Improving the Performance of the Property Tax in Latin America (Policy Focus Report)

Author(s): De Cesare, Claudia M.
Publication Date: June 2012

$15.00; 40 pages; Inventory ID PF033; English; Paperback; ISBN 978-1-55844-240-5

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Abstract

The challenges of establishing a successful and sustainable property tax in Latin American countries are numerous and varied, yet many jurisdictions are implementing viable reforms. Public officials responsible for its administration often face intense political pressure because the property tax is universal and highly visible. Public dissatisfaction arises because the property tax requires payment independent of a property transaction. Moreover, equitable property tax assessment depends on a variety of factors, including operational efficiency, technical expertise, available data, administrative capacity, and political will.

Certain conditions in Latin America compound these difficulties. Large disparities in income and wealth complicate the setting of equitable property tax rates, and as a result some municipalities are under-resourced to support efficient property tax collection. Limited access to data on property sales prices hampers accurate valuations, as does the great diversity in land tenure and occupation patterns in the region. An added difficulty is the distrust of public authorities by many taxpayers in view of weak governance and corruption.

Widespread informal land occupation also complicates matters. Excluding informal properties limits the universality of the tax and its ability to generate revenue, but including such properties requires significant efforts to update cadastral records (a comprehensive register of real property location, ownership and value). How residents of informal areas perceive the tax is another concern.

Reports on property tax revenues in Latin America are not consistent, the quality of the data is less than satisfactory, and collections vary greatly across jurisdictions and countries. The available evidence indicates that the property tax is of limited importance as a source of revenue to support local expenditures. As a result, it is easy to understand why using fees and charges instead of reforming the property tax might be less influenced by political factors, easier to administer, more efficient, and more capable of generating revenue.

Nevertheless, property taxation remains the best way to support local public expenditures for several reasons, including its familiarity to taxpayers, its progressivity relative to taxes on consumption, and the difficulty of tax avoidance. Indeed, a growing number of municipalities demonstrate the feasibility of operating efficient property tax systems. Based on their experiences, this report presents a comprehensive framework that could help overcome many of the traditional roadblocks to successful property taxation in Latin America. Recommended reforms focus on three areas.

Fiscal policy. The structure of own-source revenue and tax-sharing arrangements affect the need for and the willingness of local governments to collect property taxes. Fiscal policies should support local autonomy, avoid duplication of effort across levels of government and/or agencies, improve clarity of legislation, support under-resourced cities and towns, and guarantee the universality of the tax. These goals can be achieved by adopting policies that adhere to basic principles of equity, ability to pay, universality, legality and certainty, effective administration, and transparency.

Tax policies. Certain tax policies—such as those benefiting tax delinquents and limiting the universality of the tax—create inequities and inefficiencies in the system. Other policy choices can help create sustainable property tax systems, such as having the same level of government both decide on public expenditures and set property tax rates.

Assessment practices and collection procedures. Some of the shortcomings in tax administration relate to property cadastre systems, which may be more sophisticated than local technical capacity can support or cost more than the revenues produced by the property tax. Better tax administration thus requires increased efforts to design cadastres for sustainability and the application of more flexible cadastral and valuation approaches to improve the accuracy and uniformity of valuations. Encouraging tax payments, negotiating tax debts, and consistently applying sanctions in cases of tax evasion can all help to improve collections. Effective public information campaigns on taxation procedures and on the use of tax revenues can strengthen fiscal culture and promote trust.

Municipalities that implement these reforms can benefit from greater revenues to invest in local public services. Improvements in property tax collections strengthen local governance while underscoring the shared responsibility of citizens and public authorities for urban development.