How will local government finances be affected by the large and increasing burden to pay for previously obligated pension costs? How, in particular, will these pension legacy costs change residents’ perceptions of the local property tax and their willingness to pay? As a first step in a larger Lincoln Institute of Land Policy research agenda on these questions, we ask: What is known–and just as importantly, what is not known–about the magnitude of unfunded local government pension liabilities in the United States? (see Gordon, Rose, and Fischer 2012)

It is a first principle of public finance that current services should be paid with current revenues and that debt finance should be reserved for capital projects that provide services to future taxpayers. This principle is violated when pension liabilities associated with current labor services are not funded by current purchases of financial assets and instead have to be paid for by future taxpayers.

Alas, principles of prudence in public finance are not always observed, and local governments in the United States have accumulated substantial unfunded pension liabilities in recent years. This situation breaks an important link in the relationship between taxpayers and the services they receive–the rough correspondence between the overall value of public services and the resources taken from the private sector. There is considerable debate about the strength of this correspondence and how price-like the relationship is between value paid and value received for individual taxpayers, but there can be little question that using current revenues to pay for past services weakens the link.

Growing Public Awareness

State and local government employee pensions are in the headlines almost daily (box 1). Only a few years ago, they were the nearly exclusive province of a few elected officials, appointed boards, investment advisors, actuaries, and credit rating agencies. What changed? The most immediate answer is the Great Recession, which sapped not only state tax revenue but also the value of pension plan assets. In particular, state and local pension fund equity holdings lost nearly half of their value, dropping from a peak of $2.3 trillion in September 2007 to a low of $1.2 trillion in March 2009 (Board of Governors of the Federal Reserve System 2012).

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Box 1: Where Are Local Pensions in Trouble?

To understand where local pensions were experiencing particular difficulties, Gordon, Rose, and Fischer (2012) used media monitoring software to conduct a search of all U.S. domestic news outlets for the first three months of 2012. To satisfy the query, articles had to include the word “pension” in conjunction with terms that identify local governments (e.g., municipality, city, or county) and descriptions of funding problems (e.g., liability, deficit, underfunded, cut, default, reform, or problem). The search yielded over 2,000 separate articles from places all over the country.

Their analysis suggests several types of places are experiencing pension troubles. One group consists of jurisdictions that have been losing people and jobs over time. A prominent example is Detroit, Michigan, which has twice as many retirees as active workers. Also in this category is Prichard, Alabama, which has lost more than 45 percent of its population since 1970 and by 2010 had fewer than 23,000 residents. It simply stopped sending pension checks to its former employees in September 2009 and declared bankruptcy one month later. For such communities, pension problems may also be a symptom of larger fiscal distress or political dysfunction.

Another group of jurisdictions rode the housing boom and bust. Examples include fast-growing California cities like Stockton, which just entered bankruptcy proceedings this year, the largest city ever to do so. More puzzling are relatively affluent places, such as New York’s Suffolk or Nassau Counties, which appear unable to make tough spending cuts or raise taxes because of political gridlock. Instead, many of these jurisdictions have turned to borrowing to meet their pension obligations.

Only two recent municipal bankruptcies (Vallejo, California, and Central Falls, Rhode Island) stemmed from public pensions and employee compensation pressures together with falling revenues. Other places such as Harrisburg, Pennsylvania, and Jefferson County, Alabama, are struggling with poor investment decisions. Also, major cities such as Atlanta, San Francisco, and New York have taken steps to limit pension growth, often with cooperation from local public employee unions. Central Falls managed to extract concessions from active police officers and fire fighters as well as current retirees, but even this was insufficient to stop the slide toward bankruptcy.

Although stock markets have largely recovered and state and local plan equity holdings have climbed back over $2 trillion, public pensions remain under scrutiny. Credit rating agencies increasingly are taking unfunded pension liabilities into account when developing their assessments of state and local government borrower risk. In addition, analysts are growing more vocal in their criticisms of methods commonly used to evaluate pension funding levels.

The federal government is also paying attention. Alarmed by the prospect of defaults, Congress held a series of hearings into state and local government finances in early 2011. More recently, the Republican staff of the Joint Economic Committee (JEC) has issued reports raising the specter of a Eurozone-like crisis due to unfunded state pension liabilities (JEC 2011; JEC 2012).

In light of these criticisms and concerns about growing pension costs, 43 states enacted significant reforms to their pension systems between 2009 and 2011 (Snell 2012). The most common changes were: increased employee contribution requirements (30 states); raised age and service for eligibility (32); adjusted formulas for calculating benefits (17); and reduced cost of living increases (21). In some states the changes applied to new employees only, but in others they affected active workers and current retirees. The latter actions have proven especially controversial, prompting lawsuits in Colorado, Minnesota, New Jersey, and South Dakota.

Most of the heightened attention to government employee pensions has concentrated on state government plans, while local public employee pensions remain relatively unexplored. Although local plans represent a modest share of total public pension membership (10 percent) and assets (18 percent), their failures could be devastating. Mobile residents and businesses could flee communities that levy higher taxes to rebuild pension assets rather than to provide basic services. A shrinking tax base would leave the fund even worse off and potentially less able to pay promised benefits. The result could be more cities like Prichard, Alabama.

Looking at State and Local Pension Plans Together

State and local pensions are an important part of the nation’s retirement system. Figure 1 shows the distribution of the total of $15.3 trillion in retirement assets at the end of 2011 by type of plan. State and local public employee retirement funds held a combined $2.8 trillion in assets, or almost one-fifth of the total.

Every state has at least one public employee pension plan and some have many. There are more than 220 state plans—some of which are state-administered plans that cover local government workers—and almost 3,200 local government plans (table 1). Together these plans cover 14.7 million current workers, 8.2 million current beneficiaries, and 4.8 million people eligible for future benefits but not yet receiving them.

State and local pensions are all the more important because 27.5 percent of government employees do not participate in Social Security (Nuschler, Shelton, and Topoleski 2011). These uncovered public employees are highly concentrated in a handful of states. Figure 2 ranks the 16 states with the highest concentrations of government workers not covered by Social Security. Almost all state and local government employees in Ohio and Massachusetts and more than half in Nevada, Louisiana, Colorado, California, and Texas are not covered.

Another key feature of state and local pensions is that they are mostly defined benefit (DB) plans. Benefits are calculated by a formula, typically something like:

(Average salary in final 3 years) x
(Years of service) x
(2% for each year of service) =
Benefits

Most state and local government pensions also include a cost of living adjustment. A minority of public sector workers are enrolled in defined contribution (DC) plans where a specified amount is put in a retirement fund for each year of work. Compared to DC plans, DB pensions protect employees from investment, inflation, and longevity risks. As of 2009, nearly 80 percent of state and local workers were enrolled in DB plans and just over 20 percent were in DC plans. Private sector workers had the opposite mix: 20 percent in DB plans and 80 percent in DC plans (U.S. Bureau of Labor Statistics 2011).

DB plans used to be more prevalent in the private sector but have been disappearing partly because the Employee Retirement Income Security Act of 1974 (ERISA) imposed minimum funding standards, required insurance contributions, and other administrative burdens on them.

The weaker funding and reporting requirements that apply to public pensions allow governments to shift labor costs into the future. This is an implicit form of borrowing that can evade balanced budget rules and avoid the voter approval usually required for issuing bonds.

Funding and Reporting Requirements for State and Local Pensions

For most of their history, state and local pensions were financed out of general revenues on a pay-as-you-go basis. The current practice of prefunding state and local pension plans began in the 1970s and 1980s. While public sector plans were not covered by ERISA, the act did mandate a report on their practices. The 1978 report found a “high degree of pension cost blindness . . . due to the lack of actuarial valuations, the use of unrealistic actuarial assumptions, and the general absence of actuarial standards” (Munnell et al. 2008, 2).

This wake-up call led to voluntary increases in funding levels by many plans and increased attention to actuarial and accounting standards. The Government Accounting Standards Board (GASB) was formed in 1984, issued its first rules for pension plans in 1986, and extensively revised its actuarial valuation standards in 1994. Compliance with these rules is voluntary, but is rewarded by credit rating agencies, auditors, and other data consumers. Unlike ERISA rules that require specific valuation methods for all private plans, GASB sets out criteria that allow some latitude as to which specific methods are used by public plans. As a consequence there are serious transparency and comparability concerns with the self-reported data on state and local pension plan liabilities.

Employer Contribution

The calculation of a plan’s Actuarial Accrued Liability (AAL) requires the following information: ages and salary histories of members; assumptions for salary growth, retirement ages, asset earnings, and inflation; longevity probability tables; and a discount rate to translate estimated future values into present values. Unfunded Actuarial Accrued Liability (UAA L) equals AAL minus plan assets.

The “Normal Cost” of a pension plan is the increase in AAL due to the current year of service by existing employees. ERISA requires that normal cost be covered by employee and employer contributions. GASB specifies an “Annual Required Contribution” (ARC) of normal cost plus a 30-year amortization of UAA L. The problem is that, contrary to its name, payment of ARC is not strictly required in most jurisdictions.

Choice of Discount Rate

The issue that has received the most recent attention is the choice of discount rate. Current GASB rules allow discounting future liabilities based on projected investment returns, which averaged 8 percent per year prior to the recession. But most economists and financial theorists would agree with Brown and Wilcox (2009, 538) that “the discount rate used to value future pension liabilities should reflect the riskiness of the liabilities,” not the assets. Constitutional and other legal guarantees make government pensions of low risk, while historical investment returns include a risk premium.

State and local governments cannot avoid longterm risks such as a protracted productivity slump or a decade-long down market. Therefore, the historical long-term rate of return on an equity-heavy portfolio–before risk adjustment–is too high a discount rate. Higher discount rates can make pensions appear better funded than they truly are. This reduces contribution requirements and imposes unwarranted obligations on future taxpayers if the high rates of return are not achieved. Worse, there is an incentive for plan managers to seek high-risk portfolios in order to get a higher discount rate and lower ARC.

There are strong arguments that the 8 percent discount rate used by many public pension plans is too high, but there is less agreement on just how much lower the appropriate rate should be. Rather than review the arguments, we report one estimate of just how much of an impact a lower rate would have. Munnell et al. (2012) calculate the would-be change in reported liabilities if all plans used a 5 percent rather than an 8 percent discount rate. They estimate that state and local liabilities would increase from $3.6 trillion to $5.4 trillion and aggregate funding ratios (Assets/AAL) would fall from 75 to only 50 percent. This is a huge change, and represents a doubling of unfunded liabilities (UAA L = AAL – Assets).

Recent Changes in GASB Standards

GASB (2012) has released new accounting standards to take effect in 2013 and 2014. The key change requires state and local governments to apply different discount rates to the funded and unfunded portions of liabilities. An earnings-based rate will still be applied to the funded portion, but a lower, riskless rate will be applied to UAA Ls. The impact of this change on reported liabilities depends on how well funded a plan is: no change for fully funded plans; a small change for well funded plans; and large increases in reported liabilities and decreases in funding ratios for poorly funded plans. The new standards also require that the UAA L be shown on the government’s balance sheet, which will increase the visibility of unfunded liabilities to voters.

What Do We Know About Local Pensions?

Despite mounting concerns about the fiscal health of local pension plans, systematic knowledge about them is rare. The best available information comes from the U.S. Census Bureau’s (2012) Annual Survey of State and Local Public Employee Retirement Systems. Detailed data for each government entity is reported every five years. Plan-level data for a sample that includes roughly half of the 3,200 local plans is reported each year and is used to create estimates of totals for each state by type of government. Tables 1 and 2 exemplify the types of information in the survey.

The main virtues of the Census Bureau’s employee retirement survey are its quality and comprehensiveness. A key disadvantage is lack of timeliness, since the most recent local data available is for fiscal year 2010. Another problem is that the Bureau only recently began reporting plan liabilities, and it does so only for state plans. Like other pension data sources, the Census Bureau does not collect information on DC plans or other post-employment benefits (OPEBs).

Nevertheless, the employee retirement survey provides some insights into local pensions. For example, the number of local plans per state varies greatly: 7 states have no local plans; 20 states have fewer than 10; Florida and Illinois have over 300 each; and Pennsylvania has over 1,400. The number of active members per beneficiary is a crude measure of how well employee contributions can fund the plan. Table 1 indicates the national average for local plans is 1.4 workers per retiree, but there is considerable variation across states. This support ratio is less than 1 in 12 states; between 1 and 2 in 31 states; and over 2 in 7 states, with Utah having the highest ratio at 6.8.

Neither of these pieces of information tell us how well funded local pensions are. For this information, we must turn to independent surveys. Most have good coverage of state plans, but they generally survey only a few of the larger local plans: e.g., the National Association of State Retirement Administrators’ (NASRA ) annual survey of member plans. A small number of national studies have focused on local, as opposed to state, pension liabilities. For example, Novy-Marx and Rauh (2011) analyze local pension finances using data from Consolidated Annual Financial Reports (CAFRs) for city and county plans holding more than $1 billion in assets as of 2006.

The Boston College Center for Retirement Research (CRR) maintains a Public Plans Database (PPD) for the largest state and local plans with data from individual plan actuarial reports and local government CAFRs. Using the PPD plus information on some additional local plans, CRR recently issued a report with data for 2010 from a sample of 97 plans in 40 states (Munnell et al. 2011). This is a modest sample relative to the total of 3,200 local plans, but by concentrating on large plans it covers 59 percent of local pension assets and 55 percent of participants.

An important finding is the wide dispersion around the average funding ratio of 77 percent in 2010 (figure 3). Of 95 large plans in the CRR sample with usable information, only 16 had assets covering more than 90 percent of liabilities. At the other tail are 9 plans with below 50 percent funding (Munnell et al. 2011). This study also shows the ARC as a percent of local government payroll. The overall average for 2010 is 22 percent, and again there is wide dispersion (figure 4). Of 91 large plans in the CRR sample with usable information, more than half (49) have ARC below 20 percent of payroll, but 16 have shares in the less manageable 30 to 80 percent range. Five plans have such large pension obligations that if paid in full they would cost more than 100 percent of payroll.

Keep in mind that local governments in most states are not required to pay the full amount of the ARC. We do not have data at the local level, but a state-level study reported wide variation in the percent of ARC actually paid across plans, across years, and across states (State Budget Crisis Task Force 2012). Munnell et al. (2011) calculate pension payments actually made as a share of local budgets and again find considerable variation, with 14 percent of the sample governments devoting more than 12 percent of their budgets to pay for pensions.

Conclusions

Local government pensions are on average significantly underfunded. The key reason is that, absent a legal compulsion to do so, many governments have not set aside enough funds each year to cover the extra pension liabilities incurred in that year, much less to amortize unfunded liabilities from earlier years. In effect, they are borrowing to pay for current labor services and shifting the burden to future taxpayers.

We know much less about the 3,200 locally administered plans that we do about the 220 state plans. The best information on local plans comes from researchers who review the detailed financial reports of the plans and local governments. Of necessity, these studies concentrate on the larger plans. We do know that there is wide variation across plans on key measures: the share of liabilities that are covered by assets; the would-be full contribution to cover both current year pension costs and amortization of unfunded liabilities (ARC) relative to payroll or annual revenues; the share of ARC that is actually paid; and the share of the current budget that goes to pension costs. A significant fraction of local governments are in trouble by one or more of these measures.

Worse, what we know about liabilities comes from municipalities’ self-reported data and their own choice of discount rate. In almost all cases this discount rate is inappropriately high, and the use of a lower discount could more than double unfunded liabilities. The result is a big problem with local pension liabilities that threatens local government finances, but we do not know how big, and we do not know how unequally it is distributed.

About the Authors

Richard F. Dye is a visiting fellow of the Lincoln Institute of Land Policy. He is also a professor at the Institute of Government and Public Affairs, University of Illinois at Chicago, and professor of economics emeritus at Lake Forest College.

Tracy Gordon is a fellow in Economic Studies at the Brookings Institution, Washington, DC. Her research focuses on state and local public finance, political economy, and urban economics.

References

Board of Governors of the Federal Reserve System. 2012. Flow of funds accounts of the United States, June 7. http://www.federalreserve.gov/releases/z1/current/data.htm

Brown, Jeffrey R., and David W. Wilcox. 2009. Discounting state and local pension liabilities. American Economic Review 99(2): 538–542.

Gordon, Tracy M., Heather M. Rose, and Ilana Fischer. 2012. The state of local government pensions: A preliminary inquiry. Working Paper. Cambridge MA: Lincoln Institute of Land Policy.

Governmental Accounting Standards Board (GASB). 2012. GASB Improves Pension Accounting and Reporting Standards. Press Release. June 25. http://www.gasb.org/cs/ContentServer?c=GASBContent_C&pagename=GASB/GASBContent_C/GASBNewsPage&cid=1176160126951

Joint Economic Committee (JEC). 2011. States of bankruptcy, part I: The coming state pensions crisis. Republican Staff Commentary, Washington, DC, December 8.

Joint Economic Committee (JEC). 2012. States of bankruptcy, part II: Eurozone, USA? Republican Staff Commentary, Washington, DC, May 15.

Munnell, Alicia H., Jean-Pierre Aubry, Josh Hurwitz, and Laura Quimby. 2011. An update on locally administered pension plans. Center for Retirement Research at Boston College Policy Brief, July.

Munnell, Alicia H., Jean-Pierre Aubry, Josh Hurwitz, and Laura Quimby. 2012. The funding of state and local pensions: 2011–2015. Center for Retirement Research at Boston College Policy Brief, May.

Munnell, Alicia H., Kelly Haverstick, Steven A. Sass, and Jean-Pierre Aubry. 2008. The miracle of funding by state and local pension plans. Center for Retirement Research at Boston College Policy Brief, April.

Novy-Marx, Robert, and Joshua Rauh. 2011. The crisis in local government pensions in the United States. In Growing old: Paying for retirement and institutional money management after the financial crisis, Robert Litan and Richard Herring, eds., 47–74. Washington, DC: Brookings Institution.

Nuschler, Dawn, Alison M. Shelton, and John J. Topoleski. 2011. Social Security: Mandatory coverage of new state and local government employees. Congressional Research Service, July. http://www.nasra.org/resources/CRS%202011%20Report.pdf

Snell, Ronald K. 2012. State pension reform, 2009–2011. Washington, DC: National Council of State Legislatures, March.

State Budget Crisis Task Force. 2012. Report of the State Budget Crisis Task Force. http://www.statebudgetcrisis.org/wpcms/wp-content/images/Report-of-the-State-Budget-Crisis-Task-Force-Full.pdf

U.S. Bureau of Labor Statistics. 2011. Employee benefits survey, retirement benefits: access, participation, and take-up rates. March.

U.S. Census Bureau. 2012. 2010 annual survey of state and local public employee retirement systems. http://www.census.gov/govs/retire

David Vetter (Ph.D., Universidad de California) ha trabajado por más de cuatro décadas en temas de financiamiento y economía urbana en América Latina. He ejercido la docencia y dirigido investigaciones urbanas en Brasil durante 17 años en el Instituto Brasileño de Geografía y Estadísticas (IBGE), el Programa de Ingeniería para Graduados (COPPE), el Instituto de Planificación y Estudios Urbanos y Regionales (IPPUR) y la Fundación Getúlio Vargas. En 1990 se incorporó al Banco Mundial, donde desarrolló programas de inversión y reformas subnacionales para Argentina, Brasil, Chile y Ecuador. A fin de fomentar una mayor participación del sector privado en el financiamiento urbano, ingresó en Dexia Credit Local en 1998 en calidad de vicepresidente, y estableció programas de préstamo en Argentina, Brasil y México. Desde su regreso a Brasil en 2004, ha trabajado como consultor e investigador para varios clientes, como el Banco Interamericano de Desarrollo y el Lincoln Institute of Land Policy, donde ha sido visiting fellow desde julio de 2014. Ha escrito recientemente dos artículos para Land Lines: “Residential Wealth Distribution in Rio de Janeiro” (Distribución de la riqueza residencial en Rio de Janeiro, enero de 2014) y “Land-Based Financing for Brazil’s Municipalities” (Financiamiento basado en el suelo para los municipios brasileños, octubre de 2011).

Land Lines: ¿Cómo se involucró en el Instituto Lincoln?

David Vetter: Por muchos años, ya sea en mis trabajos de investigación y consultoría, o en el Banco Mundial o el sector privado, encontré con frecuencia información sólida del Instituto Lincoln que me ayudó. Más recientemente, el Instituto financió mis investigaciones sobre riqueza residencial y finanzas municipales en Brasil.

Land Lines: ¿Qué investigará como visting fellow y por qué?

David Vetter: Me concentraré en estrategias de financiamiento de infraestructura urbana en Brasil. Como otros países latinoamericanos, Brasil necesita realizar inversiones sustanciales en forma continua para poder mantenerse al día con el rápido crecimiento de nuevos hogares y reducir la cantidad de hogares que no tienen acceso a infraestructura urbana. Entre 2000 y 2010, la cantidad de hogares en Brasil creció en más de 12 millones, o sea, casi 7 veces más que los 1,8 millones de hogares del área metropolitana de Boston-Cambridge en 2010. Dada esta presión demográfica, la cantidad absoluta de hogares de Brasil sin acceso a infraestructura urbana siguió siendo alta en 2010, a pesar de las considerables inversiones efectuadas en la década anterior. Y los déficits de algunos tipos de infraestructura en realidad han aumentado. Entre 2000 y 2010, por ejemplo, la cantidad de hogares urbanos en Brasil sin un sistema adecuado de alcantarillado creció aproximadamente en 2 millones, que es más que la cantidad total de unidades de vivienda en el área metropolitana de Boston en 2010.

El Ministerio de las Ciudades de Brasil estimó que los sistemas de sanidad básicos (agua potable, aguas residuales, residuos sólidos, y alcantarillado) costarían más de US$80.000 millones sólo entre 2014 y 2018. Las carreteras, pavimentación de calles, seguridad pública, salud y educación demandan inversiones de similar magnitud, y estos montos frecuentemente exceden con mucho las fuentes de financiamiento existentes.

Land Lines: ¿Cómo se podría recuperar las plusvalías de estas inversiones en infraestructura para poder financiarlas?

David Vetter: Los beneficios de las inversiones en infraestructura se capitalizan en los precios del suelo y los edificios. Los foros del Instituto Lincoln sobre instrumentos notables de intervención urbana de 2013 demostraron que muchos gobiernos de América Latina están utilizando eficazmente una amplia variedad de herramientas de recuperación de las plusvalías creadas por sus inversiones de infraestructura, como puede comprobarse en el minucioso repaso de la bibliografía realizado por Martim O. Smolka (2013): venta de derechos de desarrollo; contribución por mejoras para pavimentación de calles, alcantarillado y otras mejoras; y alianzas público-privadas (APP) de recuperación de plusvalías, como en el caso de la estructuración financiera de la renovación masiva del puerto de Rio (Porto Maravilha). También sería útil contar con una cobranza más efectiva del impuesto sobre la propiedad y de los impuestos de transmisión de propiedades.

La recuperación de plusvalías puede generar una realimentación positiva, creando un círculo virtuoso que genera recursos adicionales para más inversiones. Por ejemplo, el aumento del valor generado por las inversiones aumentaría la base gravable del impuesto sobre la propiedad, suponiendo que las valuaciones se mantengan actualizadas, y los ingresos resultantes se podrían usar para financiar otras obras.

Land Lines: ¿Hasta qué punto podrían las municipalidades de Brasil aumentar la recuperación de plusvalías?

David Vetter: Según la teoría económica, el valor generado por las inversiones de infraestructura debería ser aproximadamente igual a su costo. Como la oferta de infraestructura parecería ser poco elástica, debido a las restricciones de financiamiento público, el valor de mercado generado podría exceder en realidad el costo de las inversiones.

Por ejemplo, las municipalidades de Brasil invirtieron más de US$82.000 millones en infraestructura y equipos entre 2006 y 2010 (alrededor de US$16.000 millones por año). Pero solamente en 2010, el gobierno nacional y los gobiernos estatales invirtieron también más de US$50.000 millones. La recuperación de aunque sea un pequeño porcentaje de las plusvalías creadas podría proporcionar recursos de inversión significativos. Por ejemplo, la Región Metropolitana de Rio de Janeiro está recibiendo inversiones de infraestructura masivas del gobierno nacional, estatal y municipal, y también de socios privados, para varios proyectos como el cinturón vial Arco Metropolitano y una nueva línea de metro. Algunas son concesiones o APP que reciben un financiamiento significativo a tasas de interés inferiores a las del mercado por parte de los bancos de desarrollo públicos (BNDES y CAIXA).

Land Lines: ¿Qué papel debería cumplir la recuperación de plusvalías en la política de viviendas?

David Vetter: La inversión en infraestructura crea riqueza residencial, ya que su valor se capitaliza en la venta de viviendas. Las estructuras residenciales representan alrededor de un tercio del capital fijo neto de Brasil en las cuentas de riqueza nacional, como es habitual en otros países del mundo. Dada su importancia, nos preguntamos en nuestro trabajo sobre la Región Metropolitana de Rio de Janeiro: ¿Qué genera la riqueza residencial? ¿Cuánta riqueza residencial existe? ¿Quién la tiene? Descubrimos que hay ganadores y perdedores. Por ejemplo, el aumento en el valor generado por la inversión en infraestructura incrementa la riqueza residencial de los propietarios de vivienda, pero también aumenta los precios para los inquilinos en el área beneficiada y los costos de vivienda para personas que se quieren reubicar en esa zona.

Land Lines: ¿Una política de vivienda enfocada a la generación de riqueza residencial y la equidad de su distribución sería muy distinta de la mayoría de los programas de viviendas de bajos ingresos?

David Vetter: Sería bastante distinta. La mayoría de los programas de viviendas de bajos ingresos reduce sus costos construyendo en suelo de bajo valor. El precio del suelo es bajo cuando no tiene acceso a empleo y servicios urbanos básicos, así que las unidades de vivienda social frecuentemente están en estas áreas carentes de servicios. Una política de vivienda enfocada en la riqueza residencial enfatizaría el acceso a empleo y servicios básicos, que son los determinantes clave del valor de una vivienda.

Land Lines: ¿Pero no es esto una utopía? ¿Cómo podríamos recuperar las plusvalías para ayudar a aumentar la riqueza residencial de familias de bajos ingresos?

David Vetter: Sin duda el desafío es grande. Pero la recuperación de plusvalías de familias de mayores ingresos podría subsidiar a las de ingresos menores, sobre todo a los inquilinos que se quieran reubicar en zonas que se benefician de inversiones en infraestructura.

Le voy a dar un ejemplo. La cantidad de hogares en la Región Metropolitana de Rio de Janeiro aumentó en más de 600.000 entre 2000 y 2010 (esto es el doble de la cantidad de hogares en Washington, DC en 2010). Como consecuencia, los déficits de infraestructura urbana de la región siguen siendo altos a pesar de la gran cantidad de inversiones realizadas. Un reciente estudio de impacto del nuevo cinturón vial de Rio de Janeiro (Pontual et al., 2011) exploró la posibilidad de desarrollar nuevos vecindarios completos, socialmente integrados y con todos los servicios de infraestructura, para albergar a la enorme cantidad de hogares que se esperan a lo largo del cinturón. Este desarrollo podría financiarse en parte con la recuperación de las plusvalías generadas por las inversiones masivas en infraestructura planificadas y en proceso de implementación. Parte de las plusvalías recuperadas de familias de mayores ingresos se podría usar para financiar a las familias de menores ingresos.

El estudio de impacto analizó cuál sería la mejor ubicación para estos vecindarios. ¿Qué instrumentos de recuperación de plusvalías funcionarían mejor en este caso? Es interesante señalar que el sector privado ya está desarrollando lo que se describen como “barrios verdes” en las regiones aledañas al Río metropolitano. ¿Tiene sentido planificar proyectos de vivienda individuales cuando se va a producir un aumento tan grande en la cantidad de hogares?

Land Lines: ¿Las familias de bajos ingresos estarían en condiciones de pagar por la infraestructura?

David Vetter: En América Latina, los criterios de elegibilidad de programas de recuperación de plusvalías casi siempre incluyen una prueba de capacidad de pago. Por supuesto, la recuperación de plusvalías sólo se debería aplicar a familias que estén en condiciones de pagarla.

Land Lines: ¿Cómo respondería a los profesionales de Brasil dedicados a temas urbanos que argumentan que es imposible recuperar las plusvalías por razones legales o culturales?

David Vetter: Si bien la constitución de Brasil concede amplios poderes para recuperar plusvalías, sólo las municipalidades más grandes, como São Paulo y Rio de Janeiro, parecen usarlos. Otros gobiernos subnacionales y nacionales dedican mucho menos esfuerzo para recuperar las plusvalías de sus considerables inversiones públicas.

Ello probablemente se deba, en parte, a resistencia de aquellos que creen que la recuperación de plusvalía es legalmente imposible. Aun cuando la contribución por mejoras encuentra una resistencia similar, Silva y Pereira (2013) estiman que los ingresos totales por dicho concepto superaron los US$300 millones en las municipalidades de São Paulo, Paraná y Santa Catarina entre 2000 y 2010, a pesar de que relativamente pocas municipalidades utilizaron este instrumento. Esta cantidad no es muy significativa para estados de este tamaño, pero demuestra que las contribuciones por mejoras son viables.

Una de las razones por las que las contribuciones por mejoras fueron exitosas en Paraná y Santa Catarina fue que el Banco Mundial y el Banco Interamericano de Desarrollo exigieron medidas de recuperación de costos en sus proyectos de desarrollo municipal desde la década de 1980. Este éxito respalda la idea de que los incentivos de un programa nacional o estatal pueden fomentar el uso de la recuperación de plusvalías a nivel municipal.

Además, hay muchos casos de recuperación de plusvalías que pasan desapercibidos. En la ciudad de Rio de Janeiro, por ejemplo, la venta de suelo excedente del sistema de metro existente se usó parcialmente para financiar una nueva línea completa, y los desarrolladores instalan agua corriente y alcantarillado como condición para la aprobación de un proyecto en un vecindario de mayores ingresos, Barra de Tijuca.

Land Lines: ¿De qué manera podrían fomentar el uso de la recuperación de plusvalías los programas gubernamentales nacionales y estatales?

David Vetter: Una de las maneras sería proporcionar acceso a financiamiento como un incentivo para que las municipalidades hagan uso de la recuperación de plusvalías. El banco de desarrollo de Ecuador (Banco del Estado) utiliza este tipo de acceso para alentar a las municipalidades a usar las contribuciones por mejoras. El acceso a financiamiento se podría usar para implementar una gama más amplia de instrumentos de recuperación de plusvalías, como la venta de derechos de desarrollo y aranceles de impacto, además de las contribuciones por mejoras.

Land Lines: ¿Cómo puede estimular el Instituto Lincoln el financiamiento de infraestructura por medio de la recuperación de plusvalías?

David Vetter: Lincoln ha hecho un trabajo excelente para generar el conocimiento de la recuperación de plusvalías, por medio de investigaciones, foros, programas de capacitación y publicaciones. El Instituto podría ampliar su trabajo sobresaliente en recuperación de plusvalías en la región por medio de más foros y publicaciones, y asesorando en forma directa a los dirigentes políticos en lo que al diseño y ejecución de programas se refiere.

Una versión más actualizada de este artículo está disponible como parte del capítulo 3 del libro Perspectivas urbanas: Temas críticos en políticas de suelo de América Latina.

Con el objetivo de analizar la equidad y eficacia del sistema fiscal de tributación inmobiliaria, el Instituto Lincoln desarrolló, en conjunto con el Ayuntamiento de Porto Alegre (Brasil), el Seminario Internacional sobre Tributación Inmobiliaria en abril de 2001, el cual formó parte de su programa educativo en América Latina. Asistieron al seminario más de 200 delegados de 12 países, 14 estados brasileños y 45 autoridades municipales. Expertos reconocidos en el ámbito internacional, funcionarios gubernamentales y personalidades del sector académico, de finanzas públicas y de materias impositivas representaron instituciones tales como el Banco Interamericano de Desarrollo (BID), el Instituto Internacional de Tributación Inmobiliaria (IPTI), la Asociación Internacional de Funcionarios de Tasación (IAAO), la Asociación Brasileña de Secretarías de Finanzas de Capitales (ABRASF) y la Escuela de Administración Hacendaria (ESAF). En este artículo se analizan los temas y experiencias tratados en el seminario.

Así como en los Estados Unidos, en América Latina hay un debate continuo sobre la mayor eficacia, la simplificación en los procesos de administración y la menor influencia de factores políticos que derivarían de la sustitución del tributo inmobiliario por otras fuentes de ingreso, tales como recargos y tarifas. No obstante, el tributo inmobiliario continúa siendo la opción predominante de financiamiento de los servicios públicos de los gobiernos municipales de América Latina.

Una característica importante del tributo inmobiliario es la gran diversidad que hay en su administración en cada país. Por ejemplo, en Brasil, Colombia y Ecuador es un impuesto exclusivamente municipal, mientras que en Argentina es administrado por el gobierno provincial. En México, el papel de las autoridades municipales se ha reducido principalmente a la recaudación de los impuestos. En Chile, el tributo inmobiliario es una importante fuente de ingreso para los gobiernos municipales, aunque el gobierno central es el responsable por la administración de los sistemas catastrales, de tasación y recaudación. El Salvador es el único país centroamericano que no ha impuesto nunca una tributación sobre la propiedad, aunque cada vez más se discute sobre la necesidad de establecer nuevos impuestos, dado que los ingresos tributarios constituyen apenas un 11 por ciento del producto bruto interno (PIB).

Reflexiones sobre el sistema fiscal de tributación inmobiliaria

En general, el tributo inmobiliario está reconocido como un impuesto “bueno” que tiene una función esencial en el proceso de recuperación de ingresos, financiamiento de servicios públicos y promoción del desarrollo social. Su naturaleza única establece vínculos importantes entre riqueza e ingresos, desarrollo social y uso y ocupación del suelo. Sin embargo, es fundamental administrarlo con justicia para evitar ineficacias y desigualdades en la distribución de la carga impositiva. En varias sesiones del seminario se mencionó la necesidad de contar con un catastro que tenga cobertura completa y adecuada, además de los atributos básicos para la tasación de diferentes clases de propiedades. Un grupo de participantes recomendó integrar la comunidad al proceso de actualización continua de los datos catastrales, mientras que otros enfatizaron la necesidad de realizar un cuidadoso análisis de costo-beneficio antes de implementar sistemas de información geográfica.

En países donde el catastro no es administrado por el gobierno central, no existe un sistema o modelo estándar. Según el nivel de desarrollo de la municipalidad o de los recursos financieros disponibles, la tecnología catastral puede exhibir grandes variaciones, desde una simple lista de propiedades hasta un catastro multifinalitario basado en un sistema de información geográfica. También se observan diferencias en los sistemas de tasación; por ejemplo, en Colombia y Bolivia se utiliza la autotasación, mientras que en Brasil, Chile, Ecuador y México es común el método de tasación por costos. Algunas autoridades municipales de Brasil están trabajando activamente para instituir el método de comparación de ventas para la propiedad residencial. Al aplicar el método de tasación por costos, el valor del suelo se determina mediante el método de comparación de precios de venta. El valor del suelo, si se basa en la información del mercado, también se calcula de maneras diferentes, lo cual genera preocupación sobre cómo reducir las desigualdades en la tasación.

Por encima de todo, la valuación es una tarea técnica que requiere tasación uniforme, realizada a intervalos cortos, y que no debe utilizarse para fines políticos. Los sistemas que establecen límites de los aumentos impositivos entre periodos consecutivos para cada propiedad individual, hasta un ajuste general basado en la tasa de inflación anual, son vistos como una fuente principal de inequidad de tasación. Para poder ganar la aceptación del sistema tributario y la confianza de los contribuyentes, es imprescindible que haya transparencia en los resultados de las valuaciones además de características básicas tales como responsabilidad fiscal, justicia, democratización de la información y simplificación del lenguaje técnico a fin de facilitar el entendimiento de los miembros y líderes de la comunidad. Además, estos últimos deben participar en la toma de decisiones referentes a la recaudación de impuestos y gastos públicos.

Una tendencia reciente es el uso creciente de Internet por parte de los contribuyentes para recibir y pagar sus facturas impositivas, revisar los datos estadísticos de sus propiedades y actualizar la información catastral. En este particular se considera a Chile como punto de referencia en el uso de estas tecnologías en América Latina.

Experiencias con la reforma fiscal

Varios ponentes del seminario hablaron de sus experiencias con la reforma fiscal a la propiedad inmobiliaria, las cuales suelen incluir inversiones en sistemas catastrales. En Colombia, por ejemplo, la mejora en la recaudación del tributo inmobiliario se tradujo en un aumento en el porcentaje del PIB, de un 0,22 por ciento en 1970 al 0,91 por ciento en 1994. Esta mejora se atribuyó en parte a leyes que exigieron la implementación y actualización del catastro en todo el país. La fuerte oposición hacia la actualización de los valores de tasación, así como las dificultades administrativas para realizar las valuaciones, llevaron a establecer un procedimiento de autotasación. Ahora los contribuyentes son responsables por declarar el valor de tasación de sus propiedades, pero dicho valor no puede ser inferior al valor catastral registrado. Para reducir la subtasación, el valor de tasación se usa también como base para la expropiación.

Las iniciativas de reforma fiscal que hubo en Argentina durante la década de 1990 estuvieron fuertemente motivadas por las crisis financieras del sector público. El proyecto de reforma del tributo inmobiliario fue dividido en dos áreas principales: administración catastral y fiscal. A pesar de que en estas reformas se ha invertido el equivalente a más de US$120 millones, el proyecto ha sido completado en apenas un 50 por ciento de las jurisdicciones. En otro ejemplo, Mexicali, la ciudad capital de Baja California, fue la primera en adoptar un sistema basado en el valor del suelo como base impositiva predial en la década de 1990. Si bien se trató de una exitosa experiencia de reforma fiscal a la propiedad inmobiliaria, actualmente México se enfrenta a una serie de retos, entre ellos lograr un equilibrio fiscal entre el gasto público y los ingresos recaudados, además de recuperar la importancia del tributo inmobiliario como fuente de ingresos.

La tributación inmobiliaria en Brasil

Varias barreras políticas, jurídicas y prácticas han contribuido a mantener la inequidad e ineficacia del tributo inmobiliario en Brasil. Las ramas principales del gobierno (el poder ejecutivo, el legislativo y el judicial) suelen diferir en su interpretación de las regulaciones impositivas, lo cual crea una perenne falta de confianza en el sistema tributario. Entre los problemas principales que afectan el sistema fiscal de tributación inmobiliaria cabe mencionar: 1) catastros obsoletos e incompletos que derivan en pérdidas irrecuperables de los ingresos; 2) prácticas de tasación deficientes que conducen a una falta de uniformidad generalizada; 3) fuerte influencia de los valores de tasación históricos, no sólo porque los avalúos son poco frecuentes sino también porque la aprobación de cualquier nueva lista de valuación por la Cámara de Concejales suele ser difícil; y 4) deficiencias en el proceso de recaudación de impuestos.

Se reexaminó la validez y factibilidad de adoptar tasas progresivas (móviles) para el tributo inmobiliario, las cuales habían sido utilizadas ampliamente en Brasil durante la década de 1990. La idea básica había sido establecer tasas progresivas según las clases de valores de tasación e introducir un elemento de “capacidad de pago” en el sistema, en el que la carga impositiva de las propiedades más costosas fuera mayor que las de propiedades de menos valor. Si bien en 1996 la Corte Suprema declaró como inconstitucional el uso de tasas progresivas para el tributo inmobiliario, una reciente enmienda constitucional autorizó la progresividad de las tasas de tributo inmobiliario según el valor de las propiedades, así como también diferentes tasas según la ubicación de la propiedad.

Durante el transcurso del seminario, los argumentos en contra de la aplicación de tasas progresivas para el tributo inmobiliario apuntaron a la necesidad de mantener un impuesto sencillo y eficaz, mientras que aquéllos a favor de la progresividad hicieron énfasis en la concentración de la disparidad de los ingresos en Brasil y en el hecho de que los gastos de vivienda de la población pobre son proporcionalmente mayores que los de la población adinerada. La mayoría de los participantes del seminario estuvieron de acuerdo en que las tasas progresivas podrían conducir a una distribución más justa de la carga impositiva. No obstante, la progresividad debe ser gradual, es decir, se debe aplicar una tasa mayor únicamente a la parte del valor de la propiedad que excede el límite establecido en cada clase de valor de tasación, a fin de evitar grandes diferencias en la carga impositiva para aquellas propiedades cuyos valores estén ligeramente por encima o por debajo de los límites en cada categoría.

En el ámbito nacional, en Brasil es ampliamente conocida la ineficacia del tributo inmobiliario como fuente del ingreso público. Los ingresos provenientes del tributo inmobiliario representan menos del 0,4 por ciento del PIB —de hecho, la cantidad realmente recaudada es puramente simbólica en muchas partes del país. En una encuesta reciente de las municipalidades se investigaron varios aspectos del desempeño gubernamental municipal, entre ellos la evasión de impuestos. Los resultados demostraron que la evasión de impuestos es menor del 20 por ciento en apenas un 13 por ciento de las municipalidades. En una de cada cinco municipalidades, el ingreso fiscal representa menos del 20 por ciento de las propiedades incluidas en el catastro.

Nota: La divisa brasileña es el real (R$). En 1996, R$1 equivalía aproximadamente a US$1.

En la tabla 1 se muestra la importancia relativa del ingreso del tributo inmobiliario en Brasil, según el tamaño de la municipalidad. Las municipalidades pequeñas obtienen su financiamiento mayormente por transferencias de otros niveles gubernamentales, mientras que las grandes tienen una mayor dependencia del tributo inmobiliario como fuente de ingreso. Sin embargo, el funcionamiento del sistema fiscal de tributación inmobiliaria depende directamente de la voluntad política, la cual muestra grandes variaciones entre una ciudad y otra. Por ejemplo, debido a una extensa actualización de su catastro, Santana de Parnaíba, una ciudad de 60.000 habitantes en el estado de São Paulo, recauda aproximadamente R$212,00 por habitante, mientras que la recaudación promedio del tributo inmobiliario para ciudades con población similar (10.000 a 100.000 habitantes) es de R$10,04 por habitante. Las cifras de Santana de Parnaíba son incluso mejores que las de São Paulo, la capital del estado, donde se recaudan menos de R$80,00 por habitante. Igualmente, un modelo participativo en el que actúa la comunidad local y organizaciones no gubernamentales (ONG) facilita la discusión de asuntos críticos de la evaluación y administración del tributo inmobiliario, lo cual ha llevado a medidas de mejoramiento del sistema. En la ciudad Ribeirão Pires, por ejemplo, se logró aumentar el ingreso en un 40 por ciento gracias a la adopción de medidas tales como una exhaustiva revisión de la legislación del tributo inmobiliario que permitió adoptar mejores prácticas de tasación, nuevas tasas de tributo inmobiliario e implementación de procedimientos más eficaces para la recaudación de impuestos. Aún mejor: la reforma fiscal ha contribuido a incrementar la popularidad del gobierno municipal.

Caso de estudio: Porto Alegre

Inspirado por el seminario de abril y por trabajos de investigación y análisis previos, el gobierno municipal de Porto Alegre elaboró una propuesta para una reforma fiscal a la propiedad inmobiliaria con el objetivo de promover la equidad fiscal y la importancia del tributo inmobiliario como fuente de ingreso, así como también crear una administración más eficaz del impuesto. El proyecto se presentó el 28 de septiembre ante el Ayuntamiento —entidad encargada de aprobar o rechazar las medidas—, y deberá haber una decisión final antes de finalizar el año 2001.

Se encomendó el proyecto a un equipo multidisciplinario formado por miembros de la autoridad municipal, entre ellos asesores, expertos en tributo inmobiliario y planificadores urbanos y ambientales, como también un grupo de profesionales de estadística y tecnología de información de la Universidad Federal de Rio Grande do Sul. Las medidas propuestas fueron discutidas ampliamente con representantes de asociaciones públicas, líderes de la comunidad, representantes de los medios de comunicación, y, por supuesto, con los concejales (véase la tabla 2).

Conclusión

La participación de varios cientos de delegados pone en evidencia la importancia del tributo inmobiliario en sus países. Si bien es cierto que todavía hay mucho por hacer para mejorar el desempeño general de los sistemas de tributación inmobiliaria, el debate demostró que ha habido progreso en la manera como el impuesto se administra y se percibe en muchas partes del continente. Varias experiencias independientes demostraron claramente que la voluntad política es la causa principal de las diferencias observadas en los resultados del tributo inmobiliario en América Latina. Gracias a los recientes avances tecnológicos (ahora accesibles a cualquier país), se han podido poner en práctica mejores técnicas de valuación, tasación y manejo de la información. Poco a poco los retos se están desplazando de la esfera técnica a la política. Hoy más que nunca es esencial aprender a implementar las reformas y revisiones fiscales a fin de lograr sistemas de tributación inmobiliaria de mayor eficacia. También se evidencia la tendencia al uso de métodos participativos durante las revisiones, dado que es probable que la aceptación del público facilite el proceso de reforma.

Claudia M. De Cesare es consultora en tributación inmobiliaria de la Secretaría de Finanzas de la municipalidad de Porto Alegre, Brasil; investigadora e imparte clases de valuación y tributación inmobiliaria en la Universidad Federal de Rio Grande do Sul y en el Instituto Lincoln, forma parte del consejo consultivo del Instituto Internacional de Tributación Inmobiliaria (IPTI) y participa activamente en otras organizaciones profesionales.

Sidebar: Red Latinoamerica Sobre Tributación Inmobiliaria

Recientemente el Instituto Lincoln creó un grupo de redes formadas por expertos y legisladores, cuya misión es el estudio de los fundamentos de la política impositiva y del suelo en América Latina. Bajo la dirección de Martim Smolka, Senior Fellow y director del Programa para América Latina y El Caribe, la primera reunión de la red de tributación inmobiliaria se realizó durante el seminario en Porto Alegre en abril de 2001, siendo sus participantes Hector Serravalle (Argentina), Claudia M. De Cesare, Cintia E. Fernandes, Mauro Lunardi y Sol G. Pinto (Brasil), Carlos Acuña (Chile), Maria Camila Uribe y Claudia Puentes (Colombia), Mario R. Maldonado (Ecuador), Roberto Cañas (El Salvador) y Sergio Flores (México).

La red está a la búsqueda de sistemas de tributación inmobiliaria de mayor eficacia en América Latina y de reforzar la función del tributo inmobiliario en los ingresos gubernamentales municipales. Sus miembros buscan promover el desarrollo profesional, identificar temas apropiados para proyectos educativos y trabajos de investigación comparativa y diseminar información y experiencias.

Los proyectos clasificados como principales son los siguientes:

• indicadores del tributo inmobiliario
• bibliografía comentada
• base de datos de instituciones, cursos permanentes y programas educativos
• desarrollo curricular
• intercambios para el aprendizaje profesional

Si bien es cierto que algunos programas nacionales o estatales han mejorado los sistemas catastrales, los procedimientos de valuación y la comunicación en algunos países, los miembros de la red están de acuerdo en que todavía falta un largo camino para poder mejorar la eficacia y la equidad de los sistemas impositivos actuales. Los miembros también aspiran tener mayor comunicación y acceso a la información relacionada con asuntos de tributación inmobiliaria en América Latina. Los programas de capacitación futuros podrían ser una fuente de inspiración para otras municipalidades, que al igual que Porto Alegre, enfrentan dificultades en sus sistemas fiscales de tributación inmobiliaria.

As a next step in the economic reforms begun in the post-Soviet period, momentum is growing in Poland for the introduction of a property tax based on market value. The recently established Department of Local Government Taxes and Cadastre within the Ministry of Finance is responsible for carrying out the reforms, and has invited the Lincoln Institute and other international organizations to advise them on developing an ad valorem property tax system.

Last October several Polish officials visited the Institute to learn about property taxation in the United States, and subsequently the Polish government requested support from the U.S. Agency for International Development (USAID) to bring international advisors to Poland for a series of seminars and meetings.

In January we traveled to Warsaw to participate in a week-long program on the legal and administrative framework needed to implement an ad valorem system. We made presentations at two seminars: one at the Sejm, the Polish Parliament, for its members and local government officials; and another at the Ministry of Finance for central government officials, professional experts and other interested parties. Our meetings with department officials focused on the draft laws being prepared by the ministry for introduction to the parliament later this spring.

The proposed ad valorem tax on real property in Poland will replace three existing taxes on urban, agricultural and forest property that are based on non-value-based rates per square meter of land and buildings. These taxes were introduced originally with purely fiscal objectives to expand the tax base beyond income and to capture wealth being diverted into real property assets. After the Soviet period, property taxes were recognized as an appropriate source of revenue for local governments. Since 1991 the revenues from the three existing taxes have been assigned solely to local governments (gminas).

The economic reforms introduced in the past decade by Deputy Prime Minister for Finance Leszak Balcerowicz have now reached such a stage of maturity that a market value-based tax on property is both feasible and desirable. There is an active and growing real estate market, including privatization of land holdings by local governments and secondary sales of residential and commercial properties. Ad valorem taxation will offer a stable source of revenue with a potentially broad and expanding tax base for local governments. It will provide the benefits of a more equitable distribution on taxes, as well as greater fiscal transparency and accountability.

An earlier USAID-funded feasibility study project in Krakow, in which the Institute also participated, resulted in legislative proposals for an ad valorem property tax in 1995. However, those efforts stalled in the face of complexities of land surveying, land registration and assessment administration.

Benefits and Obstacles

In this renewed effort, Polish officials are also focusing on the non-fiscal benefits of a value-based property tax, including its potential as a stimulus of real estate markets and mortgage credit institutions and as a tool for urban revitalization and more efficient land use. W. Jan Brzeski, president of the Krakow Real Estate Institute and adviser to the Deputy Prime Minister, has contributed to an understanding of these non-fiscal benefits through previous Lincoln Institute-sponsored research and education programs in Poland and other transition economies.

Considerable progress has been made in addressing some of the institutional obstacles to an ad valorem property tax that stalled the 1995 proposal. There is acknowledgment that a property tax information system and fiscal cadastre can be developed independently of title registries and land surveys that are as yet incomplete. Mass appraisal concepts and methods are more readily understood now and are viewed as opening new opportunities to the appraisal profession. Local governments have developed greater experience and influence to lobby for an autonomous source of revenue and greater independence in fiscal decision-making. Although local administrative capacity and expertise remain a concern for the over 2400 gminas, a possible solution may be found in placing fiscal cadastre and mass appraisal functions in the newly created regional governments (Powiats).

Discussions with Ministry officials concerning policy issues and implementation strategy focused on how to define market valuation in the law and how to educate local officials and taxpayers on its meaning and application. Current Polish law requires that detailed descriptions of taxation methods be written into legislation and that the local elected council approve the calculations. There is concern about an appropriate appeals system that will recognize both taxpayers’ rights and the government’s ability to achieve defensible mass appraisal models from less mature real estate markets. There is also a growing awareness of the importance of educating the public on the benefits and responsibilities associated with an ad valorem property tax.

The need to estimate implementation costs, develop effective administrative arrangements and assess the potential impacts of an ad valorem system has led some officials to propose one or more pilot projects before full implementation. However, this approach must be weighed against the possibility of losing the political momentum to enact ad valorem taxation in this parliament if legislative action is delayed until after pilot projects are completed.

Jane Malme is an attorney and fellow of the Lincoln Institute. She has researched and advised on property tax policy and administration for transitional economies and is preparing a series of case studies on the development of market value-based taxation in several countries. She is also a legal adviser on property taxation to USAID tax reform assistance programs in the Russian Federation.

Dennis Robinson, vice president for programs and operations, has worked on fiscal cadastre systems in Central and Eastern Europe and throughout Latin America.

Urban land management policies and land market operations have taken on greater status in the debate on urban public policy in Latin America, and they are given increased attention in academic research and the development agendas of many countries in the region. Over the past 10 years the Lincoln Institute’s Program on Latin America and the Caribbean has supported a network of Latin American scholars and practitioners who have developed seminars, promoted research, organized public debates, consulted with decision makers and published their findings on these timely issues. Members of this network met at a conference in Buenos Aires in April 2004 to assess their activities and prepare this summary declaration of core land policy issues crucial to the search for more sustainable urban development programs in the future.

Urban land policy in Latin America and the ways that land markets operate tend to produce cities that are economically unequal, politically and socially exclusionary, spatially segregated and environmentally unsustainable. The consequences of these policies can be seen in the high and often irrational prices for land, due in part to the absence of effective urban land management practices.

The Current Situation

Land markets are structurally imperfect. However, the functioning of urban land markets depends on social relations, just as the outcomes of land market operations affect those relations, making it both possible and necessary to influence the markets. Instead of removing the imperfections, many instruments and policies have in fact helped to distort urban land market operations even further. Moreover, many established policies have kept the “rules of the game” in urban real estate unchanged, and apparently untouchable.

A more comprehensive reading of the problem reveals that, rather than being the result of inconsistent rationalization, the current dysfunctional land market is the result of missed opportunities for socially sustainable development in Latin American cities. Yet there are promising and innovative alternatives that can overcome the existing bottlenecks evident in inadequate and destructive national government policies, the enduring difficulties in financing urban development, and poor management practices.

One of the most glaring negative outcomes of the current situation is the relative persistence, weight and importance of informal urban land markets dominated by many exclusionary practices, illegal titling, lack of urban services, and other problems. Deregulation in places that should be regulated (poor outlying areas on the urban fringe), overregulation of wealthy regulated areas, and privatization policies that disregard social criteria are factors that help to drive these negative processes, particularly the spatial concentration of the urban poor. Although the majority of regularization programs are well-intended, they instead cause perverse effects, including increased land costs for the poorest sectors.

Traditional urban planning processes and urban standards have lost importance and effectiveness as instruments for guiding urban development, especially the existing mechanisms for land management. Yet this situation offers opportunities to think about innovative ways to deal with land management and urban planning strategies. This opportunity has already been seized in some places, where new experiments and proposals are causing intense debates by questioning the predominant traditional approaches.

Creating new practices within this framework requires making one unavoidable step: rethinking urban land taxation by incorporating new methods and keeping an open mind regarding alternative fiscal instruments that must be intended as tools to redirect current urban development and discipline the operation of the urban land market. These new tools should not only collect funds in order to build infrastructure and provide urban services, but also contribute to a more equitable distribution of benefits and costs, especially those associated with the urbanization process and the return of recovered land value increments to the community.

Proposals for Action

Recognize the indispensable role of the government. It is critical that the government (from local to national levels) maintains an active role in promoting urban development. The local level should be more committed to structural changes in land management, while the national level should actively foster such local initiatives. Government must not ignore its responsibility to adopt urban land market policies that recognize the strategic value of land and the specific characteristics of how land markets operate, in order to promote the sustainable use of the land by incorporating both social and environmental objectives and benefiting the most vulnerable segments of the urban population.

Break the compartmentalization of fiscal, regulatory and legal authorities. Lack of cooperation among local authorities is responsible for major inefficiencies, ineffective policies, waste of scarce resources and inadequate public accountability. Furthermore, incongruent actions by different public authorities send misleading signals to private agents and create uncertainties if not opportunities for special interests to subvert government plans. The complexity and scale of the challenges posed by the urban social reality of Latin American cities require multilateral actions by numerous stakeholders to influence the operation of urban land markets (both formal and informal), thus insuring the achievement of joint objectives: promoting sustainable and fair use of land resources; reducing land prices; producing serviced land; recognizing the rights to land by the urban poor; and sharing the costs and benefits of urban investment more evenly.

These authorities must also coordinate urban development policies with land taxation policies. They should promote a new urban vision with legislation that recognizes the separation of building rights from land ownership rights, with the understanding that land value increments generated from building rights do not belong exclusively to landowners. Urban managers must also devise creative mechanisms whereby these land value increments may be mobilized or used to produce serviced land for low-income social sectors, thereby offsetting urban inequalities.

Recognize the limits of what is possible. Transforming the current regulatory framework that governs the use of urban land requires new legal and urbanistic thinking that recognizes that inequalities and socio-spatial exclusion are intrinsic to the predominant urban development model. Even within the current model there is substantial room for more socially responsible policies and government accountability. Urban regulations should consider the complexity of land appreciation processes and enforce effective traditional principles such as those that restrain the capacity of government agencies to dispose of public resources or proscribe the “unjustified enrichment” of private landowners.

Break vicious cycles. Alternatives to existing regularization programs are needed to break the vicious cycle of poverty that current programs help to perpetuate. It is important to recognize that these programs are only a stopgap measure and that urbanization, housing and land taxation policies must also be integrated into the process. Reliance on housing subsidy policies, although inevitable, can be nullified if there are no mechanisms to prevent these subsidies from being translated into an increase in land prices. City officials should give priority to the creation of more serviced land rather than new regularization programs, since the right to a home is a social right to occupy a viable “habitat” with dignity. It is also important to understand that the low production of serviced land per se contributes to withholding the supply and, therefore, to higher prices affecting all aspects of urban development.

Furthermore, individual solutions (such as plot-by-plot titling processes or case-by-case direct subsidies to individual families) ultimately result in more costs for society as a whole than broader, collective solutions that incorporate other aggregate values such as public spaces, infrastructure investment and other mechanisms to strengthen social integration. Many Latin American countries have witnessed subsidized housing programs, often supported by multilateral agencies, where the land component is overlooked or dismissed. Such programs seek readily available public land or simply occupy land in intersticial areas of the city. This disregard of a broader land policy compromises the replicability, expansion and sustainability of these housing programs on a larger scale.

Rethink the roles of public and private institutions. Land management within a wide range of urban actions, from large-scale production of serviced land for the poor to urban redevelopment through large projects, including facelift-type actions or environmental recovery projects, requires new thinking about how public institutions responsible for urban development can intervene through different types of public-private associations. Redeveloping vacant land and introducing more flexibility in the uses and levels of occupancy can play a crucial role here, provided such projects fall under the strategic guidelines of public institutions, are subject to monitoring by citizens, and incorporate a broadly shared and participatory vision of urban development.

Showcase projects such as El Urbanizador Social (The Social Urbanizer) in Porto Alegre, Brazil, the Nuevo Usme housing project in Bogotá, Colombia, and that country’s value capture legislation are examples of sensible and creative efforts that recognize the importance of adequate urban land management and new thinking on the role of land, particularly the potential of land value as an instrument for promoting more sustainable and equitable development for the poor in our cities. Creative and balanced new thinking is also exemplified by the joint ventures of public land and private capital in Havana, Cuba, with value increments captured for upgrading densely populated historic areas.

Empower the role of land taxation in public finance to promote urban development. National, state or provincial and local governments must share responsibility for promoting property taxation as an adequate and socially meaningful method of financing and fostering urban development. The property tax should be sensitive and responsive to Latin American cities that have a strong legacy of marked economic and socio-spatial differences. There may be good reasons to tax land at a higher rate than buildings, in a rational and differentiated manner, especially in outlying areas subject to urban speculation and lands offered ex ante to low-income sectors of society (making certain that paying the tax also helps to build citizenship in these sectors). As already noted, it is also critical to create innovative fiscal instruments appropriate to special situations and other methods for capturing the value generated.

Educate stakeholders in the promotion of new policies. All actors involved in these processes, from judges to journalists, from academics to public officials and their international mentors, need in-depth training and education in the operation of land markets and urban land management in order to achieve the above objectives. We must identify the “fields of mental resistance,” particularly in urban and economic thinking and in the legal doctrines that represent the obstacles to be overcome. We must recognize, for example, that an “informal right” exists and operates in many areas to legitimize land transactions socially, if not legally, and to create networks and spaces of solidarity and integration. It is urgent that we take steps to introduce these themes and proposals into political agendas at the various government levels, in political parties, social organizations, academia and the mass media.

Latin American Network

Pedro Abramo, Rio de Janeiro, Brasil

Oscar Borrero, Bogotá, Colombia

Gonzalo Cáceres, Santiago, Chile

Julio Calderón, Lima, Perú

Nora Clichevsky, Buenos Aires, Argentina

Claudia De Cesare, Porto Alegre, Brasil

Matilde de los Santos, Montevideo, Uruguay

Diego Erba, São Leopoldo, Brasil

Edésio Fernandes, London, England

Ana Raquel Flores, Asunción, Paraguay

Fernanda Furtado, Rio de Janeiro, Brasil

Alfredo Garay, Buenos Aires, Argentina

Silvia García Vettorazzi, Guatemala City, Guatemala

Ana Maria González del Valle, Lima, Perú

Samuel Jaramillo, Bogotá, ColombiaCarmen Ledo, Cochabamba, Bolivia

Mario Lungo, San Salvador, El Salvador

María Mercedes Maldonado, Bogotá, Colombia

Carlos Morales Schechinger, Mexico City, Mexico

Laura Mullahy, Cambridge, Massachusetts, USARicardo Núñez, Havana, Cuba

Sonia Rabello de Castro, Rio de Janeiro, Brasil

Eduardo Reese, Buenos Aires, Argentina

Francisco Sabatini, Santiago, Chile

Martim Smolka, Cambridge, Massachusetts, USA

Alvaro Uribe, Panama City, Panama

Ricardo Vanella, Córdoba, Argentina

Maria Clara Vejarano, Bogotá, Colombia

Isabel Viana, Montevideo, Uruguay

As a city grows in size and building density, improvements to the land supporting the new development are usually part of the growth process. However, the combination of demand for additional construction sites and the limited amount of physical land available for development often results in land price increases.

This land scarcity is caused by three primary factors: the ability of landowners to retain serviced land from the market (attributed to a concentration of land ownership and legal and other institutional constraints); difficulties in accessing areas not yet prepared for occupation due to a lack of infrastructure; and restrictions imposed by zoning. Each of these factors has its own dynamics, but they are not necessarily present at the same time. Such is the case in Brazilian cities, particularly São Paulo, where these restrictive factors do not always operate in the same way with regard to land price.

For example, building regulations may reduce the land price of individual plots, but increase the overall price when the regulations affect all plots and thus restrict housing supply. A large stock of vacant land controlled by a few owners can cause price increases, while the lack of accessibility can result in lower prices. Land price also depends on the nature of the land regulation. As the city grows, the greater demand for buildable urban land generally results in added values if the existing infrastructure supports a more intense occupation of land and the zoning regulations (or changes thereto) also permit higher building density.

To examine these issues, we must consider first how the investment in infrastructure that provides or intensifies the means of access and use of land is financed; and second how the benefits and costs from the land improvements are distributed. Generally the cost of public services (e.g., streets, bridges, sewers, lighting, water) is paid with public funds, whereas the improvement or added value to the land created by the public investment in infrastructure, with few exceptions, is reaped by the owners of the improved property entirely free of charge.

Increases in property value also may result from simple changes in the use of land that is already accessible, for example when land previously considered rural is redefined as urban. Changes in potential densities due to new zoning regulations can create great benefits for the affected properties, although in this case as in the previous one future pressure on the infrastructure will require substantial public investment.

The Legal Framework

Owners of improved property in Brazil, as in most countries, traditionally appropriated the added value generated by public sector investment and zoning changes. The notion that owners should not be the only beneficiaries of such improvements was introduced in Brazil gradually during the 1970s, and this principle was incorporated in articles 182 and 183 of the 1988 Federal Constitution. These articles were subsequently regulated by Federal Law No. 10,257 of 2001, also known as the Urban Development Act or City Statute (Estatuto da Cidade).

Since 1988 urban development has been a matter of federal law. In practice, the federal legis-lation ratified the principle of the social function of urban land ownership and the separation of the right to own land from the right to build. Based on the 2001 act, the City of São Paulo approved its Strategic Master Plan in 2002 and Land Use Law 13,885 in 2004. These laws introduced the mechanism of Charges for Additional Building Rights (Outoga Onerosa do Direito de Construir–OODC), established minimum, basic, and maximum coefficients of land use (or floor area ratios), and limited the supply of buildable area. These tools, utilized together, enabled the municipality to improve land management efficiency, promote socially desirable outcomes, and increase revenues.

The minimum coefficient or floor area ratio (FAR) refers to the minimum use expected from a plot to comply with its social function; the basic FAR refers to the buildable area that any owner has the right to develop by virtue of ownership; and the maximum FAR is the amount of development that could be supported by the existing in-frastructure and zoning regulations. The charges associated with the OODC are imposed on the difference between the maximum FAR and the basic FAR of a plot.

The Administration of Building Rights

The OODC is the monetary compensation paid by those who receive new building rights (buildable area) from the government. This development con-cession (provided by articles 28, 29, 30, and 31 of Federal Law 10,257 of 2001 and defined in articles 209 to 216 of the 2002 Strategic Master Plan) is one of the regulatory instruments used to administer building rights in the city, except in areas designated for large-scale urban operations that use a special legal instrument to encourage public-private interventions (Biderman, Sandroni, and Smolka 2006).

The basic FAR of land use established in 2004 varies between 1 and 2, depending on the area of the city considered. The maximum FAR can be 1, 2, 2.5, or 4, also depending on the area. In some urban areas these new regulations reduced building rights by establishing a basic FAR of 1 for land that had been designated 2 or more under prior legislation. In parallel, the municipality of São Paulo used the OODC to extend the building potential or the maximum FAR up to 4 on land that previously could be developed up to only 1 or 2.

As a result, in certain areas where the FAR was reduced from 2 to 1, developers could submit projects using the former FAR 2, or even the maximum FAR 3 or 4, as long as they paid the government for the additional buildable area corresponding to the difference between the basic FAR and the FAR used in the project. This instrument favors developers, assuming they find the charges cost-effective, because it allows them to build up to FAR 4 in areas where formerly the maximum was FAR 2. Typical landowners do not always find this tool advantageous, however, since the building potential of their land may be reduced and a charge may be imposed on what they previously perceived as a right to build, free of any charges.

Landowners of small lots and low-density housing may not notice what they could be losing when the FAR is changed because they typically view their property as combining the land, building, and other improvements. It is difficult to separate the value of land from that of improvements, so an eventual land value decrease is not perceived immediately. Furthermore, the expansion of the real estate market in São Paulo coincided with the approval of this new legislation in 2004, and the overall increase in land prices may have compensated the eventual price decline associated with changes in FAR. It is also necessary to note that the expansion of government credit for house financing since 2006 contributed to an increase in demand for land and consequently the rise of land prices.

For the developers, the increase in FAR to 4 in areas where the maximum had been 1 or 2 constituted a favorable situation. They could invest more capital in land and make more profitable undertakings, thus compensating for the extra payment they made for the difference between the basic and the maximum FAR. Gradually, developers were convinced that it was better to pay this land value increment to the government than to private owners because the government converted the payments into improvements that frequently benefited the developers’ projects.

The 2002 Strategic Master Plan and Law 13,885 of 2004 also limited the supply of residential and nonresidential building potential in all city districts by establishing a total additional buildable area of 9,769 million square meters (m2): 6,919 million m2 for residential use and 2,850 million m2 for nonresidential use (table 1). This potential did not include the buildable areas inside the perimeter of São Paulo’s 13 urban operations. The additional areas were distributed among the 91 out of 96 city districts, excluding five environmentally protected areas. This definition and demarcation of the potential building stock introduced a new element to the real estate market.

Once the maximum building area was known, developers anticipated land scarcity in those districts where the supply was low and the real estate dynamic high, thus unleashing a trend in higher land prices. The lack of buildable area, in turn, lead to pressures from real estate developers for the government to increase the supply—that is, to change the building area limits in some districts during the 2007 revision of the master plan—but their efforts were not successful. By October 2010 the land supply had been exhausted, or was very close to it, for residential use in 17 districts and for nonresidential uses in 5 districts (figure 1).

Planning and Social Interest Factors

The formula to calculate the OODC charge adopted in São Paulo’s 2002 Strategic Master Plan takes into account planning and social interest factors in addition to the characteristics of the parcel and the actual economic benefit allocated to the property as a result of the OODC.

The planning factor is an instrument that seeks to encourage or discourage higher densities in certain areas, depending on the existing infrastructure, especially public transport and mass transit. The planning factor is also used to obtain greater financial compensation from the sale of building rights for businesses in improved areas of the city, as the coefficient varies according to whether the land use is residential or nonresidential.

The social interest factor establishes exemptions or reductions in the financial charge, depending on the type of activity to be developed on the parcel. The coefficient ranges from zero to one and is applicable to a variety of activities. For example, the coefficient for affordable or social housing is zero, which means that developers of this type of housing do not pay compensation for additional building rights. Similarly, nonprofit hospitals, schools, health and infant care clinics, cultural facilities, sports and leisure institutions, and houses of worship have a coefficient of zero.

These factors act as incentives for desirable social outcomes, since the smaller the planning and social interest factor coefficients applicable to a given area, the smaller the charge to be paid, and the greater the incentive for projects to be developed in the area.

Revenue Impact and Allocation of Funds

Total revenues from OODC payments reached R$650 million (US$325 million) in approximately five years, in spite of the global financial crisis that constricted credit by end of the period (table 2). These funds are deposited into the Urban Development Fund (FUNDURB), which was created to implement plans and projects in urban and environmental areas, or other interventions contemplated in the 2002 master plan.

As of September 2008, the number of projects approved to be financed by FUNDURB included 15 linear parks (R$42.5 million), sidewalk and street improvements (R$21.2 million), drainage and sanitation (R$108 million), community facilities (R$ 21.1 million), regularization of informal settlements (R$50 million), and restoration of culture heritage buildings (R$37 million).

Concluding Remarks

After the City of São Paulo approved the 2002 Strategic Master Plan, the principle of development concessions and buildable land was applied throughout its territory. When a real estate project exceeds the basic FAR and the developer wants to build up to a maximum of 4, payment of financial charges to the government is required. Since the OODC was introduced, revenues have increased annually. One should keep in mind that these revenues are net of the more than US$1 billion generated from 2 of the city’s 13 Urban Operations (Faria Lima and Agua Espraiada) where major zoning and density changes are occurring (Biderman, Sandroni, and Smolka 2006). In those areas the new building rights are priced through the auction of CEPACs, and the revenues must be invested in the area corresponding to the urban operation instead of going to the FUNDURB fund to benefit the city as a whole (Sandroni 2010).

The charge for building rights in São Paulo does not seem to have affected the profitability of developers. On the contrary, increasing the maximum FAR to 4 in some areas of the city contributed to enhancing the developers’ rates of return. However, setting a maximum reserve for building rights seems to have caused an upward trend in land prices, especially in districts where the supply of buildable area is low. In some districts developers proceeded to deplete the supply of residential building rights quickly. This type of response will probably intensify in the future, thus putting pressure on the city government to raise the maximum stock of buildable area and/or the maximum FAR. If this happens, there is a risk that the motivation to increase municipal revenue may outweigh urban planning criteria and the limitations of infrastructure, especially public transportation and mass transit.

Moreover, the flow of financial compensation will not be continuous. Unlike property tax revenues that recur annually, revenues from the sale of building rights will fade in time as the additional building potential is exhausted. In some sectors of the city the supply of buildable area has already been depleted, and the city has achieved its defined goal for building density. However, future changes in the master plan may provide greater building potential for these areas, depending on technical recommendations and the political conditions for the change to take place.

In sum, the application of the principle of the social function of property, embedded in the 2002 Strategic Master Plan for São Paulo, enabled the enactment of municipal legislation that clearly separates the right of ownership from the right to build. As a result, the traditional notion of all-encompassing property rights is no longer sustained, and land ownership cannot override the public interest or take precedence over the social function of property. Consequently, existing building rights can be reduced without landowners being entitled to monetary compensation simply because their hopes have been dashed.

About the Author

Paulo Henrique Sandroni is an economist who served as director of urban planning and public transportation for the City of São Paulo from 1988 to 1993, and for a short period he served the federal government as vice-minister of administration. He has published articles and books on economics, including a dictionary considered a primary reference on economics in Brazil. Sandroni is also a professor at the Economics and Business School at the Getulio Vargas Foundation in São Paulo, a private consultant on urban development and transportation issues, and a lecturer in programs sponsored by the Lincoln Institute of Land Policy.

References

Biderman, Ciro, Paulo Sandroni, and Martim O. Smolka. 2006. Large-scale urban interventions: The case of Faria Lima in São Paulo. Land Lines 18(2): 8–13.

Prefeitura Municipal de São Paulo, Secretaria de Financas. www.prefeitura.sp.gov.br/cidade/secretarias/financas

Sandroni, Paulo. 2010. A new financial instrument of value capture in São Paulo: Certificates of additional construction potential. In Municipal revenues and land policies, Gregory K. Ingram and Yu-Hung Hong, eds., 218–236. Cambridge, MA: Lincoln Institute of Land Policy.

Carlos Morales-Schechinger joined IHS, the Institute for Housing and Urban Development Studies at Erasmus University in Rotterdam, The Netherlands, in 2008. This international institute attracts students from all over the world, mostly from developing countries. Some IHS programs are sponsored jointly with the Lincoln Institute.

Previously Morales was a part-time lecturer at UNAM, the National Autonomous University of Mexico. He has been collaborating on a regular basis in seminars and courses organized by the Lincoln Institute throughout Latin America for the past 12 years. He lectures primarily on land value capture instruments, land and property taxation, and land-based preventive policies as alternatives to informal settlements.

He has held various government posts, including director of land policies and instruments in Mexico’s ministry for urban development, where he designed and implemented an ambitious program on land banking; and as director of cadastral policy for Mexico City’s government, where he managed an extensive fiscal reform of property taxes. He also held posts in both public and private banks in Mexico, dealing with property valuation, mortgages, property administration, and loans for large urban developments and for local governments.

He holds a bachelor’s degree in architecture from UNAM, a diploma in local government finance from the University of Birmingham, UK, and a Master of Philosophy in urban studies from the University of Edinburgh, UK.

Land Lines: How did you become involved with the Lincoln Institute?

Carlos Morales: My first introduction was in the early 1980s when I attended an Institute-sponsored international conference in Cambridge that related to my work for the government on urban land policy. The ideas I learned about were put to direct use two years later when I worked on a reform to increase the supply of serviced land in medium-sized cities and to subsidize sites and services for low-income households in Mexico. In the early 1990s, when I was working for the government of Mexico City on an ambitious property tax reform, I attended another Institute conference on property taxation.

From 2000 onward, I participated in many education activities organized by Martim Smolka through the Program on Latin America and the Caribbean. Around 2004 the Institute started a joint venture with IHS and I was one of the visiting lecturers hired by the Institute to teach in those programs. I was later invited to join the IHS staff full-time as the manager of this joint venture.

Land Lines: How do you compare the effectiveness of institutions such as IHS and the Lincoln Institute?

Carlos Morales: I believe they are complementary. The Institute is a leader in research and education on land policies, with an international focus on Latin America and China. IHS is recognized for its education and capacity building on urban management and development for a worldwide audience, focusing on developing and transition countries. IHS courses are open to students from all regions, but most come from countries in Africa, Asia, and Central and Eastern Europe. Through its joint venture with IHS, the Lincoln Institute is able to reach out to those from many more countries in an efficient way.

Land Lines: Conveying fundamental knowledge about land policy and urban management to practitioners is not an easy task. What have you found is the most effective approach?

Carlos Morales: Using a combination of two things is important: the profile of the lecturer and the appropriate pedagogy. Lecturers should have experience both as practitioners and as academics to be able to answer questions that are relevant to practitioners, especially when the answers imply moving away from their comfort zone and facing some kind of change.

The ultimate purpose of social science is precisely to change reality, not only to understand it. Consultancy brings academics close to practice, but it does not confront them with the moral commitment of implementing policy or the ethical responsibility for making policy work on the ground. Experience in direct practice is crucial. The Institute’s programs in Latin America employ lecturers with this profile, and they have proven effective in addressing issues such as the impacts of taxation and regulations on land markets and in choosing instruments for capturing incremental land value, both of which are hot topics in the region.

Regarding pedagogy, practitioners tend to be skeptical about theory. They regard it as impractical, and they want to test it to be convinced. Using examples of policies implemented in other cities is very useful. Some students from developing countries do not accept cases from more developed countries, arguing that their governance structure is too different. Others prefer cases from diverse situations because in spite of contextual differences they aspire to better development opportunities for their own countries. A lecturer should have an arsenal of many different cases to examine when questions rise.

Doing simulation games is also a very effective technique. Games involving role playing where participants compete against each other are the most useful for understanding land markets and helping solve problems. Role playing is revealing even when participants fail to solve problems since it prompts them to question what happened. I have seen how participants who experience failure in a game begin to cooperate and design clever regulations on their own. Another strategy is to assign participants roles contrary to their beliefs or experience. For example, government officials playing the role of pirate land developers learn about the substantial amounts of money the poor must spend just to access land.

Playing the devil’s advocate works well when discussing controversial concepts, as if the participants are in a land court. This is not a new technique except when played with a couple of twists. An example is determining the criteria for compensating eminent domain. In this game one team argues in favor of current use values and the other future use values. Background literature and practical information are provided for arguments on both sides. Practitioners from many places can relate to examples of regulatory takings, whether as expropriations in China, land restitutions in Eastern Europe, or the sale of building rights in Brazil.

Since participants have to defend a position with which they do not agree, they have to study and work harder. In many cases they end up changing their minds, or at least identifying new arguments to use later in debating their opponents in real life. At the end of a land court game the group acting as jury secretly votes twice, first on the team’s performance as advocates and second on the conceptual arguments. When a team gets more votes than the position they defended, it is clear that more research on the issue is needed. What I like best is that the game does not impose a position on the participants, but it raises the level of debate.

Land Lines: What are the main types of resistance to concepts and ideas on land policy?

Carlos Morales: Perhaps the concept most frequently resisted is how taxes and regulations are capitalized into the price of land. Resistance can come from an ideological standpoint (either left or right, both have arguments), self-interest (landowners do not readily accept sacrificing profit), or ignorance of how the capitalization concept works. As an educator I have a role to play in addressing the last challenge.

Even if theory is explained to practitioners, they remain skeptical if their experience contradicts the theory. Misunderstanding can come from referring to a tax on a commodity that is not as scarce as land, but it can also come from experience with land markets themselves. This happens when two policies with opposite effects are introduced together, for example, increasing densities and increasing taxes. The combined effect of these measures makes it difficult to understand the impact of each one. A simulation game can help isolate each impact. Practitioners need to experiment with each policy measure to better understand them both. I have noticed that they may nod with skepticism when you lecture them, but they give you a “eureka” smile when they reach understanding by playing a game.

Land Lines: How do you overcome resistance to topics such as value capture?

Carlos Morales: A charge linked to the increase in densities is a way of capturing the incremental value of land and a source of funds to finance infrastructure, as São Paulo is doing when it charges for extra building rights. The discussion about how this policy impacts market price is controversial. Landowners oppose it because it reduces their price expectations, but developers favor it because it reduces land prices and the payments are returned in the form of public works. A similar situation happened in Bogotá when a tax on the increment in the value of land was introduced.

Both cases are useful references to explain land value capture in developing countries, yet more city cases need to be documented and disseminated, and some practitioners want examples from developed countries. This is not easy, because land value capture is a buzzword in Latin American circles, but not in most developed countries. This is not because value capture is not used in the United States or other places, but rather because it is assumed as part of the operation of the land market. It is the role of lecturers to point this out and open opportunities for sharing experiences among practitioners from both developed and developing countries.

Land Lines: Please comment on the difficulties of conveying taxation concepts to planners.

Carlos Morales: Planners learn about property taxes if they are high enough to have an impact on decisions by landowners, developers, and land users, as in the United States. In developing countries these taxes generally are so low that they do not impact market decisions, so planners are not interested. When I play games that illustrate land markets to architects—who are often also planners—and they realize that the city is not going the way they expect, their most frequent reaction is to suggest more taxes and more efficient land markets. Seldom do they propose a traditional land use plan.

Land Lines: What in your opinion are the central concepts or ideas that could make the difference in the international debate on urban land markets?

Carlos Morales: Pointing out that land value capture is a significant source for financing infrastructure and preventing slums can bring more stakeholders into a serious discussion. Ideas related to security of tenure, land registration, and titling in order to increase access to loans have been dominating policy, but results have not been as positive as predicted. Slums continue to develop and service provision is still lagging behind.

Policies that have to do with land taxation and property obligations—not just property rights—have more potential to improve the functioning of urban land markets. UN-Habitat and the World Bank adopted the earlier notions of security of tenure as a solution, but are now beginning to show interest in land-based urban development instruments. Land value capture policies will have an effect tomorrow, but with a political cost today because giving titles is cheap and appeals to short-term politicians. This is the challenge that should be faced in the international debate to ensure more effective and long-term land market reform.

David Vetter (Ph.D., University of California) has worked for more than four decades on urban finance and economics issues in Latin America. He taught and conducted urban research in Brazil for 17 years at the Brazilian Institute of Geography and Statistics (IBGE), the Graduate Engineering Program (COPPE), the Institute of Urban and Regional Planning and Studies (IPPUR), and the Fundação Getúlio Vargas. In 1990, he joined the World Bank, where he developed subnational investment and reform programs for Argentina, Brazil, Chile, and Ecuador. To push for greater private-sector participation in urban financing, he joined Dexia Credit Local in 1998 as vice president and established lending programs in Argentina, Brazil, and Mexico. Since returning to Brazil in 2004, he has worked as a consultant and researcher for various clients, including the Inter-American Development Bank and the Lincoln Institute of Land Policy, where he has been a visiting fellow since July 2014. He recently authored two articles for Land Lines: “Residential Wealth Distribution in Rio de Janeiro” (January 2014) and “Land-Based Financing for Brazil’s Municipalities” (October 2011).

Land Lines: How did you become involved with the Lincoln Institute?

David Vetter: For many years—whether I was doing research, consulting, or working at the World Bank or in the private sector—I quite often found solid information to help me from the Lincoln Institute. More recently, the Institute financed my research on residential wealth and municipal finance in Brazil.

Land Lines: What will you research as a visiting fellow and why?

David Vetter: I will focus on strategies for financing urban infrastructure in Brazil. Like other Latin American countries, Brazil continually needs to make substantial investments to keep pace with the rapidly growing number of new households and to reduce the number of them without access to urban infrastructure. From 2000 to 2010, the number of households grew by more than 12 million—an increase nearly 7 times the 1.8 million households in the Boston-Cambridge Metro Area in 2010. Given this demographic pressure, the absolute number of Brazilian households without access to urban infrastructure remained high in 2010, despite sizeable investments over the previous decade. And the deficits of some types of infrastructure actually increased. From 2000 to 2010, for instance, the number of Brazilian urban households without adequate sewage systems rose by nearly 2 million—more than the total number of housing units in Metropolitan Boston in 2010.

Brazil’s Ministry of Cities estimated that basic sanitation (potable water, waste water, solid waste, and drainage) would cost more than US$80 billion just for 2014 to 2018. Highways, street paving, public security, health, and education demand similarly high investments, and the amounts required often greatly exceed existing sources of financing.

Land Lines: How could value captured by these infrastructure investments help to finance them?

David Vetter: The benefits of infrastructure investments are capitalized into land and building prices. The Lincoln Institute’s 2013 forums on Notable Instruments for Urban Intervention showed that many governments in Latin America are effectively using a wide variety of tools to capture value created by their infrastructure investments, as detailed in Martim O. Smolka’s comprehensive review of the literature (2013): sale of development rights; betterment levies for street paving, drainage, and other improvements; and public-private partnerships (PPPs) involving value capture, as in the financial structure of Rio’s massive port renovation (Porto Maravilha). More efficient collection of the real estate property and transfer taxes help as well.

Value capture can generate positive feedback, creating a virtuous circle that generates additional resources for further investments. For example, the increases in value generated would increase the base for the property tax if real estate assessments were conducted in a timely manner, and the resulting revenue could be used to finance further investment.

Land Lines: To what extent could Brazilian municipalities increase the use of value capture?

David Vetter: According to economic theory, the value generated by infrastructure investments should roughly equal their cost. Because the supply of infrastructure would seem to be inelastic due to public finance constraints, the market value generated can actually exceed the cost of the investments.

For example, Brazilian municipalities invested more than US$82 billion in infrastructure and equipment from 2006 to 2010 (about US$16 billion per year). But in 2010 alone, state and national governments also invested more than US$50 billion. Capture of even a relatively small percentage of the value created could provide significant resources for investment. For example, the Rio de Janeiro Metropolitan Region is receiving massive infrastructure investments from national, state, and municipal governments, as well as from private sector partners, for various projects including the new Arco Metropolitano beltway and a new Metro line. Some are concessions or PPPs with significant financing at below-market interest rates from the public development banks (BNDES and CAIXA).

Land Lines: What role could value capture play in housing policy?

David Vetter: Infrastructure investment creates residential wealth, as its value is capitalized into housing value. Residential structures represent about one third of Brazil’s total net fixed capital in the national wealth accounts, as is typical for other countries around the world. Given this importance, we ask in our own work on the Rio de Janeiro Metropolitan Region: What generates residential wealth? How much residential wealth exists? Who holds it? We found that there are winners and losers. For example, the increase in value generated by infrastructure investment increases the residential wealth of homeowners, but it raises prices for renters in the benefitted area and housing cost for homebuyers wishing to locate there.

Land Lines: Would a housing policy focused on generating residential wealth and the equity of its distribution differ from most low-income housing programs?

David Vetter: It would be quite different. Most low-income housing programs keep unit costs down by building on low-cost land. Land price is low when it lacks access to employment and basic urban services, so affordable units often end up in these poorly serviced areas. A housing policy focused on residential wealth would emphasize access to employment and basic services, as they are among the key determinants of housing value.

Land Lines: But isn’t this utopian? How could value capture help to increase the residential wealth of lower-income families?

David Vetter: The challenge is certainly great. But value capture from higher-income families could allow cross subsidies to lower-income ones, especially renters who wish to locate in the areas benefiting from infrastructure investments.

Let me illustrate. The number of households in the Rio de Janeiro Metropolitan Region increased by more than 600,000 from 2000 to 2010 (that’s twice the number of households in Washington, DC, in 2010). As a result, the region’s urban infrastructure deficits remain high despite high investments. A recent impact study of metropolitan Rio de Janeiro’s new beltway (Pontual et al. 2011) explored the possibility of developing whole new socially integrated and fully serviced neighborhoods to hold the huge expected increase in the number of households along the beltway. This development could be financed in part by capturing value generated by the massive infrastructure investments planned and being implemented. Part of the value captured from higher-income families could be used to finance lower-income ones.

This impact study analyzed where such neighborhoods might best be located. Which value capture instruments might work best in this case? It is interesting that the private sector is already developing what they describe as “green neighborhoods” in the outlying regions of metropolitan Rio. Does it make sense to plan individual housing projects when such large increases in households are involved?

Land Lines: Would lower-income families be able to pay for infrastructure?

David Vetter: In Latin America, the eligibility criteria for value capture programs almost always include a test for capacity to pay. Of course, value capture should only be applied to families who can afford it.

Land Lines: How do you respond to the Brazilian professionals working on urban issues who argue that it is impossible to capture value for legal or cultural reasons?

David Vetter: Although Brazil’s constitution provides broad powers for value capture, only the largest municipalities, such as São Paulo and Rio de Janeiro, appear to be using them. Other sub-national and national governments are doing much less to capture the value of considerable public investments.

This failure is probably due in part to resistance by some who think that value capture is legally impossible. Yet while betterment levies meet with similar resistance, Silva and Pereira (2013) estimate that total revenue from them exceeded US$300 million among municipalities in the states of São Paulo, Paraná, and Santa Catarina from 2000 to 2010, even though relatively few municipalities employed them. This amount is not very significant for states of this size, but it does show that betterment levies are feasible.

One reason why betterment levies were successful in Paraná and Santa Catarina was that the World Bank and Inter-American Development Bank have required cost recovery in their municipal development projects since the 1980s. This success supports the idea that incentives of a national or state program can encourage use of value capture at the municipal level.

In addition, many cases of value capture seem to go unnoticed. In the City of Rio de Janeiro, for example, the sale of excess land from the existing subway system partly financed the expansion of a whole new line, and developers provide water and sewerage trunk lines as a condition for project approval in a higher-income neighborhood, Barra da Tijuca.

Land Lines: How might national or state government programs encourage greater use of value capture?

David Vetter: One way would be to provide access to financing as an incentive for the municipalities that use value capture. Ecuador’s development bank (Banco del Estado) uses such access to encourage municipalities to employ betterment levies. Access to financing could be used to provide access to a broader range of value capture instruments, such as the sale of development rights and impact fees, as well as betterment levies.

Land Lines: How can the Lincoln Institute encourage infrastructure financing through value capture?

David Vetter: Lincoln has done an excellent job of generating knowledge about value capture through its research, forums, training program, and publications. The Institute could scale up its excellent work on value capture in the region through more forums and publications, and by directly advising policy makers regarding program design and implementation.

As part of its ongoing education program in Latin America, the Lincoln Institute, with the Porto Alegre (Brazil) City Council, organized the “International Seminar on Property Taxation” in April 2001, to discuss equity and efficiency in property tax administration. More than 200 delegates came from 12 countries, 14 Brazilian states and 45 local authorities. Internationally recognized experts and public officials in government, academia, public finance and taxation represented such institutions as the Inter-American Development Bank (IDB), the International Property Tax Institute (IPTI), the International Association of Assessing Officers (IAAO), the Brazilian Association of Secretariats of Finance of Capitals (ABRASF) and the Brazilian School of Fiscal Administration (ESAF). This article draws on the issues and experiences discussed at that seminar.

As in the United States, there is an ongoing debate in Latin America over the replacement of the property tax with alternative revenue sources, such as fees and charges, that might be easier to administer, less influenced by political factors and more efficient. Nevertheless, the property tax remains the predominant option for raising revenue to finance public services at the local government level in Latin America.

An important characteristic of the property tax is the great diversity found in its administration. For example, the property tax is a purely local tax in Brazil, Colombia and Ecuador, but it is administered at the province level of government in Argentina. In Mexico, the role of the local authorities has been reduced to primarily tax collection. In Chile, the property tax is an important revenue source for local governments, although the central government is responsible for administering the cadastral, assessment and collection systems. El Salvador is the only country in Central America that has never introduced the property tax, although currently there is strong pressure for establishing new taxes, since tax revenue represents only about 11 percent of GDP.

Insights on Property Tax Administration

In general the property tax is recognized as a ‘good tax’; its role is essential in the process of recovering revenue, funding public services and promoting social development. The unique nature of the property tax provides important links among wealth and income, social development, and land use and occupation. However, the property tax must be administered fairly to avoid inefficiency and inequity in the distribution of the tax burden. Concerns mentioned in several seminar sessions included the need for an adequate cadastre, as complete as possible in terms of coverage and containing basic attributes needed for assessing different types of properties. One discussion group recommended integrating the community in the continual process of updating cadastral data. Others emphasized the need for performing a careful cost and benefit analysis before implementing geographic information systems.

In countries where the cadastre is not administered by the central government, there is no standard model or system. Depending on the development level of the municipality and/or financial resources available, the cadastre technology can vary enormously from a simple list of properties to a cadastre based on a geographic information system with multiple purposes. Diverse valuation approaches are also observed: self-assessment is used in Colombia and Bolivia, whereas the cost approach is commonly used in Brazil, Chile, Ecuador and Mexico. Some local authorities in Brazil are engaged in a movement to use the sales comparison approach for residential property. In applying the cost approach, the land value is determined using the sales comparison approach. Although based on market information, the land value is also estimated in different ways, causing concerns over how to reduce assessment inequities.

Valuation is primarily a technical task that requires assessment uniformity and short valuation cycles, and should not be used for political purposes. Capping systems, which limit tax increases between consecutive periods for each individual property up to an overall adjustment based on annual inflation rates, are seen as a major source of assessment inequity. Transparency in the valuation results is considered fundamental for guaranteeing the taxpayers’ confidence in and acceptability of the tax system. Other basic premises include fiscal accountability, fairness, democratization of information, and translation of technical language into a form that is understandable to community members and leaders. Furthermore, community members should take part in making decisions on public revenue collection and expenditures.

A recent development of interest in this regard is the increasing use of Internet facilities by taxpayers to receive and pay tax bills, review statistical data on their property and update cadastral information. Chile is considered the benchmark in Latin America in the use of these technologies.

Experiences with Fiscal Reform

Several seminar presenters shared their experiences with property tax reform and revisions, which often include investments in cadastral systems. For instance, the improvement in the collection performance of the property tax in Colombia increased as a percentage of GDP from 0.22 percent in 1970 to 0.91 percent in 1994. This improvement was attributed in part to legislation that demanded the implementation and updating of the cadastre throughout the country. The strong pressure against updating assessed values, as well as administrative difficulties in undertaking valuations, resulted in the establishment of a self-assessment procedure. Taxpayers are now responsible for declaring the assessed value of their properties, but the value cannot be less than the recorded cadastral value. To reduce underassessment, the assessed value is also used as the basis for expropriation.

Fiscal reform initiatives in Argentina during the 1990s were strongly motivated by financial crises in the public sector. The reform project relating to the property tax was divided into two main areas, cadastres and fiscal administration. The equivalent of over US$ 120 million has been invested in these reforms, yet the project has been completed in only about 50 percent of the jurisdictions. In another example, Mexicali, the capital city of Baja California, pioneered the adoption of land value as the property tax base in the 1990s. Although this was a successful experience with property tax reform, current challenges in Mexico include achieving fiscal balance between public expenditure and revenue raised and recovering the importance of the property tax as a revenue source.

Property Taxation in Brazil

Political, legal and practical obstacles have contributed to the continuation of inequities and inefficiencies in the property tax in Brazil. Frequently there is no common interpretation of tax regulations among major branches of government (the judiciary, legislature and executive), creating a pervasive lack of confidence in the tax system. Primary concerns in property tax administration include incomplete and out-of-date cadastres, resulting in irreplaceable losses in revenue; poor assessment practices that generate a low degree of uniformity; the strong influence of historical assessed values, because valuation is infrequent and approval of a new valuation list in the Chamber of Councilors is often difficult; and low performance in tax collection.

The validity and feasibility of adopting progressive (sliding) rates for the property tax, was largely used adopted in Brazil during the 1990s, was reexamined. The basic idea had been to establish progressive rates according to classes of assessed value and to insert an element of ability-to-pay into the system, simultaneously making high-value properties pay more proportionally and alleviating the tax burden on low-value properties. In 1996, the Supreme Court declared the use of progressive rates for the property tax unconstitutional. However, a recent constitutional amendment authorized progressivity in the property tax rates based on the value of properties, as well as different rates based on property location.

Arguments expressed in the seminar against the application of progressive rates for the property tax were based on the principle of keeping the tax simple, and concerns about the measure’s effectiveness. Arguments in favor of progressivity included the concentration of income disparities in Brazil and the fact that the poor are likely to spend more proportionally in housing expenditures than are the wealthy. The majority of seminar participants believed that the progressive rates might promote a fairer distribution of the tax burden. However, progressivity should be gradual; that is, a higher rate should be applied only over the part of property value that exceeds the limit established in each class of assessed value, to avoid a large difference in tax burden for properties with values slightly above and below the boundaries of each class.

At the national level in Brazil, inefficient use of the property tax as a revenue source is widely recognized. Revenue from property taxes represents less than 0.4 percent of GDP. Indeed, the tax actually collected is only symbolic in many parts of the country. A recent survey of municipalities investigated several aspects of local government performance, including tax evasion. In only 13 percent of the municipalities was the tax evasion rate less than 20 percent. In one out of five municipalities, the revenue collected represented less than 20 percent of the properties included in the cadastre.

Table 1 demonstrates the relative importance of property tax revenue in Brazil, according to the size of the municipality. Small municipalities are financed largely by transfers from other government levels and larger municipalities are more dependent on the property tax as a revenue source. However, the performance of property tax administration depends directly on political will, which varies enormously among cities. For instance, due to an extensive updating of its cadastre, the city of Santana de Parnaíba, with 60,000 inhabitants in the State of São Paulo, collects approximately R$ 212.00 per inhabitant, while the average revenue collected from property tax for cities of its size (10,000 to 100,000 population) is R$ 10.04 per inhabitant. That performance is even better than in São Paulo, the capital of the state, which collects less than R$ 80.00 per inhabitant. Similarly, a participatory approach involving local community and nongovernmental organizations (NGOs) allows critical issues of property tax assessment and administration to be discussed, resulting in actions to improve the system. In the city of Ribeirão Pires, for example, measures that increased revenue by 40 percent included an ample review of the property tax legislation that allowed the adoption of better assessment practices, new property tax rates and more efficient procedures for tax collection. Furthermore, the tax reform has contributed to increasing the local government’s popularity.

Case Study of Porto Alegre

Inspired by the April seminar and previous research and analysis, the local government of Porto Alegre has prepared a proposal for a property tax reform aimed at increasing fiscal equity, enhancing the importance of the property tax as a revenue source, and creating more efficient administration of the tax. The project was presented on September 28 to the City Council, the entity in charge of either approving or rejecting the measures, which must be decided before the end of 2001.

A multidisciplinary team worked actively on the project, composed of local authority members, such as valuers, property tax experts, and urban and environmental planners, as well as a group of statisticians and information technology experts from the Federal University of Rio Grande do Sul. The measures being proposed have been discussed thoroughly with representatives of public associations, community leaders, the media and, of course, city councilors (See Table 2).

Conclusion

The participation of several hundred delegates at the seminar is evidence of the importance of property taxes in their countries. Although there is still an ample need for improving the overall performance of property tax systems, the debate demonstrated progress in the way the tax is administered and perceived in many parts of the region. Several independent experiences made it clear that political will is the principal element for explaining differences in the performance of property taxes in Latin America. Recent technological advances, now accessible to any country, have been able to provide better solutions in data management, valuation and assessment. Challenges are gradually moving from the technical to the political sphere. More than ever learning how to implement tax reforms and revisions is essential for pursuing more effective property tax systems. A trend toward using a participatory approach when undertaking such revisions is also evident, since public acceptance is likely to facilitate the reform process.

Claudia M. De Cesare is a property tax advisor to the Secretariat of Finance for the municipality of Porto Alegre, Brazil. She also conducts research and teaches courses on valuation and property taxation at the Federal University of Rio Grande do Sul and the Lincoln Institute. She is a member of the advisory board of the International Property Tax Institute (IPTI) and is active in other professional organizations.

Sidebar: Latin America Network On Property Taxation

The Lincoln Institute has recently formed informational networks of scholars and policy makers focused on several key issues in land and tax policy in Latin America. Led by Martim Smolka, senior fellow and director of the Lincoln Institute’s Program on Latin America and the Caribbean, the first meeting of the property taxation network took place in conjunction with the seminar in Porto Alegre in April 2001. Network rpresentatives came from Argentine (Hector Serravalle), Brazil (Claudia M. De Cesare, Cintia E. Fernandes, Mauro Lunardi and Sol G. Pinto), Chile (Carlos Acuña), Colombia (Maria Camila Uribe and Claudia Puentes), Ecuador (Mario R. Maldonado), El Salvador (Roberto Cañas) and Mexico (Sergio Flores).

The network’s mission is to pursue more effective property tax systems in Latin America and to reinforce the role of the property tax as an alternative for local government revenue. The network will promote professional development, identify relevant themes for comparative research and educational programs, and disseminate information and experiences. The members of the network have prioritized the following projects:

• property tax indicators;
• annotated bibliography;
• database on institutions, permanent courses and educational programs;
• development of curriculum; and
• exchanges for professional learning.

Although isolated initiatives at national or state levels have improved cadastral systems, valuation procedures and communication skills in some countries, the network members agree there is still great potential for improving efficiency and equity in current tax systems. The members also wanted more accessible information and better communication on property tax issues in Latin America. Innovative experiences and lessons like those cited in the following article can be shared within the group. Future educational programs may be a source of inspiration for other municipalities, like Porto Alegre, facing challenges in property tax administration.