GTZ - Land Tenure in Development Cooperation: Chapter 4.3.5

Guiding Principles: Land Tenure in Development Cooperation
Orientierungsrahmen: Bodenrecht und Bodenordnung		Deutsche Gesellschaft für Technische Zusammenarbeit Abt. 45 / Div. 45

4.3.5 Land and Property Tax

The land and property tax can be an important source of income for the public budget (ECE 1996). The land tax is especially relevant for community management with respect to decentralization. The tax can contribute 70% - 90% of the income from taxes within local communities. It is important as an instrument for supporting the communities' budgets.	Relevance of the land and property tax
Most tax policy experts favor leaving land and other property taxation as a revenue source for local government. This is so for several very important reasons. First, although the sums collected are minimal from a national perspective, they are usually significant from the perspective of local and municipal governments. Second, the local use of property tax revenue creates an incentive for keeping good local records at the parcel level, reducing national administrative expenses and overheads. Third, this approach creates a mechanism by which the local community can take a proactive role in implementing environmentally sound, sustainable land policy, since decisions on who and where to tax are made at the local level. [...] An effective land taxation policy has always to walk a very fine line of efficiently collecting revenue while not discouraging investment. (Herrera, Riddell and Toselli 1997)

Its advantages are the following: The tax is relatively simple to raise since the object is visible. The tax is a stable form of taxation since the basis for calculation minimizes fluctuations in the tax. The land tax is especially important for development cooperation in decentralization, privatization, community development and tax reform projects.

The working group on "The Reform of Land-Based Taxes" gave the following suggestions for land tax reform at the international GTZ seminar "Urban Land Management" in Ecuador in 1993:

To improve the credibility of local governments by increasing transparency, equity and implementing appropriate legal settings, appropriate regulatory procedures and broadly accepted expenditure concepts, e.g. increase the ratio between capital investment and operation.
To develop strategies for the sustainability of financial reform projects.
To determine the property tax base potential. Property tax revenue depends on the tax base, the coverage ratio, the valuation ratio, the assessment ratio, the legal tax rate, and the collection ratio. Improving each of these components will lead towards maximization of the yield.
To always consider valuation and taxation systems when deciding about cadastre projects.
To keep in mind throughout the reform process the following elements that lead to a successful property tax reform:

keep objectives clear

keep policy simple

rather than rely solely on property information and valuation,

concentrate on efficient tax collection

keep operation processes simple

establish correct incentives and resist temptations

introduce innovations through pilot projects (e.g. public/private partnership for tax collection through local banks;SISTEP, Indonesia)


Besides its importance as a source of income, taxation of land can also be a fiscal steering instrument: Production incentives, Provision of land for construction, Reduction of land speculation, Mobilization of the land market, Guiding of land use. This is especially the case when the basis for calculation of the tax is not the current use value, but the potential market value.	Fiscal instruments of indicative planning

Production and guiding of land use can be influenced by the land tax. A high land tax based on the potential soil capacity should urge the farmers to use the land optimally, thus contributing to an increase in productivity per unit area (e.g. in the case of irrigation). The lack of a land tax can have the effect, such as in Honduras, that large landholders utilize the most fertile areas as pasture, while the smallholders suffer from a land shortage.

In Brazil, Chile, Guatemala, Panama and Thailand, a "penalty tax" was raised on fallow land or land used in an undesirable way. In Brazil, however, this led to the negative effect of more areas being cleared.

Land tax and production incentives

Table 9: Income from land taxes in Chile and Indonesia
	Year 1981	Year 1991	Percentage of tax for agriculturally used land (in %)	Percentage of tax for non-agriculturally used land (in %)
Chile (US$ million)	123.0	202.0	13	87
Indonesia (Rupia billion)	135.4	574.3	13	87
(Lincoln Institute of Land Policy 1994)