Reforming Property Taxes for Financing Local Government: Key Lessons Learned

Presentation to the World Bank January 9, 2003 Institut International de la fiscalité immobilière International Property Tax Institute

The presentation made on January 9 th taken from the slides included below.

is These slides form a more complete document and are provided for your information, as well as to address questions that you may have.

Property Tax Reforms

It is a widely held belief that the introduction of a real property taxation system will provide the means to improve the revenue flows and stability needed to finance local government. With this in mind many countries have embarked upon valuation work, mapping projects, computerized regression analysis and like activities . . .

In the Matter of the Blind Ones

None were aware of the elephant

Fundamentals of Property Tax Reform

    What revenues are required to finance local government?

Where do property taxes fit in to this picture?

How do we get there?

Where do we start?

Property Tax Reforms

 Real property tax reform is a process of financing local governments  Not a series of unrelated functions  Works well only when planned in a holistic fashion  Relies on information and support from many government departments

Lessons from Tanzania

     36 million people 5 million parcels (est.) 100 certified valuers Poor mapping and ownership records 18 year project for first national roll with current legislation

Lessons from Tanzania

    Limited valuation expertise available No evidence of revenue planning or analysis of tax impacts Current legislation restricts process Need:  Goal setting    Tax policy review Re-work legislation Planning

Lessons from Uganda

      25 million people Graduated poll tax in place 3 million parcels (est.) 11 certified valuers Lack of training facilities Impossible task under current legislation

Lessons from Uganda

    Haphazard application of existing poll tax system – creates barriers to new tax acceptance Tax structure not independent from political structure – provides opportunity for corruption Lots of tax options – no plan on how they would be applied – creates inequity Incomplete ownership and cadastre info.

Lessons from Kosovo – UN Protectorate       No land records No ownership records No certified valuers Started with revenue requirements Lack of IT and admin structures Crude assessment base

Lessons from Kosovo – UN Protectorate     Legislation well formed Some limits on opportunities for corruption Cash flowing in one year to municipalities Need to continue and refine property tax processes

Lessons from Kyrgyz Republic

      Unsophisticated land tax in place Real property tax proposed for 22 cities Potential double taxation Land cadastre and land registry reforms underway 70 trained appraisers in country Collection by national agency

Lessons from Kyrgyz Republic

     Proper goal setting requires education of decision makers about impacts/ options Emphasis on openness and transparency required to counter-act historic patterns of corruption in government Need to limit options and opportunities for corruption Failure to integrate taxation processes Planning of property tax process required

Lessons from Czech Republic

     Property taxes    7.5 bill. CZK 0.4% of GDP 9.0% of local municipal budgets Tax reform started in 1993 Issue before central government in 1997 2001 refusal to implement new property taxes system for political reasons 2002 – starting over

Lessons from Czech Republic

   Vision of desired goals required Planning and implementation schedule required Political commitment from all levels of government required

Lessons from Poland

      Land and area tax systems in place Generates up to 13% of local revenue Distortions between residential tax - 0.062% of value, and commercial tax - 8% of value Politically difficult to progress to next stage Vested interests in entrenched positions Urban productivity hampered by infrastructure deficiencies

Lessons from Poland

     Ad valorem tax process too intricate for current level of financial support Jump start required End goals need definition Implementation process required Political commitment required

Lessons from Nova Scotia, Canada

     72.7% of local government finances from property taxes 6.2% of taxes from payments in lieu Residential accounts generate 55% of property tax revenue Market value system is open and understood by public Proactive search for better methods continue

Summary of Lessons Learned

   To be successful, strategies to support and implement local government financing must be created. This should start with an analysis of the current situation and then determine the desired ends.

Need for a pre-project review and audit – not a post project lament Findings of audit should be included as part of terms of reference for tax projects.

Summary of Lessons Learned

 Need to consider the whole picture.

  Educate decision makers about options.

Set goals and gain commitment from all levels of government.

 Consider and plan for all aspects of project:  Legislation  Administration    Valuation Political acceptance Adjudication   Training Collection

Adjusting Systems in Balance

    Present revenue system is in balance Change requires:  Vision   Strategy Documented process Change generates chaos that must be managed.

Transition period to arrive at a new balanced system.

Managing Transitions

Transitions fail because: 1. Lack of visions and documentation of  Current state  Desired state.

2. Transition is disruptive for people  Creates risks and fears 3. Inability to see the whole picture

Basic Tests of a Good Tax System

      Stable and assured source of revenue.

Understood by both taxpayer and administrator.

Distributes tax in a manner that is perceived to be fair and equitable.

Easy to administer and efficient to run.

Available appeal process.

Collection process that assures total compliance.

IPTI

 International organization – world-wide expertise.

 Multi-cultural background and sensitivity to local customs and standards.

 Expertise in all areas of property taxation – tax policy, administration, legislation, valuation, data systems, quality control, adjudication and tax collection.

IPTI Project Management Style

 The long-term goal for a self-sufficient property tax system requires a distinct approach:  Holistic  Supportive  Instructive  Sensitive to local needs and culture

IPTI Management Organization

Project Management and Coordination Specific Expertise Legal/ Legislation Valu ation Data Systems Admin/ Mgmt Collect -ion General Expertise Education/ Communication/ Quality Control

Description of Property Tax Implementation Process

Stepped Approach to Growth

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6

Time

Step 1. Audit

1.

2.

3.

4.

Review all existing taxes.

Determine where tax system requires adjustment.

Establish commitment to re-distribute existing taxes and re-allocate the responsibilities between levels of government.

Audit current tax legislation and policies.

Step 1. Audit

5.

Audit current state of:

  Mapping Land registry and ownership data     Assessment policies and legislation Data systems and capabilities Tax administration and billing Collection practices and enforcement laws

Step 2. Goal Setting and Planning

Prepare for action by cooperating with Government officials to:  Set immediate and long term goals for local taxation   Establish social policy objectives Set up plan to establish taxation system to achieve social and fiscal objectives over time

Step 2. Goal Setting and Planning

Preparing for Action    Consider types of property tax systems  Develop Tax Policies Define exempt properties  Establish penalties for non-compliance Determine implementation strategy

Step 2. Goal Setting and Planning Preparing for Action

   Identify legislative requirements Identify infrastructure requirements Complete impact analysis

Step 3. Infrastructure Development

3

     2 1 Write required legislation Establish property registration system Develop assessment administration system Develop assessment processes Develop adjudication processes and system

Step 3. Infrastructure Development    Develop communication/ marketing materials for taxpayers Develop appropriate geographic information Develop levy, billing, collection and enforcement system

Step 4. Implementation and Training       Set up assessment offices Communicate/ market new taxation process Train assessment administrators Train assessors Train data collectors Train tax administrators

Step 4. Implementation and Training Appeal Process     Train adjudicators Train assessors Provide public information sessions for:  Taxpayers  Legal profession Set up appeal process and adjudication facilities

Step 5. Support

   Assist with initial assessment and taxation process Provide quality control Assist with development of process see Step 6.

Step 6. Phased Development

 The introduction of a property tax system can have planned phases. For example: Phase 3 Ad Valorem Phase 2 Tax Bands Phase 1 Land Only

Time

Step 6. Phased Development

  Prepare/ train for next phase of process Make adjustments to existing processes where required.

     Legislative Administrative Training Procedures Re-focus on long-term goals