Four reasons policymakers should prioritise the taxation of land and immovable property
1) Land and property taxes can yield substantial revenues for governments
Local governments in many developing cities are constrained by limited revenues to carry out the necessary public investments that enable urbanisation to become a force for sustained economic growth. In this context, land and physical properties represent the largest source of untapped municipal revenue. Broad ownership of these assets mean that taxing them can raise significant public revenues which, if designed appropriately, can increase with per capita income growth in a city. For example, it is estimated that a 1% tax on land and property in Kigali could generate over USD$60 million per year under full tax compliance.1 In Lagos, reforms to property taxes under governors Tinubu and Fashola that have been implemented since 1999 have helped the state to increase public revenues from taxes five-fold to over $1 billion in 2011.2
2) Taxing land and property is fairer than other forms of tax
When local governments invest in building a road, a school, or any other public infrastructure near a property, the price of this property significantly increases. In Accra, for example, properties that benefit from public investment in tarred roads and concrete drains are 1.8 times more valuable that those without.3 At the same time, prices of land and property in a city are constantly increasing in line with urban population growth since this places higher demand on land, a scarce resource. Taxing land and property is therefore fairer than other forms of taxation, as it allows governments to capture some of these increases in land and property prices that result from forces outside of the owner’s control and are in part the direct result of public investment. If designed appropriately, those individuals who gain more from public services and population growth can be taxed for the benefit of the wider community.
Taxing land and property is fairer than other forms of taxation, as it allows governments to capture some of these increases in land and property prices that result from forces outside of the owner’s control and are in part the direct result of public investment.
3) Land and property taxes can provide a self-sustaining return on investment
Related to this, annual land and property taxes can allow governments to obtain returns on their investments in public services and infrastructure that raise the value of nearby land and/or property. These taxes enable a virtuous cycle where appreciating urban land and property values finance the public investments which make the city more productive.
Implementing annual land and property taxes therefore provide governments with credible future income streams on the basis of which it may be possible to finance current projects through capital markets. Reforms to these taxes can complement policies to improve land value capture through one-off betterment fees and land transfer taxes that can help to initially finance public investment.
4) Land and property taxes are more efficient than other forms of taxation
The fixed supply of land in a city means that taxing this asset does not negatively affect urban investment and instead encourages efficient land use by incentivising owners to use their land more productively, unlike taxation on land and property transactions that can limit the sale of land and property towards their most efficient use. The OECD finds that taxing land and property, though less efficient than taxing land alone, is less harmful to investment and growth than other taxes such as income and corporate tax.4