Why tax urban land and property? Four key reasons
1) Land and property taxes can yield substantial revenues for governments
Urban land, and the physical properties on this land, represent the largest source of untapped municipal revenues in many developing cities. Land and property fees only account for 0.5% of GDP across sub-Saharan African countries, as compared to around 2% in OECD countries2.
Broad ownership of these assets means that taxing them can raise significant public revenues that can continue to rise as cities become more productive. In Kigali, for example, estimates suggest that levying a 1% tax on land and property could generate over $60 million per year under full tax compliance3 – over four times the city’s own source revenues. These taxes can have a significant impact on the ability of municipal government to deliver public infrastructure and services. 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 4
In Kigali, estimates suggest that a 1% tax on land and property could generate over $60 million per year under full compliance – over 4 times the city’s own source revenue.
2) Taxing land and property is fairer than other forms of tax
When local governments invest in building a road, or a school 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 without5. At the same time, the value of land and property in a city is increasing all the time due to urban population growth that places higher demand on land. These increases are not small – in Kigali, for example, peri-urban land has appreciated 1000-fold in the last ten years6.
Taxing land and properties 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 these taxes therefore provide governments with higher future income streams, on the basis of which it may be possible to finance current projects through capital markets.
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 in some cases can encourage more efficient land use. This is unlike taxation on work or savings that can incentivize individuals to work or save less (see below on the benefits of land tax in defining the tax base for more on this). Taxing land and property, though less efficient than taxing land alone, has been found to be less harmful to investment and growth than other taxes such as income and corporate tax 6
Asset rich but cash poor?
Annual taxation on land and property, rather than more irregular forms of taxation such as transfer taxes or capital gains tax, can be particularly valuable. Not only do annual taxes provide a steady stream of income to governments, they do not impede the transfer of land and property towards their most efficient use.
However, the one key disadvantage of annual taxation is that they are a tax on the stock of assets, rather than income flows. As such, these taxes may be difficult to pay for certain groups that own high value assets but do not earn commensurately high incomes, such as retired seniors or low income earners.
In order to address this, policymakers can employ tax deferral schemes, which limit the amount of tax current land/property owners pay, with the outstanding amount taken as a transfer tax on the asset when it is sold or inherited. Governments can also provide exemptions to allow for long term low-income housing in central areas of cities.