5.1 The details of administration should be designed in accordance with the underlying philosophy of the tax. For what purpose is a property tax required? How does it fit into the present or proposed government structure? Is it part of a decentralisation strategy? How will it fit with other existing taxes? What will be the social and economic effects of introducing a property tax or modifying an existing one? The detailed design of the tax depends on the answers to these questions.
5.2 There are some important political decisions to be made. The legal drafter and those who have the task of instructing them can draw on examples of law from all over the world. It is known what works. Maybe more importantly it is also known what has not worked. The following section lists the separate but interrelated issues for which rules should be provided in the legal code. (This can be done either directly in the law or through powers devolved to ministers under the law.) It is a checklist and is not exhaustive.
5.3 Jurisdiction of tax. The law must specify the jurisdiction and extent of the tax. What bodies can impose the tax? What areas does it cover?
5.4 Administrative benefits and responsibility. Administration of property tax falls into various stages:
The legal initiation of the tax, commonly the responsibility of the central government minister.
The assessment and the choice of where the responsibility for this task should be assigned.
The responsibility of setting the percentage rate which can be specified in the law or fall to the local government body, possibly within limits set by central government.
The law must specify the duty of collection.
The law must specify which body receives the benefit of the revenue.
It is possible for every one of these functions to fall to the local government body but generally this situation is unusual and rarely is central government willing to give local governments a free hand.
5.5 The basis of assessment. The basis of assessment is of course important and forms the core of the taxation process. Unfortunately public and political discussion of the options is often misled by those with an over enthusiastic attitude to one basis or another, and frequently fuelled by unrealistic expectation of the economic benefit that their preferred option will bring with it. The enthusiasts are seldom those with practical experience of administering taxes. Tax professionals have first hand experience of the imperfections of tax systems in practice.
5.6 If change is considered to be necessary, of course a public debate is needed. If that debate is not to become bogged down by ill informed prejudice the ground needs to be carefully prepared with a well researched discussion paper setting out the pros and cons of the different options available in the local circumstances.
5.7 The final result is not as important as might be supposed. In most situations there are at least three options that would work almost equally well. No solution will have the monopoly of benefits. There are always disadvantages. There are a number of different choices. Table 1 illustrates the permutations available.
5.8 The selection of an appropriate tax base must accord with the general philosophy underlying the tax and fit with other administrative provisions. For instance, is it intended as tax on ownership or on occupation? The underlying philosophy probably determines the best option(s) for the basis of assessment. It is also fundamental to the legal provisions relating to many of the items listed in this section. There can be other considerations relating to how property is held or used.17 The selection of an appropriate tax base for an ad valorem system should also take into account the preponderance of available evidence of value. If most properties are rented, a rental basis of valuation would be sensible. If most properties are bought and sold on the basis of their market capital value, this will provide a more credible basis.
Comparison of bases of assessment
A - Valuation assumption: Value restricted to existing use only.
B - Valuation assumption: Valuations taking into account the 'highest and best use' of the property.
1. Capital value.
The price that the property would sell for in the open market.
1A: Common and well-tried basis of assessment, based on the value of the property in its present state. Probably the most used globally. Easy to understand. Potential value from redevelopment is ignored unlike 1B.
1B: Well known and well tried. Thought to have economic advantages in encouraging best use of the property. It requires a clear physical planning legal code so that the highest and best use is clearly apparent. Not as easy to collect as bases 1A & 2A.
2. Rental value.
The price at which the property could be let from year to year.
2A: Well-tried basis of assessment. Works in almost any circumstances. Many fiscal advantages. The easiest tax option to collect. Less well understood than 1A in situations where there is a limited or statutorily controlled market.
2B: Not an easy option to apply in practice and rarely worth considering. Not realistic to take into account potential value from redevelopment in relation to an annual value.
3. Site value.16
The value of the land only. The price that the property would sell for without buildings and other improvements.
3A: Well-tried basis of assessment that often works well. It can have administrative advantages and be a cheap system to run. Less easy to understand than 1A or 1B which may affect ease of collection. Correlates less well with ability to pay than 1A or 1B.
3B: Realistic option in some circumstances. The different uses that may be considered are only those permitted by physical planning or zoning classes.
5.9 There are advantages of adopting one of the ad valorem tax bases above. Generally they are well understood by the taxpaying public, particularly where the basis is natural rather than artificial, and where it reflects the prevalence of market evidence that will be known and available to the public. They encourage the better use of property and have some correlation with ability to pay. Usually the potential yield from ad valorem taxes is higher than from the other options. However, they are not the only choice. Several of the countries to which this paper is addressed use what might be termed 'flat rate property taxes' which are less dependant on valuation skills and are often a quick and easy option. An attractive option, particularly where valuation skills are in limited supply, is to adopt a system of "banding" of values to provide a reasonable degree of equity in liability without being too demanding in terms of data and professional level skills.
5.10 Definition of the separately assessed property. What should constitute a single assessment? It is by no means self evident in all circumstances. For instance, in the context of areas where farms are held in many scattered non-contiguous fields, the question is whether each field is a separate assessment or the farmer's entire holding a single assessment. The definition of the holding must accord with other aspects of tax. For instance if it is a tax on ownership, a single apartment block might have one assessment. This is not possible if the tax is one on occupation, in which case each apartment must be separately assessed.
5.11 The taxpayer: who pays? The choice is broadly between the owner and the occupier. 18 There are fiscal advantages to the occupier being the taxpayer especially where registers are incomplete. The occupier is much easier to find and identify and there is probably also a greater correlation with ability to pay. However, it is politically easier to persuade the public of the merits a property tax with the owner as a tax payer. To the uninformed it sounds fairer for the owner, who may be a landlord of rented property, to be the one liable for property tax. In reality in many instances it will matter little and either may be feasible. In any case the ultimate burden will lie with the land owner (although of course, the land owner may try to pass the tax on to the consumer of produce or goods generated from the land). A tenant can only afford a certain amount in rent and property tax. If tenants, as occupiers, are liable for property tax they must, on a new lease, reduce the market rental value they can afford to bid.
5.12 There is an important caveat if the owner is to be specified as the taxpayer. The definition should not be too closely tied to registration because failures in the registration system may cause properties to go unassessed. Moreover, where registration triggers annual property tax liability, this creates serious disincentives to registration and undermines the effectiveness of investment in registration systems. In systems of property taxation in which the primary liability is on the owner there are known legal formulae which allow the assessment of the occupier in cases of doubt with legal protection for the occupier to pass on this liability to land owner where this can be done. Where the owner has primary liability it is also common in countries with large amounts of property owned by the public sector and let to private individuals or companies, for the law to put the tax burden on the person holding from the public sector.
5.13 Revaluations. The law must stipulate how often revaluation must be carried out. Commonly this is required under the law every five years. There are considerable disadvantages if the interval is greater. The more often the revaluations are carried out, the better the tax base value reflects the current market and the better it is understood by the tax paying public. Information technology (IT) allows the possibility of annual revaluations (as typically in the USA). There are good reasons to introduce the concept of annual revaluations into any revisions of property tax where there is sufficient IT capacity to do so reasonably inexpensively. Revaluations can be politically difficult to handle if they result in large changes in values and tax liabilities. Such large charges, and the associated need for sensitive political decisions, can be avoided by introducing annual revaluations.
5.14 Setting the rate. There are several possible approaches. In one approach the rate is fixed annually by local government taking into account the budgeted needs of the authority. The setting of the rate is a political act, which will give rise to local debate. In another approach the law fixes the rate in primary legislation and the tax revenues will vary according to changes in market values and regular revaluations. In a third approach, the central government fixes the property tax rate annually taking into account the needs of local government and reflecting the extent of intergovernmental transfers from central to local government.
5.15 Although in the longer term the general picture will tend to be of buoyant revenues, in situations with declining property values revenues will decline. This could also be a problem for some Central and Eastern European countries where populations are forecast to decline significantly. The yield of the tax in these circumstances is not within the control of local politicians. One of the main strengths of the locally set tax rate for property tax is that it allows decentralised accountability. This accountability is reduced if the local government is not in control of the rate.
5.16 It is also possible to have differential rates depending on the value of property and/or the amount of property held by any taxpayer. Thus it is possible to introduce a policy where the greater the assessed value of the taxpayer's properties the higher the rate of tax. In theory it makes the tax more progressive and it sounds attractive at first sight. There are, however, many technical reasons to avoid this and adopt a single tax rate. It leads to artificial splitting of properties to avoid the higher rates. The approach makes the total yield of the tax less predictable and therefore complicates local government budgets. It makes the tax a degree less transparent. The greater complexity decreases the level of accountability achievable from the administrative staff and can lead to corruption.
5.17 Exemptions. In general it is the case that the fewer the exemptions, the easier and cheaper it is to administer a property tax. Exemptions seldom bring with them any lasting political popularity and rarely have the expected beneficial economic and social consequences. As noted above, the case for exempting agriculture is weak. It is advisable to minimise the number of exemptions. There are specific classes to be considered by the designer of property tax:
One type of exemption universally found throughout the world is that for churches, mosques, etc., with associated burial grounds. It would be wise to exempt such buildings.
Roads, public parks and some other public amenities are also usually exempt. The occupations and ownerships are often difficult to define and therefore to tax. The same consideration may apply to common amenities in rural locations such as common grazing areas. However even if such valuable amenities are not included in valuation lists the benefit is not lost to the tax base. The value is reflected in the increased value of the properties that benefit from that amenity.
There is usually little point in assessing land used for commercial forestry. As a rule the value of forestry land, if the value of standing timber is excluded, is very low. Moreover the ability to pay is restricted by the periodic cash flow pattern of forestry yields that does not fit an annual tax.
5.18 Government property and property tax. Commonly government and local government property is exempt. At first sight this appears sensible. Taxation of property owned and occupied by the public sector would seem to be an unnecessary bureaucratic exercise of taking money from one public sector pocket to another. On closer analysis it may be seen that there are very good reasons for public sector properties to be subject to property tax in the normal way:
Such taxation is a method of apportioning liability between the different layers of government. A central government establishment uses local facilities and there is no reason why central government should not contribute to the cost through property tax in the normal way. Taxation of central government property may be very important for those local governments in which a relatively large number of central government properties are located.
Throughout the world it is generally the case that the public sector is not a careful user of land and property. The reasons for this include the lack of financial sanction: they have the public purse at their disposal. Also for most public sector departments land management is not their core function and land and property are held incidentally to this. There are a number of ways that the administration of the public sector estate can be improved. The liability of public sector properties to property tax is one step towards better management, because then holding land and property are no longer cost free. It is an encouragement to use land and property less wastefully. It is a step towards proper accountability by public sector departments for the property holdings. As the public sector is almost always a very large owner and occupier of property the question is important. This is commonly the case in Eastern Europe.
5.19 Exemption for small properties. An analysis of most valuation lists prepared on an ad valorem basis typically reveals that 40 percent or more of the total assessed value derives from less than 10 percent of the most valuable properties. On the other hand about half the population live in less valuable properties that account for less than 10 percent of the total value. 19 Furthermore, because of the higher cost/yield of assessing these less valuable properties and greater difficulties of collection, it would in fiscal terms be possible to exempt them from tax with little loss of revenue. It appears politically attractive to exempt so many poorer people from tax and to pay so small a price in loss of revenue. There are sound reasons why this is rarely done. First, it diminishes the configuration of the tax as a channel of local accountability because a smaller proportion of the population are taxpayers. Second, it can lead to artificial division of properties for avoidance purposes. Third, it creates dissatisfaction at the margins, and those property owners just into the tax threshold feel aggrieved.
5.20 Rules for payment. The law must specify how and when payment must be demanded and made.
5.21 Enforcement. The law must provide powers of enforcement in cases of non-payment. Typical remedies include distraint on goods (i.e., the removal of goods for sale to make the payment), seizure of rents and profits, fines and interest on late payment exceeding the commercial rate, forfeiture of the property and imprisonment.
5.22 Settlement of disputes. Experience throughout the world shows the advantage of having a system of tribunals or local courts that are local, accessible without professional representation, speedy and cheap. It is important to ensure that tribunals used to settle property tax appeals are seen to be independent from both the body responsible for the property tax assessments and the responsibility for collecting the property tax.
5.23 Many of the disputes relating to property tax will turn on matters of fact and valuation. The typical composition of such tribunals (at least three persons, chaired by a lawyer) will reflect this. The non-legal members are typically informed and respected local persons and/or non-legal professionals such as valuers and accountants. The dispute resolution system is very important to the smooth administration of the tax and is also an important safety valve. The law must of course specify how and when appeals can be made.
5.24 Relation to other taxes. The main point on which a political decision must be made is whether property tax is an expense allowable against income tax and corporation tax, and if so, in what circumstances. It is normal for property tax to be an allowable expense against corporation tax and for individual tax in businesses.
5.25 Essential Features of Property Tax Administration. There are important and sometimes unique features of property tax administration which it is necessary to understand when planning the implementation of the tax or a revaluation:
Chain of functions: The successful implementation of property tax requires the completion of a number of different functions each of which is essential to the success of the whole process. They are links in the chain and the absence or failure of any one link causes complete failure.
Completion of the valuation list: Property tax requires that every taxable property should be included in the valuation list. If a list is incomplete, not all possible revenues are being collected. Inclusion of all properties is also important from an equity principle as it ensures that the tax burden is placed fairly on all eligible taxpayers. Every property must be assessed within the planned time schedule.
Schedule: The time taken to implement the system will depend on the scale of the task and the resources available. It will take at least two years to implement a new valuation list from scratch, and often takes longer. The time can be reduced in subsequent years if the list has been well maintained and if the computer systems are well designed. Policy makers need to take this into account.
Yearly modules: It is usual for a new valuation list to come into effect at the beginning of a financial year. The timetable should take this into account. If the valuation list is not complete at the beginning of the financial year in which it is scheduled this is likely to cause a full year's delay.
5.26 There are therefore several factors that can give rise to failure. There are probably no other taxes for which there is such a stark gulf between success and failure. Furthermore the abortive work done for failed valuation lists may well be completely wasted. Most of the data has a comparatively short useful life. The effect of this is that property tax administration must be carefully planned and executed with considerable determination.
5.27 People and professional skills. In the developed market economies, the number of people working in valuation and property management in the private sector is usually 3-4 times that working in the public sector. In every country with established annual property taxes, the assessment process is organised in ways that minimise the number of fully qualified valuers used. Using computer-assisted mass appraisal techniques, much of the work can be carried out by people with appropriate IT and statistical skills and valuation technicians.
5.28 Valuation knowledge and skills are still in short supply in transition countries. Moreover, the specific skills necessary for rural valuations require appropriately trained valuers with experience and standing in the valuation districts. This shortage has been considered a factor limiting the implementation of an ad valorem tax. The property tax skills requirements in the public sector have to compete with the private sector and the other functions in the public sector which use valuation and property management skills. In some countries, property market valuation skills are developing more rapidly in the private sector than in the public sector. There may often therefore be private valuers but few if any in the public sector. In other countries, the private sector has not developed to the stage in which it can be used reliably in valuation for taxation purposes. Private sector companies have found it difficult to train their personnel and invest in IT technology needed for mass appraisal.
5.29 Particularly when introducing an ad valorem based property tax, countries will need to consider training and education for valuers, property advisors and property managers. The shortage of professionally qualified valuers will remain a challenge for most transitional economies for the time being and the public sector will find it difficult to secure and retain these scarce skills. Strategies for combating this difficulty will include support for development of university capacity in training and research in this area, the in-house training of technicians and the use of the private sector. Strategies must also address the fact that training and education for valuers and assessors generally includes no instruction on the organisation of a property tax office or the planning and execution of a revaluation.
5.30 Institutions. The location of the different property tax functions within the government administration is not straightforward and may make the difference between success and failure. There are several different sub-functions which can be located in different ministries or at different levels of government. Table 2 illustrates possible choices.
5.31 When considering the assignment of responsibility for the assessment function there are often entrenched interests to be taken into account. Property records that could be relevant to assessment may be divided and located in several ministries. Agriculture holds records of soil classification and farm units. Land ownership records may be with the cadastral department and records of buildings may be held separately. The shortage of professional valuation skills in the countries of Central and Eastern Europe suggests that in most cases it is probably not an option to devolve the assessment function to the beneficiary local governments who will not have the professional in-house capability. There is the option of contracting with the private sector to carry out the work.
Choices for locating responsibilities
1. Overall responsibility
Ministry of Finance,
Ministry of Financial Planning,
Ministry of Local Government,
Ministry of the Environment,
Ministry of Agriculture, and/or whichever ministry controls the surveying and cadastral functions
Ministry of Finance,
Ministry of Local Government, Ministry of Agriculture,
Ministry of the Environment, and/or whichever ministry controls the surveying and cadastral functions if not one of the above,
Subcontracting to the private sector by any of the above
Central government on behalf of local government
Subcontracting to the private sector by any of the above
5.32 There are good reasons for separating the collection function from that of assessment and in many cases local government carries out the collection function while central government retains control of assessments.
5.33 Technical considerations. Valuation lists of high quality have been compiled for several millennia without the benefit of modern technology and long before computers were invented. It is worth bearing this in mind when deciding on the level of sophistication of information technology (IT) to be used:
IT has no effect on the quality of the final product
IT does not produce a substitute for valuation skills
IT does not produce organisational skills
Greater spending on IT will not necessarily produce better results
However, the careful and well-planned use of IT may well reduce costs, should increase accuracy and consistency of the data, and will certainly save time. A valuation list is a very large database and IT allows the data therein to be reproduced in several different formats. Fortunately IT skills are generally available in the transition countries. There is a wealth of experience (the successes and the failures) of computerising property tax from throughout the world from which to learn. It is important to get the strategy right.
5.34 The purpose of this section is to demonstrate the chronological order of the actions and the interrelation between them. The sequence of events illustrated in Table 3 indicates the steps that must take place from conception to collection for introducing or reforming property tax. It is intended to help plan the process in individual countries and to assist identifying the critical path in each individual case. The sequence is also intended to emphasise the unity of the process. All parts of the process must be in place to succeed. The malfunction of any one process will cause failure of the whole. This guide cannot do more than indicate the functions. It does not discuss the detail of how they are implemented as this will vary from case to case.
5.35 Policy planning. It is obvious that policy makers must decide the direction in which they wish to go. It is clearly impossible to start the detailed design before this has taken place. One initiative that is not included in the chart is the preparation of public opinion.
5.36 Legislation. The legislative process must be complete by the time the tax is to come into effect. If the government is certain that it can get the legislation through by that time this step can proceed during the preparation of the valuation list. In the table it is suggested that the legislative process should be complete before this. This may be advisable. There is a risk in setting up a valuation office if the changes in the legislation may fail. There is also a need for the valuers to have legal powers to enter properties and to obtain information necessary for their task.
TABLE 3 Sequence of events
5.37 Establishing the valuation office. Although the assessment process is only one of the functions, it is the one that is most technically and organizationally demanding. There must be an office capable of carrying out this step completely, punctually and to the required quality standards. It requires technical valuation skills, organizational skills and computer skills.
5.38 Establishing the collection office. There must be an entity to collect the tax. It requires fewer technical skills and fewer people than the assessment process but as much determination.
5.39 The assessment process. This is the big time consuming function. It will certainly be on the critical path. There are many sub-functions within this step. These include:
collection and assembly of data on market transactions
devising of mass valuation benchmarks
identification of taxable land parcels and the relevant characteristics
compiling the list
5.40 In order to assist in updating the lists, the assessing body should establish links with other land administration agencies such as the land registry and cadastre (for information on characteristics of the land parcels, transfers and selling prices) and the planning authority (for information on new buildings, etc.) The mass assembly of relevant data on land parcels for property taxation purposes is a major initial and ongoing task that requires careful planning and budgeting of resources.
5.41 Setting the rate. In some systems the rate is set in the law. Otherwise this step is essentially the taking of a decision. However, it is a politically charged decision and will be preceded by political debate. Steps include:
Depositing the legal valuation list. This is the culmination of the assessment process.
Dealing with objections and appeals. The assessment process does not end with the deposition of the list. In any transparent and sustainable system there must be an appeal system.
Collection. The collection process follows an annual cycle.
Enforcement. Collection will not be complete without enforcement.
Maintenance of the Valuation List. Properties and the tax base are always changing. These must be tracked and recorded. The process must roll on continuously.