Learning from best practice

Successful reforms from a number of developing cities highlights that at each stage of the design of a land and property tax system, realistic reforms can harness the benefits of land and/or property taxation whilst addressing associated administrative and political challenges.

1) Low cost technologies and local parasurveyors to expand the tax base

Expanding the tax base for land and properties requires up-to-date information both on characteristics of land and properties, and on those liable for taxation – physical and legal ‘cadasters’ that are often developed by local authorities during land right formalisation. The challenge for many developing cities is that this information is often seriously incomplete, resulting in significant losses in revenues. Registration of land and property rights is often hampered by high titling costs and competing claims over these assets. In Tanzania, for example, complex surveying processes inflate titling costs to over $3,000 for an individual land parcel – more than double per capita incomes 17.

In Tanzania, complex surveying processes inflate titling costs to over $3,000 for an individual land parcel – more than double per capita incomes

Successful registration in countries like Rwanda, where all land in the country was registered at only $6 per parcel between 2009 and 2013, highlights some ways in which these administrative and political costs can be overcome. Instead of employing highly trained professional cadastral surveyors to conduct individual site visits, local para-surveyors demarcated plot boundaries in
the presence of the whole community using simple methods of demarcation, and recorded plots using satellite and aerial photographs. The use of local parasurveyors not only reduced costs but ensured that those responsible for demarcating the land were known to the claimants. By encouraging entire communities to participate in resolving boundary disputes, competing claims were resolved openly and cost-effectively.

Where identifying land ownership is not possible, data collection on occupancy can form the basis of a land/ and property tax base. In Hargeisa, Somaliland, land ownership registration was virtually nonexistent in 2005 after years of conflict. Limited revenues from property taxation were insufficient to cover even essential municipal services. The local government in Hargeisa developed basic cadasters using satellite data and surveys to collect data on physical characteristics of properties and the occupier(s) of those properties. Over eight months between 2004 and 2005, properties registered for taxation increased from 15,850 to 59,000. Alongside changes to implement a more complex valuation process and automate property tax billing, this new system of taxation increased revenue by 248% 18.

In Rwanda, low-cost boundary demarcation by local parasurveyors resulted in all land in the country registered at only $6 per parcel between 2009 and 2013

2) Matching valuation methods to administrative capacity

There are a range of methods for land and/or property valuation, from complex computer aided assessments based on market values, to simplified area-based assessments. Tax valuation based on capital market values is the most accurate way of capturing the true taxable value of land and property, but administratively, it is extremely demanding. It requires significant data on market transactions of land and property, data on the contents and characteristics of plots, and the capacity to estimate land and property values based on existing data. In order to accurately reflect market values, it also requires frequent revaluation. The success of such complex tax value assessment across local governments in South Africa and Namibia has been largely based on mature real estate markets, adequate local resources, and substantial valuation assistance and training from provincial authorities 19.

By contrast, area-based tax value assessment offers the simplest form of standardised assessment of land and/or property. Many developing countries, including Ethiopia and Mozambique, have adopted this method of valuation that raise taxes based on the size and location of buildings. In countries like Sierra Leone and Malawi, additional factors that affect relative property values, such as access to roads, are taken into account in developing a ‘points’ based valuation system.

Key to effective valuation is matching valuation to current or projected capacity. In cities such as Kigali, where land registration levels are high and land market transactions are recorded, evidence suggests that a computer-aided mass appraisal based valuation that would increase accuracy of valuation by over 40% compared with less accurate methods could be developed within a year of investment 20. By contrast, in cities in Sierra Leone, implementing a simplified points based valuation systems based on observable construction type, structure, location and access to services enhanced the legitimacy of new local government structures whilst allowing local authorities to increase local revenues by 200-450% between 2007 and 2011 21.

3) Automation and digitisation of billing and payment

Automation of billing and computerised payment systems can be key to improving tax collection by allowing for efficient monitoring and collection of payments and reducing opportunities for corruption. In Arusha, property tax collection was done through an electronic revenue collection system that updates to show compliance when taxes are paid and a receipt is generated. This updated revenue collection system, launched in December 2013, allowed the city to expand its property tax revenues by 107% in the first three months of operation 22. More broadly, linking computerised records of registration, valuation and collection can significantly improve administrative efficiency at each stage, whilst reducing the potential for corruption and discretion in the tax system.

4) Linking taxes to public investments

Public support for land and property tax reform is critical for its success. If reforms are closely linked to tangible benefits, such as public expenditure on roads and hospitals, they can become seen as the legitimate price paid for public services and infrastructure.

Surveys in Lagos, for example, suggest that greater levels of tax compliance are linked to the belief from taxpayers that their taxes have been well spent, which is largely the result of visible, costly, and popular infrastructure projects such as road improvements. In Fashola’s first term in office, annual capital spending in Lagos rose from $600 million in 2006 to $1.7 billion in 2011 (in inflation adjusted 2012 figures)xxii. These investments played an important part in Fashola’s continued popularity and re-election.

To be successful, current or future investments must be matched with efforts to raise awareness of the link between land and/or property taxes and public investment. In Lagos, public signs to educate citizens about the benefits of paying taxes were placed at public works sites, and stakeholder forums were held to discuss tax obligations – coinciding with roll outs of public investment in infrastructure and transport 23.

Surveys in Lagos, for example, suggest that greater levels of tax compliance are linked to the belief from taxpayers that their taxes have been well spent, which is largely the result of visible, costly and popular infrastructure projects such as road improvements. In Governor Fashola’s first term in office, annual capital spending in Lagos rose from $600 million in 2006 to $1.7 billion in 2011 (in inflation adjusted 2012 figures).24 These investments played an important part in Fashola’s continuing popularity and re-election.

To be successful, current or future investments must be matched with efforts to raise awareness of the link between land and/or property taxes and public investment. In Lagos, public signs to educate citizens about the benefits of paying taxes were placed at public works sites, and stakeholder forums were held to discuss tax obligations – coinciding with roll outs of public investment in infrastructure and transport 25.

Highly visible and popular investments in infrastructure such as road improvements funded by property taxes have transformed Lagos City

 

Footnotes

  • 17 Ali, D. A., Collin, M, Deininger, K., Dercon, S. and Sandefur, J., ‘The Price of Empowerment Experimental Evidence on Land Titling in Tanzania’, CSAE Working Paper, WPS-2014/23, 2014.
  • 18 Lawrence Walters, ‘Land and Property Tax: A Policy Guide’ (UN-HABITAT, 2011).
  • 19 Monkam, N. and Moore, M. ‘How Property Tax Would Benefit Africa’ (Africa Research Institute, 2015).
  • 20 Murray, S. Kopanyi, M. and McSharry, P. ‘A Land Value Tax for Kigali: Analysis and Policy Considerations’ (IGC, 2016). Samuel S. Jibao and Wilson Prichard, ‘The Political Economy of Property Tax in Africa: Explaining Reform Outcomes in Sierra Leone’, African Affairs 114, no. 456 (1 July 2015): 404–31; Samuel Jibao and Wilson Prichard, ‘Rebuilding Local Government Finances After Conflict: Lessons from a Property Tax Reform Programme in Post-Conflict Sierra Leone’, The Journal of Development Studies 52, no. 12 (1 December 2016): 1759–75.
  • 21 Loy Nabeta, ‘Building Arusha: One City’s Journey to Better Urban Services, Access and Quality of Life’, World Bank, 2014.
  • 22 Diane de Gramont, ‘Governing Lagos: Unlocking the Politics of Reform’ (Carnegie Endowment for International Peace, 2015).
  • 23 de Gramont.
  • 24 Diane de Gramont, “Governing Lagos: Unlocking the Politics of Reform” (Carnegie Endowment for International Peace, 2015).
  • 25 Headline sources: http://www.theafricareport.com/Columns/lagos-proves-africas-property-tax-potential.html, http://www.vanguardngr.com/2011/05/lagos-generates-n3bn-from-property-tax-in-2010/, http://guardian.ng/businessservices/business/lagos-edo-turn-to-land-property-tax-to-shore-up-revenue/