Georgia: Land Monitoring and assessment of gap in tax revenue ANNUAL WORLD BANK CONFERENCE ON LAND AND POVERTY 2015: LINKING LAND TENURE AND USE FOR SHARED PROSPERITY 23 MARCH 2015, WASHINGTON DC 1

Background  Land is high on policy agenda - Inter-Ministerial Commission on Land (established in 2013)  Fully digitized Cadaster and Registry  Provisions for tax billing is in place  Piloting of mass registration will start in 2015  Pilot Monitoring of land governance for 2013  Retrospective monitoring

Early monitoring results  Data across agencies is linked  Improvements in tax statistics  Improvements in administrative records  Established capacity for policy analysis Yet:  Land registration is incomplete 3

Georgia: Land Tax improvements 1.What is the gap in the current land tax revenue under the current tax design and current level of registration? 2.Does the level of land registration and inequality in effective tax rate affect the tax revenue? 3.What are the strategies for upgrading the land tax design and revenue collection? 4

Data  Land Inventory  Land Cadaster  Registry of Real Estate and Immovable Property  Land and real estate tax revenues 5

Land Tax Design  Tax Code of Georgia (2010), Articles  Flat payment per ha  Non-agricultural land: single rate – 2,400 GEL (1,400 USD) per ha per year  Agricultural land: municipality specific rates for arable land, pastures and forests  Exemptions  Non-agricultural land: for low income families  Agricultural land: land below 5 ha  High Mountings Areas: 50% tax reduction 6

Tax Revenue, Declared parcels per,000 population AgriculturalNon-Agricultural 2914 Tax revenue, GEL per,000 population AgriculturalNon-Agricultural 5,2118,436

Assessing the tax gap Region Agricultural landNon-Agricultural land Declared in tax declarations Present in the inventory Declared in tax declarations Present in the inventory Ajara A.R.221,5251,171,1162,827,4793,266,929 Guria440,590856,0051,243,7231,122,447 Imereti712,9082,024,8913,123,22312,735,951 Kakheti10,565,80112,290,1251,368,42724,633,352 …………… 8

Tax Revenue and Tax Gap, Agricultural landNon-Agricultural land Estimated revenue Estimated, per 000 populationGap, GELGap, % Estimated revenue Estimated, per 000 populationGap, GELGap, % Upper bound:42,036,3529,34618,634, %184,786,57641,086146,905, % Lower bound:29,849,0236,6376,447, %135,422,88830,11097,541, % Current Revenue23,401,5205,203 37,880,9828,422 How to close this gap? Mass registration Land tax re-design Privatization Options:

Tax Declarations per 000 population 10 VARIABLES Agricultural land Non-Agricultural land AllIndividualsCompaniesAllIndividualsCompanies Parcels per 000 population registered last year * *** Registered Parcels square ** ** Effective tax rate Log(SD of Effective tax) -3.35***-3.22***-0.13* * ControlsYes Observations R-squared ControlsRegions

Strategies for improving tax revenue 1)Improving land registration (e.g. mass registration; decreasing registration cost) 2)Making more equal effective tax rate (e.g. adjusting the tax rates to the market values; mass valuation and proportional tax rate) 11

Effective Tax Rate, Average: 1.2% Min: 0.03% (Tbilisi and Batumi ); Max: above 6% (Dedoplistskaro and Dmanisi ) Average: 2.8% Min: 0.24% (Batumi ); Max: above 20% (Ninotsminda and Dedoplistskaro)

Alternative Tax rates 13 Municipality Agricultural land Municipality Non-Agricultural land Effective tax rate, % Current Tax rate, GEL/ha Median price, GEL/ha Alternative rate, Gel/ha Effective tax rate, % Current Tax rate, GEL/ha Median price, GEL/ha Alternative rate, Gel/ha (1)(2)(3)(4) (5)(6)(7)(8) Batumi ,6553,536Batumi0.242,400984,11927,555 Tbilisi ,8373,658Ozurgeti0.272,400884,88924,777 Khulo ,710861Tbilisi0.392,400612,91817,162 Tsalka5.6771,36516Gurjaani152,40016, Dmanisi6.1821,33616Ninotsminda202,40011, Dedoplistskaro6.3871,39117Dedoplistskaro372,4006, a) Adjusting tax rates to market price at municipality or district level

Alternative Tax rates Sales transactions: 41,754 Valuated Parcels: 3,396,211 Valuation Model: hedonic CAMA  region specific model parameters  spatial model (parcel specific parameters) 14 Factors:  Land use type  Presence of buildings  Average municipality prices  Proximity to see  High mounting areas  Resort areas  Seasonality  Municipality specific effects  Neighborhood land use patterns b) Mass Valuation and proportional tax rate

Predicted Price,

Predictive power 16 Out of Sample In Sample

Necessary condition for introduction of proportional rate  Mass registration 17

Conclusions  Facilitate the mass registration of land and record data on land use (e.g. presence of buildings)  Adjust the tax rates to reflect the market value (Introduce the mass valuation and proportional land tax; or regularly update the tax tables with variation at municipality or sub-municipality level) 18

What is next? 19  Incorporating updated Cadaster and Inventory of all regions  Calibrating the proposed tax rates for proposed scenarios Other direction for LG Monitoring analysis:  Benchmark system for performance of local authorities  Monitoring of designated land use (with remote sensing data)  Impact evaluation and piloting of policy innovations

Thank you! Denys Nizalov 20