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For cities to become engines of growth and structural transformation in developing countries, coordinated public policy is needed, both to provide the connectivity that makes cities work, and to tackle the potential downsides of density. Implementing these policies is expensive. The problem for many cities is that the necessary public investments that enable urbanisation to become a force for sustained economic growth are constrained by limited revenues of local governments. As urban populations in sub-Saharan Africa and South Asia rapidly grow, demands on public investment will only continue to rise.
In this context, annual taxes on land and physical properties represent the largest source of untapped municipal revenue for developing cities. Alongside their potential to raise significant public revenues, these land and property taxes are also fairer and more efficient than other forms of tax. Their limited use stems from the fact that land and property tax reform often faces significant political resistance from owners of these assets, and designing or reforming land and property tax systems can require substantial investment in technical and staffing capacity. At each stage of the design of a land and property tax system, policymakers can make decisions to harness the benefits of annual land and/or property taxation whilst addressing these associated challenges. Even modest investments in reform to land and property tax systems can help dramatically expand municipal revenues to enhance public service and infrastructure provision.
1. Policymakers should prioritise the taxation of land and immovable property to enhance city revenues. Alongside their potential to raise significant public revenues, land and property taxes are also fairer and more efficient than other forms of tax.
2. What to tax, what assets are exempt from taxation, and what rates to set are crucial policy decisions. Policymakers face trade-offs within each of these that will have to be made in reforming or introducing land and/or property taxes.
3. Policymakers can learn from success stories across developing cities. These successes show that relatively minor reforms to land and property taxes that address political and administrative challenges can dramatically expand municipal revenues.