Workable Solutions for Property Tax Reform Richard Almy * almy, gloudemans, Jacobs & denne Margie Cusack * Research Manager International Association of assessment officers

Focus On administration of technical matters not differential tax rates or exemptions Policy influences administration Policies that clash with efficiency and perceptions of equity Actual administration not consistent with legislated policy is de facto policy Willful disregard of law Resource constraints

What Are We Talking About? Reform—any improvement in policy or administration that makes an immovable property tax system fairer and more acceptable or more productive or efficient in revenue terms Workable solution—a policy or practice that has made a reform effort possible and that led to a sustained improvement

The Situation Property tax reform is recommended To improve governance & strengthen local government To make the overall tax system more growth friendly To contribute to knowledge about immovable property use and value Property tax reform is recommended Reform goals seldom fully realized Annual taxes on immovable property often seem underutilized Why?

Reform Recommendations Bahl Norregaard 1) Do a thorough diagnostic of the existing system of property taxation, examining specifically what is working and what is not. 1) Make an in-depth diagnostic. 2) Adopt a “policy first” stance (administrative reform comes second). 2) Have a specific tax policy design 3) Choose the tax base that is best for the country.   4) Restrict exemptions 5) Question how best to provide property tax relief for the poor. 6) Include identification of properties, valuation, recordkeeping, and collections in any administrative reform program. 3) Plan administrative reforms in detail

Reform Recommendations Bahl Norregaard 7) Bring all properties on to the tax roll.   8) Concentrate administrative resources on improving the ratio of assessed to market value of property. 10) Adopt any reasonable measures to raise collection rates. 9) Remove or reduce the incentive to under declare the value of property transactions which results from the imposition of a property transfer tax. 4) Reduce or phase out property transfer taxes and replace them with a recurrent tax on property or with a capital gains tax 11) Monitor performance. 5) Develop a monitoring device

Sequence & Relationship of Reform Elements Situation Analysis Policy Reforms Agency Reforms Monitoring

Analyzing the Situation Holistic or systemic approach Structure of situation analysis (pro-forma, SWOT) Issues: Autonomy & Accountability Culture (paying taxes, corruption) & Government Structure Land tenure & land institutions (professions)

Perceived Corruption & Property Taxation

Real Estate Market Transparency

Rate Determination Considerations Rate Needed to Generate Desired Revenue Revenue needed divided by tax base (less than 2%) Acceptable Rate Administrative & compliance costs divided by revenues (1 – 5%) Affordable Rate Administer Viable Rate Taxes divided by income (1-2%)

Underemphasized in literature on setting tax rates Affordability Underemphasized in literature on setting tax rates Judgment Possible measures Per-capita tax vs. per-capita income Per-household tax vs. per-household income Compare amounts with fiscal measures

Fiscal Measures Global benchmarks Needs (budget-based rate setting) Percentage of GDP Percentage of revenues, all taxes, or both (generally and locally) Global benchmarks Needs (budget-based rate setting) Fixed rates vs. floating rates Revenue capacity—base times rate Effort—actual performance

Administrative Measures Cost (administrative + compliance) As a percentage of revenue-goal is to be efficient-to minimize the ratio (Adam Smith) Per unit (property) Effectiveness ratios (per Roy Kelly) Coverage maximize Valuation minimize dispersion or maximize concentration Collection

Administrative Cost Benchmarks Lithuania Madrid 2001 revaluation Netherlands U.S.

Principles & Standards FAO voluntary guidelines Professional standards & guidance IAAO Other professional valuation standards (IVS, TEGoVA) Expert opinion: literature, APSEG When do standards apply? USPAP Jurisdictional Exception Rule

Where to Start? http://www.iaao.org/wcm/Resources/Publications_access/Technical_Standards/

Case Study: Northern Ireland Research Reforms: annual value to capital value Consultation Planning Reassessment of domestic (residential) properties by 2006 Execution Communication

Potential Policy Reform Areas Property market openness and efficiency Legal framework for value-based property taxation A clear definition of the value standard and a statement of valuation assumptions Access to market data Guidance on valuation methods A revaluation requirement Publicity and appeals Measures to mitigate excessive annual increases in property tax obligations Management and organization of the property tax administration and valuation agency

Policy Strategies to Consider Ensuring affordability & cost-effectiveness Lowering transfer taxes while increasing recurrent taxes Focus on negative aspects of the current situation rather than on putative benefits of reform proposals Stability. Revenue neutrality. Anticipate opposition (winners & losers) Draw on pronouncements IAAO, and other standards Institutional reforms

Administrative Reforms to Consider Rational: cost-effectiveness & sustainability Roles of administrative bodies, professionals, & taxpayers Cadastral system improvements Valuation system improvements Collection system improvements Communications

South Africa Central & provincial legislation & regulation Local administration Requirement to state policies Basis options Valuer registration & use of firms

Cadastral System Improvements Property (object) register, not taxpayer (subject) register Fiscal cadastre must reflect land tenure realities; can be distinct from juridical cadastre Valuation success begins with data Attribute data collection options

Parcel Information Mapping Application

Valuation System Improvements Market-centered Tailor to market and fiscal realities Valuation approaches Stratified per-unit models Extrapolation from benchmark (beacon) properties Banding Multivariate models Keeping valuations current

Collection System Improvements Do not maintain obstacles to establishing tax liability Focus on taxing property rather than legal ownership Deemed delivery of tax bill rather than personal service of bill Focus on making payment easy Make enforcement routine

Communications & Data Access Have a public information program Make as much data public as possible Use the Internet if possible

Monitoring Performance Need to focus on variability (dispersion) as well as overall level of achievement Fiscal capacity & effort Revenue efficiency The (theoretical) coverage, valuation, and collection ratio metrics coverage ratio not easily measured Ratio studies Performance reviews Netherlands & New Zealand External: Cape Town & Lithuania

Action ideas for Reform Strategic vision. Phased approach to build on successes (Lithuania, Iceland) Pilot projects (Turkey) Explore and try new technologies Need to think about reform processes and institutions internationally as well as reform projects—where do you fit? What lessons can you draw? Consider the need for outside interventions—is financial assistance desirable? Can meaningful technical assistance be obtained? Can an external review validate plans and progress? Buttress reform proposals by referring to international standards (such as those of IAAO) and rankings (such as Doing Business, JLL, and others) to harness competitive spirits. YouTube

A Lack of Political Will? Often the blame for failure or disappointment Is that fair? What if: The case for reform is not strong Abstract, theoretical rationales Unclear path forward Externally generated reforms too easily ignored Perceived burden increases/shifts are too great Capacity limitations (financial, institutional & technological) are too great

Information on systems in 195 countries with taxes on property Appendix: Dataset Information on systems in 195 countries with taxes on property 187 have one or more recurrent taxes on immovable property 171 have one or more value-based recurrent tax cusack@iaao.org richard.almy@gmail.com