One of the primary challenges facing urban authorities is in capturing the substantial increase in land value that occurs when public amenities are developed and thus being able to use such revenues both to finance the current and well as further development. For example land values tend to rise rather dramatically around hubs when transit systems are built; and around green spaces, parks, and other public facilities, etc. 

The increase in land value can be captured by taking taxes off of buildings and placing them on the valuation of land instead. Through the use of Land Value Taxation the added value coming from public improvements can be captured and returned to the community. Indeed the fees collected can even pay for the costs of such improvements to be made over time. LVT also results in providing improved living conditions, growth in the economy and jobs, infill development, and reduced costs for infrastructure development, etc. In all it is a win-win policy that gets pretty much all of the incentives right. 

As is said in the Vancouver Action Plan – the 1976 founding document for UN-Habitat, “The unearned increment resulting from the rise in land values resulting from change in use of land, from public investment or decision or due to the general growth of community must be subject to appropriate recapture by public bodies (the community).” 

However as recognized elsewhere in this Dialogue and in the Concept Note one of the challenges faced is the lack of trust among the people in the local authorities, thus a refusal or at least failure to pay their taxes; and then there is also the often very real matter of corruption. It is thus essential that when additional revenues are raised that there be an open and transparent system of accounting, along with development of a strategic development plan for what the revenue raised will be spent on – which should be developed in an inclusive participatory manner. Such a plan could include the various local action plans that the UN has agreed should be produced, along with efforts to implement and achieve the SDGs. 

Several years ago more than 85 municipalities had developed participatory budget processes. Most of such processes are exemplary in nature and would make a great addition to new taxation policies.  Indeed, people typically value the additional revenue even more when they have a hand in determining how and what it will be spent on.

Finally developers and land owners need to be made aware of and to realize that these new policies will greatly improve the quality of life and the economic well being of the local community. And as such it will safeguard their investments and help to create a community that they can really be proud of and that others will want to live in as well. 

Another part of a community planning process relating to land values is the need to value land held by the public sector. Local government essentially foregoes revenue from the locations it uses for public purposes. Knowing the potential market value of land is important when deciding whether it makes sense to use the land for tax-exempt purposes or offer the land under a leasehold arrangement or sell it outright to private interests.

Locating a government facility in an area of low land values can act as a magnate for economic development in that area.

A related problem is associated with “transit-oriented development” where the land contiguous to a suburban train station is held by a tax-exempt government authority and is used for automobile parking, when a far better use of the land would be mixed-used development of housing, retail and commercial space, with automobile parking available in parking garages.

¿Qué retos de política económica enfrentan las autoridades urbanas en los países en desarrollo en la generación de ingresos a partir de fuentes locales? ¿Cuáles son algunas soluciones?

Un primer reto sería el de acceder a nuevas fuentes de financiamiento que permitan recuperar una parte de la riqueza que se genera en el territorio de las ciudades y municipios de los PED. Ejemplo de eso son los impuestos sobre las actividades comerciales o la captación de plusvalías generadas por el aumento del valor predial obtenido gracias a la intervención de la autoridad local (por medio de un Plan o de un proyecto).

Un segundo reto es el de participar de forma equitativa en las riquezas naturales que subyacen en su territorio. Ejemplo de eso son las regalías.

Un tercer reto es el de contar con una adecuada gestión de los recursos a partir de fuentes locales.

Un cuarto reto a superar es el de mejorar la participación del predial como fuente de ingresos corrientes. Para eso, generalmente hay que contar con una base predial actualizada, así como con un marco claro de tenencia de la tierra.

Thank you all for your contributions to this discussion. I’ll be joining Ananda as a moderator of this fruitful debate for the days we have prior to the conference.
I’d like to pick up on the comment posted by the International Union for Land Value Taxation and relate it to Ananda’s original question on the political challenges for the generation of revenue from local sources.
Although widely acknowledged by urbanists and economists, land value taxation is politically difficult to implement. Any examples of cases where actions have been taken successfully to gradually increase the share of land value taxation over the total share of revenues?

Municipal governments in many countries may not have sufficient resources to track property sales and changes in property values. The result is that assessments (and, this is the case in many parts of the United States) do not reflect a uniform percentage of current market values. One obvious advantage of a land-only property tax base is that property improvements can be ignored in the assessment process, dramatically reducing the cost of administration. The exemption of property improvements will generally benefit a majority of property owners (i.e.., those who have improved the land held to “highest, best use” or nearly so. In the United States, this has been the case in those communities that have adopted partial land value taxation. Landed interests in cities in other countries may be even more politcally powerful than in the U.S in defense of the status quo. And, the slow adoption of land value taxation in the U.S. is a recognition of just how powerful landed interests are in most communities here.

One somewhat novel proposal is to require property owners to self-assess, subject to the community having a right of first refusal to purcahse the property at the amount set by the owner.

Ed and Slaven,

Thank you for posting this very important and useful message and for the interesting discussion that follows. As I read this I think about how fruitful it could be to have local authorities enter into online discussions with the “experts” on implementation in able to better understand and appreciate the policy and how it might best be implemented. This might be something that UN Habitat and the GLTN could think about hosting or co-hosting in the future. 

Thanks Edward. I understand that Australia, New Zeland, Denmark, Estonia, Jamaica and Kenia use land-only property tax (Norregaard 2013). In economic terms it is also more efficient since land is strictly immobile. However, I am not so sure though whether it is easier in terms of assessing values accurately. It surely is in terms of not needing to track property improvements, but on the other hand, most of the transactions you observe (and use to determine market prices) are from built units. It is of course possible to attempt disentangling land value from the package, but that requires assumptions and carries imprecisions.

Your last proposal is also very interesting. Any examples of anything similar to that actually implemented?

My professional work for 40 years involved putting together the financing structures for affordable housing initiaitives here in the United States. Pennsylvania was part of my territory, and it is in Pennsylvania that a version of land value taxation has been in place for several decades in some cities, towns and a few school districts. As inaccurate as the assessments are in these communities, the effects of increasing the rate of taxation on the assessed land values are consistently positive. The fact that not all of Pennsylvania’s taxing jurisdictions have followed indicates the difficulty of obtaining political support even when determined resistence by major land owners has not mobilized. The idea of self-assessment has been raised from time to time by activists but there are no instances of its adoption that I am aware of.

On the technical challanges of distinguishing the value of property improvements from that of the underlying land value, the methodology is straight-forward for markets where constructiion cost data is known and property appraisals are required to obtain mortgage financing. The value of a building is best defined as replacement cost, less depreciation. Property appraisers in the U.S. make this calculation as part of their analysis. The land value component is the amount a willing buyer pays for the property above the depreciated valuation assigned to the building.

What will happen over time with the adoption of a land-only tax base is that the selling price of land will come down, potentially to zero. Land will still yields a rental value (i.e., what individuals or entities will bid to obtain exclusive use for land with differing locational advantages), and it is this rental value that is appropriately collected as public revenue.  

With regards to the idea of self-assessment, last year Chile carried out a tax reform which includes the taxation to capital gains in real estate. The way in which the legislation was passed allowed current homeowners to update the market value of their homes to the time of the approval of the law, in order to set a starting price for potential capital gains in future transactions.

This certification has been massively performed by private appraisers hired by homeowners who then send the information to the national tax agency. What is interesting is that this same national agency performs appraisals and keeps the real estate cadaster used as tax base for the property tax.

Although the tax agency has informed that these self assessments will not be linked to the cadastral appraisals, the simple exercise of merging both databases may come as useful exercise and may inform future decisions in this area.

As with all such approaches to valuation, the concept of self-assessment requires very specific conditions. As I noted previously, what the community could have is a right of first refusal to purchase the property at the value assigned by the owner for tax purposes. The community needs to have a right to challenge the self-assessed value based on comparable sales data, or the owner could put a very low value on the property until the tax year when the owner decides to sell the property. Assessment officials would be able to identify underassessed properties by looking at how other owners have valued their properties in that immediate area. Of course, it would be helpful if the assessing body had access to technologies that provided descriptions and photographs of every property.

South Africa’s property tax reforms have been largely successful.  The 2004 Property Rates Act replaced a patchwork of provincial legislation with a national framework, within which municipalities decide the rates and exemptions.  The Act, combined with the December 2000 amalgamation of municipalities, brought many properties into the local government property tax net for the first time.  The increasing property rates bills have not gone down well with commercial property owners, who in many cases pay two or three times the rate that residents (voters) pay.  Some property owners have filed lawsuits challenging the rates levied.  Notwithstanding this resistance, municipal property rates collections, especially in the bigger metropolitan municipalities, have gone up steadily since the new law was adopted.

Thanks Mathew. This is interesting. I am wondering whether you need to restructure the whole system in order to increase revenue from land. My guess is that once the property tax system is well in place, it is harder to increase revenues either by increasing rates, reduce abatements, have assessed values more closely resemble market values, etc. The political economy of those reforms “in the margin” is very hard to deal with. I wonder whether there are such cases.

Thanks Matt. I would include the reconsideration of exemptions and preference along those measures which are very hard to implement. Acquired benefits like this are very difficult to remove. However, I agree that there is a lot to be done and we must come up with smart ways to implement these measures avoiding the political downside.

One possible way to do this is adjusting the reassessment procedures in order for it not to be a political issue (many homeowners affected at the same time). I understand some cities in Illinois use a mechanism where the reappraisals are performed sequentially (not everyone at the same time, but a third of the properties each year, for example). I am sure there other examples of the kind, like making the tax less “visible” linking it to mortgage payments.

Assessment equity is everywhere a challenge. If equity means that every owner of property pays the taxes based on the current market value of their property, then assessments need to be updated every year. Otherwise, some property owners will be overtaxed, others undertaxed. For many reasons, some neighborhoods in a town or city are losing value each year, while others are experiencing escalating values. If assessments are not regularly updated, the property owners in areas with declining values are always overtaxed and those in areas with increasing values undertaxed.

One important option is to index property appraisals to an inflation index in the years between a general revaluation.  This avoids the sticker shock effect that property owners experience when valuations are revised dramatically, sometimes after a gap of 5 years, sometimes much longer.  A 2% year on year increase in value is easier to absorb than an 11.5% increase after 5 years.  You end up at the same place, but more smoothly and with incremental income in the bargain, through such indexation.

en Bogotá, estamos en un periodo de transición, gobiernos de izquierda lograron consoliadr un modelo politico inck¿luyente durante 10 años de mandato local que sirvio además de oposición al gobierno nacional entanto este se caracterizo por ser de derecha. hoy día afortunadaemnte los dos gobiernos nacional y distrital trabajan de la mano, de manera que en Colombia se busca articular las politicas para incidir en todo el territorioy cobijar a todos los ciudadanos.

la cuestión de la seguridad y la economía a nivel distrital estan dando un giro significativo pues va a crearse una secretaria de seguridad y esto seguramnete redunda en beneficios para la función pública y la seguridad general de la ciudad, por otro lado el que economicamente sean sostenible y/o favorezcan el ingreso interno de la ciudad dependera de la organización y capacidad institucional para validar las iniciativas ciudadanas y como, hasta hoy lo ha hecho nuestro nuevo alcalde, conocer las necesidades de la sociedad civil y sus capacidades de organización e iniciativa.

lo que nuestro actual gobierno distrital logre en proyectos gubernamentales de sostenibilidad financiera viene unido a la sostenibilidad ambiental, Nuestro alcalde enrique Peñalosa se posiciono entre arboles que tragieron del Jardin Botanico de nuestra ciudad y el ha hecho enfasis en la importante asunción de responsabilidad social por parte de la empresa privada, de manera que aunque nuevo nuestro gobierno tiene unas bases solidas que comprende el entramado socio-politico que debe tejerse en aras de cumplir con los ODS planteados por la ONU.

Gracias Bilma por tu comentario. Efectivamente uno de los mayores problemas de economía política para el desarrollo urbano son las posibles descoordinaciones entre los distintos niveles de gobierno. Esto es especialmente relevante en áreas metropolitanas o en municipalidades grandes donde el alcalde es un actor político con potencial de proyección a  nivel nacional. El caso de Colombia es interesante como también lo es el de Londres y otras ciudades. Muchas veces es este conflicto potencial el que frena los esfuerzos por descentralizar recursos y decisiones. Sería muy interesante si pudieras elaborar más en relación a tu experiencia en Bogotá.

Thank you very much to all of you, specially to Enid, Matthew, and Michael, for your valuable contributions to the discussion during the last week.

Last week, we mentioned some options urban authorities can use to ensure efficient and effective delivery of services in urban areas in developing countries. These include, cross subsidies, single purpose governments, privatization of municipal service delivery, public-private partnerships, outsourcing of service provision, and inter-municipal cooperation. This week, I would like the focus to be more on real world examples. Could you enrich that discussion with some specific examples in these areas?

Economies of scale occur where the per-unit cost of producing a particular service falls as the quantity of the service provided increases. Economies of scale are often used as a reason for creating metropolitan governments. There may some problems with the application of this criterion, however. The literature suggests that economies of scale can be achieved for some services such as administrative functions and services with large capital inputs (e.g. transportation, water, and sewerage systems), but not for all services. Furthermore, sometimes economies of scale are achieved at relatively small population sizes. For example, a study of economies of scale for fire and police in municipalities in Ontario, Canada found that cost-minimizing population for fire was 20,000 and 50,000 for policing.

There is also evidence that larger units of government can result in higher costs for some services because there may be problems delivering services to remote areas within the region or because governments can be become so large that there are diseconomies of scale in the provision of some services.

Another consideration is that the jurisdiction that provides the service does not necessarily have to be the one that consumes it. Economies of scale can be achieved by the jurisdiction producing the service (which may be different than the jurisdiction consuming the service) or by contracting out the service to the private sector. In this context, the design of government structure may be less important to achieving economies of scale.

Finally, particularly in the context of less developed countries, the impact of a weak infrastructure may negate the advantages of economies of scale. For example, economies of scale may be achieved by having one large school instead of several smaller schools scattered throughout the metropolitan area but, if the transportation system is inadequate, students may not be able to get to that school. Even though there may be economies of scale in centralizing some functions, it may still be necessary to decentralize the services so that people have access to them.

Thank you Enid

Metropolitan areas face different set of challenges due to large populations they serve and involvement of different government institutions. On the other hand, there is evidence that smaller local authorities ensure more political authority and more efficient provision of public goods. So, what are the implications of economies of scale for local government service delivery?

One of the biggest problems is that metropolitan areas are often characterized by fragmented local governments. The result is that services spill over municipal boundaries without regional coordination. In Dar es Salaam, for example, the governance of urban transport is highly fragmented with three lower tiers, a metropolitan tier, and 20 different agencies involved. There is currently no regional body to address the transportation challenges for the metropolitan area. Traffic congestion is a real problem and collaboration on traffic management among the different local authorities does not currently exist. It is also difficult to build new roads that cross municipal boundaries because there is no coordinating mechanism among the municipal councils.

Another problem that arises where there are many local government jurisdictions in a metropolitan area is the likelihood that there will be some rich communities and some poor communities. The rich communities have a more adequate tax base with which to provide services and may not have very great demands for some services (such as education or social services). The poor communities, on the other hand, may require more services but have only a small tax base on which to levy taxes. Furthermore, there is no mechanism to redistribute resources from the richer communities to the poorer communities.

Choosing an appropriate governance structure for a metropolitan area depends upon the weights applied to a number of conflicting considerations: efficiency, access, and accountability are usually satisfied through smaller local government units, whereas economies of scale, reduced externalities, equity, and regional coordination are better achieved through larger scale governments.

Many different metropolitan governance models exist around the world. These models can be characterized as: one-tier fragmented, one-tier consolidated, two-tier, or voluntary cooperation (including special purpose districts).There are also examples of metropolitan areas that exhibit characteristics of more than one of these models. For example, a metropolitan area with a number of fragmented one-tier governments may engage in voluntary cooperation.

Some examples of innovative governance approaches in developed and less developed countries include: the geographic boundary of the City of Cape Town that reflects the economic region; the two-tier government structures in cities such as London and Barcelona which allow regional and local issues to be addressed; the ABC Chamber in São Paulo which brings together various stakeholders in the metropolitan area to tackle economic problems on a voluntary basis in a context where regional government has not been popular; national government financial incentives in the US that have resulted in the formation of regional planning bodies as a prerequisite for receiving federal funding for transportation; open government initiatives in Seoul and participatory budgeting in Porto Alegre both of which encourage citizen participation and greater accountability in a large metropolitan area where access is often difficult.

Thank you very much to both Enid and Matthew.

The provision of public services in large urban areas (metropolitan areas) in developing countries poses a different set of challenges compared to resolving the problems of financing expenditures of a single city government.  What are the main challenges facing authorities of large urban areas in public service provision and what the innovative governance approaches to finance efficient and equitable public service provision and urban development in these areas?

I have come across three principal kinds of political economy issues.  The first issue has to do with the intergovernmental fiscal framework.  In many countries, the tax and revenue instruments available to local government are inadequate. National governments in many countries keep the most productive and easily administered taxes for themselves, and provide only trivial revenue instruments for local governments.  In these and other countries, local governments depend on transfers or tax sharing arrangements to support their budgets.  This lack of authority and autonomy can be rooted in a distrust of local governments’ admininstrative capacities, or in political concern about the alternative source of power and legitimacy that a strong and autonomous city can represent.  In countries with multiple political parties, one or more large cities may be controlled by the political opposition, and national governments are not keen to give them the tools they would need to raise significant resources on their own.

A second kind of political economy problem occurs at the local level, in cases where there is significant overlap and alignment between wealth, income, and political power.  When the ownership of taxable property, business, or income is concentrated in the hands of people who are close to the powers that be, whether elected or appointed, it is not in their self-interest to tax themselves.  Often the highest value properties and businesses belong to people with political clout.  This can discourage both the adoption of meaningful taxes and their implementation in particular cases.

A third problem has already been commented on by others, which has to do with the sense that taxpayers have about whether the money they pay for taxes and services is well spent.  When they can understand what it is spent on, and how the decisions are made about local budgets, they can form a judgement about whether they are getting their money’s worth.  When the money seems to disappear into a black hole and services are of low quality, then of course no one wants to pay

Thank you very much Enid.

It is true that political will and support is critical. There is sufficient political will on the part of the central governments to decentralize roles and responsibilities to local authorities. However, a key challenge facing many local authorities in developing countries is that there is little or no political will at all for adequate fiscal decentralization.

Any successful experiences of sufficient tax revenue decentralization in developing countries?

Economics tells us that cities should charge for services wherever possible and levy property and other taxes to pay for local services. Grants are appropriate where services spill over municipal boundaries. Municipal infrastructure should be financed by taxes and fees as well as charges on developers, municipal borrowing, and public-private partnerships. Yet, reliance on grants in cities in many developing countries is high, property tax and user fees revenues are low, and borrowing and public-private partnerships are often restricted. What are some solutions?

First, we need to create the right incentives for local governments to increase their own-source revenues. Central governments can provide incentives by cutting back on transfers, providing incentives for increased tax effort, and providing conditional, matching grants (that is, grants that have to be spent on particular functions and require local governments to add their own funds). Incentives to augment own-source revenues have to be large enough to compensate for the political costs of raising taxes and user fees.

Second, strengthening the link between local taxes and local expenditures will increase awareness and support to increase own-source revenues. When people can see service improvements, they are less unhappy about paying for them. Improving bus service before introducing the congestion charge in London, for example, provided an incentive to drivers to take transit and reduced opposition to the charge.

Third, increasing taxes requires sustained political will and support. For such support to be generated, taxpayers (and local governments) must accept tax increases. They are more likely to consent to reform if they have been consulted and feel that they have been heard. A proper communications strategy engaging businesses, unions, special interest groups, academics, and the broader public (in a form that everyone can understand) may help to overcome some of the opposition to tax increases.

Finally, comparative data on the finances of cities around the world would improve our understanding of what cities are doing and what they need to do to finance services and infrastructure. Although it is possible to find comparable information on the revenues and expenditures of all local governments within a country in sources such as the OECD and IMF, there is very limited comparable information on individual local governments.