How can land and property tax rates be set?
Setting a tax rate is a difficult political decision since it has to weigh the need to raise municipal revenues against the ability of taxpayers to pay. The level of tax rate(s) will depend on the tax base, tax revenue collection aims, and affordability for taxpayers. Given the tax base, and how much a government aims to raise from land or property tax, a tax rate can be established – as long as it satisfies affordability constraints for taxed individuals.
Tax rates across the world
Land and property taxes across Europe and in the US are typically set somewhere between 0.5-1% of market value per annum.5 In East Asian countries such as China and the Philippines, property tax rates are approximately 1-2% whilst annual property taxation in South Korea is levied between 0.15 and 0.5% of property values.67
In many sub-Saharan African countries, high tax rates are applied to outdated asset values – in Kenya, for example, land taxes range from less than 10% to over 30%.5 In others, however, rates can be much lower; in Rwanda, taxes on land and buildings under freehold titles are set at only 0.1% of asset values.9
The affordability of land and/or property taxes depends on a range of factors, such as taxpayers’ incomes, other taxes levied on land and/or property, such as capital gains tax, and other taxes more generally. Given that a house is typically seen as “affordable” if it is 2-3 times the owner’s annual income, it is possible to roughly estimate landowner incomes using data on property values and calculate what percentage of incomes would go towards any particular tax rate.10
In many developing cities, different rates are often applied to land and property based on whether they are used for residential, commercial or industrial purposes. At the same time, tax rates are sometimes differentiated by area if there are certain public services that only benefit particular areas in a city.11
Variable tax rates can be beneficial in a number of cases. Higher tax rates on vacant or underdeveloped land alone, for example can be key to reducing land speculation, where land is bought by investors as a short-term investment with no intentions to develop it. In Gaborone City in Botswana, for example, land tax rates on underdeveloped plots are four times higher than on developed plots, in order to discourage speculation and encourage rapid development.12 Policymakers may also want to capture a greater proportion of the value of residential properties, that generally make greater use of public services and infrastructure than non-residential properties.
However, introducing variable tax rates can, like exemptions, increase complexity of the tax system, and raise associated administrative costs in its implementation. Differentiating between types of land/property or their values substantially increases the data requirements, increases the opportunity for error in judgement, and face similar administrative challenges as implementing exemptions. In addition, the more complex the system of tax rates, the more difficult it is to communicate the system transparently to taxpayers. If administrative capacity is low, a single rate may be the best option for policymakers.