7.1 It is widely recognised that the incidence of taxation on land and property can have profoundly distorting effects on property markets. Many taxes impinge on property and the design of each has the potential to affect the market in different unintended and undesirable ways. But there may also be ways in which the tax system encourages beneficial consequences. Table 4 illustrates the complexity and scope of the issues although it is not comprehensive or applicable in all circumstances.
7.2 Clearly any review of the effect of taxes on property as an investment or how tax affects access to land and property must have regard to many other wider factors: the wider economy, the existing pattern of taxation and the incidence of taxation on investments other than land and property. Taxation is of course primarily about raising revenue and is therefore an issue that goes well beyond the property market and land administration.
7.3 The first action is to review the incidence of taxation on land and property and identify any distortions caused by taxation. Remedies can only be devised in the light of the larger economy, the need to raise revenue, the national capacity to implement new taxes and political realities.
7.4 In the final analysis, property taxes can play an important role in developing sustainable rural livelihoods and communities. The tax is transparent, cheap to administer, efficient to collect and well understood by the taxpaying public. It is administratively feasible in virtually any circumstances.
7.5 It is particularly suitable as a source of locally generated revenue for local government. It enables local communities to provide for locally determined needs. This is important in transition countries because central governments may find it increasingly difficult to respond to local rural needs. Rural livelihoods will be inhibited without sound rural infrastructure. Property tax has an important part in providing it.
TABLE 4
Consequences of taxation
|
Taxes on Land and Property |
Consequences for Property Markets |
|
Property taxes using market values as a basis of assessment. |
A system that uses up-to-date market values (capital or rental) as a basis does not distort the market provided the categories of exemption are those conventionally used. It will tend to reduce the market value and may thus make property more accessible. |
|
Capital Gains Taxes |
Capital Gains Tax and its design is likely to be a factor considered by those investing in property. In most countries houses used as primary residences are exempt. This does distort the market in favour of owner-occupation of residential properties, but this is regarded as a benign result in most countries. This tax need not affect the operation of the land market or the operation of property tax. |
|
Transfer taxes or Stamp Duties |
If the total cost, including tax, of officially transferring property becomes too great the market will not use the official systems thus leading to a less secure and less transparent market. |
|
Capital or Wealth Taxes |
If applied evenly and with few exemptions the distorting effects are few. The incidence of the tax can have some relevance to property tax. Both taxes impinge on the same target. |
|
Income tax |
The income tax system affects the property market in a number of ways. The treatment of capital allowances (how capital investments in property may be written off against income) will affect the decisions of investors. Arrangements can be made to assist farmers but unintended effects may occur: concessions often result in increasing land prices and impeding access to land. Applying property tax to rural property will tend to correct this distortion. |
|
Taxes on inheritance |
This tax can have a beneficial effect. Its redistributive nature can cause more land to come on the market. |
|
Value added taxes and the effect on sales and building costs |
The design of the tax, categories of exemptions and zero rating and level of tax payable are all factors relevant to property as an investment and the market |
7.6 Many of the countries of Central and Eastern Europe have introduced a property tax in some form or other. Generally the advantages of property tax as a means of generating local revenue are understood. In many instances the tax in force is not yet on a true ad valorem basis due to perceived difficulties in assessment. There is a concern about the lack of valuation expertise. In some cases it is thought there is not a sufficiently strong property market. It is considered that this is not now the case even in rural areas. Well administered transparent property taxes have the potential to generate a greater revenue and reduce the opportunities for corruption.
7.7 Most tax reforms take time and property tax is no exception. The longest and most unpredictable phase is the public debate and policy planning. Only when this stage is complete can the execution begin. Thereafter there are a number of interrelated steps which will take not less than two years. Thus time from initiation of the policy debate to the flow of tax revenue is likely to be about five years. Time is thus an important element. The single most complex step is the assessment process which must be completed within a certain period (say a maximum of three years) because the information captured becomes out of date and undermines the credibility of the tax. The most important step is setting the tax rate. If the tax rate is set too high, there will be widespread resistance. If the tax rate is set too low, the system will not be cost-effective. The aim should be to set the tax rate at a level high enough to generate sufficient revenue to make it worthwhile but not so high that it becomes impossible to collect the taxes because of an 'inability to pay'.
7.8 Property tax is an ancient and very well understood tax. There is plenty of experience from countries all over the world and it is well known what works, and what does not. There are probably no circumstances in which property tax cannot be introduced if there is the political will to do so. The overall message is that property tax in rural areas is technically feasible and will benefit the rural economy.
