Implementing Property Taxation in Bosnia and Herzegovina
The state of Bosnia and Herzegovina continues its long process of reconstruction and reconciliation, four years after the November 1995 signing of the Dayton Peace Accords, which marked the end of a three-and-one-half-year war. Under the terms of the Accords, the state was set up within the original borders of what had been the Yugoslav Republic of Bosnia and Herzegovina, but was divided into two largely independent entities: the Federation of Bosnia and Herzegovina (Federation) and the Serb Republic (Republika Srpska). Sub-entity levels of government include cantons and municipalities in the Federation and municipalities in the Republika Srpska.
The task of rebuilding a country ravaged by war is never an easy one. International donor organizations have dedicated large amounts of human and financial resources to the cause, greatly assisting in the development of new government institutions and rebuilding the economy. One of the many challenges facing the country is ensuring that there are sufficient resources available to carry out necessary governmental functions. Of particular concern are service responsibilities and infrastructure needs, including reconstruction, which are straining the already limited budgets of the municipalities.
The Lincoln Institute, the World Bank and the United States Treasury have been involved in a joint project that provides assistance to cantonal and municipal governments in Bosnia and Herzegovina as they explore ways to enhance existing revenues and identify new revenue sources. A number of revenue-generating ideas have been discussed, and one option under serious consideration is an area-based property tax.
Ad Valorem vs. Area-based Tax Systems
Ideally, a property tax system should be ad valorem based in order to promote vertical and horizontal equity in the overall tax system. However, an ad valorem system has a number of administrative complexities that limit its full adoption, especially in developing and transitional economies. An efficient and effective ad valorem property tax system requires a functioning market for property, a network of professional appraisers, substantial amounts of exogenous data, and a sophisticated administrative infrastructure. Because Bosnia and Herzegovina is both a transitional and a post-war economy, these necessary elements are not readily available.
The country does not have a robust market for property, although a real estate market is beginning to emerge around the capital city of Sarajevo. A weekly gazette advertises available properties, but the number is limited and the transactions that do occur tend to be cash or barter-based. An initiative to privatize residences and businesses promises to stimulate the supply of privately held property, ultimately increasing the pool of available properties for real estate transactions. However, the privatization effort does not involve "arms-length" transactions because prices are being established by administrative fiat.
Currently no professional appraisal training is available in the country, but it is a necessary condition for a properly functioning ad valorem system of property taxation. Even if such a system is not adopted, training is still needed, as tax authorities administer the tax on non-movables that has been adopted recently in a few cantons. This tax is similar to the property transaction tax used in various states in the U.S. To assure that the sales price being reported by the seller is reasonable, an appointed committee of citizens is asked to validate it. Ideally these citizens would receive training in appraisal techniques before embarking on their duties.
Efficient and effective administration of an ad valorem property tax system requires an extensive administrative infrastructure and substantial amounts of exogenous data. Neither the infrastructure nor the data, such as financial information, cost of construction and mortgage information, are readily available. Therefore, instituting an ad valorem property tax system in Bosnia and Herzegovina would be very costly and would require a substantial amount of lead time to begin collecting the necessary data and to build the required infrastructure.
However, there are at least three property-based alternatives that are appropriate for developing and transitional economies and are worthy of consideration in this case. The first alternative is a flat fee on occupiers/owners of land and/or improvements with no adjustments for size, value or use of the property. A second alternative is an area-based tax that takes into account the size or area of the property, including both land and improvements. The physical area of the land and improvements provides the base for the tax, and the base is multiplied times the rate of the tax, which is generally low. The third alternative is to adjust the aforementioned area-based tax for such factors as the location of the property, its use, and the quality of the improvements on the land.
A hybrid of alternatives two and three-an area-based tax with adjustments for the location and use of the property-seems to make the most sense for Bosnia and Herzegovina, for several reasons:
- Both entities already have some familiarity with area-based taxes: the Federation's tax on specialized types of real and personal property and the Republika Srpska's tax on agricultural land.
- Data requirements associated with an area-based tax are less than those associated with traditional measures of valuation.
- Trained appraisers and assessors are not required for an area-based system.
- Self-appraisal and self-reporting of information may be easily accomplished with an area-based system.
- Area-based techniques can easily be modified to account for differences in the location of the property and the quality and type of building with a modest investment in process design.
The Process of "Discovering" Property
For an area-based property tax system to work properly, all property must be discovered. Ideally, discovery would be accomplished by reading digitized cadastral records. However, such information is limited and technological constraints make this approach infeasible at this time.
Both the Federation of Bosnia and Herzegovina and the Republika Srpska have reasonably good cadastral records considering their 40 years of socialism, the nationalization of property, and the effects of war. The legal cadastral records contain data on legal ownership of property, while the land cadastral records document the size of land. Two key missing components are complete information on improvements to the land and accurate property ownership information, due to the mass dislocations of citizens during the war.
It will take a substantial amount of work to update the cadastral records sufficiently to support an area-based property tax system. In the meantime, it makes sense to use existing information to assist in the identification and discovery of property. Public housing records, which are quite complete and in some instances are computerized, are one source. For example, the Sarajevo Housing Authority has detailed information on the size, quality, amenities and location of publicly owned residential apartments, and its rent collection system is computerized.
Other sources are the gas and electric utilities that must possess information about their customers in order to efficiently and effectively bill them for service. Sarajevo Gas appears to have fairly complete customer records and it makes a serious effort to keep these data files up-to-date. The largest of three electric utilities operating in Bosnia and Herzegovina, Public Enterprise Elektoprivreda BiH, also maintains very good customer records on approximately 560,000 customers, including approximately 60,000 businesses.
These housing, gas and electric records contain a lot of information on property and its owner/occupier, yet no single set of records appears to be sufficient for the level of detail necessary for an efficiently operating property tax system. Given the incomplete information contained in the cadastral records, tax administration officials in Bosnia and Herzegovina are faced with the challenge of developing a data discovery process that can best utilize these existing databases.
An active approach to discovery would require occupants to provide the necessary information to the taxing authorities. The reason that occupants rather than owners should be enlisted in this task is because land and property ownership records are incomplete and inaccurate in many parts of the country. The first step would be to develop a form that asks for the name of the occupant, a cadastral identification number, the location of the property, the area of the land, the size of improvements to the land, and the use of the land. In the Federation, it makes sense for the cantons, in cooperation with the municipalities, to develop these records, whereas in the Republika Srpska, municipalities most likely would do this with assistance from the entity-level government.
The second step would involve collecting this information. Asking occupants to fill out the form voluntarily would require a public information campaign explaining why the information is needed, how to comply with the request, and the penalties associated with non-compliance. Occupants would be encouraged to pick up the forms from the local cadastral office, complete them, and return them. A second approach would be to prepare a list of known properties using existing cadastral, housing, and gas and electric utility records, and then either hand deliver or mail the property record form to the occupants.
Once the municipalities have compiled the property information, it should be audited for accuracy and completeness by comparing information on the forms with similar information contained in the records of the electric and gas utilities. In many cases this comparison could be performed electronically. Then a manual comparison could be done with housing and cadastral records. The result will be a list of properties and occupants who have failed to comply with the request for property record information. Non-compliers could be sent a reminder of their responsibility to comply, and in extreme cases of non-compliance, individual visits to the property can be conducted.
Revenue Potential and Administrative Challenges
Despite the presence of property-based taxes in Bosnia and Herzegovina, officials at the cantonal and municipal levels of government do not fully appreciate the revenue potential of area-based property taxes. However, these taxes have the potential to generate sizable amounts of revenue, relative to current local budgets, and eventually produce more than one percent of gross domestic product (See Table 1).
There also are sizable administrative challenges associated with the implementation of such a tax. Foremost is the development of a legal and administrative framework that will ensure uniformity, an important criterion for any property tax system. Fortunately, the current government system is designed to promote uniformity because the Constitution of the Federation of Bosnia and Herzegovina grants sole responsibility for fiscal policy to the Federation. Therefore, a framework law, outlining the methodology for determining the property tax base and the range of allowable tax rates, and authorizing cantons to pass enabling legislation for municipalities to levy the tax, should be prepared at the Federation level. Similarly, a framework law would be prepared at the entity level in the Republika Srpska authorizing municipalities to pass enabling legislation.
To overcome any misconceptions regarding the revenue potential from or the administrative challenges posed by the implementation of an area-based system of property taxation, the cosponsors of this research are planning a short training conference in Sarajevo in the late fall. It will provide a common foundation of knowledge about property taxes to officials for both the Federation and the Republika Srpska and foster discussion about the best way to implement an area-based system.
Three pilot studies will then be launched to test whether sufficient property information can be obtained at a reasonable level of effort and cost. In addition, these studies will help determine the roles that various participants at the entity and sub-entity levels of government should play in the discovery phase. If the pilot studies prove successful, a significant step will have been taken toward the introduction of an area-based property tax and diversification of the local government tax base in Bosnia and Herzegovina.
C. Kurt Zorn is professor of Public and Environmental Affairs at Indiana University in Bloomington. Jean Tesche is resident tax advisor for Bosnia and Herzegovina for the United States Treasury, Office of Technical Assistance, in Arlington, Virginia. Gary Cornia is professor at the Romney Institute of Public Management at Brigham Young University in Provo, Utah.
The authors have prepared a Lincoln Institute Working Paper available for free on the web titled "The Potential for a Property Tax in Bosnia and Herzegovina."