new technologies for property tax assessment and data gathering to make tax systems operate both efficiently and fairly. However, technical improvements are just a part of the process. It is also vital to work on public opinion. An important step is to encourage dialogue between community residents and politicians, showing the drawbacks of the current system and the consequences of keeping its structure. Confidence in the property tax system is likely to increase if revisions are discussed seriously in the public domain.

Claudia M. De Cesare is an assessor in the Department of Local Taxation for the Municipality of Porto Alegre. She received a Lincoln Institute Dissertation Fellowship in 1999 to support the research reported here and in her Ph.D. thesis, which she completed at the University of Salford in England. The Lincoln Institute is continuing to develop educational programs with administrators, politicians, scholars and the community in Porto Alegre to help improve the equity and efficiency of the property tax system.

In the context of entirely new fiscal policies and new approaches to property rights in central and eastern Europe over the past decade, taxes on land and buildings have taken on significant new roles—politically as adjuncts to privatization, restitution and decentralization, and fiscally as revenue-raising tools for local governments.

The Lincoln Institute is particularly interested in the complex debate over property-based taxes and in how different countries experience the transition from communism to democracy and from planned to market-driven economies. Over the past four years, the Institute has undertaken a series of educational programs to help public officials and business leaders in eastern Europe understand both underlying principles and practical examples of property taxation and valuation through offering varied perspectives and frameworks for decision making.

The Institute is also sponsoring a series of case studies to compare the implementation of ad valorem property tax systems in eastern European countries. These studies provide a unique perspective from which to review the initiation of land privatization, fiscal decentralization and land markets, as well as to compare the various legal and administrative features adopted for the respective tax systems.

Programs in Estonia

The Baltic country of Estonia was the first of the new independent states to recognize the benefits of land taxation and thus has been the focus of several Lincoln Institute programs. The Institute’s work in Estonia began in September 1993 when Fellow Jane Malme and Senior Fellow Joan Youngman participated in a conference with the Paris-based Organization for Economic Cooperation and Development (OECD) on the design of a property taxation system. Estonia had just instituted its land tax program, and since then the Institute has continued to support programs there relating to land reform and property taxation.

The most recent education program, on “Land and Tax Policies for Urban Markets in Estonia,” was presented in the capital of Tallinn in May to nearly 30 senior-level state and city officials interested in public finance, land reform and urban development. President H. James Brown, Jane Malme, Joan Youngman and a faculty of international experts explored current issues concerning land reform, valuation and taxation. They also discussed methods of urban planning, land management and taxation to both encourage development of urban land markets and finance local governments.

Estonia is also serving as the pilot case study for a survey instrument to gather and analyze information from countries adopting new fiscal instruments for market-based economies. Malme and Youngman are working closely with Tambet Tiits, director of a private real estate research and consulting firm in Tallinn, to draft the survey, research and collect data, and analyze the results.

Other Case Studies and Conferences

A second case study examines Poland, where an ad valorem property tax law is under legislative consideration. Dr. Jan Brzeski, director of the Cracow Real Estate Institute, serves as the country research director and liaison with the Institute. Subsequent studies will survey Latvia, Lithuania and Russia. In addition, Professors Gary Cornia and Phil Bryson of the Marriott School of Management at Brigham Young University in Utah are using the Lincoln Institute survey instrument to study property tax systems in the Czech and Slovak Republics.

The Lincoln Institute was a sponsor of the fourth international conference on local taxation and property valuation of the London-based Institute of Revenues, Rating and Valuation (IRRV) in Rome in early June. The conference attracts about 300 senior level officials from central as well as local governments throughout Europe. Dennis Robinson, Lincoln Institute vice president for programs and operations, was on the conference advisory committee and chaired a session on “Case Studies in Local Taxation in the New Democracies,” at which Jane Malme and Joan Youngman discussed the Institute’s case studies on land and building taxation in transitional economies. Other participants in that session were Institute associates Tambit Tiits of Estonia and Jan Brzeski of Poland. Board member Gary Cornia spoke about his research on property taxation in the Czech Republic. Martim Smolka, senior fellow for Latin America and the Caribbean, presented a paper on “Urban Land Management and Value Capture” at another session chaired by Joan Youngman. Jane Malme also was a discussion leader for a session on “Tax Collection and Administration.”

The Institute is planning another program with OECD in December 1997 for public officials and practitioners in the Baltic countries of Estonia, Latvia and Lithuania to examine policy aspects of land valuation and mass appraisal concepts for ad valorem taxation.

The land market allocates land and access to urban amenities, and it does so with impressive efficiency. Yet, economists and planners continue to debate the extent to which the market fails to achieve broader social goals, how far regulation can offset for that failure, and even whether regulation results in land market outcomes being even farther from the socially desired outcome than would be the case without any regulation. To examine this debate and the underlying issues, more than 30 economists and planners met at the Lincoln Institute in July 2002 to encourage new policy-relevant analysis on land markets and their regulation, and to foster more fruitful communication between the disciplines.

At the center of the substantive debate was the basic question of regulation within a market economy and the unintended consequences that can result. The discussions touched upon many themes including gentrification, the use of public resources for private consumption, distributional issues, urban form and its regulation. If perspectives regarding market regulation differed between the two disciplines, so too did views regarding the strengths and limitations of the analytic tools that academics from different disciplines bring to such thorny problems. Among the challenges are the basic questions of how to define the problem, how to measure the current conditions in light of limited data, and how to interpret findings. Throughout the conference, the differences in the perspectives, assumptions, tools and references between planners and economists were ever present, in particular with regard to the role of politics in planning and policy making.

Unintended Consequences of Land Market Regulations

Despite their differences, concern for land markets and their centrality to social, political and economic life was the common focus of both economists and planners at the conference. They agreed that land markets are about far more than land. These markets have an important role in delivering life experiences and conditioning the welfare of the majority of people in developed and developing countries alike who live and work in cities. In addition, their regulation has both direct and indirect economic effects that extend into many areas of economic life and public policy. For example, the urban poor are likely to have worse schools and to experience higher levels of neighborhood crime because land markets capitalize the values of neighborhood amenities, such as better school quality and lower crime, thereby pricing poorer households into less desirable neighborhoods.

This power of land markets to reflect and capitalize factors that affect a household’s welfare was revealed in a study of impact fees levied on new development in Florida. Ihlanfeldt and Shaughnessy found that impact fees appear to be fully capitalized into house prices for owners of new and existing houses by redistributing the costs of new infrastructure provision from existing taxpayers to a reduced value of development land. In fast-growing Miami the cost of impact fees was borne by developers, yet offset by the increases they received in higher prices for new housing, “while buyers of new homes are compensated for a higher price by the property tax savings they experience. In contrast to the neutral effects that fees have on developers, landowners, and purchasers of new housing, impact fees provide existing homeowners a capital gain” (Ihlanfeldt and Shaughnessy, 26).

One complement to their story of Florida’s impact fees was illustrated in several other papers concerned with the unintended outcomes of regulation. British participants reported that Britain’s containment policy has generated higher densities within urbanized areas, but cities leapfrog out across their Greenbelts (or growth boundaries) to smaller satellite settlements; the consequence is that development becomes less contiguous and travel times increase. Villages become high-density suburbs surrounded by a sea of wheat: London in functional terms extends to cover most of southeastern England.

In a U.S. example based on an econometric simulation, Elena Irwin and Nancy Bockstael found that a clustering policy intended to preserve open space could instead backfire. Using Maryland data, they simulated the effects of a policy that was intended to preserve rural open space and found that it would instead accelerate development if “small to moderate amounts of open space are required to be preserved (specifically, 20 acres or less) and would slow the timing of development if larger amounts of open space are required to be preserved” (Irwin and Bockstael, 26). Their simulation results yield an interpretation that is highly nuanced and requires careful thought. That is, under certain conditions the cluster policy can backfire, while under other specific conditions the policy can yield an intended policy outcome.

These hypothetical clusters in Maryland may be echos of a real situation that Jean Cavailhès and his colleagues observed in the French countryside, where some urban dwellers moved to farm regions to create a mixed-use area that is neither entirely urban nor entirely rural. These former urbanites appear to value their proximity to a functioning rural landscape in exchange for longer commutes and (surprisingly) smaller residential lots. The authors hypothesize that these peri-urban dwellers benefit in different ways from living among the farmers.

In another example of the unintended consequences of regulations, Donald Shoup analyzed curbside parking. Many U.S. municipalities require developers to provide minimal parking per square foot of new commercial or, in some communities, residential space. The requirement for off-street parking, coupled with a systematic underpricing of curbside parking, has a double impact, according to Shoup. It imposes a substantial tax on affected developments (equivalent to up to 88 percent of construction costs), increases land taking, and means that public revenues annually lost an amount equal to the median property tax.

In these cases of unintended consequences of policy or regulatory interventions in the market, the authors argued for more careful design of both policies and regulations so state and local governments could reasonably achieve their policy goals. Despite the fact that the conference debate tended to pit regulation against the market, there was probably a tendency—if not full-fledged consensus—to favor market incentives and disincentives to achieve policy goals, rather than to rely strictly, or even largely, on regulation. Roger Bolton’s comments on Shoup’s paper cogently reflected this viewpoint. He said that Shoup’s work was valuable because it urges us to pay attention to a whole package of “important and related phenomena: inefficient pricing of an important good, curb parking; inefficient regulation of another good, privately owned off-street parking; and missed opportunities for local government revenue.”

Data and Measurement Challenges

Growth management and urban form were referenced extensively throughout the conference. The paper presented by Henry Overman, and written with three colleagues (Burchfield et al.) provided useful grounding to that conversation. They attempted to measure the extent of sprawl for the entire continental U.S. Using remote sensing data they calculated and mapped urban development and the change in urban land cover between 1976 and 1992. They defined sprawl as either the extension of the urban area, or leapfrog development, or lower-density development beyond the urban fringe. They concluded that only 1.9 percent of the continental U.S. was in urban use and only 0.58 percent had been taken for urban development in the 16-year period covered by the study. Furthermore, during this period, urban densities were mostly on the increase.

This study found development to be a feature of the “nearby urban landscape,” whether that was defined as close to existing development, or near highways or the coasts, and thus was perceived as encroaching on where people lived or traveled. The authors use this last observation to reconcile the apparent contradiction between their finding that less than 2 percent of the continental U.S. has been developed and the fact that containing and managing sprawl is at the center of policy agendas in many states and regions across the U.S. While relatively little land might have been consumed by new development in aggregate during the study period, many people see and experience this development on a daily basis and perceive it to represent significant change, often the kind of change they do not like.

The conference discussion touched upon some of the data questions raised by this work. The paper’s discussant, John Landis, noted some challenges he has faced in working with these and similar data to measure growth patterns in California. The estimates by Burchfield et al. are extremely low, possibly for technical reasons, according to Landis. Among the reasons is the difficulty in interpreting satellite images and the different outcomes that can occur when different thresholds are used for counting density, for example. That is, an area can be classified as more or less dense depending on what threshold the analysts establishes. “Ground-truthing” is required to remove some of the arbitrariness from the analysis, but this is an enormously costly undertaking.

Policy analysts are always faced with data limitations. Sometimes the problem is missing data, while other times it is data with questionable reliability. Yet, all too often researchers spend very little time paying attention to how serious that deficiency is for the policy problem at hand. When the available data is a very long time series with frequent intervals that relies on a well-structured and well-understood data collection method, and where few transformations occur between data collection and data use, most researchers and policy analysts would feel extremely comfortable interpolating one or two or even a handful of missing data points. Econometricians relying on data collected at regular intervals from government surveys frequently face this situation and are quite adept at filling in such “holes in the data.” In the world of limited data, that might be considered the best-case scenario.

At the other extreme we might have data that are collected using relatively new methods and that require significant transformation between collection and use. Data reliability likely decreases under these circumstances. Given the imperfect world in which we live, the answer is probably not to insist on using only the “best data.” However, researchers and policy analysts do have the obligation to use care in interpreting results based on weak data and to convey that weakness to their audience.

Another side of the limited data problem is the translation from concept to measure, and it explains why the conference participants spent so much time discussing “What is sprawl?” For researchers this question becomes “How does one define sprawl in such a way that one can measure it?” Burchfield et al. define sprawl as leapfrog or discontiguous urban development. Landis argues for “a more multi-faceted definition of sprawl, one that also incorporates issues of density, land use mix, and built-form homogeneity.”

Definitions are not trivial in policy analysis. If we cannot define the problem or the outcome, and we cannot measure it, how can we know if it is getting better or worse, and if our policies are having an impact? On the other hand, a very precise definition of a different but perhaps related concept may lead to unnecessary intervention. The new policy may improve the score on the measure but have little or no effect on the problem. For a variety of reasons (perhaps in part the customs and cultures within different disciplines) the economists at the conference tended to favor concepts that are simple and for which the data exist. On the other hand, the planners tended to favor concepts that are messy. In the end, one is left with weaknesses on both sides. The uni-dimensional definition, and therefore the uni-dimensional measure, may provide many of the desirable properties that allow statistical analyses. Multi-dimensional concepts are difficult to translate into measures. Which is better for policy making?

The Political Nature of Land Policy

Planning as a political activity was emphasized by several authors, notably Chris Riley (discussant of papers by Edwin Mills and Alan Evans), to emphasize the importance for economists to recognize this role and the constraints it imposes on significant change (particularly given the capacity of land markets to capitalize into asset values the amenities generated by planning policies themselves). Richard Feiock added there was also evidence that the forms of planning policies that communities selected (both the severity of such policies and the degree to which they relied on regulation in contrast to market instruments) could be largely accounted for by the political structure and socioeconomic and ethnic composition of those communities.

Participants reacted differently to the political nature of land policy and planning. For some this was problematic: it meant that the market was not being allowed to work. For others, it meant that the political process in a democracy was being allowed to work: the people had spoken and the policy reflected the expressed will of the body politic.

Reflections on Debate

The differences between economists and planners will continue, and differences among practitioners in different countries and even different parts of the same country (notably the large United States) can either stimulate or thwart future debates over the study of land market policies and implementation. Perhaps, though, the word debate itself thwarts our efforts. In debates, the debaters rarely change their minds. They enter the debate with their point of view firmly fixed and do not get “points” for admitting that their debating opponent taught them something or that they have consequently changed their own mind. However, one purpose of a professional conference is, indeed, for thoughtful people to consider their own assumptions and to be informed and changed by the points of view of others. In the future, perhaps debates will be supplanted with reflective conversation.

Paul Cheshire is professor of economic geography at the London School of Economics, England; Rosalind Greenstein is senior fellow and cochair of the Department of Planning and Development at the Lincoln Institute; and Stephen C. Sheppard is professor in the Department of Economics at Williams College, Massachusetts. They jointly organized the Lincoln Institute conference, “Analysis of Urban Land Markets and the Impact of Land Market Regulation,” on which this article is based.

Conference Papers

The conference participants whose papers are cited in this article are noted below. All conference papers and discussants’ comments are posted on the Lincoln Institute website (www.lincolninst.edu) where they can be downloaded for free

Burchfield, Marcy, Henry Overman, Diego Puga and Matthew A. Turner. “Sprawl?”

Cavailhès, Jean, Dominique Peeters, Evangelos Sékeris, and Jacques-François Thisse. “The Periurban City.”

Feiock, Richard E. and Antonio Taveras. “County Government Institutions and Local Land Use Regulation.”

Ihlanfeldt, Keith R. and Timothy Shaughnessy. “An Empirical Investigation of the Effects of Impact Fees on Housing and Land Markets.”

Irwin, Elena G. and Bockstael, Nancy E. “Urban Sprawl as a Spatial Economic Process.”

Shoup, Donald. “Curb Parking: The Ideal Source of Public Revenue.”

Margaret Dewar is the Emil Lorch Professor of Architecture and Urban Planning at the Taubman College of Architecture and Urban Planning at the University of Michigan. She directs the Detroit Community Partnership Center through which University of Michigan faculty and students work with community-based organizations and city agencies on community-identified neighborhood issues. Dewar is also faculty director of the Ginsberg Center for Community Service and Learning, whose mission is to involve faculty, students, staff, and community partners in learning together through community service and civic participation in a diverse democratic society. She and her students have worked on brownfield redevelopment with numerous organizations in Detroit and Flint.

Dewar’s research is concerned with American government effectiveness in intervening in microeconomic systems to deal with economic distress such as troubled industries, declining regions, distressed cities, and poverty. She has written books and articles on industrial policy, rural economic development programs, and urban revitalization. Her current research focuses on ways to address the barriers to equitable redevelopment of older industrial cities. She is writing about systems for moving tax-reverted property to new uses, the role of place-committed coalitions in redevelopment of brownfields, and indicators of early neighborhood decline and revitalization that can facilitate public intervention.

Dewar has a Ph.D. in Urban Studies and Planning from the Massachusetts Institute of Technology and a Master of City Planning from Harvard University. She received her undergraduate degree from Wellesley College.

Land Lines: How did you become involved in and concerned about brownfield redevelopment?

Margaret Dewar: I had done quite a lot of research on the effects of state and local economic development incentives on business location and expansion decisions. I also had taught courses where students worked on plans for urban redevelopment with nonprofit organizations in Detroit.

The calls for subsidies for brownfield redevelopment grew louder in the mid-1990s as states reformed their laws about cleanup requirements and liability. Given my background in economic development and urban redevelopment, I thought those calls sounded inauthentic. The campaigns for cleanup subsidies were essentially claiming that if the subsidies were provided, redevelopment of contaminated property would occur, implying that the only barrier to land reuse was the dirty dirt.

However, urban redevelopment is a very complex process that involves the assembly of land owned by many people, relocation of residents, demolition of structures, removal and replacement of infrastructure, and adherence to or release from regulatory restrictions and requirements—to name a few of the issues. Contamination could not be the only barrier, and, I thought, it was not even likely to be the most important one.

Further, state and local incentives for economic development rarely change business location and expansion decisions. I suspected that brownfield incentives would have a similar effect. Therefore, I started to do research on the determinants of brownfield redevelopment to place this kind of development in the broader urban redevelopment context.

Land Lines: How has your brownfield research evolved over the last decade?

Margaret Dewar: As I watched community development corporations (CDCs) in Detroit struggle with redevelopment, I became interested in whether place-committed coalitions were more or less effective in brownfield redevelopment than other kinds of developers.

Place-committed coalitions are the alliances of CDCs, nonprofit housing corporations, neighborhood organizations, and determined residents who are going to stay in place, no matter what. Unlike many other developers or businesses, they will not move to the suburbs because development is easier and more profitable there. They are often the only developers interested in the poorest neighborhoods, and any hope for a better physical environment in those places rests with them. Unlike private developers, they are not seeking especially profitable redevelopment projects; if they can break even, much of the return on their investment is seen in the creation of a better neighborhood.

When place-committed coalitions succeed in redevelopment, they may create market conditions that are attractive to private developers and therefore spur further redevelopment, or they may demonstrate market potential through bellwether projects. As a result, nonprofit developers are especially important in making urban redevelopment succeed.

However, I found that these coalitions were rarely successful in brownfield redevelopment, although development on contaminated land did not seem particularly different from other kinds of redevelopment. Now most of my own research projects and quite a few of the student projects I supervise are concerned with factors that lead to positive reuse of abandoned property in cities, especially reuse by nonprofit developers.

Land Lines: How do you involve your students in this work?

Margaret Dewar: I get many research ideas from working with CDCs, nonprofit housing corporations, and public agencies on plans for brownfield reuse, and I am able to bring these ideas into planning practice on specific projects. Twice each year I teach a course where advanced urban planning students develop plans with organizations working on strengthening their city neighborhoods and help advance the organizations’ efforts.

For example, my students and I worked with the Genesee County Brownfield Redevelopment Authority (BRA) and the Genesee County Land Bank to inventory brownfields in Flint, Michigan. We also helped to prioritize sites for attention based the goals of the BRA and the land bank, which are now following up on the recommendations in the plan with a neighborhood nonprofit and a group of diverse property owners.

Another team of students worked with a neighborhood nonprofit organization in southwest Detroit to identify brownfields and determine which sites have the greatest priority for reuse. Although the staff praised the plan, the organization has not been able to act on the recommendations. The contrast in these two experiences, along with the literature on determinants of nonprofit developers’ success, suggests numerous hypotheses about what helps and hinders the reuse of brownfield sites in such situations.

Land Lines: What is your most recent project with the Lincoln Institute?

Margaret Dewar: With Kris Wernstedt at Virginia Polytechnic Institute, I am looking at some of these hypotheses about why CBOs are successful or not in reusing vacant, abandoned, and contaminated property. Kris is looking at the work of CBOs in Baltimore, Portland, and Denver, and I am studying their reuse of such property in Detroit, Cleveland, and Flint. Because the demand for land in my set of three cities is similar, the comparison holds the market constant and promises to reveal institutional, political, and legal factors that are important in CBOs’ results.

The three midwestern cities differ in the strength of their nonprofit development sectors. Cleveland has an active network of nonprofit developers that have constructed thousands of units of housing over the last 15 years. Detroit has a maturing nonprofit development sector that is growing in its capacity to do projects, but Flint has very little such activity.

These differences can help reveal factors that matter and the ways they matter in redevelopment success. For instance, a commonly cited force in the success of Cleveland’s nonprofit developers is the commitment of foundations to provide funding for redevelopment. However, Flint also has foundations with large amounts of resources committed to that city. What are the differences in how the foundations in each city work that might help explain these differences in nonprofit development activity and effectiveness?

Land Lines: How can CBOs be most effective in brownfields redevelopment?

Margaret Dewar: Kris Wernstedt and I pose four groups of hypotheses or framing perspectives in our research on CBOs’ effectiveness in redeveloping brownfields. First, the special features of CBOs—their shortage of funds, small number of professional staff, lack of skills for redevelopment, and other issues—may interfere with implementing successful projects to reuse vacant, abandoned, and/or contaminated sites. CBO staff may especially lack the background to take on projects that involve contaminated sites.

Second, legal and political issues may interfere with the transfer of tax-reverted property to nonprofit developers for redevelopment projects, even though this land is essential for projects to go forward.

Third, weak local institutional settings may leave CBOs without adequate political or financial support for undertaking projects to reuse vacant, abandoned, and/or contaminated properties. Local government, financial institutions, foundations, and intermediaries may not provide sufficient backing to help CBOs over the substantial hurdles.

Fourth, federal and state legal and regulatory structures and financing provisions for contaminated sites in particular may interfere with CDCs’ efforts to reuse such property.

Another factor is that the demand for land in different cities affects the approach and efficacy of CBOs in redeveloping that land. In cities or neighborhoods with strong market demand, CBOs may have little opportunity to obtain such property for redevelopment because they are competing with private developers. On the other hand, in cities with weak demand for land, CBOs may struggle to find tenants or buyers for redeveloped property.

Land Lines: How is your work with the Lincoln Institute helping to broaden the scope of brownfield research?

Margaret Dewar: I continue to believe that contamination is rarely the determining factor in whether land can be reused or not, especially now that cleanup standards and liability risks have changed. By placing contamination in the larger context of the redevelopment of vacant, abandoned, and contaminated property in cities, we gain a better understanding of the complexity of redevelopment in general and of the kinds of changes that would help CBOs be more effective in remaking cities in ways that can improve the quality of life in distressed areas.

Una versión más actualizada de este artículo está disponible como parte del capítulo 7 del CD-ROM Perspectivas urbanas: Temas críticos en políticas de suelo de América Latina.

Paulo Sandroni se graduó de economista en la Universidad de São Paulo en 1964 y fue profesor adjunto de economía en la Universidad Católica de São Paulo (PUC) hasta 1969, cuando dejó Brasil durante la dictadura militar. Enseñó en la Universidad de Chile en Santiago hasta 1973 y después en la Universidad de los Andes en Bogotá, Colombia, hasta 1979. Después de retornar a São Paulo, volvió a enseñar en la PUC hasta 2006 y también se incorporó a la Escuela de Administración de la Fundación Getulio Vargas (FGV).

En 1988, después de la victoria del Partido de los Trabajadores (PT) en Brasil, se incorporó al gobierno municipal de la alcaldesa Luiza Erundina en São Paulo, donde dirigió agencias dedicadas al desarrollo urbano y el transporte público. Durante un breve período, también fue viceministro de administración en el gobierno federal.

En 1994 dejó el área de gobierno municipal para continuar enseñando y realizando investigaciones sobre desarrollo urbano en ciudades de Brasil y otros países de América Latina, y publicando artículos y libros sobre economía, incluyendo un diccionario de economía que se considera como referencia primaria en Brasil. Inició su afiliación con el Instituto Lincoln en 1997. En la actualidad es consultor privado sobre temas de desarrollo urbano y transporte, y sigue enseñando en la Escuela de Administración de FGV y en programas patrocinados por el Instituto Lincoln.

Land Lines: ¿Cómo se interesó en temas de política urbana, vistos sus antecedentes en macroeconomía?

Paulo Sandroni: En 1988 −cuando era asistente de Luiz Inácio Lula da Silva, ahora Presidente de Brasil y en ese entonces un candidato en las elecciones de 1989− ayudé a desarrollar programas para resolver los problemas macroeconómicos de Brasil. Después de la victoria de Luiza Erundina a la alcaldía de São Paulo en 1988, fui invitado a dirigir el programa de Operaciones Interligadas. Este programa consistía en negociar y formar sociedades entre los sectores público y privado para otorgar derechos adicionales de edificación, y usar la recaudación proveniente de la parte recuperada del incremento del valor del suelo (o plusvalía) para construir viviendas sociales para familias pobres.

También participé en el desarrollo de Operaciones Urbanas (OU), una forma de intervención para revitalizar grandes áreas de la ciudad, que también involucró la recuperación de plusvalías. Estaba fascinado por el desafío de formar parte de un grupo cuya misión era gobernar la ciudad más grande de Brasil con un proyecto de gran connotación social, y además continué asistiendo al Presidente Lula da Silva en temas macroeconómicos hasta 1998.

Land Lines: A su juicio, ¿por qué los proyectos de desarrollo urbano son un desafío tan grande?

Paulo Sandroni: La primera razón es que en los grandes proyectos que afectan los aspectos históricos, culturales, sociales y ambientales de la ciudad, la resolución de los problemas económicos y de financiamiento se debe considerar como parte del desafío, pero no son el objetivo principal. Por ejemplo, las OU que tratan de evitar el aburguesamiento y producir un entorno social más equilibrado pueden tener que usar tierras más valiosas para construir viviendas sociales. Estos proyectos requieren atención especial, porque la tierra no se puede vender usando el criterio típico de mayor y mejor uso. En Brasil hay una distinción importante entre los grandes proyectos urbanos (GPU) que pueden o no usar las herramientas de recuperación de plusvalías proporcionadas por las OU. Los GPU que están en condiciones de usar estas herramientas pueden redituar beneficios financieros y sociales, tanto para el sector público como el privado, con mayor facilidad.

Land Lines: ¿Puede describir el instrumento financiero detrás de esta política?

Paulo Sandroni: Desde 2004, los fondos para financiar las viviendas sociales y otras inversiones de infraestructura en las OU se han recaudado por medio de un nuevo instrumento ingenioso de recuperación de plusvalías llamado CEPAC (Certificado de Potencial Adicional de Construcción). Un CEPAC puede representar una cantidad determinada de metros cuadrados de derechos de construcción adicionales, dependiendo de dónde se formó la OU. Por ejemplo, en la OU de Faria Lima los CEPAC oscilaban de un mínimo de 0,8 a un máximo de 2,8 m2 y en la OU de Agua Espraiada, de 1,0 a 3,0 m2, porque los precios del suelo varían entre distintos lotes, incluso dentro de la misma OU.

La administración pública que crea y posee los derechos de desarrollo puede vendérselos a los emprendedores que quieran edificar con una densidad mayor que lo que estaba permitido previamente en esos lotes. Los CEPAC se venden en subasta a través de la bolsa, y si el interés de los emprendedores es alto, los precios pueden llegar a aumentar. No hace falta que el sector público valore la propiedad, porque el mercado se encarga de hacerlo. Los ingresos por la venta de CEPAC se depositan bajo una ley muy estricta en una cuenta separada utilizada para financiar proyectos de infraestructura y de viviendas sociales dentro de la OU, de manera que no aumenta la presión sobre el presupuesto de la ciudad.

Muchos observadores ven con recelo este instrumento porque temen que sea una forma de especulación del suelo en los mercados financieros. Creo que esto es un error, por dos razones. Primero, los especuladores agresivos en general invierten en bonos de alta liquidez que pueden aumentar de valor rápidamente en el corto plazo; los CEPAC no tienen ninguna de estas características. Segundo y más importante, el gobierno controla el mercado a esta altura del proceso. Si los precios aumentan debido a especulación, el sector público puede vender estos derechos a un precio más alto, incrementando sus ingresos proporcionalmente, o puede vender una cantidad más grande de acciones, causando un descenso del precio y neutralizando a los especuladores.

Land Lines: ¿Cómo han funcionado los CEPAC en la práctica?

Paulo Sandroni: Ambas OU que mencioné anteriormente han usado este instrumento para recaudar fondos de los emprendedores. A la fecha se ha vendido el 31 por ciento del inventario de metros cuadrados, o CEPAC, en el caso de Agua Espraiada y el 32 por ciento de Faria Lima. El caso de Agua Espraiada ilustra el proceso de licitación y la influencia de los especuladores. El gobierno de la ciudad realizó una subasta de 186.740 CEPAC en febrero de 2008, a un precio inicial de R$460 (equivalente a US$200). Un oferente trató de comprarlos todos, así que el precio subió a R$1,110 (US$480), un aumento increíble del 141 por ciento.

Meses más tarde, en octubre, otra subasta ofreció 650,000 CEPAC a un precio inicial de R$535 (US$230), pero se vendieron solamente 379.650, sin ningún aumento del precio. Entre diciembre de 2004 y febrero de 2009, la recaudación por venta de CEPAC en la OU de Faria Lima fue de R$567 millones (US$244 millones) y en la OU de Agua Espraiada fue de R$642 millones (US$276 millones). Si comparamos estos ingresos combinados de $520 millones de dólares en el curso de cuatro años con la recaudación total de impuestos sobre la propiedad en 2008, que fue de $1,25 mil millones de dólares, vemos que representa más del 40 por ciento, o alrededor del 10 por ciento anual.

Land Lines: ¿Cómo se pueden usar estos ejemplos para obtener respaldo a los medios alternativos de financiamiento del desarrollo urbano?

Paulo Sandroni: La forma clásica de financiar inversiones de capital en infraestructura es por medio de préstamos de largo plazo y transferencias de fondos federales; en general, el impuesto sobre la propiedad se usa para mantener la infraestructura y los servicios públicos. Pero en Brasil, los préstamos que pueden tomar las municipalidades y los estados están sujetos a límites estrictos. El hecho de que los ingresos por CEPAC no tengan este tipo de restricción presupuestaria agrega un valor financiero significativo a este instrumento.

Además, al igual que en los Estados Unidos y otros lados, aumentar impuestos es muy impopular. En las últimas cinco elecciones en São Paulo, por lo menos tres candidatos perdieron porque los votantes interpretaron que respaldaban un aumento de impuestos. Por lo tanto, para financiar grandes proyectos urbanos tenemos que evaluar cuánta plusvalía se va a crear, determinar cómo capturarlo y crear una situación que beneficie a todos. Los CEPAC ofrecen una alternativa viable.

Land Lines: ¿La mayoría de los proyectos de América Latina tienen tendencia al aburguesamiento? ¿Cómo se pueden hacer más socialmente aceptables?

Paulo Sandroni: En la medida que los GPU se concentren en las inversiones urbanas en infraestructura (construcción de caminos, puentes, centros comerciales, centros de negocios, etc.), el precio de la tierra probablemente aumentará en ciertas áreas afectadas, y ello contribuirá a la expulsión de familias pobres y hasta algunas de la clase media. De todas maneras, estos GPU son iniciativas del sector público, así que se pueden diseñar mecanismos para mitigar estas fuerzas de exclusión.

La legislación brasileña permite el establecimiento de ZEIS (Zonas Especiales de Interés Social) en áreas ocupadas por barrios marginales dentro del perímetro de los GPU. En estas áreas designadas, el emprendedor sólo puede construir nuevas viviendas para los pobres, aun cuando el precio de la tierra sea muy alto. Por supuesto, la oposición económica y social creada por este mecanismo es considerable entre los terratenientes y los emprendedores inmobiliarios, pero es defendida vigorosamente por las organizaciones y los residentes locales. São Paulo cuenta en la actualidad con ZEIS en cuatro GPU: Agua Branca, Faria Lima, Agua Espraiada y Rio Verde-Jacu. El ZEIS del barrio marginal Coliseu en Faria Lima, y el barrio marginal Jardim Edith en Agua Espraiada, son casos interesantes, porque están ubicados en las tierras más caras dentro de estos proyectos (ver Biderman, Sandroni y Smolka 2006).

Land Lines: ¿Cuáles son las desventajas de estas herramientas regulatorias (CEPAC, ZEIS, OU, etc.) que puedan haber dejado vacíos para el oportunismo de partes interesadas bien posicionadas?

Paulo Sandroni: Bueno, se puede encontrar corrupción y conductas antisociales en todos lados, y algunas condiciones pueden favorecerlas. Pero si uno sobrecarga el sistema con reglamentaciones y normas, se puede terminar bloqueando las iniciativas para superar estos problemas y se paraliza un proceso que puede beneficiar el interés público. Es más riesgoso, por supuesto, reducir las reglamentaciones y brindar más oportunidad para negociar, pero este riesgo se puede mitigar si se crean normas de negociación, con castigos muy severos por violarlas. Al mismo tiempo, hay ciertos asuntos que demandan una reglamentación muy precisa, como es el caso de los ZEIS, porque los grupos más pobres de la ciudad necesitan de la intervención del sector público.

Land Lines: ¿Se pueden replicar estos tipos de proyectos de São Paulo en otras ciudades de América Latina?

Paulo Sandroni: Tenemos que tener cuidado a la hora de transplantar o repetir experiencias que fueron exitosas en un país a otro. Antes de hacerlo, es importante conocer dos cosas: las condiciones imperantes en la ciudad cuando se crearon estas OU; y los tipos de problemas que los planificadores querían resolver con estos proyectos.

Por ejemplo, una condición importante en São Paulo es la separación de los derechos de edificación de los derechos de propiedad, lo cual abre un camino para cobrar por un cambio en la relación de superficie de edificación a superficie del lote. En grandes partes de la ciudad, la relación de superficie de edificación a superficie del lote, que está relacionada con las normas de zonificación, es muy baja en la actualidad, oscilando entre una y dos veces el área del lote. Cuando sea posible aumentar esta relación tres o cuatro veces sin ejercer una gran presión sobre la infraestructura, se impone un cargo sobre los dueños o emprendedores por los derechos adicionales a construir con mayor densidad.

En otras ciudades, donde la relación de superficie de edificación a superficie del lote ya sea alta, hay menos flexibilidad para cobrar por derechos de desarrollo adicionales, de manera que quizás haga falta crear otras políticas o herramientas. La lección principal es que las OU de São Paulo han demostrado que cobrarles a los propietarios o emprendedores por los derechos adicionales a edificar ha sido tanto razonable como equitativo. Ya no es social, política o aun económicamente admisible conceder estos derechos de desarrollo sin cargo.

Referencia

Biderman, Ciro, Paulo Sandroni, y Martim O. Smolka. 2006. Large-scale urban interventions: The case of Faria Lima in São Paulo (Intervenciones urbanas a gran escala: el caso de Faria Lima en São Paulo). Land Lines 18(2): 8–13.

La recuperación de la plusvalía del suelo es ahora un tema popular entre los profesionales de finanzas públicas a nivel local, en parte debido a que la disminución en los ingresos de los gobiernos locales causada por la recesión ha despertado el interés en nuevas fuentes de ingresos, y en parte debido a la necesidad de encontrar nuevas maneras de financiar la infraestructura local, que se ha deteriorado a causa de la falta de inversión. La sexta Conferencia Anual sobre Políticas de Suelos del Instituto Lincoln, celebrada en mayo de 2011, analizó varios aspectos de la recuperación de plusvalías, utilizando experiencias a nivel nacional e internacional.

Principios básicos de la recuperación de plusvalías

Los cambios en el valor del suelo se deben con frecuencia a factores que no están relacionados con el esfuerzo del propietario: acciones tomadas por la comunidad relativas a las inversiones en infraestructura; crecimiento cercano de actividades industriales, comerciales, residenciales o recreativas; normas de edificación que permiten al dueño desarrollar el suelo; o el crecimiento gradual de la comunidad. La recuperación de plusvalías consiste en aplicar un impuesto o arancel diseñado para devolver a la comunidad algo o todo el valor agregado al suelo por las acciones de la comunidad. Su aplicación es particularmente atractiva cuando las inversiones públicas —en caminos, suministro de agua, saneamiento o servicios locales, como el alumbrado público— aumentan los valores de la propiedad.

Experiencia internacional

Arriendo de suelos. Quizás la aplicación más amplia y comprensiva del principio de recuperación de plusvalías tiene lugar en China, donde las municipalidades compran suelos agrícolas a los granjeros a precios de uso agrícola, les agregan servicios públicos de infraestructura, y se los venden a los emprendedores como suelos urbanos, con permisos para realizar emprendimientos urbanos. La municipalidad se queda con la diferencia de precio entre el valor urbano y agrícola del suelo, generando una proporción importante de sus ingresos locales con los cuales paga, entre otras cosas, la instalación de la infraestructura.

Co-desarrollo. Las compañías de transporte público de Hong Kong y Tokio han usado los ingresos de co-desarrollo de comunidades residenciales y áreas comerciales cercanas a las nuevas estaciones de transporte público para ayudar a financiar sus costosos proyectos. En Tokio, los ingresos de las líneas de transporte que no se deben a la venta de pasajes suman del 30 al 50 por ciento del total. En ambas ciudades, los ingresos operativos por la gestión de propiedades están cobrando más importancia que las ganancias obtenidas de los emprendimientos en sí, y proporcionan una fuente de ingresos sustentable.

Tributación del desarrollo inmobiliario. Los intentos de tributar la valorización de las propiedades en el Reino Unido comenzaron en 1909, pero su implementación se vio obstruida por problemas de valuación y otros desafíos. Las contribuciones directas de valorización fueron reemplazadas por contratos con las autoridades locales, donde los emprendedores contribuyen al suministro de infraestructura y servicios, viviendas de interés social y otras obligaciones de planeamiento. Estos contratos se están convirtiendo poco a poco en contribuciones de infraestructura comunitaria, que es una contribución de valorización obtenida por otros medios. Siguiendo una trayectoria histórica distinta, Francia también ha establecido un impuesto de infraestructura local a los nuevos emprendimientos.

Consorcios de suelos. India ha experimentado con los consorcios de suelos para implementar sus nuevos planes de urbanización que reemplazan a los viejos planes de ordenamiento territorial. Esta práctica alienta a los dueños de suelos sin desarrollar, o desarrollados en forma precaria, a que agrupen sus predios y luego reciban una parcela con servicios de infraestructura o un espacio construido cuando el emprendimiento se haya completado. La estrategia adoptada en Ahmedabad usa el 15 por ciento de los suelos para caminos, el 10 por ciento para parques, el 15 por ciento para subastar a terceras partes y el 60 por ciento para los miembros del consorcio.

La experiencia de los Estados Unidos

Algunas de las políticas específicas de recuperación de plusvalías en los Estados Unidos incluyen áreas de tributación especial con cargos por valorización. Por ejemplo, los Distritos de Establecimientos Comunitarios (Community Facilities Districts, o distritos Mello-Roos) destinan aranceles pagados por los residentes al pago de bonos vendidos para financiar el desarrollo de infraestructura. Los Distritos de Mejoras Comerciales (Business Improvement Districts) y el Financiamiento por Incremento de Impuestos (Tax Increment Finance) usan ingresos tributarios o arancelarios separados para financiar mejoras urbanas en áreas designadas al efecto. Los Acuerdos de Beneficios Comunitarios (Community Benefit Agreements), que se negocian en forma privada, obligan a los emprendedores a proporcionar instalaciones comunitarias o beneficios económicos a los residentes locales. Los aranceles municipales de desarrollo e impacto inmobiliario, que se utilizan para financiar obras de infraestructura y otras inversiones relacionadas con los emprendimientos, se basan en general en los costos de dichas inversiones, pero sólo generan ingresos cuando la plusvalía excede el costo.

Lo más notable de la experiencia norteamericana es que los términos en sí —contribuciones de valorización o recuperación de plusvalías— raramente se mencionan, si bien los principios se aplican con regularidad. Sin embargo, este país puede aprender lecciones de las nuevas estrategias de recuperación de plusvalías adoptadas internacionalmente.

Las actas de la conferencia, con artículos y comentarios de más de 25 contribuyentes, serán publicadas en mayo de 2012.

Desde la primera reforma económica ocurrida en 1978 hasta la liberalización de inversiones extranjeras y el desarrollo del sector privado que se dio entre mediados de la década de 1980 hasta la actualidad, las principales reformas económicas de China han tenido como prioridad lograr una alta tasa de crecimiento económico. Estas políticas funcionaron tan bien que el PIB per cápita en dólares constantes en China aumentó cerca de un 10 por ciento anual de 1980 a 2010. Este rendimiento en el crecimiento no tiene precedentes en un país de grandes dimensiones, pero ha sido acompañado por incontables costos, tales como la transformación estructural de la economía, el ajuste social y las migraciones y la degradación medioambiental. En un nuevo libro del Instituto Lincoln titulado China’s Environmental Policy and Urban Development (La política medioambiental y el desarrollo urbano en China), editado por Joyce Yanyun Man, se trata el último de estos temas. Según este libro, de acuerdo con las estimaciones realizadas por agencias gubernamentales, los costos medioambientales sin documentar asociados a la producción económica fueron del 9,7 por ciento del PIB en 1999 al 3 por ciento en 2004.

El crecimiento económico en países de bajos ingresos por lo general viene acompañado de costos medioambientales. Este trueque se ve plasmado en la “curva medioambiental de Kuznets”, según la cual la calidad medioambiental se deteriora con el crecimiento económico en los niveles de bajos ingresos y luego mejora con el crecimiento económico en los niveles de ingresos más altos. Según lo indicado en este libro, las estimaciones de la curva medioambiental de Kuznets para las ciudades chinas entre 1997 y 2007 muestran que, durante dicho período, los índices de contaminación industrial en China se redujeron a medida que aumentaron los ingresos, lo que indica que las ciudades con ingresos más altos experimentaron mejoras en estos índices de calidad medioambiental conforme aumentaron sus ingresos.

Varios de los autores de los capítulos de este libro afirman que las políticas medioambientales de China y su rendimiento se encuentran en una etapa de transición. Los indicadores medioambientales están mejorando en respuesta a las nuevas políticas y reglamentaciones, mientras que el crecimiento económico continúa. Al mismo tiempo, China también ha sufrido reveses en este sentido. Por ejemplo, ciertos eventos de gravedad extrema, como la combinación de un clima extremadamente frío con inversiones atmosféricas que se dio este invierno en Beijing, produjeron niveles muy altos de concentraciones de partículas en dicha ciudad.

La lógica detrás de la curva medioambiental de Kuznets implica diferentes elementos, tanto de demanda como de oferta. En cuanto a la demanda, las poblaciones con ingresos más altos demuestran apreciar cada vez más los servicios que tienen que ver con el medio ambiente, por lo que defienden las mejoras medioambientales. Con respecto a la oferta, las inversiones en nuevas capacidades hacen uso de equipos modernos con procesos que respetan el medio ambiente y tecnologías de control más accesibles económicamente. Las últimas mejoras medioambientales en China también derivan del fortalecimiento de los entes de regulación ambiental. En 1982, la función que tenía la Agencia de Protección Medioambiental era principalmente de asesoramiento. No obstante, en 1988 se transformó en una agencia nacional; en 1998 se convirtió en un ente más independiente, la Agencia Estatal de Protección Medioambiental; y posteriormente, en 2008, se elevó la jerarquía del ente para convertirse en el Ministerio de Protección Ambiental.

La creciente influencia de las agencias de protección medioambiental centrales se vio acompañada por un cambio en el estilo de las reglamentaciones. El antiguo énfasis que se daba a las normas de orden y control (tales como las normas sobre emisiones) se reemplazó en forma parcial por instrumentos basados en incentivos económicos (tales como los impuestos sobre insumos y el nuevo impuesto sobre emisiones de carbono). Según las investigaciones realizadas, a la fecha la aplicación de las normas de orden y control ha arrojado mejores resultados.

Mientras que las agencias centrales establecieron normas nacionales, la responsabilidad de monitorear y velar por el cumplimiento de dichas normas se descentralizó en gran medida hacia las agencias medioambientales municipales o metropolitanas. El rendimiento de los gerentes municipales se revisa todos los años según criterios que hacen hincapié en el crecimiento económico. Otras mejoras en los resultados medioambientales pueden darse solamente cuando dichos criterios dan un mayor peso a las mejoras medioambientales. Por ejemplo, como consecuencia de haber incluido la reducción de las emisiones de sulfuro como criterio de rendimiento anual, se produjo un rápido aumento en el control de las emisiones de dióxido de sulfuro de las centrales de energía.

Aun cuando a China le resta mucho por hacer para reducir la contaminación del aire urbano, limpiar los ríos y lagos y mejorar la eficiencia en el uso de la energía, estos objetivos están cobrando mucha más importancia para los ciudadanos. La creciente disponibilidad de datos relacionados con los indicadores medioambientales está promoviendo un diálogo nacional respecto de la calidad medioambiental. El nuevo libro de la profesora Man representa un aporte a este diálogo, ya que informa sobre el progreso realizado, identifica los desafíos inmediatos y evalúa las nuevas políticas y enfoques normativos para las mejoras medioambientales.

In the wake of the housing market collapse and the Great Recession—which caused a substantial increase in residential foreclosures and often precipitous declines in home prices that likely led to additional foreclosures—many observers speculated that local governments would consequently suffer significant property tax revenue losses. While anecdotal evidence suggests that foreclosures, especially when spatially concentrated, lowered housing prices and property tax revenue, the existing body of research provides no empirical evidence to support this conclusion (box 1). Drawing on proprietary foreclosure data from RealtyTrac—which provides annual foreclosures by zip code for the period 2006 through 2011 (a period that both precedes and follows the Great Recession)—this report is the first to examine the impacts of foreclosures on local government property tax values and revenues. After presenting information on the correlation between foreclosures and housing prices nationwide, we shift focus to Georgia in order to explore how foreclosures affected property values and property tax revenue across school districts throughout the state. Our empirical analysis indicates that, indeed, foreclosures likely diminished property values and property tax revenues. While still preliminary, these findings suggest that foreclosures had a range of effects on the fiscal systems of local governments.

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Box 1: Existing Research into the Impacts of Economic Factors on Property Tax Revenues

While there is existing research examining the various impacts of economic factors on property tax revenues, these studies use data that reflect only a previous recession (e.g., the 2001 recession) or that cover only the very start of the housing crisis in the Great Recession. Doerner and Ihlanfeldt (2010), for example, focus directly on the effects of house prices on local government revenues, using detailed panel data on Florida home prices during the 2000s. They conclude that changes in the real price of Florida single-family housing had an asymmetric effect on government revenues. Price increases do not raise real per capita revenues, but price decreases tend to dampen them. Doerner and Ihlanfeldt also find that asymmetric responses are due largely to caps on assessment increases, positive or negative lags between changes in market prices and assessed values, and decreased millage rates in response to increased home prices. Alm, Buschman, and Sjoquist (2011) document the overall trends in property tax revenues in the United States from 1998 through 2009—when local governments, on average, were largely able to avoid the significant and negative budgetary impacts sustained by state and federal governments, at least through 2009, although there was substantial regional variation in these effects. Alm, Buschman, and Sjoquist (2009) also examine the relation between education expenditures and property tax revenues for the 1990 to 2006 period. In related work, Alm and Sjoquist (2009) examine the impact of other economic factors on Georgia school district finances such as state responses to local school district conditions. Finally, Jaconetty (2011) examined the legal issues surrounding foreclosures, and the MacArthur Foundation has funded a project on foreclosures in Cook County, Illinois.

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Potential Links between Housing Prices, Foreclosures, and Property Values

Local governments in the United States rely on various own-source revenues, including local income, property, and general sales taxes and specific excise taxes, fees, and user charges. Of these, the dominant source is by far the property tax. In 2011, local property taxes accounted for roughly three-fourths of total local government tax revenues and for nearly one-half of total local own-source revenues (including fees and charges).

Some local taxes, such as income and sales taxes, have bases that vary closely with the levels of economic activity, and the Great Recession seriously depressed revenues from such taxes. The basis of the property tax is assessed value, which does not automatically change in response to economic conditions; in the absence of a formal and deliberate change in assessment, a decrease in the market value does not necessarily translate into a decrease in assessed value. Assessment caps, lags in reassessments, and the ability to make deliberate changes in millage or property tax rates combine so that economic fluctuations that influence housing values may not affect the property tax base or property tax revenues in any immediate or obvious way. Over time, however, assessed values tend to reflect market values, and property tax revenues also come under pressure.

A weakened housing market—with lower housing values and more foreclosures—may reduce local government tax revenues from several sources (Anderson, 2010; Boyd, 2010; Lutz, Molloy, and Shan, 2010), including real estate transfer taxes, sales taxes on home construction materials, and income taxes from workers in the housing construction and home furnishings industries. Because property tax revenues are such a large share of local tax revenue, however, changes in property tax revenues are often larger than the changes from these other housing-related taxes.

Foreclosure Activities Nationwide During and After the Great Recession

Figure 1 (p. 24) presents the total nationwide numbers of foreclosures at the 5-digit zip code level as a share of the number of owner-occupied homes in 2010. This figure demonstrates the clear geographic concentration of foreclosures. Arizona, California, and Florida were especially hard hit by the collapse of the housing bubble. However, other areas also experienced significant foreclosure activity.

The Federal Housing Finance Agency (FHFA) produces a housing price index for each metropolitan statistical area (MSA). We matched the RealtyTrac foreclosure data to the FHFA housing price index for 352 metropolitan statistical areas. Figure 2 (p. 24) presents a simple scatterplot that relates total foreclosures over the years 2006 to 2011 as a share of the number of owner-occupied housing units in 2010, to the change in the housing price index over the period 2007 to 2012 for all 352 metropolitan areas. The simple correlation coefficient between foreclosures per owner-occupied housing units and the change in housing price index is -0.556; if we consider only those MSAs with non-zero foreclosures over the period, the correlation coefficient is -0.739. This simple analysis suggests that foreclosures have a significant negative relation with housing values. The next step is to explore the effect of foreclosures on the property tax base and on property tax revenues. In the next section, we examine this issue for the state of Georgia.

More Detailed Analysis: Foreclosures, Property Values, and Property Tax Revenues in Georgia

By examining the effect of foreclosures on property values and property tax revenues in a single state, we eliminated the need to control for the many ways in which institutional factors may differ across states. Georgia is a suitable focal point because in many ways it is roughly an “average” state. For example, local governments in Georgia rely on property taxes only slightly less than the national average; in 2008, property tax revenue as a share of total taxes for local governments was 65.1 percent in Georgia compared to 72.3 percent of the U.S. (Bourdeaux and Jun 2011).

We measure foreclosure activity with the Realty-Trac data, aggregating zip code observations into the corresponding counties. The Georgia Department of Revenue supplied the annual property tax base (referred to as “net digest” in Georgia) and property tax rates. Property tax and total local source revenues for school districts came from the Georgia Department of Education. The tax base is as of January 1 of the respective year. The property tax rate is set in the spring with tax bills being paid in the fall, the revenue from which would be reported in the following fiscal year. School districts are on a July 1 to June 30 fiscal year, so the 2009 tax base and millage rates, for example, would be reflected in revenues for fiscal year 2010. We also use various demographic and economic data (income, employment, and population) measured at the county level to help explain changes in the base. Because these variables are at a county level, for the analysis that follows, we added the property tax base and revenue variables for city school districts to those for the county school systems in each city’s county to obtain countywide totals for 159 counties. For counties that include all or part of a city school system, the tax rate is the average of the county and city school tax rates, weighted by the respective property tax base.

Only county governments conduct property tax assessment in Georgia, but the state evaluates all property tax bases annually, comparing actual sales of improved parcels during the year to assessed values, and determining if the assessment level is appropriate relative to fair market value, which is legally set at 40 percent. The resulting “sales ratio studies” report an adjusted 100 percent property tax base figure for each school district in the state, along with the calculated ratio. We use these adjusted property tax bases, covering the periods 2000 through 2011, to measure the market value of residential property.

Georgia has very few institutional property tax limitations. School district boards can generally set their property tax rates without voter approval, which is required only if the property tax rate for a county school district exceeds 20 mills. Currently, the cap is binding on only five school systems. Also, there is no general assessment limitation, although one county has an assessment freeze on homesteaded property. In 2009, the State of Georgia imposed a temporary freeze on assessments across the state, potentially affecting property tax revenue only in school year/fiscal year 2010; however, with net and adjusted property tax bases declining on a per capita basis for most counties in 2009 through 2011, it is unlikely that the freeze has constrained assessments.

Foreclosures

Table 1 provides the statewide mean and median number of foreclosures by zip code for 2006 through 2011. Total foreclosures almost doubled between 2006 and 2010, before declining in 2011. The mean number of foreclosures is much larger than the median, implying that the distribution is highly skewed.

Table 2 shows the distribution of Georgia zip codes by the number of years that the zip code had non-zero foreclosures. Over 65 percent of the zip codes had foreclosures in each of the six years, while only 7 percent had no foreclosures in all six years. This distribution suggests that very little of the state was immune to the foreclosure crisis.

Figure 3 (p. 25) shows the distribution of foreclosures across the state over the period 2006 through 2011. Because zip codes differ in size and housing density, we also map the number of foreclosures per owner-occupied housing units for 2010 in figure 4 (p. 25). Note that zip codes marked in white either have no foreclosures or are missing foreclosure data. As one would expect, urban and suburban counties (particularly in the Atlanta metropolitan area) have the most foreclosures. However, there are large numbers of foreclosures in many of the less urban zip codes as well.

Figure 5 shows the annual distribution of foreclosures per hundred housing units in each of Georgia’s 159 counties. Note that the bar in the box represents the median value, the box captures the observations in the second and third quartile, the “whiskers” equal 1.5 times the difference between the twenty-fifth and seventy-fifth percentiles, and the dots are extreme values. The median number of foreclosures by county increased from 0.17 per 100 housing units in 2006 to 1.18 per 100 units in 2010—more than a sixfold increase in the median. There is a high positive correlation between foreclosure activity in 2006 and 2011 across the counties. This correlation is 0.78 when measured relative to housing units and 0.74 when measured on a per capita basis, indicating that counties with above (below) average foreclosure activity before the housing crisis remained above (below) average at its peak.

Property Values

As for changes in property values, figures 6 and 7 show the distributions of annual changes, respectively, in the per capita net property tax base and in the per capita adjusted 100 percent property tax base across the 159 counties from 2001 through 2011. Studies suggest that foreclosures may have spillover effects on the market values of other properties in the jurisdiction (Frame, 2010). We attempt to estimate the effect of foreclosures on market values as measured by the adjusted 100 percent property tax base.

Our results are preliminary, in that the analysis included only Georgia data. Even so, they suggest significant negative effects of foreclosures on property values, controlling for year-to-year percent changes in income, employment, and population. The coefficient estimates on the foreclosures variable suggest that a marginal increase of one foreclosure per 100 homes (or approximately the increase in median foreclosures from 2006 to 2011) is associated with a roughly 3 percent decline in the adjusted 100 percent property tax base over each of the two following years. Similarly, an increase of one foreclosure per 1,000 population is associated with nearly a 1 percent decline in the adjusted 100 percent property tax base after one year, and a slightly lower percent decline in the following year.

Property Tax Revenues

We also explore the effect of foreclosures on property tax revenues. Figure 8 (p. 27) depicts the distribution of nominal changes by county in total maintenance and operations property tax revenues since 2001, showing considerable variation across the school systems in the annual changes in property tax revenues. Even in the latest three years of declining property values, at least half the counties annually realized positive nominal growth in property tax revenue. To understand the effect of foreclosure activity on local government property revenues, we estimate regressions that relate foreclosures to property tax levies and to actual property tax revenues.

We find that a rise in foreclosures is associated with a reduction in the levy, after controlling for changes in the property tax base as well as fluctuations in income, employment, and population. An increase of one foreclosure per 100 housing units is associated with about a 1.5 percent subsequent decline in the levy, all else held constant. We also find that foreclosures have a negative impact on revenues, all else constant. Like our earlier estimates, these results are for Georgia only, but they indicate a significant negative relationship between foreclosures and local government property tax levies and revenues. It may be that higher foreclosure activity makes local officials hesitant to raise property tax rates to offset the effect of foreclosures on the tax base.

Conclusions

How have foreclosures driven by the Great Recession affected property values and property tax revenues of local governments? Our results suggest that foreclosures have had a significant negative impact on property values, and, through this channel, a similar effect on property tax revenues, at least in the state of Georgia. Our results also suggest additional effects on levies and revenues after controlling for changes in the tax base. Further work is required to see whether these results extend to other states.

About the Authors

James Alm is a professor and chair of the department of economics at Tulane University.

Robert D. Buschman is a senior research associate with the Fiscal Research Center in the Andrew Young School of Policy Studies at Georgia State University.

David L. Sjoquist is a professor and holder of the Dan E. Sweat Chair in Educational and Community Policy in the Andrew Young School of Policy Studies.

Resources

Alm, James and David L. Sjoquist. 2009. The Response of Local School Systems in Georgia to Fiscal and Economic Conditions. Journal of Education Finance 35(1): 60–84.

Alm, James, Robert D. Buschman, and David L. Sjoquist. 2009. Economic Conditions and State and Local Education Revenue. Public Budgeting & Finance 29(3): 28–51.

Alm, James, Robert D. Buschman, and David L. Sjoquist. 2011. Rethinking Local Government Reliance on the Property Tax. Regional Science and Urban Economics 41(4): 320–331.

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