4. IMPLEMENTING A RURAL PROPERTY TAX

4.1 In jurisdictions where a property tax system does not exist, the devolution of certain responsibilities to local governments may require the introduction of a completely new property tax system. In jurisdictions where an existing property tax system is limited to urban properties, and especially only to those properties in larger cities, the extension of an urban tax system to include rural properties may require almost all the steps needed for the implementation of a completely new property tax system. Other jurisdictions which already tax rural properties may find their tax systems to be ineffective or otherwise dysfunctional. The emphasis in such cases is likely to be on the transition to a more efficient and equitable tax system.

4.2 Whether a completely new rural property tax system is to be introduced, an existing urban tax system is to be extended to include rural property, or an existing rural tax is to be substantially improved, important political decisions must be made. While the scope of the implementation will vary depending on whether a tax system is being introduced for the first time, expanded or improved, in all cases there will be a change to the tax structure and to the assignment of the burden for paying the taxes. Because the design and implementation of a rural property tax are politically sensitive, there is a need for strategies to mitigate some of the effects of the changes that will be introduced. An impact assessment should identify how different target groups will be affected by the proposed changes to the tax system. Appropriate phasing of the tax should be considered, for example by gradually increasing the tax burden, to make the tax more acceptable to those who will pay it. Dissemination of information on the tax, and how the revenues will be used, is necessary to win public support.

4.3 The details of administration of the tax 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? How does it fit into the decentralization 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.

4.4 While property taxes are well suited for local governments, it is essential that the central government creates and maintains the enabling conditions that allow local governments to take on more responsibilities. Central ministries have crucial roles in promoting and sustaining decentralization by developing appropriate and effective national policies and regulations for strengthening local institutional capacity to assume responsibility for new functions.

4.5 In relation to property tax a split of functions will have to be arranged between the central and local governments, for example:

1. Local access to information in land registry offices can assist in maintaining the tax base and identifying tax-payers, and will improve access to services by buyers and sellers of property. Local land registries may be operated as decentralized offices of the central land registration agency, or through devolution to local government agencies where local governments have the capacity to provide registration services. It should be noted, however, that while a comprehensive land registry can be valuable, it is not a pre-requisite for the establishment of a tax system. Examples exist of independent tax lists which use land registry data as only one of a number of sources in their compilation.

2. Property identification is ideally suited as a local function given the local knowledge of local government officials. The identification of property for tax purposes should be based, where possible, on the records of the land registry.

3. Maintenance of the tax base should be regarded primarily as a local function. However, checks should be established if there are incentives that prevent local government officials from carrying out this function objectively.

4. Responsibility for the provision of valuation assessments requires the allocation of sufficient resources to provide for a robust and uniform valuation system. Ideally the central government should have the capability to provide this service for smaller jurisdictions. However, larger local governments could have the necessary resources to provide this function. In such cases, checks should be established to ensure that valuation assessments are carried out objectively.

5. The appeals system should be independent from the responsibility for valuations. Appeals against valuations should be heard first by a locally based system of tribunals or courts. The appeals system may provide for a right to appeal on questions of law to a higher level, which is likely to be provided centrally.

6. A regional or central billing system can create economies of scale in terms of human resources and required technology.

7. Collection is an important local function particularly where all revenues collected are allocated to the local budget. There is therefore a financial incentive for effective collection at the local level which would be absent at the central level. Where local governments lack the capacity to collect taxes, a central government agency can provide a tax collection service to local governments.

8. As with collection, enforcement is suitable as a local government function.

4.6 Policy decisions will have to be made before the detailed design can be undertaken. These policy decisions will depend on the choice of decentralization and whether the jurisdiction is introducing a completely new property tax system, or modifying an existing system by expanding its scope or by reforming it. An important aspect of policy planning is to assess the impact of the proposed changes on various target groups of tax-payers, and to evaluate options to mitigate some of the effects.

4.7 Public debates are needed if taxation is to be introduced or changed. However, 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. There is a need for a positive communications campaign linking the proposed property tax to the anticipated benefits, i.e. improved local services.

4.8 Legislation for the implementation of a rural property tax will be required. The following section lists the separate but interrelated issues for which rules should be provided in the legal code. This could be done either directly in the law or through powers devolved to ministers under the law. The section provides a checklist but is not exhaustive.

Practical details of rules: a checklist

4.9 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? What type of property will become liable to the tax? Who will be responsible for payments of the tax?

4.10 Administrative benefits and responsibility. Administration of property tax falls into various stages:

1. The legal initiation of the tax, commonly the responsibility of the central government minister.

2. The valuation, and the choice of where the responsibility for this task should be assigned in the law.

3. The responsibility of setting the tax rate. This can be specified in the law or be assigned to the local government body, possibly within limits set by central government.

4. The law must specify the duty of collection.

5. The law must specify which body receives the benefit of the revenue.

6. The law must specify which body will enforce the collection of taxes and adjudicate disputes.

It is possible for every one of these functions to be assigned to the local government body but generally this situation is unusual and rarely is central government willing to give local governments an entirely free hand. Providing for statutory independence of the valuation base can be important for public credibility of the property tax system. Legislation should give legal backing and support for those people who carry out the valuation task.

4.11 The basis of valuation assessment. The basis of valuation assessment 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 expectations of the economic benefit that their preferred option will bring with it. In practice, however, there are not great differences between options and in most cases there are at least three options that would work almost equally well. No solution will have the monopoly of benefits and there are always disadvantages. Table 1 illustrates the choices available.

TABLE 1
Comparison of bases of valuation assessment

4.12 The selection of an appropriate tax base must be in line with the general philosophy underlying the tax and fit with other administrative provisions. For instance, is it intended as a tax on ownership or on occupation? The underlying philosophy probably determines the best option for the basis of valuation assessment. It is also fundamental to the legal provisions relating to many of the items listed in this section. The selection of an appropriate tax base for an ad valorem tax system (i.e. a tax system based on value) 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 and most easily understood. If most properties are bought and sold on the basis of their market capital value, this will provide a more credible basis.

4.13 There are advantages of adopting one of the ad valorem tax bases identified in Table 1. Generally, they are well understood by the tax-paying 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 other options. However, they are not the only choice. Several countries 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 low-cost 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 for tax payment without being too demanding in terms of data and professional skills. In a system of banding, each property is assigned to one of several ‘bands’ or categories, and all properties assigned to a band pay the same property tax. This means that there is no need to provide a discrete, detailed valuation of each property.

4.14 Definition of the separately assessed property. What should constitute a single valuation 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 is 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 that is occupied by tenants might have one assessment. This is not possible if the tax is one on occupation, in which case each apartment must be separately assessed.

4.15 The tax-payer: who pays? The choice is broadly between the owner and the occupier. There are fiscal advantages to the occupier being the tax-payer especially where land registers are incomplete. The occupier is much easier to find and identify and there may also be a greater correlation with ability to pay. The occupier is also more likely to be the consumer of the services provided by local government. However, it is politically easier to persuade the public of the merits of 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 a new property tax this will reduce the rent that they can afford to bid on a new lease. This point emphasises the importance of transitional arrangements to ease the introduction of a new tax.

4.16 There is an important caveat if the owner is to be specified as the tax-payer. The definition should not be too closely tied to registration of ownership because failures in the land 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 the land owner where this can be done. In countries where public lands are leased to private individuals or companies, and where the owner has primary liability to pay, it is common to put the tax burden on the person leasing the land from the public sector.

4.17 Revaluations. The law must stipulate how often properties must be revalued to ensure the valuation assessments are up-to-date. Commonly this will be specified under the law for a period of around 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. 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. As more frequent revaluations are likely to result in smaller changes in value than less frequent valuations, the need for sensitive political decisions can be reduced by introducing annual revaluations.

4.18 Setting the tax rate. There are several possible approaches:

1. The tax rate is fixed annually by local government taking into account the budgeted needs of the authority. The setting of the tax rate is a political act, which will give rise to local debate. This approach provides greatest autonomy to decentralized local governments, giving the flexibility to set tax rates in accordance with the need for revenues. Transparency and accountability in local government are essential.

2. The central government fixes the tax rate annually taking into account the needs of local government and reflecting the extent of inter-governmental transfers from central to local government.

3. The law fixes the tax rate in primary legislation and the tax revenues will vary according to changes in market values and regular revaluations. This results in limited tax buoyancy, and revenues depend on the timing of the revaluation exercise in relation to highs and lows of the market values. The approach does not give any discretion to decentralized local governments.

4. The law fixes a maximum tax rate in primary legislation, leaving local governments with the opportunity to set actual tax rates within the established limit.

4.19 It is also possible to have differential rates depending on the value of property or the type of property concerned. Thus it is possible to introduce a policy where a higher tax rate is applied to properties with larger assessed values. 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 to adopt a single tax rate. Multiple tax rates usually lead to the 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 less transparent. The greater complexity decreases the level of accountability achievable from the administrative staff and can lead to corruption.

4.20 Exemptions. In general, the fewer the exemptions, the easier and cheaper it is to administer a property tax. The larger the number properties assessed, the lower the tax burden carried by any individual property. Exemptions seldom bring with them any lasting political popularity, may distort the property market, and rarely have the expected beneficial economic and social consequences.

4.21 There are few, if any, good reasons for exempting agricultural property from being taxed. Most reasons commonly proposed do not bring about the desired result. There is a belief that exempting agriculture from tax will reduce food prices but there is little evidence that it has ever done so. Economic theory suggests that the exemption tends to increase the price of land relative to other assets that are subject to tax and there is evidence that this is the case. Another belief is that access to land is facilitated if agricultural land is exempted from tax but, in practice as already noted, tax relief causes the price of agricultural land to rise and makes it more difficult for newcomers to gain access to farms. Furthermore, by exempting agriculture, damage is done to perceptions of the role of the tax as a fair way of apportioning local expenditure. It also renders it of little use for raising revenue for single function authorities that deal principally with agricultural land (such as drainage boards, irrigation authorities, etc.)

4.22 There are few sound reasons for exempting small properties. At first glance, such exemptions may appear sensible. Much of the total assessed value may derive from a small percentage of valuable properties, and much of the population live in less valuable properties that may account for a small percentage of the total assessed value. (In developed economies, perhaps 40 percent or more of the total assessed value typically derives from less than ten percent of the properties, while about half the population live in properties that account for less than ten percent of the total value). Because of the higher cost/yield of assessing these less valuable properties, and the greater difficulties of collection, it could be argued that exempting small properties from tax would be possible with little loss of revenue. Despite these apparent advantages, exempting small properties is rarely done. First, it diminishes the tax as a channel of local accountability because a smaller proportion of the population are tax-payers. Second, it can lead to artificial division of properties to avoid the tax. Third, it creates dissatisfaction and aggrieves those property owners at the margin who just meet the requirement to pay the tax.

4.23 There is also little reason for exempting government property. In a number of countries government property is exempt. Such exemptions may appear sensible at first. Taxation of property owned and occupied by the public sector would seem to be an unnecessary bureaucratic exercise. On closer analysis it may be seen that there are very good reasons for public sector properties to be subject to property tax. First, such taxation is a method of apportioning liability between the different levels of government. A central government agency uses local facilities and there is no reason why the central government should not contribute to the cost of locally provided services through property tax. 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. Second, it is generally the case that the public sector is not a careful user of property. Payment of property tax is one step towards better management, because then holding property is no longer cost free. As the public sector is almost always a very large owner and occupier of property the issue is important.

4.24 Properties which may be considered for exemption include:

1. Properties used for religious purposes, e.g. churches, mosques, temples, etc., together with associated burial grounds.

2. Roads, public parks and similar properties that are ‘occupied’ by the public. The same consideration may apply to similar public amenities in rural locations such as common grazing areas. Even if such amenities are not included in valuation lists, the benefit is not lost to the tax base. Their value is often reflected in the increased value of the properties that benefit from such amenities.

3. Land used for commercial forestry. In general, the value of forestry land is very low if the value of standing timber is excluded. Moreover the ability to pay is restricted by the periodic cash flow pattern of forestry yields that does not sit comfortably with an annual tax.

4.25 Rules for payment. The law must specify how and when payment must be demanded and made.

4.26 Enforcement. The law must provide powers of enforcement in cases of non-payment. Typical remedies include 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.

4.27 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 body responsibility for collecting the property tax.

4.28 Many of the disputes relating to property tax will be judged on matters of fact and valuation. The typical composition of such tribunals (at least three persons, often but not always chaired by a lawyer) will reflect this. The non-legal members are typically informed and respected local persons or 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.

4.29 Relation to other taxes. A decision must be made as to whether property tax is an expense allowable against income tax for an individual, and corporation tax on company profits and, if so, in what circumstances. It is common for property tax to be an expense that can be deducted against income tax paid by individuals, and against corporation tax paid by businesses.

Administrative machinery

4.30 Essential features of property tax administration. Important features of property tax administration to be considered when planning the implementation of the tax or a revaluation include the following:

1. 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.

2. Completion of the valuation list: Property tax requires that every taxable property should be included in the valuation list. If a list is incomplete, potential revenue is not being collected. Inclusion of all properties is also important for fairness and equity as it ensures that the tax burden is placed fairly on all eligible tax-payers. Every property must be assessed within the planned time schedule.

3. Schedule: The time taken to implement the system will depend on the scale of the task and the resources available. It will normally 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 well-designed computer systems are used. Policy-makers need to take this into account.

4. 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. Failure to compete the valuation list and to have it properly approved in accordance with the legislation at the beginning of the financial year is likely to cause a full year’s delay.

4.31 There are several factors that can give rise to failure. Furthermore, the 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.

4.32 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 three or four times that working in the public sector. In every country with established annual property taxes, the assessment process is organized 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, in collaboration with valuation technicians. The requirements for professionally qualified valuers could be reduced through the use of approaches such as banding (i.e. putting properties into one of a number of valuation bands rather than providing individual valuations of all properties).

4.33 Valuation knowledge and skills are still in short supply in developing 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 requirements for property tax skills in the public sector have to compete with demands in the private sector and in 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.

4.34 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 developing economies for some time, 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 capacity in universities for training and research in this area, the in-house training of technicians, and the use of the private sector and professional institutions. Strategies must also address the fact that training and education for valuers generally includes no instruction on the organization of a property tax office or the planning and execution of a revaluation.

4.35 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.

4.36 There are often entrenched interests that must be taken into account when considering the assignment of responsibility for the assessment function. Property records that could be relevant to assessment may be divided and located in several ministries. The Ministry of Agriculture may hold records of soil classification and farm units. Land ownership records may be with the land registration office or cadastral department and records of buildings may be held separately.

TABLE 2
Choices for locating responsibilities

4.37 The shortage of professional valuation skills in many countries suggests that in most cases it is may not be an option to devolve the assessment function to the local governments. Where local governments lack the professional capability in-house, it may be more effective to concentrate skilled resources in a central valuation unit. In other cases, there may be the option of contracting with the private sector to carry out the work. Even when valuation is contracted to the private sector, the government agency should have sufficient expertise to assess the quality of the valuations.

4.38 There are good reasons for separating the collection function from that of valuation, and in many cases local government carries out the collection function while central government retains control of valuations.

4.39 Technical considerations. Valuation lists of high quality have been compiled for several millennia without the benefit of modern information technology (IT). It is worth bearing this in mind when deciding on the level of technical sophistication to be used:

• IT does not automatically improve on the quality of the final product;

• IT does not remove the requirement for valuation skills; and

• IT does not produce organizational skills.

However, the careful and well-planned use of IT may 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. There is a wealth of experience (of both successes and failures) of computerizing property tax throughout the world from which to learn. It is important to get the strategy right.

Putting it into practice: a chronological checklist

4.40 This section presents the chronological order of the actions required to introduce a local property tax, and the interrelation between them. The sequence of events illustrated in Table 3 indicates the steps that must take place from conception to collection. The table 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 if the system is 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.

4.41 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 careful consideration of the preferred policy has taken place.

4.42 Public awareness. A very important aspect of preparation is the need to provide information to the public about the proposed tax and, in particular, the benefits that will flow from its introduction.

4.43 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 for survey purposes and to obtain information necessary for their task.

TABLE 3
Sequence of events

4.44 Establishing the valuation office. Although the valuation 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. If valuation work is contracted to the private sector, the valuation office should have the skills necessary to manage the contracting exercise.

4.45 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.

4.46 The valuation assessment process. This is the main time-consuming function. It will certainly be on the critical path. There are many sub-functions within this step. These include:

• identification of taxable properties and the relevant characteristics;

• carrying out of property surveys;

• collection and assembly of data on market transactions;

• analysis of market information;

• devising of mass valuation benchmarks;

• preparation of the valuation scheme;

• carrying out of valuations; and

• compiling the valuation list.

4.47 If a property tax system is being newly introduced, then compiling the basic data required for the valuation list (property identification, ownership or occupancy, billing addresses, etc.), can be extremely difficult if no comprehensive register already exists. The collection of available data will not necessarily achieve a complete valuation list. The list itself is likely to contain errors. At some stage a decision will have to be made whether to publish the valuation list despite its incomplete stage.

4.48 In order to assist in updating the valuation lists, the valuation 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 are major initial and ongoing tasks that require careful planning and budgeting of resources.

4.49 Setting the tax rate. In some systems the tax rate is set in the law. Otherwise this step is essentially the taking of a decision. However, it is a politically charged decision and should be preceded by political debate. A balance needs to be achieved between setting a tax rate that (a) produces the level of revenue that is required to meet the cost of services to be provided, and (b) recognises the tax-payer’s ability to pay. If the tax rate is set too high, there will be widespread dissatisfaction and resistance by tax-payers. If the tax rate is set too low, the revenue generated may not be sufficient to meet the needs of local governments, and may not even justify the cost of assessment and collection. The decision on the tax rate is probably the most important decision to be taken in connection with property tax.

4.50 Steps of setting the tax rate include:

1. Depositing the valuation list. This is the culmination of the assessment process.

2. Dealing with objections and appeals. The assessment process does not end with the deposit of the list. In any transparent and sustainable system there must be an appeal system.

3. Collection of the tax. The collection process follows an annual cycle.

4. Enforcement. Collection will not be complete without effective enforcement.

5. Maintenance of the valuation list. The tax base is always changing as new properties are built and others are altered or demolished. These changes must be tracked and recorded. The process must roll on continuously.