Una versión más actualizada de este artículo está disponible como parte del capítulo 1 del libro Perspectivas urbanas: Temas críticos en políticas de suelo de América Latina.

Si bien se le conoce como una región de gran diversidad, América Latina también se caracteriza por una serie de herencias comunes que afectan la tierra de manera directa o indirecta. Entre dichas herencias figuran el proverbial patrimonialismo, basado en una estructura de propiedad del suelo que otorga inversiones y servicios públicos según las influencias políticas que haya detrás; asimismo, administraciones centrales fuertes con una débil responsabilidad fiscal en el ámbito local; y una tradición de códigos elitistas y reglamentos rígidos ¾incluso anacrónicos¾ referentes a los temas vinculados al uso del suelo. La planificación urbana, sesgada hacia el diseño físico, ha tendido a concentrarse en la ciudad “legal” al mismo tiempo que ha descuidado a la “real”. Las inversiones en el ambiente construido, en un proceso de rápida expansión, gozan de relativa autonomía del proceso de industrialización. En un ambiente caracterizado por mercados de capital débiles y por una alta (y a menudo crónica) inflación, la tierra frecuentemente asume el papel de un mecanismo de capitalización o de un sustituto de la falta de seguridad social.

Tendencias regionales

En América Latina, los mercados de suelos urbanos se destacan por la magnitud y persistencia de actividades ilegales, irregulares, informales o clandestinas relacionadas con el acceso y ocupación de la tierra, todas ellas derivadas principalmente de la escasez de tierras urbanizadas costeables. Esta escasez desempeña un papel importante en la cultura social latinoamericana, dado que el acceso al suelo es frecuentemente una condición tácita para obtener sentido de ciudadanía y movilidad social.

Quizás más importantes son una serie de tendencias multifacéticas que están diseminándose a paso firme por todo el continente y abriendo nuevas oportunidades a la política de tierras urbanas. Podemos comenzar citando la redemocratización de muchos países latinoamericanos tras largos períodos de regímenes autoritarios o militares, con numerosas implicaciones en la política del suelo. Hoy en día existe una intensificada conciencia general sobre la responsabilidad de los funcionarios por el manejo del suelo urbano u otros aspectos de la administración pública, así como también se observa el reconocimiento público de nuevos agentes sociales como lo son las organizaciones no gubernamentales (NGO). Nuevas formas de participación comunitaria y acción civil han surgido en respuesta a la necesidad de legitimar alternativas al acceso a la tierra para la población urbana de bajos recursos, alternativas que incluyen innovadores abordajes de propiedades en cooperativa, y atención a asuntos de género en la regularización de tierras de ocupación ilegal.

Una segunda y relacionada tendencia refleja la necesidad de poner en práctica reformas institucionales y constitucionales acompañadas de nuevas definiciones del papel del Estado. Este proceso ha tenido una gran variedad de manifestaciones, a saber:

• una descentralización fiscal que ha creado presión para generar nuevas fuentes de ingreso en el ámbito local, y oportunidades para mejorar la recaudación de los impuestos inmobiliarios;
• una descentralización política y administrativa que ha aumentado el poder y la autonomía de las autoridades locales e intermedias. Este proceso ha creado nuevas y numerosas responsabilidades asociadas a la regulación del mercado de la tierra para la provisión de servicios y viviendas de interés social;
• nuevos instrumentos para la intervención normativa y fiscal, tales como herramientas de movilización de los incrementos en el valor de la tierra (plusvalías) para beneficio de la comunidad;
• la privatización o eliminación de restricciones estatutarias referentes a la cesión de terrenos que antiguamente pertenecieron al Estado, lo cual ha aumentado las oportunidades de utilizar (o volver a utilizar) tierras vacantes existentes;
• nuevos modos de provisión de servicios, en parte originados por la privatización generalizada de las compañías de servicios públicos, con efectos directos sobre el proceso de uso del suelo y la redefinición de los patrones de segregación espacial;
• el afloramiento de sociedades públicas o privadas en el desarrollo urbano, conducente a una variedad de nuevas clases de subcentros urbanos.

La tercera tendencia importante de las décadas recientes ha sido una reestructuración macroeconómica que ha llevado a estabilizar los tradicionales ¾y frecuentemente crónicos¾ problemas de inflación y que ha influido en la evolución de los precios de la tierra. América Latina también ha experimentado tendencias más acentuadas hacia la globalización, la apertura de economías nacionales y los cambios tecnológicos. Entre otros efectos, estas tendencias han generado una mayor competencia entre las ciudades para atraer inversiones privadas, mediante mecanismos que van desde el uso de planificación estratégica como un dispositivo de mercadeo de la ciudad, hasta el ofrecimiento de incentivos locales a través de las denominadas “guerras fiscales”. Todo este movimiento ha afectado profundamente la base económica de las ciudades y la naturaleza y escala de la pobreza urbana. Igualmente afectados se encuentran los tipos de intervenciones urbanas (que abarcan desde proyectos de rehabilitación a gran escala de áreas abandonadas o en malas condiciones, hasta los nuevos proyectos inmobiliarios de uso mixto en las áreas de bordes urbanos) que están redefiniendo la forma urbana, la dinámica de las ciudades, y los patrones de segregación espacial y social.

Establecimiento de una presencia

Desde 1993, el Instituto Lincoln ha hecho un esfuerzo coordinado para participar activamente en el debate sobre las políticas del suelo y de tributación en América Latina. Adoptamos un abordaje multinacional para trabajar dondequiera que existan asuntos contemplados en las áreas de estudio de nuestros programas, buscar oportunidades para el fortalecimiento de recursos en el ámbito local, o desarrollar iniciativas con potencial de diseminación o replicación en otros países. Esta estrategia nos permite estar presentes en regiones donde se vislumbren cambios significativos en la política o donde se estén discutiendo asuntos importantes relacionados con el tema del suelo.

El Instituto Lincoln ha demostrado inequívocamente su capacidad para desempeñar tres funciones importantes conducentes a su mandato educativo: promover la fertilización cruzada de ideas; convocar y moderar debates entre diferentes grupos de interés; y ofrecer liderazgo intelectual. En todos nuestros programas enfatizamos la diseminación de informaciones valiosas basadas principalmente en estudios de caso que puedan utilizarse para nutrir intercambios intrarregionales y para resolver problemas. Este énfasis en la fertilización cruzada de ideas mediante un diálogo horizontal es particularmente importante dado el centralismo de la administración pública en América Latina y la predominancia de canales de comunicación verticales.

El reconocimiento y la credibilidad internacional que goza el Instituto Lincoln como una respetada institución no partidista que se dedica al estudio de la política del suelo y la tributación a la propiedad, nos coloca en una posición única para facilitar discusiones complejas y políticamente delicadas entre diversos grupos de interés, particularmente funcionarios de diferentes niveles administrativos y representantes del sector comercial, de organizaciones no gubernamentales y de la comunidad política en general.

Igualmente importante es el papel del Instituto en ofrecer un liderazgo intelectual para llenar el vacío existente entre los conocimientos teóricos más avanzados y las necesidades más prácticas e inmediatas de los funcionarios que tratan directamente con la puesta en práctica y la administración del uso de la tierra y de las políticas de tributación. A menudo, esta función involucra “traducir” ideas y argumentos académicos al lenguaje de los profesionales comunes, lo cual se hace mediante materiales impresos, cursos y seminarios. Al apoyar proyectos de desarrollo curricular y de investigación, también ponemos de manifiesto esas dimensiones críticas y a veces “invisibles” de asuntos complejos tales como los efectos económicos de la informalidad en el acceso a la tierra. Como proveedor de recursos a nuestros socios internacionales, ayudamos a localizar expertos y facilitar casos de estudios y otros materiales de diferentes países y contextos.

Redes y áreas temáticas

Desde 1995 el Programa Latinoamericano del Instituto ha ido desarrollando una red central de representantes de doce países con quienes se han realizado trabajos conjuntos en programas educativos y de desarrollo curricular. Nuestra estrategia ha evolucionado conforme hemos adquirido un entendimiento más profundo de los asuntos que atañen a los programas internacionales del Instituto. Actualmente trabajamos con varias redes de funcionarios, profesionales y expertos que están organizadas por áreas temáticas en vez de por regiones geográficas. Estas cinco redes transnacionales, cuyos temas de interés a menudo se traslapan y se refuerzan mutuamente, están vinculadas a las tres áreas programáticas principales del Instituto:

En el Programa de Tributación de Tierras y Edificios, la captura de plusvalías es el tema primario para el cual el Instituto tiene claras ventajas comparativas definidas en el continente latinoamericano. Nos hemos dedicado al estudio de las condiciones técnicas y de gestión para poner en práctica instrumentos que puedan promover la redistribución de los incrementos en el valor de la tierra, sea directa o indirectamente (a través de impuestos, tarifas, exacciones y otros instrumentos legislativos), a fin de impulsar el desarrollo urbano y beneficiar a la comunidad como un todo.

Además de utilizar los mecanismos de captura de plusvalías para controlar el crecimiento urbano y la expansión territorial, así como también para reducir los negativos efectos de la especulación de la tierra, nos interesa su aplicabilidad a circunstancias derivadas de la proverbial informalidad de los mercados de suelo en América Latina. Éstas incluyen situaciones caracterizadas por una relación confusa en la tenencia de la tierra, donde las ocupaciones de la tierra son mayoritariamente irregulares o ilegales, y donde los incrementos significativos en el valor de la tierra son generados por la comunidad, en vez de por acción estatal. Esta red explora si los incrementos en el valor del suelo (resultantes directa o indirectamente de intervenciones públicas) pueden promoverse para mitigar la pobreza urbana en general y mejorar el acceso al suelo urbanizado, particularmente para las familias de las bajos ingresos.

Nuestra segunda red estudia los temas de recaudación, tasación y tributación inmobiliaria. Mediante comparaciones internacionales se ha demostrado que la recaudación del impuesto a la propiedad en América Latina es generalmente inadecuada para satisfacer las necesidades de la urbanización acelerada. En muchas áreas, los sistemas de tributación inmobiliaria están plagados de problemas tales como fuertes inequidades verticales y horizontales, deficientes sistemas de recaudación y prácticas de tasación, fuertes influencias de valores históricos, y débiles marcos legales. No obstante, muchos programas nacionales, a veces apoyados por agencias multilaterales, están promoviendo reformas y mejoras en los sistemas de tributación inmobiliaria. Entre dichas mejoras se incluye el uso innovador de sistemas autodeclaratorios y complejos sistemas de información, giros creativos a los impuestos sobre el valor del suelo, y oportunidades para restablecer el impuesto inmobiliario en países donde actualmente no existe. Esta red contempla más iniciativas interconectadas de educación e investigación, que van desde el estudio de las ventajas y las desventajas de aplicar impuestos sobre el valor de la tierra, hasta el papel del impuesto predial para facilitar el acceso al suelo para los pobres urbanos, y el uso de nuevas herramientas operativas para promover las metas de tributación inmobiliaria en general.

La segregación social y espacial son inquietudes que compartimos con el Programa de Mercados de Suelo del Instituto. El paisaje de las ciudades latinoamericanas está frecuentemente marcado por la contradictoria coexistencia de áreas residenciales para la clase adinerada (que se asemejan a los sectores más elegantes de ciudades de cualquier país desarrollado), y aquellos asentamientos precarios o áreas marginales donde está confinada la mayor parte de la población urbana de bajos recursos. La formación de este divisivo patrón social del uso de la tierra puede atribuirse a factores variados, a saber: “expulsiones blancas” a través de mecanismos de mercado; políticas de exclusión más sutiles escondidas dentro de normativas legales y administrativas (p. ej., normas urbanísticas, reglamentos y requisitos de crédito); o los desalojos forzosos de los que han sido víctimas los pobres de prácticamente todas las ciudades latinoamericanas. Si bien mucho se ha escrito acerca de estos procesos, hasta ahora existen pocos estudios que documenten políticas que prevengan dichos problemas o que puedan revertir sus resultados. Esta red se plantea interrogantes tales como: ¿Cuáles son las políticas que se han usado o que pudieron haberse usado? ¿Qué tan eficaces son dichas políticas? ¿Qué deben saber los planificadores urbanos sobre el tema de segregación espacial? ¿por qué?

La cuarta red, también en el área de Mercados de Suelo, reconoce la necesidad de revisar los entornos normativos existentes en el programa de política del suelo latinoamericano, y de diseñar nuevas normas y reglamentos urbanísticos que puedan ser cumplidos de manera más realista y razonable por las familias de escasos recursos. Para ello se requiere conducir una evaluación adecuada de los efectos de reglamentos alternativos en el patrón de usos de la tierra, específicamente en el acceso a la tierra y a los servicios urbanos para el pobre urbano. En la mayoría de las grandes ciudades latinoamericanas se está observando una tendencia a construir nuevos proyectos inmobiliarios para la población adinerada en las tierras de la periferia, aquellas que tradicionalmente habían estado “reservadas para la clase baja”; esto ha provocado el encarecimiento del precio de dichas tierras, con la consecuente imposibilidad del pobre para pagarlas. Los administradores de las ciudades se enfrentan a la tarea de promover la densificación sostenible de barrios y la reutilización de áreas industriales abandonadas, al mismo tiempo que deben tratar de controlar la urbanización desenfrenada en las periferias urbanas.

Entre los puntos de estudio más importantes del Programa de Suelos como Propiedad Común, se encuentra el de seguridad de tenencia, regularización y mejoramiento urbano. Muchos países de todo el continente se están esforzando activamente por establecer programas de regularización legal y urbana; no obstante, la puesta en práctica de estas iniciativas se enfrenta frecuentemente con obstáculos políticos y prácticos. Las señales que dan estos programas esencialmente “curativos” ejercen influencias marcadas en las actividades ilegales, irregulares, informales o clandestinas de grupos que buscan el acceso y la ocupación de tierras urbanas. A menudo, la resolución de las disputas derivadas de los programas de regularización y del arbitraje de valores tasados adecuadamente para la adquisición pública de tierras para proyectos de interés social, se enfrenta con un mundo de obstáculos y cuellos de botella legales e institucionales en el ámbito nacional y local. Esta red se propone mejorar el entendimiento del impacto económico que tienen estos programas sobre los mercados de la tierra en general, en particular sobre los asentamientos beneficiados.

Diseminación de la información

Al mismo tiempo que continúa patrocinando programas de investigación y educativos en países latinoamericanos, el Instituto Lincoln está también trabajando para transmitir la información a una audiencia cada vez mayor. En el sitio Web del Instituto hay una sección dedicada a América Latina donde se publica la versión completa de muchos proyectos y artículos de investigación presentados en nuestros seminarios y conferencias, en su idioma original. En este sitio también están publicados una gran variedad de artículos del folleto Land Lines traducidos al español.

El Instituto está trabajando para sistematizar todos los materiales curriculares (artículos de investigación, presentaciones de seminarios, bibliografías, materiales audiovisuales de soporte y otros materiales educativos) y productos (libros, artículos, videos) para facilitar la organización e integración de nuestras actividades académicas presentes y futuras. Un buen número de publicaciones sobre América Latina están ahora disponibles o en etapa de planificación. Por ejemplo, recientemente se publicó una bibliografía sobre documentos que tratan sobre los mercados de suelos urbanos de México. Dicha bibliografía estará pronto disponible en nuestro sitio Web, y la misma debe servir como un modelo para otros miembros de nuestras redes latinoamericanas. Además, para fines de publicación, actualmente se está realizando la revisión de un grupo de artículos presentados como parte de programas educativos presentados en nuestra sede.

Esta edición de Land Lines contiene una lista de proyectos de investigación y desarrollo curricular y becas para la realización de tesis para el año académico actual, en donde se destacan proyectos afiliados con el Programa de Latinoamérica.

Martim Smolka es Senior Fellow y Director del Programa para América Latina y El Caribe del Instituto Lincoln. Laura Mullahy es Investigadora Asociada del Programa.

América Latina: Un territorio de gran diversidad

Un vistazo al continente latinoamericano revela una amplia variedad de situaciones referentes al estado de la tierra y de los mercados de suelo, tal como se indica debajo. El Instituto Lincoln ha trabajado con expertos y funcionarios públicos en cada uno de esos países para entender y discutir sus inquietudes relacionadas con la política del suelo.

La liberalización de los mercados de suelo y virtual eliminación de los bordes urbanos en Chile en 1979 (reintegrados sólo parcialmente en 1985) es un contraste marcado con los esfuerzos en Colombia para poner en práctica una fuerte herramienta de planificación de captura de plusvalías, conocida como “participación en plusvalías”. Esta legislación requiere a los gobiernos locales la designación de un 30 a 50 por ciento del incremento en el valor de la tierra resultante de cambios en la designación de la tierra de uso rural a urbano para dotar de infraestructura y viviendas sociales a las vecindades privadas de servicios públicos.

En los países latinoamericanos existen marcadas diferencias en el manejo de los asentamientos informales y las ocupaciones de tierras. En Argentina, por ejemplo, prácticamente no existen restricciones en el uso del suelo, y por tanto no hay un reconocimiento oficial de los asentamientos ilegales. Por su parte en Perú, desde 1961 los gobiernos de han reconocido las tierras ocupadas carentes de servicios situadas en la franja urbana (arenales), mientras que en Ecuador hay una ausencia total de normas y reglamentos para el manejo de las ocupaciones informales.

También son importantes las marcadas variaciones que hay en las políticas de suelo. Por ejemplo, es poco probable que el gobierno de Cuba renuncie al aproximadamente 70 por ciento de la tierra que está bajo su control, mientras que México aprobó en 1992 una ley nacional que permite la privatización de las tierras mantenidas bajo su sistema de ejido.

The idea of reducing or abolishing capital gains taxes to encourage private investment and general economic growth often comes up in state and national political campaigns. Advocates of cutting these taxes argue that if investors could keep their gains, they would invest them in new enterprises, thereby creating new jobs and strengthening local economies.

The public discussion usually focuses on stock market investments, but most capital gains are generated in the real estate sector where most of the economy’s assets are based. In 1994, the Federal Reserve Board estimated that real estate accounted for 67 percent of the nation’s total economic assets, including land worth about $4.4 trillion, homes worth $5.9 trillion, and other buildings (stores, factories, office buildings) worth an additional $3.1 trillion.

There are no comprehensive national statistics on capital gains from real estate or other assets. But the most recent survey by the Internal Revenue Service, conducted in 1985, estimated that land and buildings accounted for at least 58 and perhaps as much as 70 percent of the total of $208 billion in capital gains that year.

Federal statistics also report that the annual cost of doing business in real estate often exceeds the taxable income generated from land and buildings. It follows that many real estate investors receive a net benefit only when they eventually sell their properties for more than they originally cost. In effect, they are willing to turn over most current income to their mortgage bankers, in the hope of reaping a capital gain at the end of the process.

How Much Total Income Does Real Estate Generate?

There are no adequate national statistics on how much real estate is worth or the total income it generates. It is possible, however, to estimate real estate cash flow by starting from the income reported by the owners of real estate and adding to that some of the major expenses they paid before paying taxes. In 1993, the owners of real estate reported receiving about $209 billion in cash flow (earnings plus depreciation), though the amount depreciated was not taxable. In addition, the real estate industry paid about $515 billion in a combination of mortgage interest and property taxes. Thus real estate generated at least $724 billion in total earnings in 1993 (see chart 1).

The portion of this total paid out as interest to lenders since the end of World War II has grown much faster than any other part of the total. Between 1945 and 1993, the share of real estate earnings paid out as interest grew from about 10 percent to about 50 percent. This reflects the fact that about 70 percent of private sector lending is committed to real estate mortgages. This two-way street—with money flowing from real estate into financial institutions, then back out into real estate loans—is one reason why federal statistics lump real estate and finance together as the “finance, insurance, and real estate” sector, or FIRE for short.

Who Receives Income Generated by Real Estate?

Federal income and tax statistics attribute income from real estate to three categories of owners: persons, corporate real estate and noncorporate real estate. These categories are not self-explanatory. They are based on the motives and behavior of real estate owners, and do not refer simply to individual people, partnerships and companies.

“Persons” receive some income from real estate, though it is not their primary way of earning a living. They may rent out an apartment in a two-family house or a second home during the off-season, for example; or, they may own an apartment building or small commercial property.

“Corporate real estate” is a relatively small category, consisting only of land and buildings that are owned and used for non-real estate business purposes. For example, manufacturing companies typically own their own corporate headquarters and industrial plants. To capture tax advantages, however, these companies may spin off their facilities as “noncorporate” real estate, then lease them back.

The “noncorporate real estate” category is the least obvious. Owners in this category participate either full- or part-time in real estate as a business, mostly through partnerships. The category includes a wide range of people and organizations, from professional developers or property management companies to doctors who own nursing homes.

In 1993, the annual earnings for these three categories were $86 billion for persons, $3 billion for corporate owners, and $120 billion for noncorporate owners (see charts 2-4).

How Is Real Estate Income Taxed?

Since 1970, when the federal government began separating real estate statistics from those for the finance and insurance sectors, real estate has shown little taxable income. Corporate and noncorporate real estate businesses enjoy several tax advantages that help to account for this seeming anomaly of the economy’s major asset generating such low reported earnings:

(a) Like other business owners, they can deduct the cost of maintaining their property (painting, landscaping, replacing a leaky roof, etc.) as an expense before paying taxes on their business income. The purpose of this spending is to preserve the value of their real estate.

(b) They can also claim depreciation (“capital consumption allowances”) for their buildings (technically land does not depreciate). In most businesses, this allowance is a way to compensate for wear-and-tear on machinery, which must be replaced when it becomes obsolete. In practice, real estate owners have often been allowed to depreciate their buildings even though their market value is not declining at all.

(c) When owners sell their properties, any positive difference between the depreciated price received and the price originally paid is taxed as a capital gain. Capital gains are taxed at a lower rate than other income. Thus, over-depreciation turns out to be a way of minimizing tax liability.

The combination of (b) and (c) raises what might seem like an obvious question: how can real estate depreciate, losing value and eventually needing replacement, yet end up selling for more than its purchase price, generating capital gains? Of course a given piece of real estate does not always do both. Some real estate is indeed sold at a loss–for example, if property values in a whole neighborhood or city decline. But land, unlike machinery or even buildings, cannot wear out. Since World War II, urban land in particular and real estate holdings in general have gained in value far more often than they have declined.

How Should Real Estate Income Be Taxed?

In a rising market, federal tax policy allows real estate investors to earn several times more than they could simply by making smart buying and selling decisions. Writing off maintenance expenses and the supposedly declining value of the property before calculating taxable income means that the same property can produce a steady income for realtors and potential investors, but appear to lose money as far as the federal tax collector is concerned.

A tax-smart investor in a rising real estate market will own a piece of property only until it has been fully depreciated. It then has a “book value” of zero—like a piece of machinery so worn out or outdated that it cannot be sold at any price. The owner of such a machine has to junk it and buy a new one. The real estate investor, in contrast, can sell the “zero value” property to new owners, who can depreciate it all over again starting from the new, higher price they paid.

The upshot of these tax policies is that an industry with large total earnings reports little or no taxable income. Charts 3 and 4 show that real estate businesses have reported a negative taxable income frequently since the mid-1980s, despite the fact that real estate values in many places were rising. Since the real estate industry pays hardly any income taxes on its rental income, the major federal tax it does pay is the capital gains tax—for that is where the accumulated rental earnings are taken, when the building is sold for its depreciated value.

Does such favorable tax treatment for real estate benefit the economy as a whole? That question cannot be answered from tax statistics alone. The answer depends in part on whether all real estate projects that are taxed the same way are equally good at generating public benefits, such as jobs in construction and property maintenance, or other needed goods such as housing, shopping, and manufacturing facilities. If the answer to that question is “no,” then the public interest might be better served if funds now invested in real estate for tax advantages alone were invested in new technologies or public infrastructure.

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Michael Hudson is a research associate at the Jerome Levy Economics Institute at Bard College in New York. He is writing a book about how federal income and capital gains taxes on land and buildings affect national taxation and investment patterns, and he spoke on this topic at the Lincoln Institute in October 1995.

Recent court decisions have made economic development and tax policy front-page news. The recent U.S. Supreme Court decision in Kelo v. City of New London raised a public outcry when it allowed local governments dramatic latitude in acquiring private property for economic development purposes. This case had a fiscal aspect as well, for it illustrated how financial pressures can lead local governments to seek alternatives to direct investment for economic revitalization and redevelopment.

Economic development was also the focus of a major lower court decision on state tax policy. In Cuno v. DaimlerChrysler, the 6th Circuit Court of Appeals found that Ohio’s investment tax credit, intended to attract businesses from other states, violated the Commerce Clause of the U.S. Constitution (Hellerstein 2005). These and other, similar cases raise many questions about the connections between economic development and tax policy.

Is there a relationship between economic development and infrastructure spending?

Infrastructure, that vast network of capital-intensive services including roads, water provision, sewer services, and electrical supply, is critical to current and future economic activity. However, serious economic examination of the link between infrastructure spending and economic productivity only began in the late 1980s. Aschauer (1989, 194–197) argued that declining infrastructure spending resulted in less economic growth. More recently, Bougheas et al. (2000, 520) reported findings that “highlight the importance of infrastructure accumulation” for productivity gains.

Other researchers have pointed out that the most significant recent changes in infrastructure spending have occurred at the state and local levels, rather than the federal level. Gramlich (1994, 1178) argued that federal infrastructure spending has been fairly consistent over time, but state and local spending has decreased. Holtz-Eakin (1993) cautioned that while public expenditures on infrastructure may be important, they may not directly affect economic productivity. He argued that differing state and local needs may account for many infrastructure spending disparities, and that maintenance of existing infrastructure assets may be more important than new spending for capital acquisition. Boarnet (1997) considered efficient pricing for infrastructure use as important as its actual provision.

Nevertheless, the American Society for Civil Engineers (ASCE) is sufficiently concerned about the condition of infrastructure in the U.S. to assign it a grade of “D.” ASCE (2005) argues that the country needs to spend about $1.6 trillion over the next five years to improve the situation.

What is the relationship between infrastructure spending and local tax systems?

The mechanisms for funding infrastructure and its role in state and local spending are complex. Research in this area deals with such topics as fiscal illusion (i.e., when the complexity of the revenue system obscures the true cost of public goods and services) and specific capital financing strategies used to fund infrastructure. However, there has been little research on the impact of local tax structures on infrastructure spending.

Economists have long argued that the value of publicly provided goods and services, such as infrastructure and its maintenance, are reflected in the value of the property served by those goods. Accordingly, a tax that captures the value of these public goods and services may be an important revenue source for funding them. However, in the last 30 years, local governments have moved away from such a tax, the property tax, to other sources of revenue. In many communities, this shift has produced an increased reliance on state aid, local sales tax revenues, and user fees.

In analyzing infrastructure spending in Utah, it is clear that the local revenue structure affects per capita operating and maintenance spending and new capital acquisition expenditures. Preliminary analysis indicates that communities are more likely to increase per capita infrastructure spending when it is financed by property taxes, all other funding sources held constant. It also appears that as per capita sales tax revenue increases, per capita spending for infrastructure services declines.

How constrained are local revenue systems?

One reason that local government revenue structures affect spending on infrastructure is that the states impose various constraints on local revenue sources. Although the past ten years have seen no dramatic changes in the roles of the property tax, intergovernmental aid, or the sales tax in overall local government revenues, the ratio of total revenues to personal income has fallen about 7.5 percent. This real decline highlights the increasing pressure on local governments to identify new revenue sources.

Yet, local governments face serious constraints when they seek to change their revenue systems. States impose intergovernmental restrictions, such as limits on sales tax rates that localities can impose. Less tangible but equally important is political opposition to tax increases. The third factor is the set of tax and expenditure limitations that many states have enacted, ranging from Proposition 13 in California in 1978 to the more recent taxpayer bill of rights enacted in Colorado, which drastically limited increases in government spending.

These constraints have forced local governments to become more innovative in their revenue-raising methods. An entire cottage industry of financial advisors, bond attorneys, and other public and private sector innovators has emerged to help local governments find ways of loosening or circumventing these limitations. Some strategies may have increased economic efficiency, although they give rise to equity concerns (for example, the movement toward the increased use of fees and charges); others are nearly invisible to the taxpayer. In nearly all cases, local governments have been seeking to use land as a revenue-generating device—a trend that shows no sign of abating.

What are alternative ways to finance capital infrastructure?

Two types of debt traditionally have financed infrastructure projects: general obligation (GO) bonds, backed by the full faith and credit of the issuing locality; and revenue bonds, backed by income from the capital project. Both types of debt have significant restrictions on their use, such as voter approval requirements and caps on maximum indebtedness. These debt limitations, the difficulty in raising property taxes, and the fear of political opposition have increased the use of alternative capital finance methods based on land use.

One longstanding method, tax increment financing (TIF), utilizes the increases in property value to help finance redevelopment projects. Originally designed as a financial instrument to eliminate blight and provide affordable housing, this instrument has become increasingly popular in many states for a variety of projects. Forty-seven states and the District of Columbia now allow this technique.

Capturing the property tax increment attributable to government-sponsored redevelopment in order to service this debt makes economic sense if the new development would not have occurred without the formation of the tax district. Moreover, this debt does not have to be approved by voters, but rather by a group designated by the city government. Not even these two factors explain the extraordinary recent growth in the number and size of TIF districts, however, raising suspicion that this tool may be used more often to attract and subsidize economic growth than to eliminate blight. For example, in 2003–2004, California had 33 TIF redevelopment projects, each of which covered more than 6,000 acres, a surprisingly large area to be declared “blighted” in any one jurisdiction (see Figure 1).

Another popular tool in several states is the community facilities district (CFD), which usually funds new development. Landowners within a region form a CFD to issue debt to finance the infrastructure needed to develop raw land. District members’ votes are typically a function of the amount of property each landowner holds. The local government must approve CFDs, although they are not a formal part of the government and their debt issuance is not subject to approval by the general public.

A lien for CFD assessments is placed on each lot in the district, and the CFD tax liability appears on the property tax bill of each district member as a separate line item. Variations of this technique may utilize sales taxes, impact fees, and user charges. Many rapidly growing local governments encourage the formation of these districts to help finance their community’s growth. Nevertheless, CFDs can be very complex, and may fail if anticipated growth does not occur (see Figure 2).

TIFs, CFDs, and other such techniques present an ethical dilemma to local government. Sometimes they are not fully understood by the political decision makers who authorize their use, let alone by members of the general public who will bear the burden of paying this debt in the future. Yet they remain a popular tool to finance crucial infrastructure that is basic to improving the economic well-being of the community.

Could a land tax help finance infrastructure for economic development?

The land component of property value is another potential source of revenue to encourage economic development. Since the supply of land is fixed in the short run, an increase in a land tax will not affect the tax base. However, it will encourage more intensive use of the land and may slow urban sprawl. Unfortunately, the lack of empirical data makes it difficult to determine if this theory is accurate. One example in the U.S. is the City of Pittsburgh, which in 1979–1980 restructured the tax on land to be five times that on improvements. Building activity showed a dramatic increase, although other factors may have contributed to the change as well (Oates and Schwab 1997). Pittsburgh later returned to a single-rate property tax system.

Increased use of a land tax poses significant problems. In particular, accurately assessing land can be challenging, although statistical and econometric techniques may help address this in the future. A second concern is that more intensive use of land value taxation will lead to denser development, exacerbating many of the problems associated with congestion. These effects must be weighed against the positive benefits of reducing long-distance commuting. A third problem concerns equity. Owners whose property has a high land/improvement ratio will face an increased tax liability. This shift might be mitigated by adjustments in the tax rate, special exemptions or targeted tax credits.

A land tax has the important advantages of transparency and accountability. In particular, if land value increases because of government activities, there is strong justification for recovering at least some of those costs through a tax on the land component. We would even propose a name for this additional tax—a positive externality tax (PET). We recognize that, like any proposed increase in the property tax, such a shift would be politically controversial.

Conclusions

Our current research analyzes relationships among economic development, infrastructure, and the tax system. The fiscal problems of local jurisdictions are made more complex by the use of intricate methods of infrastructure financing, such as TIFs and CFDs, to fund economic development. The use of financing mechanisms based on a land tax may be one part of a potential response to this challenge.

Jeffrey Chapman is professor and director of the School of Public Affairs at Arizona State University in Tempe. He specializes in state and local finance and administration of financial resources, and has recently published in the area of local land use responses to fiscal stress.

Rex L. Facer II is assistant professor of public management at the Romney Institute of Public Management of the Marriott School of Management at Brigham Young University in Provo, Utah. He specializes in city management, public finance, public management strategy, and public policy analysis.

Nonprofit organizations operated for charitable purposes in the United States are exempt from most taxes, including investment income, sales, and property taxes. They benefit from the tax deductions that donors receive for charitable contributions, and some nonprofits also benefit from financing raised through tax-exempt bonds. Data allows informed estimates of the size of these tax benefits for most types of charities. However, comprehensive data on religious organizations and governments, both of which are also largely exempt from taxes, are difficult to obtain.

A review of these tax benefits provides a useful perspective on efforts by state and local governments to collect PILOTs (payments in lieu of taxes), which generally focus on nonprofits other than religious organizations (see page 23).

Tax benefits for nonprofits, such as educational institutions, health and human service organizations, foundations, and the arts, were worth about $140 billion in FY2009. About half ($72 billion) was from forgone taxes on investment income, about a third ($46 billion) was the tax benefit for charitable contributions, and about a tenth ($15 billion) was from property tax exemptions. Sales tax exemptions ($3 billion) and benefits from tax-exempt bonds ($5 billion) round out the total.

In 2009, nonprofit property tax exemptions (excluding those for religious organizations) were slightly less than 4 percent of the $400 billion total. Of course, the property tax exemption share varies widely across communities.

The distribution of five types of tax benefits are shown in figure 1 for six categories of nonreligious charitable nonprofits. They are listed in the order of their overall tax benefit, with educational institutions receiving the most benefits and arts organizations the least. The exemption for the tax on investment income has the same ranking as the overall tax benefit, but rankings of the other tax benefits vary widely.

The property tax exemption accrues to those sectors that use property and buildings most extensively, with health having the highest benefit followed by education. Foundations, which figure significantly in income and charitable contribution tax benefits, receive only modest property tax benefits. Sales tax exemptions, the smallest tax benefit in the aggregate, accrue mainly to the health sector.

This summary of the distribution of property taxes by charitable sector makes it clear why local governments have focused their efforts to collect property tax PILOTs on hospitals and universities—that’s where the property tax money is—but most tax benefits for nonprofits come from other sources.

Sources: Totals from An Overview of the Nonprofit and Charitable Sector. 2009. Congressional Research Service (http://www.fas.org/sgp/crs/misc/R40919.pdf). Sector allocations based on data from National Center for Charitable Statistics (http://nccs.urban.org) and J. Cordes, M. Gantz, and T. Pollak. 2002. What is the property-tax exemption worth? In Property-tax exemption for charities, ed. E. Brody. Urban Institute Press.

Infrastructure (comprising energy, telecommunications, transportation, water supply, and sanitation) plays an important role in urban land development, and it influences city and country productivity. Data on the amount of infrastructure stocks at the national (but, alas, not the metropolitan) level are available for many developing and high-income countries and support several results summarized here.

The amount of infrastructure stocks per capita across countries is strongly related to per capita income levels—when country incomes double, infrastructure stocks nearly double as well. However, country infrastructure stocks have essentially no association with a country’s level of urbanization once country income is taken into account. This seems surprising because cities have large amounts of infrastructure. But they also have dense populations that use the infrastructure intensively, so per capita urban infrastructure stocks are similar to national levels.

The composition of infrastructure stocks also varies systematically with per capita income. Roads have the largest share of infrastructure stocks in the lowest income countries, with water systems second and electric power systems a close third. As country incomes increase, the infrastructure related to electric power systems increases more rapidly than income levels. Infrastructure for water and sewer systems increases less rapidly, and for roads the change is in proportion to income. As a result, in high-income countries electric power systems are the largest component of infrastructure, followed by roads, whereas water, sanitation, and telephone systems comprise only a modest share of their infrastructure.

Based on recent rates of economic growth, and using the existing relations between infrastructure and per capita income, developing countries are likely to need to spend about 5 percent of their GDP on infrastructure (3 percent for expansion and 2 percent for maintenance)—currently about $750 billion annually—to maintain existing ratios between infrastructure and GDP. For high-income countries, total spending would be lower, at 1.7 percent of GDP (about evenly divided between investment and maintenance)—currently about $700 billion annually. Countries growing faster than average need to invest a higher share of their GDP so that infrastructure stocks can keep up with economic growth.

In some countries, improving the efficiency of service production from existing infrastructure is an alternative to new investment. For example, average electricity losses across countries range as high as 25 percent, and leakage and unbilled water can exceed 30 percent. Reducing such high losses can forestall the need for additional capacity. Somewhat surprisingly, performance within countries across sectors varies greatly—efficient performance by a country in one infrastructure sector is uncorrelated with performance in other sectors.

What sources will provide these investment funds, particularly for developing countries? Foreign assistance and development bank financing of infrastructure in developing countries currently total about $40 billion annually, and that figure has more than tripled since 1990 in current dollars. Private investment in infrastructure in developing countries has recently reached $160 billion annually and has grown eight-fold since 1990, also in current dollars. Foreign assistance is directed mainly at energy, transport, and water and sanitation systems, with virtually no funding for telecommunications. In contrast, more than half of private funding goes to telecommunications (particularly mobile telephony), followed by energy. Telecommunications and energy draw more private investment in developing countries because their tariff revenues cover a large share of operating costs, whereas tariff revenues and user fees cover a much smaller share of costs for transport and water and sanitation. Private investment in infrastructure was concentrated in Latin America and East Asia in the 1990s but has spread more evenly across global regions in the 2000s.

Despite the growth in international funding, large and growing metropolitan areas in developing countries still need to raise significant sums to finance infrastructure investments. This will involve raising tariffs charged to users, increasing taxes (particularly property taxes) on properties whose value is enhanced by infrastructure investments, and establishing municipal bond markets such as the one being developed in South Africa.

Imagine for a moment that you are a political leader—a prime minister, president, or governor—and you awake to the news that natural disaster has struck. Citizens died, buildings collapsed, infrastructure is hobbled, and local leaders desperately need additional resources and support.

You respond immediately, sending personnel and equipment to the disaster zone and pledging additional assistance to local leaders. Your country, like many around the world, has institutionalized a scalable, tiered response system with regional, state, and national levels of government engaging as disaster-related demands exceed local capacities to respond. Yet within days, even hours—before all the casualties are treated and citizens are accounted for, and before the streets have been cleared of rubble and basic services have been restored—other leaders and the media are demanding answers to questions you haven’t had time to consider: How much money will be pledged to the rebuilding? What standards will guide it? Will all landowners be permitted to rebuild? Who will lead the process? Is a new institution or governance structure needed to cut through bureaucratic red tape and expedite the rebuilding?

This article summarizes ongoing research into the roles of various government levels in successful disaster recovery and rebuilding (table 1). It represents the synthesis of two decades of recovery research and planning practice following some of the largest disasters of our time in the United States, Japan, China, Taiwan, Indonesia, India, New Zealand, Australia, Chile, and elsewhere. Its purpose is to find common lessons in these disparate environments and help facilitate recovery for communities struck by disasters yet to come.

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Table 1: Recovery Management Experiences Around the World

Australia

Victoria Bushfire Recovery and Reconstruction Authority

• Formed after February 2009 bushfires; disbanded in June 2011 and transferred operations to government departments, local councils, and nonprofit groups.
• State-level department formed through a national-state agreement.
• Had broad authority and responsibility for leading and coordinating recovery and reconstruction including state- and community-level planning and actual rebuilding.

Queensland Reconstruction Authority

• Established in February 2011 following 2010–2011 flooding in Queensland; still exists.
• State-level statutory authority established by the state parliament.
• Has broad authorities to decide recovery priorities, work closely with communities, collect information about property and infrastructure, share data with all government levels, coordinate and distribute financial assistance, realize the board’s strategic priorities, and facilitate flood mitigation.

Chile

Ministry of Housing and Urban Development (MINVU- Ministerio de Vivienda y Urbanismo)

• Formed after Chile’s 2010 earthquake and tsunami.
• Main national agency in charge of reconstruction and development of national reconstruction plan.
• Interministerial Committee established by Chile’s president; includes representatives of MINVU and all other national ministries involved in recovery and reconstruction; coordinates national budget and finance, integrates the work of ministries involved in reconstruction, and coordinates and monitors the implementation of complex projects over time.

China

General Headquarters for Earthquake Relief

• Formed following the 2008 Wenchuan Earthquake.
• Established within China’s State Council (Chinese cabinet), with the premier as nominal director.

India

Gujarat State Disaster Management Authority (GSDMA)

• Formed after 2001 earthquake; still exists.
• Formed administratively as state implementing agency; subsequently formalized through legislation in 2003.
• Cabinet-level agency with chief minister as chair.
• Has broad powers to manage public recovery funds (provided by government of India, Gujarat, and international donors), set policy, issue recovery guidelines, and to plan, coordinate, and monitor recovery.

Abhiyan

• Established after 2001 Gujarat earthquake; still exists.
• A network of 30 NGOs facilitates among NGOs, communities, and government.
• Formally endorsed and supported by government.

Project Management Unit

• Created after 1993 earthquake in Maharashtra state.
• Implemented policies of a cabinet-level recovery policy subcommittee.
• Focused on implementing community reconstruction projects, with authority to supervise other state agencies and hire consultants.

Indonesia

Rehabilitation and Reconstruction Agency—BRR

• Formed after 2004 Indian Ocean tsunami, with a 4-year life.
• Operated under the authority of the president.
• Had considerable latitude to coordinate, monitor, and implement recovery; took over housing reconstruction when other agencies failed to deliver.
• Built capacity of Aceh government following 30 years of armed conflict.

Coordination Team for Rehabilitation and Reconstruction—TTN

• Established by presidential decree after 2006 earthquake in provinces of Yogyakarta and Central Java.
• Coordination team of national and provincial representatives.
• Improved coordination and communication between central and local governments.

Japan

National Reconstruction Agency

• Formed after the March 11, 2011 earthquake and tsunami; still exists.
• National agency directly responsible to prime minister.
• Sets guidelines for local planning, approves local recovery plans, and coordinates work of national ministries as they implement reconstruction.

New Zealand

Canterbury Earthquake Recovery Authority

• Formed following 2011 earthquake in Christchurch; expires April 2016.
• National agency reporting to special cabinet-level minister appointed for Canterbury Earthquake Recovery.
• Broad authority to lead recovery policy and planning and to manage critical recovery and rebuilding functions for national and local governments.

Taiwan

921 Post-Earthquake Recovery Commission

• Formed after 1999 earthquake in central Taiwan.
• Temporary national organization formalized by presidential decree; dissolved in 2006.
• Central government agency led by three ministers of state; included representatives from various national departments.
• Responsible for all post-earthquake recovery activities.

Morakot Post-Disaster Reconstruction Council

• Formed after 2009 typhoon in southern Taiwan.
• Central government agency modeled after the 9-21 Post-Earthquake Recovery Commission.
• Responsible for all relief activities and reconstruction.

United States

Lower Manhattan Development Corporation

• Formed after the September 11, 2001, terrorist attacks; still in operation.
• Joint state-city corporation governed by 16-member board of directors (half appointed by New York governor and half by New York City mayor).
• Lead planning agency for reconstruction of Lower Manhattan; responsible for distribution of federal rebuilding funds.

Louisiana Recovery Authority

• Formed after 2005 Hurricane Katrina; expanded focus following 2005 Hurricane Rita; disbanded in 2010.
• State agency set planning policy for recovery, made recovery policy recommendations to the governor and state legislature, and provided oversight of state agency recovery activities.

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Recovery Management Around the World

Governments tasked with post-disaster reconstruction face an extraordinary set of management challenges. The first is the compression of activities in time, focused in space, as cities built over the course of decades if not centuries are destroyed or damaged suddenly and must be rebuilt in a fraction of the time it took to construct them. From this tension develops a second challenge: a keen tension between speed and deliberation, as the various recovery actors in stricken communities move with urgency while aiming to make thoughtful and deliberate decisions, to ensure optimal long-term recovery. From both these phenomena a third challenge arises: the need for immediate access to a deep wealth of money and information—the two currencies of the post-disaster recovery environment.

To meet these demands, governments in every country after every large disaster create new relief agencies or significantly rearrange existing organizations. The most common reason for these post-disaster governance transformations is lack of capacity. Governments still need to attend to their normal daily affairs while they coordinate the reconstruction or reinvention of impacted communities, so they appoint an entity that can focus daily attention on rebuilding while coordinating the recovery-related activities of multiple government agencies. Commonly designed to serve a variety of purposes and governmental settings, these recovery agencies provide a range of substantive functions as they rebuild infrastructure, housing, and economic activity. They differ depending on the type and scale of coordination they provide; the scope of their authority, especially regarding the flow of money and information; and the level of government they serve—at either the national, state, or intergovernmental level.

National governments handle very large disasters at the top political tier, mobilizing financial resources from national reserves or international aid and providing capacity support to lower levels of government in the disaster-stricken locality. When large disasters transcend state or provincial boundaries, national governments also assume active roles in developing recovery policies, and they create recovery organizations to assist them. Examples include Japan’s National Reconstruction Agency, established after the 2011 earthquake and tsunami; New Zealand’s Canterbury Earthquake Recovery Authority, created after the 2010 and 2011 earthquake sequence in Christchurch; and China’s General Headquarters for Earthquake Relief following the 2008 disaster in Wenchuan. Each of these international bodies hewed to the national administrative leadership, derived authority from the top rung of government, and articulated policies approved by the reigning administration.

Similarly, state-level recovery agencies are usually created in direct response to disasters that affect a region or other subnational jurisdiction. The authorities and legalities of these entities are more limited by their authorizing body’s secondary, subnational position in government. Examples include the Gujarat State’s Disaster Management Authority (GSDMA), created after the 2001 earthquake in western India; Louisiana’s Recovery Authority, founded after Hurricane Katrina in 2005; Victoria State’s Bushfire Reconstruction and Recovery Authority (VBRRA), established after the 2009 Australian bushfires; and Queensland State’s Reconstruction Authority, founded after the summer 2010–2011 floods in Australia.

A third class of organizations are designed to operate between levels of government, such as the Lower Manhattan Development Corporation, created as a state and city partnership for recovery planning and funding following the September 11, 2001, terrorist attacks in New York City. Another example, the Rehabilitation and Reconstruction Agency (BRR) created in Aceh, Indonesia, following the 2004 tsunami, consisted of three independent agencies whose membership came from a wide range of local and national stakeholders. Likewise, the Indonesian government’s Coordination Team for Rehabilitation and Reconstruction (TTN), following the 2006 earthquake in Yogyakarta and Central Java, was designed to provide a bridge between national agencies and local agencies, and it also monitored and investigated local implementation issues.

In some cases, governments choose to modify or adapt existing institutions and procedures to help manage recovery. For example, Chile established a national interministerial task force after the 2010 earthquake and tsunami, but the existing Ministry of Housing and Urban Development took on expanded roles and responsibilities and managed the national planning and implementation efforts.

The Mastery of Money, Information, Collaboration, and Time

Considering these factors, common to all post-disaster recovery settings, our research demonstrates that the key to governing large-scale crises effectively is the mastery of money, information, collaboration, and time. For this article, we offer here some best practice examples and lessons learned from our various country-organization studies.

1. Managing Money: Sourcing and distributing recovery funding efficiently, effectively, and equitably.

When large amounts of public funds are involved in a disaster cleanup, the true power over the recovery resides with the level of government that controls the flow of money and how it is acquired, allocated, disbursed, and audited. Sometimes, the recovery organization assumes all or some of these powers, and sometimes all funding authority continues to reside where it did before the disaster, in the same legislative and administrative branches. Important functions in the post-disaster environment include setting policies and priorities for allocating large sums of recovery funding and establishing accounting systems that allow for timely disbursal of critical financing while also providing transparency and minimizing corruption.

Some organizations, such as India’s state-level GSDMA, are established specifically to collect all the recovery funds in one place and then allocate and disburse them. Some, such as one of the three legs of Indonesia’s intergovernmental BRR, are created to independently audit and monitor the expenditures of recovery implementation organizations. In contrast, the state-level Louisiana Recovery Authority recommended funding priorities to the state and provided oversight as needed, but it had no direct control over recovery funds. Japan’s National Reconstruction Agency received national funding and allocates that money to the relevant national ministries and local governments.

2. Increasing Information Flows: Effectively gathering, integrating, and disseminating information to enhance decision making and actions by all recovery actors.

A critical demand is to accelerate and broaden the flows of information among recovery actors about the dynamics of reconstruction actions and emergent opportunities. This challenge includes the planning and public engagement processes that provide information to citizens and institutions involved in the recovery, facilitate communication and innovations among recovery actors, and convey citizen concerns to government agencies and NGOs in a timely manner. It also includes providing information between both governmental and nongovernmental organizations and establishing forums to facilitate coordination.

In Victoria, Australia, after the 2009 bushfires, national and state leaders worked with affected communities to form more than 30 local recovery committees, which were then charged with developing a community recovery plan that identified local priorities and projects. These committees were used by state and national governments as focal points for local funding distribution and by local communities to raise additional funds and establish local policy guidance for rebuilding. In Yogyakarta, Java, after the 2006 earthquake, TTN kept a variety of local and national agencies mutually informed of each other’s activities—which, in turn, helped to provide early alerts to officials regarding potential problems.

A critical function appropriately provided by a government-supported agency is the acquisition, synthesis, and distribution of basic information on damage, reconstruction activities, population, social and economic issues, and various recovery indicators. Such agencies issue regular progress reports and monitor recovery indicators, as both Japan’s National Reconstruction Agency and New Zealand’s Canterbury Earthquake Recovery Authority have done, using a variety of communication mechanisms, including website postings, press releases, newsletters, and forums. Frequent information from credible sources can help to ensure that all actors understand the current recovery environment, and it can also help reduce the spread of rumors and misinformation.

3. Supporting Collaboration: Building sustainable capacity and capability for long-term recovery through genuine collaboration and coordination, both horizontally among local groups and vertically among different levels of government.

Vertically organized, hierarchical agencies—with clear organizational charts and streamlined channels of communication—are usually not well suited to manage disaster recovery, because the lack of “connecting flow” across vertical hierarchies limits collaboration as well as the flow of new and updated information among organizations. U.S. national agencies involved in recovery, for example, are more adept at administering individual programs than they are at solving complex problems that cut across governmental institutional boundaries.

By contrast, horizontally organized agencies can promote interagency coordination and information sharing, allowing individual groups to adapt to new contexts and information while remaining responsible to their parent organization. If multiple states or local jurisdictions are involved, cooperation among multiple jurisdictions is essential. Technical assistance and capacity building for the key recovery actors is also important for building local capabilities to sustain long-term recovery.

After Hurricane Katrina in 2005, Governor Kathleen Blanco appointed the members of the Louisiana Recovery Authority, so it was technically an extension of the state-level administration. But the legislature eventually formalized it. As an intentionally bipartisan body, it operated independently as it interacted with both U.S. national officials and local governments, made policy recommendations, and provided oversight of state agency recovery activities. Even though its power was limited to making policy recommendations, it was able to exert considerable influence at multiple levels in a very politically contentious atmosphere. It also collaborated with U.S. national agencies to set standards for long-term community recovery planning and helped match technical assistance and provide other planning resources at regional, local, and neighborhood scales.

Because they carried the authority of state leaders, India’s GSMDA and Queensland Australia’s reconstruction authority were able to successfully coordinate the activities of other state agencies. Similarly, Chile’s MINVU and Taiwan’s national recovery agencies have had the centralized authority to coordinate activities of other national agencies. Abhiyan, an NGO officially endorsed by the Gujarat government in India but without any defined governmental authority, also played a crucial role in coordinating the work of hundreds of NGOs and in establishing a network of local subcenters to provide information and technical support.

The hierarchical recovery process after the 2008 Wenchuan Earthquake in China succeeded in quickly reconstructing buildings, but it left little room for local innovation, as it lacked genuine local capacity building and involvement in decision making. Because local conditions were not always considered, economic recovery appears to be uneven.

Likewise, in many tsunami-affected communities in the Tohoku region of Japan, recovery has stalled because the hierarchical system established under the national government and the National Recovery Agency leaves insufficient room for local innovation. Furthermore, within the complex and powerful Japanese ministry system, the National Reconstruction Agency lacks power to compel actions by other ministries.

Increasingly, research shows that if residents are partners in reconstruction planning, they are tolerant of delays, and they are more satisfied with the results. Still, even the best examples of decentralized processes involve an agency at the top establishing the framework and rules. This trend strongly suggests that governments should resist the urge to manage the details of reconstruction and act less as managers and more as coordinators and facilitators of the process.

4. Balancing Time Constraints: Effectively meeting the immediate and pressing local needs of recovery while also successfully capitalizing on opportunities for longterm betterment.

Governments face a balancing act as they confront the tensions between speed and deliberation, and between restoration and betterment. The most fundamental way to address these challenges is to increase information flows, as described above. But recovery agencies have found several other specific ways to attain both speed and improvement.

To hasten reconstruction, there are often opportunities to streamline normal bureaucratic processes of decision making, especially regarding construction permits, without compromising quality. Because such processes often involve multiple agencies, a recovery agency can be helpful to the extent that it can facilitate or compel line agencies to cooperate more effectively.

New Zealand’s parliament conferred upon the Canterbury Earthquake Recovery Authority and its minister a wide range of unilateral powers that would enable the timely and coordinated recovery of greater Christchurch. Parliament continued the emergency authorities granted under previous legislation and extended the expiration date of those authorities where appropriate; permitted the minister to acquire land compulsorily; and allowed the suspension of any part or all of the national land use, local government, and transport management, plans or policies developed under various acts. It directed CERA to prepare a draft recovery strategy within nine months of its authorization. Similarly, it issued the Christchurch city council a nine-month deadline to draft a recovery plan for the city’s damaged central business district.

Most recovery agencies include disaster risk reduction in their reconstruction policies. A common recovery slogan is “build back better.” The slogan of the Louisiana Recovery Authority was “Safer, Stronger, Smarter.” The easiest form of post-disaster betterment is to adopt disaster-resistant building standards. The incorporation of new structural standards need not slow down the rebuilding process, but land use improvements such as relocating neighborhoods or entire communities can require considerable time for planning and land acquisition. These projects involve difficult tradeoffs between speed, design quality, and public involvement. New Zealand is undertaking a major buyout of neighborhoods that sustained heavy damage in the 2010–2011 earthquakes and remain vulnerable to damage from future tremors. Japan is encouraging relocation of coastal communities from tsunami hazard areas, and some of these will likely take up to ten years to complete.

One way to manage these goals simultaneously is to support participatory planning processes to create long-term betterment while also trying to meet immediate needs. In many cases, professional planners worked with neighborhoods—in Japan, Chile, New Orleans, and Bhuj, India, for example—but each project also involved difficult compromises in order to meet time constraints. Victoria and Queensland’s creation of local recovery planning committees, however, are great examples of state and national support systems that helped build local capacity to carry forward the rebuilding processes over time.

Next Steps in our Research

Governments know that their task is to manage information and money flows among many actors in a compressed time. Up to this point, we have identified many examples of how to accomplish this. But, even better, we would like to be able to create menus of organizational and process choices, based on combinations of disaster magnitude and scope and economic, political, environmental, and governmental contexts.

We also have several remaining questions: Why do many of the same institutional problems continue to appear from one disaster to the next, and is there a way to avoid repeating some of them? What are the effective outcomes—negative and positive—of these institutional arrangements that may inform future leaders facing similar reconstruction challenges? What specific kinds of technical assistance and capacity building should international donors and national governments focus on providing for local governmental and non-governmental organizations, so they can do their jobs better during the recovery process? In large-scale disasters, how do the tiered goals of a recovery (i.e. rebuilding households, neighborhoods, cities, regions, nations) relate to each other, in terms of consistency, efficiency, and effectiveness? And what happens when these disaster-related organizations cease to exist? Is the local capacity and capability in place for long-term community sustainability? By studying varied national and organizational experiences, we can better understand how the time compression phenomenon of post-disaster recovery affects other theoretical constructs guiding public policy and city management; planning, land development and growth management; and fiscal and capital management.

About the Authors

Co-authors of Clear As Mud: Planning for the Rebuilding of New Orleans (2010, APA Planners Press), Laurie A. Johnson and Robert B. Olshansky are currently collaborating on a Lincoln Institute book and policy focus report on governing post-disaster recovery. For the past two decades, they have been researching and practicing post-disaster recovery planning following urban disasters around the world. Johnson is an urban planner based in San Francisco and specializing in disaster recovery and catastrophe risk management. Olshansky is professor of urban and regional planning at the University of Illinois at Urbana-Champaign. Contact: laurie@lauriejohnsonconsulting.com or robo@illinois.edu

References

Alesch, Daniel J., Lucy A. Arendt, and James N. Holly. 2009. Managing for Long-term Community Recovery in the Aftermath of Disaster. Fairfax, VA: Public Entity Risk Institute.

Chandrasekhar, Divya and Robert B. Olshansky. 2007. Managing Development After Catastrophic Disaster: A Study of Organizations That Coordinated Post-Disaster Recovery in Aceh and Louisiana. Milwaukee, Wisconsin.

Olshansky, Robert B., Lewis D. Hopkins, and Laurie A. Johnson. 2012. Disaster and recovery: Processes compressed in time. Natural Hazards Reviews. 13(3):173–178.

Olshansky, Robert B., Laurie A. Johnson, and Kenneth C. Topping. 2006. Rebuilding communities following disaster: Lessons from Kobe and Los Angeles. Built Environment. 32(4): 354–374.

Smith, G., and Dennis Wenger. 2007. Sustainable disaster recovery: Operationalizing an existing agenda. In Handbook of disaster research (Handbooks of Sociology and Social Research). ed. Havidan Rodriguez, 234–257. New York, NY: Springer.

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.

While it is known as a region of great diversity, Latin America is also characterized by common legacies that directly or indirectly affect land issues. These include a heritage of patrimonialism based on a land ownership structure in which political influences determine the spatial allocation of public investments and services; strong central administrations with weak fiscal accountability at the local level; and a legal tradition with elitist codes and rigid, even anachronistic, land-related legislation. Urban planning, with its physical design bias, has tended to focus on the “legal” city while overlooking the “real” city. At a broader level, investments in the fast-growing built environment (i.e., urbanization) are relatively autonomous from the industrialization process. In a context of weak capital markets and high, often chronic, inflation land frequently takes on the role of a capitalization mechanism or a surrogate for the lack of social security.

Regional Trends

One of the main features of the functioning of urban land markets in Latin America is the magnitude and persistence of illegal, irregular, informal or clandestine activities in accessing and occupying land, largely resulting from the insufficient supply of serviced land at affordable prices. This scarcity of serviced land plays an important role in the region’s social culture, since access to land is often a tacit condition for citizenship and social mobility.

Perhaps most important are the multifaceted trends that are sweeping the continent and are opening new opportunities for urban land policy. First is the widespread re-democratization of many countries after long periods of authoritarian or military regimes, which has had numerous implications on land policy. There is a generalized increase in awareness of public officials’ liability and accountability in urban land management as in other aspects of public administration, as well as the emergence and public recognition of new social agents such as non-governmental organizations (NGOs). New forms of community participation and civil action are the expressions of a heightened consciousness of the need to legitimize alternatives to land access by the urban poor, including innovative modes of collective ownership and attention to gender issues in the regularization of illegally occupied land.

A second and related trend reflects the need for institutional and constitutional reforms accompanied by the redefinition of state roles. This process has had a number of manifestations, including:

• fiscal decentralization, resulting in pressure for new revenue sources at the local level and opportunities to improve on property tax collection;
• political and administrative decentralization, which has increased the power and autonomy of local and intermediate level authorities. This process has created many new responsibilities associated with land market regulation for the provision of services and social housing;
• new instruments for regulatory and fiscal intervention, including the implementation of tools associated with the mobilization of land value increments for the community’s benefit;
• privatization or removal of statutory restrictions on the availability and release to the market of previously state-owned land, thus increasing opportunities to use or reuse existing vacant land;
• new modes of service provision caused in part by the widespread privatization of utilities, with direct implications on the process of land use and redefinition of patterns of spatial segregation;
• the emergence of public/private partnerships in urban development and redevelopment, resulting in a variety of new kinds of urban sub-centers.

A third major development of recent decades has been macro-economic restructuring, which has resulted in the stabilization of the region’s historic and often chronic problems with inflation and has influenced the evolution of land prices. Latin America also has experienced broader trends toward globalization, the opening of national economies, and technological changes. Among other consequences, these trends have led to greater competition among cities for private investments, ranging from the use of strategic planning as a city marketing device to giving up local incentives through fiscal wars. This has greatly affected the economic base of the cities and the nature and scale of urban poverty. Also affected are the types of urban interventions (ranging from large-scale rehabilitation projects of abandoned or depressed areas, to new mixed-use developments in urban fringe areas) that are redefining urban form, city dynamics, and patterns of spatial and social segregation.

Building a Presence

Since 1993, the Lincoln Institute has made a concerted effort to participate in the lively debate over land and taxation policy in Latin America. We adopted a multi-country approach to work wherever we can find issues closely related to our own agenda, pursue opportunities to make a difference for local capacity building, or develop initiatives that could be disseminated and potentially replicated in other countries. This strategy allows us to be present in places where significant policy changes are imminent or where important land-related issues are under discussion.

Experience has shown that the Institute is well positioned to play three important roles that serve our educational mandate: to promote cross-fertilization of ideas, to act as a convenor and facilitator of debates among different stakeholders, and to offer intellectual leadership. As in all Lincoln programs, we place great value on the dissemination of valuable information based largely on case studies that can be used to foster intraregional sharing of knowledge and problem solving. This role of encouraging the cross-fertilization of ideas through horizontal dialogue is particularly important given the centralist nature of public administration in Latin America and the predominance of vertical channels of communication.

The Lincoln Institute’s international credibility and recognition as a respected non-partisan institution concerned with land policy and property taxation issues places us in a unique position to facilitate complex, politically sensitive discussions among different stakeholder groups, particularly public officials at different administrative levels and representatives of the business sector, NGOs, and the political community.

Equally important is the Institute’s role in offering intellectual leadership by helping to bridge the gap between state-of-the-art knowledge and the more practical, immediate needs of public officials dealing directly with the implementation and administration of land use and taxation policies. This role often involves “translating” academic ideas and arguments into the language of practitioners through both printed materials and face-to-face courses and seminars. By supporting research and curriculum development projects, we also draw attention to critical and sometimes unperceived dimensions of complex topics, such as the economic consequences of informality in the access to land. As a resource provider to our international partners, we help identify experts and provide useful case studies and other materials from different countries and contexts.

Networks and Program Focus Areas

Beginning in 1995, the Institute’s Latin American Program developed a core network of representatives from twelve countries with whom we worked closely on both curriculum development and educational programs. Our strategy has evolved as we have gained a more profound understanding of the issues that are pertinent to the Institute’s international agenda. Today we work with several networks of public officials, practitioners and scholars that are organized thematically rather than geographically. These five transnational networks, whose topics are often overlapping and thus mutually reinforcing, are linked to the Institute’s three main program areas.

In the Program on Taxation of Land and Buildings, value capture is the primary topic for which the Institute has definite comparative advantages in the region. We focus on technical and management conditions for the implementation of instruments through which land value increments have been or may be mobilized directly or indirectly (through taxes, fees, exactions and other regulatory means) to promote urban development and to benefit the community at large.

In addition to the use of value capture mechanisms to control urban growth and territorial expansion and to reduce the perverse effects of land speculation, we are interested in their applicability to circumstances characterized by the large-scale and persistent informality in land markets so typical in Latin America. These include situations where land tenure relationships are poorly defined, where land occupations are mostly irregular or illegal, and where significant land value increments are self-generated by the community, rather than by state action. This network explores whether land value increments (resulting directly or indirectly from public interventions) can be mobilized to mitigate urban poverty in general and improve the access to serviced land by low-income families in particular.

Our second network looks at property taxation, assessment and collection. International comparisons have shown that the collection of property taxes in Latin America is generally considered inadequate to meet the needs of rapid urbanization. Strong vertical and horizontal inequities, inefficient collection systems, poor assessment practices, strong influence of historical values, and fragile legal frameworks are among the drawbacks to property tax systems in many areas. Nevertheless, many national efforts, sometimes supported by multilateral agencies, are promoting reforms and improvements in property tax systems. These improvements include the innovative use of self-declaratory systems and sophisticated information systems, creative shifts to land value taxes, and opportunities to reinstate the property tax in countries where it does not currently operate. This network contemplates more interconnected research and educational initiatives, ranging from studies of the pros and cons of shifting to land value taxes, to the role of the property tax in facilitating access to land by the urban poor, and to the use of new operational tools to improve local property taxation goals in general.

Spatial and social segregation are concerns we share with the Institute’s Land Markets Program. The landscape of Latin American cities is often stigmatized by the social distance between neighborhoods that emulate the most elegant sectors of cities in any developed country and those settlements with precarious physical conditions to which the majority of the poor urban population is confined. The formation of this divisive social pattern of land use may be attributed to a number of factors: “white expulsions” through market mechanisms; more subtle exclusionary policies embedded in legal and administrative standards (i.e., urbanistic norms, regulations and credit requirements); or the direct land evictions and removals by force that have occurred in almost all Latin American cities. Much has been written about these processes, yet little has been documented about the policies to prevent them or reverse their outcomes. This network addresses questions such as: What are the policies that have been or could be used, and how effective have they been? What should urban planners know about spatial segregation, and why?

The fourth network, also in the Land Markets area, recognizes the need to review existing regulatory environments in the Latin American land policy agenda and to design new urbanistic norms and regulations that can be complied with more realistically by low-income sectors. This means adequately assessing the effects of alternative regulations on the pattern of land uses, specifically on the access to land and urban services by the urban poor. In most large cities in the region, new high-income developments are increasingly out-competing the less attractive and accessible land traditionally affordable to the urban poor. City managers struggle with the promotion of sustainable inner-city densification and the reutilization of abandoned industrial areas, while also trying to control sprawling land use in urban peripheries.

As part of the Institute’s Land as Common Property Program, security of tenure, regularization and urban upgrading programs are important themes. Many countries throughout the region are making major efforts to set legal and urban regularization programs. However, the implementation of these initiatives is often met by political and practical obstacles. The signals being given by these essentially “curative” programs have significant impacts on the illegal, irregular, informal or clandestine activities of groups seeking to access and occupy urban land. The resolution of disputes around regularization programs and arbitration of adequately assessed values for public acquisitions of land for social interest projects often runs into legal and institutional bottlenecks at the national and local levels. This network seeks to better understand the economic impacts of these programs on the functioning of land markets in general and on the benefited settlements in particular.

Dissemination of Information

While continuing to sponsor research and educational programs in Latin American countries, the Institute is also developing parallel efforts to disseminate information to broader audiences. We have created a Latin American section within the Lincoln Institute website, where we present the full text of many research projects and papers presented in our seminars and conferences, in their original language. Also available on the site are a number of Land Lines articles translated into Spanish.

The Institute is making a concerted effort to systematize all curriculum materials (research papers, seminar presentations, outlines, supporting audiovisual materials and other teaching aids) and products (books, articles, videos) to facilitate the organization and integration of our present and future academic activities. A number of Latin America-related publications are now available or are in the planning stages. For example, an annotated bibliography of materials related to urban land markets in Mexico was recently published and will soon be available on our website. This bibliography should serve as a model for other members of our Latin American networks to publish materials on their countries. In addition, several collections of papers presented as part of on-site education programs are being edited for publication.

This issue of Land Lines lists funded curriculum development and research projects and dissertation fellowships for the current academic year, highlighting those affiliated with the Latin American Program.

Martim Smolka is senior fellow and director of the Institute’s Program in Latin America and the Caribbean, and Laura Mullahy is a research and program assistant.

Latin America: A Region of Great Diversity

A brief look at the region reveals a wide variety of situations regarding the status of land and land markets, as indicated below. The Lincoln Institute has worked with scholars and public officials in each of these countries to understand and address their land policy concerns.

Chile’s liberalization of land markets and virtual elimination of urban land boundaries in 1979 (only partially reinstated in 1985) stands in contrast with Colombia’s current efforts to implement a strong value capture planning tool, “Participación en Plusvalias.” This legislation requires local governments to designate 30 to 50 percent of the land value increment resulting from changes in land designation from rural to urban use for social housing and infrastructure provision in underserved neighborhoods.

Informal settlements and land occupations are dealt with quite differently among Latin American countries. In Argentina there have been virtually no restrictions on land use, and consequently there are no officially recognized illegal settlements. Peru’s governments have recognized freely accessed unserviced land on the urban fringe (arenales) since 1961, while in Ecuador there is a complete absence of norms and regulations to deal with informal occupations.

Significant variations in national land policies are also important. For example, Cuba is unlikely to give up state ownership of the approximately 70 percent of land under its control, whereas Mexico passed national legislation in 1992 that allowed for the privatization of the land held under its ejido system.

It is not surprising that proposals for land value taxation (LVT) should elicit strong reactions in public debate. Land, taxes and information are a combustible combination, but they are critical to our political system. Without land we cannot live; without taxes we cannot be governed; without information about land and taxes we are powerless to change the way we are governed. Although Britain has not confronted basic land or tax reform in recent years, there are several signs, outlined below, that this is changing, and such changes can open the way for renewed attention to LVT initiatives.

Increasing Awareness of the Tax Burden

There is now widespread acceptance that Britain taxes jobs and enterprise far too much. In 1997 the European Commission (now known as the European Union) asked its 15 member states to produce employment action plans, including proposals to relieve the burden of taxes on employment. In 1999 British Prime Minister Tony Blair and German Chancellor Gerhardt Schroeder issued a joint statement that said, “. . . overall, the taxation of hard work and enterprise should be reduced.” Britain’s Liberal Democrat Party manifesto in 1998 called for a “major tax shift off people and on to pollution and resources.” Across the political spectrum consensus is building for a shift in the tax burden.

Devolution and Constitutional Reform

The United Kingdom is in the midst of far-reaching constitutional changes involving elections by proportional representation, which almost guarantee coalitions and make continuity of policy more likely. The number of voting hereditary peers in the House of (Land) Lords has been reduced from 400 to fewer than 100. Unlike a century ago, the Lords can no longer block an elected government with a mandate to introduce LVT or other land reforms. Although Britain still has one of the most centralized governments in Europe, Scotland and Wales now have considerable autonomy through their elected Parliament and Assembly.

Northern Ireland also has an elected Assembly, and land policy there is arguably more forward-thinking than on mainland Britain, with integrated ministerial responsibility for maps, land registers and property valuation. By 2007 there will be a fully electronic, map-based comprehensive land register and up-to-date property assessment. Uniquely in the UK, residential areas will be assessed through computer-aided mass assessment (CAMA) techniques imported from the U.S.

Scotland can vary income tax by up to 3 percent and can choose the tax base for its 28 local authorities. There is a much better understanding of LVT in Scotland than elsewhere in the UK, and the Scottish Executive has promised to initiate a thorough study of the economic implications of LVT before the next elections in 2004.

London now has its own devolved regional government, the Greater London Assembly, with an elected mayor, Ken Livingstone, who has become keenly interested in the potential of land values to fund transport infrastructure. The mayor’s transport commissioner, American Bob Kiley, is even more interested and has gone on record saying LVT might have a role, and not just in transport funding. There is currently a lively political battle concerning the London Underground, addressing who pays for investment and who benefits from it, which may provide a context for considering the role of LVT.

In most of the UK, however, local government is still a creature of the central state. Seventy percent of local government revenue comes directly from central grants, and over 90 percent of local expenditure is constrained by directives from the central government.

Advances in Geographic Information Technology

There have been amazing changes in information technology since the last thorough review of local government finance in Britain, in 1975. Then, base map information was held on a quarter of a million glass plates that were only revised on a 10- to 25-year cycle, using manual cartography, steel tapes and parchment paper. Now the entire national mapping system is computerized, using satellites, hand-held field data recorders and Internet map access. The Ordnance Survey MasterMap data structure recognizes land and building parcels and can hold attributes as diverse as height, material of construction, value and ownership. It is updated on a continuous basis and can incorporate pre-build and historic information. In 1975 the map archive occupied a large four-story building; now it fits on just eight CD-ROMs, covering every building and land parcel occupied by 60 million people.

All of these advances could assist the introduction of a tax based on land value, although there are serious institutional problems in getting all agencies that would be involved in LVT to apply the technology fast enough. However, the government has a target of enabling all information-based functions to be delivered electronically by 2005.

Unpopularity of the Uniform Business Rate

The uniformity of taxation in Britain is reflected in the name of the nonresidential property tax: Uniform Business Rate (UBR). At the end of the 1980s, local councils lost the power to fix the rate of the tax, and with it any direct financial connection with their local business communities. The central government at Whitehall decides what each council will collect from its business ratepayers, and how much each council retains, which can be substantially more or less than is collected locally. All that remains is some discretion over businesses exemptions, at the expense of local residents. No wonder that a recent government study showed a deep disdain for local councils among business owners and huge ignorance by both business and councils about their respective roles and problems.

Because this tax is based on occupancy and not on ownership, vacant and underused land largely or wholly escapes taxation. The UBR is regarded as a most regressive tax, accounting for up to one-third of the turnover of the smallest independent traders but only 3 percent of turnover of large multiple stores. My research has found UBR to be extremely unpopular: it penalizes success and fails to compensate for harm done by irresponsible neighbors. So this is another factor in the return of interest in LVT. As others have noted in recent years, the replacement of UBR, in part or totally, with a site-value-based tax would most likely be an extremely effective policy for urban renewal.

Business Improvement Districts

BIDs are coming to Britain after years of use in the U.S. These special districts allow commercial and office sectors to raise funds through property assessments for maintenance and improvement of their neighborhoods. But the only tax currently proposed for BIDs is a supplement to the occupier-based UBR. The business community does not like this idea, and LVT campaigners are now working with others to persuade prospective BID partnerships to consider assessments on owners and also to press for the creation of new tax powers.

LVT supporters propose that if a large majority within the BID support such measures, the BID should be able to compel all owners in the district to pay them; free-riders should not be allowed. The idea, known as “Smart BIDs,” is to support the BIDs with taxes on owners rather than business rates, and perhaps even to reduce the UBR rate within Smart BIDs.

Environmental Concerns

Current interest in LVT in Britain was boosted by an Urban Task Force report and formal support for LVT pilot projects by Friends of the Earth (which has more members in the UK than the Liberal Democrat Party) and the Town & Country Planning Association. These environmental organizations are interested in taxation as a tool for sustainable development, and such concern will only grow in the future. People in Britain will recycle even if it costs them time and money to do so. The same concern for the environment will increase acceptance of LVT when it is understood as a means of keeping towns and cities viable and protecting the countryside.

Practical Administrative Considerations

Two surveys of the town of Whitstable by Hector Wilks in 1963 and 1973 support the view that LVT presents fewer assessment difficulties than do traditional rating systems. Recent advances in computerized assessment systems make LVT more feasible than ever before. My own preliminary studies of other countries that use computerized assessments, especially Denmark and Australia, show that the overall cost of property tax administration is far lower there.

Denmark’s property tax, with annual revaluations, costs 20 percent less per property than Britain’s. When I visited Denmark last year, I found an extremely efficient property tax system tapping into land values in a modest way. Tax administrators told me that, aside from the environmental benefits of the tax, the greatest interest came from Treasury officials concerned about the growth of offshore tax havens. They are attracted to LVT because it costs very little to administer and there is virtually no possibility of avoidance or evasion.

If a British government were inclined to switch to LVT, it would not find any insuperable problems within our highly intelligent and incorruptible valuation profession. We have a professional, politically independent agency for conducting property tax assessments and the best national mapping agency in the world. It is simply a matter of exercising political leadership.

The Way Forward

In addition to supporting Smart BID pilot projects, my personal list for projects to help realize the potential of LVT includes:

• updating basic economics courses and making them available on the Web;
• implementing exchange programs between relevant tax professionals in Britain and countries with LVT;
• developing easy-to-use value mapping tools;
• studying the links between planning and LVT;
• comparing compliance costs of LVT and other taxes;
• developing indicators of the economic impact of LVT;
• monitoring public perceptions of land and tax issues over time and across countries; and
• providing more accessible nontechnical publications about LVT. These are.

The subject of tax reform is one of the most important issues of our age and political environment, and after years of neglect LVT is being considered in Britain again. The Lincoln Institute’s sponsorship of work by many LVT thinkers, writers and researchers in Britain and elsewhere has been instrumental in advancing public awareness of and professional appreciation for the potential benefits of LVT.

Tony Vickers recently completed a David C. Lincoln Fellowship in Land Value Taxation at the Lincoln Institute, and this article summarizes his Founder’s Day lecture on the topic in Cambridge, Massachusetts, in June 2002. Vickers is the former CEO of the Henry George Foundation in London, and he is currently pursuing a Ph.D. at the School of Surveying, Kingston University, London.

C. Lowell Harriss is Professor Emeritus at Columbia University, where he taught economics from 1938 until his retirement in 1981. He then served as executive director of the Academy of Political Science until 1987. He has been a consultant to and a member of numerous government commissions and boards of professional organizations. He has written and edited many books and hundreds of articles, and is the recipient of countless honors and awards. Dr. Harriss has been a valued associate of the Lincoln Institute since its founding in 1974, as a faculty member, research scholar, and board member. Joan Youngman, senior fellow and chairman of the Institute’s Department of Valuation and Taxation, spoke with him about his lifelong commitment to education, public service, and property taxation.

Joan Youngman: How does land value differ from improvement value as a property tax base?

Lowell Harriss: The significant factor with land is location, the unimproved condition of nature in the most fundamental economic sense. Whatever results from private or public investment and labor, such as streets, buildings, and so forth, is not part of land in this definition. Land differs from other productive resources because it is immobile and its quantity is fixed.

Land exists not because people produce it, but because it’s there by nature. The price one pays for land, as contrasted with other resources, has no role in creating supply. Land is also unique in that no two pieces are the same, so the kind of analysis appropriate for labor and capital with fungible aspects is not applicable to land.

Another important element is the ability to control land use–for example, to receive rent as payment for access, rather than because the owner created anything. The person who controls land use can serve a constructive function by directing it into better instead of poorer uses, and I think there should be the prospect of rewards for doing so. Market forces will indicate demand, and one interested in public policy hopes that the land will be used in the best possible ways. The owner of desirable land will get higher returns, but not because of anything he or she did to create it.

Almost any urban use illustrates this. Some thirty or forty years ago, I was walking down Park Avenue and I saw a very fine building in a key location, 64th Street, I think, housing some offices of the New York City Board of Education—much too valuable a location to be used for administrative purposes. I raised this point with someone in the school system, and he said that they were moving out. They had come to the same economic realization.

Any use of land prevents another use. Holding land idle or partially idle affects not only the owner but neighbors and society at large. Others will have to travel further to get to work or to the grocery store or to school. Land is so crucial, so important to life, that society will be better off if there are forces, market forces or governmental forces, inducing better rather than poorer uses.

JY: How can the tax system encourage better land use?

LH: A tax system that imposes higher taxes on land creates pressure on owners to make more productive use of their land. I don’t like the term “land value tax,” because it emphasizes the tax aspect. My focus over the years has been on reducing the tax rates on structures to induce more investment in improvements. I have not emphasized increasing the tax rates on land to increase pressure for better land use, but these can go together. If the tax system can create a built-in inducement, year in and year out, for better use of land, that will be a plus. I don’t want to be unduly skeptical about more direct land use regulation, but government is politics and the political pressures that affect government regulation do not always represent mankind at its best.

JY: How would you deal with past improvements to land, before the implementation of a land-based tax?

LH: I would just establish the tax on the current condition of the land. The past is past. We’re not talking about a tax on capital gains but a recurring tax on an immobile resource. Some of its current value does reflect prior capital investment, the same as for structures, but I don’t see how to make any differentiation for an annual tax on land value. As a practical matter we have no market for land the way it was hundreds of years ago.

Going forward, it would be desirable to distinguish the value of unimproved land from the value of capital improvements to the land, such as infrastructure and grading, that aren’t viewed commonly as “buildings” but that represent investment and effort. The tax system should not create obstacles to investment. I would certainly be open to learning more about what might be administratively feasible in that regard.

JY: What about the taxation of farms, forests, and open space?

LH: Well, this raises complicated concerns. On one hand, I think it would be good to have additional pressure on some owners of agricultural land to speed up nonagricultural development, especially in the urban fringe. On the other hand, decisions about land use are often irreversible. Covering more acres in Westchester County, where I live, with asphalt and buildings will affect drainage for years to come. I think if anything there should be bias against decisions that are costly in the long run and difficult to reverse if conditions change. But it’s also pretty clear that interests vary, and what is in the interest of farmers is not always in the interest of the public as a whole.

Land is a large part of farm investment, and anticipated future income is reflected in land prices. The market value of land does not necessarily reflect current cash flow, so if taxes are high they may constitute a substantial portion of farm income. I’m sometimes considered not very sympathetic to farmers, because I think they have undue political influence.

The effect of many state and federal programs to benefit farms will be capitalized into higher land values. The consumer will pay forever, and the benefits will go to the person who owned the land when the policy was established. This is not a new conclusion. It’s been in the literature since farm programs began in the 1930s, but it has not affected the political decision-making process. Congressman Barney Frank of Massachusetts asked why the family farm deserves more consideration than the family shoe store, and I agree with the implication of his question.

JY: What about two people who own identical parcels of land, side by side, but one has a small, older house and the other has a new commercial building or shopping center? Many people think it’s unfair to impose the same tax on both.

LH: There are real problems here, too, partly because of imperfections in the capital markets. The person with unimproved land, let’s say it’s a widow, might ideally get a reverse mortgage to realize cash income from her property. The logical thing at that stage of life is to consume capital, for example, by drawing down retirement accounts. We have a systematic market that enables us to live off of our capital when it’s in the form of financial investments, but it’s not that well developed for the real estate market.

I always want to be sympathetic with the person who is having trouble, but wise public policy cannot be made well by concentrating on the extreme cases. Society needs to deal both with the cases of human need and with other problems such as the pressures on land use. Those whose land has become valuable, not because of what they did, but because of their neighborhood, are lucky, even though they may not recognize it. We need separate instruments to deal with separate problems, such as the person whose tax bill goes up even when his cash income does not.

Another aspect of the question is that the property tax is not a personal tax and cannot be evaluated on the same grounds as, say, an income tax. To attempt to do so can mislead. A rich person may own no land and a person with very little cash may own a good deal of land. There are ways to deal with the cash-flow problem, such as circuit breakers that limit property taxes to a certain percentage of income or deferral of tax payments until the property is sold.

JY: Is speculation a special concern? Is everyone who holds property with the hope that it will rise in value a speculator?

LH: I’ve always been reluctant to use the term “speculation,” and I certainly would not say that public policy should penalize the speculator. But, to the extent that government plays a role, I would say its bias should be toward use rather than idleness, and tax policy also supports this view. There is a whole range of speculation, from an owner deciding not to sell a house this week because of hopes for a better price next week, to holding a plot of ground idle in downtown Manhattan, knowing that someone is going to offer a very high price for it eventually.

The developer is presumably a constructive element in the total process. I don’t think anyone really wants equilibrium, but something better than what would be equilibrium. More people live better by reasonable standards now than was the case 20 or 100 years ago, and the real estate developer has played a part in that process. Sometimes it’s fashionable to be disparaging of developers, but we owe a lot to them. Maybe we’ve overpaid some of them, but plenty of them have lost their shirts. It can be a very risky business.

JY: How should the tax system treat government-financed improvements to land?

LH: In New York City, for example, I don’t know how much of the cost of building and extending subways could be borne by taxing the increments of the land value in the neighborhood, but probably a good deal. It’s not going to slow down progress to use those land value increases to help finance the expansion of the subway system.

We need to distinguish, however, between year-in, year-out financing of government by taxes on land and more or less one-time charges. That is, if the subway system is extended, there will be immediate capital gains as well as a long-term increase in the property tax base. Each of these effects deserves consideration in public policy.

JY: What is the difference between someone who invests in a piece of land and then watches as the price of land rises and someone who invests in a stock and then watches the stock market rise?

LH: Well, as far as income taxation is concerned I would think they are the same, but for financing local government they’re very different. The land stays in place, yet the stockholder can move. The ability of the landowner and stockholder to pay may be the same, but that isn’t the only relevant consideration. In thinking about how to tax gains you need to take into account whether the taxpayer can move from the jurisdiction.

I think that taxing people annually to finance local government, based on their ownership of land, is good public policy. The effort to apply that same principle to intangibles was a complete failure in the late nineteenth and early twentieth centuries, because you can’t tax people locally on the basis of resources that are so mobile.

The distinction here is not between earned and unearned income. For income tax purposes the tax is applied after a sale when the owners have realized their gain. But, to finance schools and other services you don’t want to rely on residents’ decisions about whether or not to sell their land. You want a permanent and steady source of tax revenue.

This is quite different from the question of unearned income, that is, whether or not the owner grew rich in his sleep. If the Astors became rich from owning land in Manhattan, but paid their property taxes year in and year out, well, so be it. I think that the property tax can take only a very limited account of differences in wealth. The administrative difficulties of a net wealth tax could be enormous. And the identification of a property tax with a tax on wealth or net worth is, I think, diverting and dangerous. It shifts attention from the goal of financing government to issues of personal status and relative position.

JY: Could you say more about the problem of jurisdictions competing for business by offering tax reductions?

LH: It seems to me there is no need for property tax exemptions on land. Special concessions may be appropriate for buildings, as an acceptable means of competition, but I’m dubious and favor broad reduction of taxes on structures. In any case, the land is not going to move. If you give concessions for land, they will tend to be capitalized into capital gains for the present owners. Under a two-rate land and buildings tax system, any concessions should be made on the basis of the variable resource, which is the building value. Inducements are not going to create more land, but they might create more structures. In this way, economic development incentives might be more effective under a land tax.