Taxing Taxing agricultural landagricultural land

Malcolm Childress, David Malcolm Childress, David Solomon and Rogier van den Solomon and Rogier van den

BrinkBrink

What is a land tax?What is a land tax?

““land tax” is a tax on the value of land tax” is a tax on the value of land, which is paid by the owner.land, which is paid by the owner.

Different from a property tax:Different from a property tax: land tax taxes the value of the land onlyland tax taxes the value of the land only property tax taxes the value of the land property tax taxes the value of the land

and the fixed improvements made on it and the fixed improvements made on it (e.g. a house, a farm building, and (e.g. a house, a farm building, and irrigation canal).irrigation canal).

History: the “ideal tax”History: the “ideal tax”

long been considered an “ideal tax” by a long been considered an “ideal tax” by a wide range of scholars and politicians:wide range of scholars and politicians: 17th century philosopher John Locke17th century philosopher John Locke 18th century revolutionary Benjamin Franklin18th century revolutionary Benjamin Franklin 19th century politician Henry George:19th century politician Henry George:

Hence the term “Georgists”, who want the land tax Hence the term “Georgists”, who want the land tax to be the to be the onlyonly tax tax

Example from 1990:Example from 1990: several leading economists—including four Nobel several leading economists—including four Nobel

prize winners—wrote to then President Mikhail prize winners—wrote to then President Mikhail Gorbachev, suggesting that Russia use land taxation Gorbachev, suggesting that Russia use land taxation in its transition towards a free market economyin its transition towards a free market economy

Economic argumentsEconomic arguments does not distort economic incentives (because does not distort economic incentives (because

the overall supply of land is fixed);the overall supply of land is fixed); fair, because it specifically targets unearned fair, because it specifically targets unearned

income (a rent):income (a rent): the value improvements of land caused by public the value improvements of land caused by public

investment (owners are taxed on what was there investment (owners are taxed on what was there originally—the potential of the land) and originally—the potential of the land) and notnot an an economic activity of the owner;economic activity of the owner;

provides a disincentive to land speculation in provides a disincentive to land speculation in both urban and rural areas; andboth urban and rural areas; and

relatively easy to administer, becauserelatively easy to administer, because it is impossible to hide landit is impossible to hide land Most rural communities have an idea of what land Most rural communities have an idea of what land

is worthis worth

Does a land tax Does a land tax redistribute land?redistribute land?

Recall that the price of land in the market Recall that the price of land in the market reflects:reflects: Income stream from agricultureIncome stream from agriculture PlusPlus value as asset, hedge against inflation value as asset, hedge against inflation

Farmers can typically only afford to pay the Farmers can typically only afford to pay the agricultural valueagricultural value So will be outbid in the land market by the richSo will be outbid in the land market by the rich Need to remove all distortions favoring large Need to remove all distortions favoring large

farmersfarmers Need Need subsidiessubsidies for the poor for the poor And a land tax can help, because it reduces the And a land tax can help, because it reduces the

land price and its speculative valueland price and its speculative value See: Binswanger, Hans, Klaus Deininger and Gershon Feder. 1995. “Power, Distortions, See: Binswanger, Hans, Klaus Deininger and Gershon Feder. 1995. “Power, Distortions,

Revolt and Reform in Agricultural Land Relations.” In Jere Behrman and T.N. Srinivasan Revolt and Reform in Agricultural Land Relations.” In Jere Behrman and T.N. Srinivasan (eds). Handbook of Development Economics. Vol. 3B. Amsterdam: Elsevier.(eds). Handbook of Development Economics. Vol. 3B. Amsterdam: Elsevier.

Does a land tax redistribute Does a land tax redistribute land?land?

continuedcontinued In practice, it has not:In practice, it has not:

Usually rates set very low;Usually rates set very low; Low assessment valuesLow assessment values Example from Brazil:Example from Brazil:

tax locally administered, and large tax locally administered, and large landowners used their influence to evade landowners used their influence to evade the taxthe tax

Taxed “unused” land which is very difficult Taxed “unused” land which is very difficult to define—hence easy to evadeto define—hence easy to evade

Reasons for adoption of Reasons for adoption of land tax:land tax:

very diversevery diverse As part of land restitution: EstoniaAs part of land restitution: Estonia As a form of land reform: BrazilAs a form of land reform: Brazil As a mechanism for defining property rights: BrazilAs a mechanism for defining property rights: Brazil To create property valuation capacity. To create property valuation capacity. Defuse transitional tensions: Eastern EuropeDefuse transitional tensions: Eastern Europe Build on existing fiscal systemsBuild on existing fiscal systems Discourage foreign absentee land ownership: Discourage foreign absentee land ownership:

Australia Australia Discourage speculation: Singapore, JamaicaDiscourage speculation: Singapore, Jamaica Low cost of assessment: South Africa, KenyaLow cost of assessment: South Africa, Kenya Part of local economic development: Pittsburgh, Part of local economic development: Pittsburgh,

Harrisburg, Queensland, NSW, BrazilHarrisburg, Queensland, NSW, Brazil Equity: Australia, DenmarkEquity: Australia, Denmark

International Best International Best PracticesPractices

Land taxes should be local:Land taxes should be local: rate-setting, discovery, assessment, billing and collectionrate-setting, discovery, assessment, billing and collection They should be administered along with the urban ratesThey should be administered along with the urban rates

Basis of assessment should be simple and able to Basis of assessment should be simple and able to be monitored for consistency. All the following are be monitored for consistency. All the following are suitable: suitable: AreaArea Self Assessment,Self Assessment, Geographic BandingGeographic Banding CAMACAMA Community based value factor identification and Community based value factor identification and

application application It is most important to ensure that the base is It is most important to ensure that the base is

capable of being fairly administered.capable of being fairly administered. This may be more important than the choice of the base. This may be more important than the choice of the base.

…… …… Best Practices ……Best Practices …… There should be zero-rated thresholds, phasing in, There should be zero-rated thresholds, phasing in,

“circuit breakers”, capping of increases,“circuit breakers”, capping of increases, Should be tailored to local agricultural Should be tailored to local agricultural

circumstances in the municipal property rates policycircumstances in the municipal property rates policy Assessment should not be index-linked to Assessment should not be index-linked to

agricultural risk factors such as rainfall and agricultural risk factors such as rainfall and commodity pricescommodity prices

Rate should be differentiated from the urban rate. Rate should be differentiated from the urban rate. Rate should not be progressive Rate should not be progressive (the base is already (the base is already

distributed progressively)distributed progressively) There should not be a tax on land market There should not be a tax on land market

transactions. transactions. There should be an accessible transparent appeal There should be an accessible transparent appeal

process. process. There should be on-going monitoring of assessment There should be on-going monitoring of assessment

quality to ensure sound administrationquality to ensure sound administration

Defining land valueDefining land value ““market value”: value as if land was currently sold in the market value”: value as if land was currently sold in the

market without any duress by a willing seller to a willing market without any duress by a willing seller to a willing buyer, unencumbered by any loans or other financial buyer, unencumbered by any loans or other financial obligations. obligations.

““prairie value”: value as if there were no improvements prairie value”: value as if there were no improvements or any geographical advantages relating to or any geographical advantages relating to infrastructure or improvements. infrastructure or improvements.

““use value”: as opposed to “highest and best use” in use value”: as opposed to “highest and best use” in situations where the value of the land includes the situations where the value of the land includes the potential for future development, usually for urban potential for future development, usually for urban residential use.residential use.

Agricultural land is often valued only on the current use, Agricultural land is often valued only on the current use, i.e. agricultural, not on the basis of potential future uses.i.e. agricultural, not on the basis of potential future uses.

Use of its “rental value” will also achieve that objective Use of its “rental value” will also achieve that objective

Area-based land taxArea-based land tax

In some countries, the land tax is not In some countries, the land tax is not based on the actual land value of each based on the actual land value of each individual farm, but on a standardized individual farm, but on a standardized price per hectare, adjusted by a price per hectare, adjusted by a fertility or location factor.fertility or location factor.

This is in effect a simplified valuation, This is in effect a simplified valuation, aimed at reducing the cost of aimed at reducing the cost of assessment.assessment.

E.g. NamibiaE.g. Namibia

Self-appraisalSelf-appraisal When the taxpayers themselves provide the When the taxpayers themselves provide the

assessment of the taxable value of the property, the assessment of the taxable value of the property, the process is known as self-appraisal.process is known as self-appraisal.

It has an advantage in that it is simple to administer, It has an advantage in that it is simple to administer, as the cost of appraisal is shifted to the taxpayer.as the cost of appraisal is shifted to the taxpayer.

In practice, taxpayers often have access to this In practice, taxpayers often have access to this information, having conducted valuations for other information, having conducted valuations for other purposes.purposes.

Self appraisal gives them an opportunity to provide Self appraisal gives them an opportunity to provide this otherwise confidential information voluntarily.this otherwise confidential information voluntarily.

Under-appraisal is often discouraged by a provision Under-appraisal is often discouraged by a provision that expropriation can take place at the declared that expropriation can take place at the declared value. value.

Community-assessment. Community-assessment.

International experience: even in very International experience: even in very remote areas, the local population has a remote areas, the local population has a pretty good idea of land values, even if these pretty good idea of land values, even if these are not correctly reflected in legal are not correctly reflected in legal documents.documents.

For instance, local mayor (tribal chief) and For instance, local mayor (tribal chief) and agricultural extension agent know what land agricultural extension agent know what land is generally worth.is generally worth.

This "community perception" is a promising This "community perception" is a promising avenue, which has been tested out avenue, which has been tested out successfully in several countries.successfully in several countries.

BandingBanding

A method of lowering the cost of A method of lowering the cost of appraisalappraisal

Banding requires the assessing Banding requires the assessing officer to assign each property to officer to assign each property to one of several value bandsone of several value bands

Instead of performing a detailed Instead of performing a detailed valuation in each case. valuation in each case.

Computer Aided Mass Computer Aided Mass Appraisal. (CAMA).Appraisal. (CAMA).

A means of performing valuations en A means of performing valuations en masse by determining the key value masse by determining the key value creating variables by statistical analysiscreating variables by statistical analysis

estimating values by applying the estimating values by applying the estimated statistical coefficients to estimated statistical coefficients to locally collected data.locally collected data.

CAMA is reported to be much less CAMA is reported to be much less expensive than conventional valuation. expensive than conventional valuation.

ThresholdsThresholds

Many jurisdictions place a minimum Many jurisdictions place a minimum threshold of land value, below which threshold of land value, below which no tax is charged.no tax is charged.

Dual function: it both provides relief Dual function: it both provides relief for the poor and lowers the cost of for the poor and lowers the cost of administration by avoiding the need to administration by avoiding the need to conduct a detailed valuation on a very conduct a detailed valuation on a very large number of small properties.large number of small properties.

Eases the transition when an area is Eases the transition when an area is absorbed into the tax base. absorbed into the tax base.

South Africa:South Africa:Municipal Property Rates Municipal Property Rates

ActActMPRA conforms to “best practice”:MPRA conforms to “best practice”: Gives proper basis for taxing all real estate, Gives proper basis for taxing all real estate,

including agriculturalincluding agricultural Agricultural land is already part of the Agricultural land is already part of the

municipal tax base. (has been since “wall-to-municipal tax base. (has been since “wall-to-wall local government”) wall local government”)

Allows differential ratesAllows differential rates Requires certain reliefs, eg threshold, phasing Requires certain reliefs, eg threshold, phasing

inin Requires a properly consultative “rates policy” Requires a properly consultative “rates policy”

But in the old Transvaal….But in the old Transvaal….

   area (ha)area (ha) value (R)value (R) R/haR/ha

farm examplefarm example 100100 400,000400,000 4,0004,000

Mogale CityMogale City(Krugersdorp)(Krugersdorp)

MadibengMadibeng(Brits)(Brits)

MerafongMerafong(Carltonville)(Carltonville)

MbombelaMbombela(Nelspruit)(Nelspruit)

tarifftariff 7.62%7.62% 17.33%17.33% 13.00%13.00% 24.18%24.18%

bracket (ha)bracket (ha)agricultural agricultural

rebate rebate factorfactor

Tax payable (R/year)Tax payable (R/year)

11 100%100% 304.86304.86 693.20693.20 520.00520.00 967.20967.20

44 25%25% 228.64228.64 519.90519.90 390.00390.00 725.40725.40

2020 10%10% 487.77487.77 1,109.121,109.12 832.00832.00 1,547.521,547.52

>20>20 1%1% 243.88243.88 554.56554.56 416.00416.00 773.76773.76

totaltotal 1,265.151,265.15 2,876.782,876.78 2,158.002,158.00 4,013.884,013.88

How hard would it be to How hard would it be to implement a land tax in implement a land tax in

SA? SA? Effective rate can be very low, half to one Effective rate can be very low, half to one

percentpercent Half a percent on half of the land would yield Half a percent on half of the land would yield

significant revenue significant revenue Can differentiate between categories of land Can differentiate between categories of land

use.use. Enabling legal framework is in place Enabling legal framework is in place

(MPRA)(MPRA) But national guidelines needed, as per Section 5 But national guidelines needed, as per Section 5

(2) b of MFMA(2) b of MFMA Could be integrated with work on Could be integrated with work on

municipal financial frameworkmunicipal financial framework

NamibiaNamibia Land taxation rate is set at 0.75 percent of the Land taxation rate is set at 0.75 percent of the

unimproved value of the farmlandunimproved value of the farmland land values determined using a standardized metric land values determined using a standardized metric

per hectare and by accounting for the size of the per hectare and by accounting for the size of the farm. farm.

Raises substantial revenue for land reform programsRaises substantial revenue for land reform programs reduces inefficient use of landreduces inefficient use of land encourages an increased land supply and moderate encourages an increased land supply and moderate

pricing of agricultural land, pricing of agricultural land, as well as to specifically defend against land as well as to specifically defend against land

speculation and foreign ownership:speculation and foreign ownership: charges an additional 0.25 percent of land value annually charges an additional 0.25 percent of land value annually

for every extra farm ownedfor every extra farm owned charges foreigners a higher land tax rate of 1.75 percent charges foreigners a higher land tax rate of 1.75 percent

rather than 0.75 percentrather than 0.75 percent

Implementation Implementation challengeschallenges

iso-value metric does not account for iso-value metric does not account for minor topographical variations that minor topographical variations that alter land values.alter land values.

extra charges for additional farms do extra charges for additional farms do not account for the aggregate size of not account for the aggregate size of all farms:all farms: an individual holding several farms with a an individual holding several farms with a

total of 10,000 hectares could be taxed total of 10,000 hectares could be taxed more heavily than an individual owning a more heavily than an individual owning a single 15,000 hectare farm.single 15,000 hectare farm.

ConclusionConclusion

Economic rationale for land tax is Economic rationale for land tax is sound, in theory and in practicesound, in theory and in practice

Administration is not as difficult as Administration is not as difficult as earlier observers had thoughtearlier observers had thought

Land tax can never be the only Land tax can never be the only instrument to promote land instrument to promote land redistributionredistribution

But should be seriously considered as But should be seriously considered as part of the “package”part of the “package”