In the wake of the housing market collapse and the Great Recession—which caused a substantial increase in residential foreclosures and often precipitous declines in home prices that likely led to additional foreclosures—many observers speculated that local governments would consequently suffer significant property tax revenue losses. While anecdotal evidence suggests that foreclosures, especially when spatially concentrated, lowered housing prices and property tax revenue, the existing body of research provides no empirical evidence to support this conclusion (box 1). Drawing on proprietary foreclosure data from RealtyTrac—which provides annual foreclosures by zip code for the period 2006 through 2011 (a period that both precedes and follows the Great Recession)—this report is the first to examine the impacts of foreclosures on local government property tax values and revenues. After presenting information on the correlation between foreclosures and housing prices nationwide, we shift focus to Georgia in order to explore how foreclosures affected property values and property tax revenue across school districts throughout the state. Our empirical analysis indicates that, indeed, foreclosures likely diminished property values and property tax revenues. While still preliminary, these findings suggest that foreclosures had a range of effects on the fiscal systems of local governments.

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Box 1: Existing Research into the Impacts of Economic Factors on Property Tax Revenues

While there is existing research examining the various impacts of economic factors on property tax revenues, these studies use data that reflect only a previous recession (e.g., the 2001 recession) or that cover only the very start of the housing crisis in the Great Recession. Doerner and Ihlanfeldt (2010), for example, focus directly on the effects of house prices on local government revenues, using detailed panel data on Florida home prices during the 2000s. They conclude that changes in the real price of Florida single-family housing had an asymmetric effect on government revenues. Price increases do not raise real per capita revenues, but price decreases tend to dampen them. Doerner and Ihlanfeldt also find that asymmetric responses are due largely to caps on assessment increases, positive or negative lags between changes in market prices and assessed values, and decreased millage rates in response to increased home prices. Alm, Buschman, and Sjoquist (2011) document the overall trends in property tax revenues in the United States from 1998 through 2009—when local governments, on average, were largely able to avoid the significant and negative budgetary impacts sustained by state and federal governments, at least through 2009, although there was substantial regional variation in these effects. Alm, Buschman, and Sjoquist (2009) also examine the relation between education expenditures and property tax revenues for the 1990 to 2006 period. In related work, Alm and Sjoquist (2009) examine the impact of other economic factors on Georgia school district finances such as state responses to local school district conditions. Finally, Jaconetty (2011) examined the legal issues surrounding foreclosures, and the MacArthur Foundation has funded a project on foreclosures in Cook County, Illinois.

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Potential Links between Housing Prices, Foreclosures, and Property Values

Local governments in the United States rely on various own-source revenues, including local income, property, and general sales taxes and specific excise taxes, fees, and user charges. Of these, the dominant source is by far the property tax. In 2011, local property taxes accounted for roughly three-fourths of total local government tax revenues and for nearly one-half of total local own-source revenues (including fees and charges).

Some local taxes, such as income and sales taxes, have bases that vary closely with the levels of economic activity, and the Great Recession seriously depressed revenues from such taxes. The basis of the property tax is assessed value, which does not automatically change in response to economic conditions; in the absence of a formal and deliberate change in assessment, a decrease in the market value does not necessarily translate into a decrease in assessed value. Assessment caps, lags in reassessments, and the ability to make deliberate changes in millage or property tax rates combine so that economic fluctuations that influence housing values may not affect the property tax base or property tax revenues in any immediate or obvious way. Over time, however, assessed values tend to reflect market values, and property tax revenues also come under pressure.

A weakened housing market—with lower housing values and more foreclosures—may reduce local government tax revenues from several sources (Anderson, 2010; Boyd, 2010; Lutz, Molloy, and Shan, 2010), including real estate transfer taxes, sales taxes on home construction materials, and income taxes from workers in the housing construction and home furnishings industries. Because property tax revenues are such a large share of local tax revenue, however, changes in property tax revenues are often larger than the changes from these other housing-related taxes.

Foreclosure Activities Nationwide During and After the Great Recession

Figure 1 (p. 24) presents the total nationwide numbers of foreclosures at the 5-digit zip code level as a share of the number of owner-occupied homes in 2010. This figure demonstrates the clear geographic concentration of foreclosures. Arizona, California, and Florida were especially hard hit by the collapse of the housing bubble. However, other areas also experienced significant foreclosure activity.

The Federal Housing Finance Agency (FHFA) produces a housing price index for each metropolitan statistical area (MSA). We matched the RealtyTrac foreclosure data to the FHFA housing price index for 352 metropolitan statistical areas. Figure 2 (p. 24) presents a simple scatterplot that relates total foreclosures over the years 2006 to 2011 as a share of the number of owner-occupied housing units in 2010, to the change in the housing price index over the period 2007 to 2012 for all 352 metropolitan areas. The simple correlation coefficient between foreclosures per owner-occupied housing units and the change in housing price index is -0.556; if we consider only those MSAs with non-zero foreclosures over the period, the correlation coefficient is -0.739. This simple analysis suggests that foreclosures have a significant negative relation with housing values. The next step is to explore the effect of foreclosures on the property tax base and on property tax revenues. In the next section, we examine this issue for the state of Georgia.

More Detailed Analysis: Foreclosures, Property Values, and Property Tax Revenues in Georgia

By examining the effect of foreclosures on property values and property tax revenues in a single state, we eliminated the need to control for the many ways in which institutional factors may differ across states. Georgia is a suitable focal point because in many ways it is roughly an “average” state. For example, local governments in Georgia rely on property taxes only slightly less than the national average; in 2008, property tax revenue as a share of total taxes for local governments was 65.1 percent in Georgia compared to 72.3 percent of the U.S. (Bourdeaux and Jun 2011).

We measure foreclosure activity with the Realty-Trac data, aggregating zip code observations into the corresponding counties. The Georgia Department of Revenue supplied the annual property tax base (referred to as “net digest” in Georgia) and property tax rates. Property tax and total local source revenues for school districts came from the Georgia Department of Education. The tax base is as of January 1 of the respective year. The property tax rate is set in the spring with tax bills being paid in the fall, the revenue from which would be reported in the following fiscal year. School districts are on a July 1 to June 30 fiscal year, so the 2009 tax base and millage rates, for example, would be reflected in revenues for fiscal year 2010. We also use various demographic and economic data (income, employment, and population) measured at the county level to help explain changes in the base. Because these variables are at a county level, for the analysis that follows, we added the property tax base and revenue variables for city school districts to those for the county school systems in each city’s county to obtain countywide totals for 159 counties. For counties that include all or part of a city school system, the tax rate is the average of the county and city school tax rates, weighted by the respective property tax base.

Only county governments conduct property tax assessment in Georgia, but the state evaluates all property tax bases annually, comparing actual sales of improved parcels during the year to assessed values, and determining if the assessment level is appropriate relative to fair market value, which is legally set at 40 percent. The resulting “sales ratio studies” report an adjusted 100 percent property tax base figure for each school district in the state, along with the calculated ratio. We use these adjusted property tax bases, covering the periods 2000 through 2011, to measure the market value of residential property.

Georgia has very few institutional property tax limitations. School district boards can generally set their property tax rates without voter approval, which is required only if the property tax rate for a county school district exceeds 20 mills. Currently, the cap is binding on only five school systems. Also, there is no general assessment limitation, although one county has an assessment freeze on homesteaded property. In 2009, the State of Georgia imposed a temporary freeze on assessments across the state, potentially affecting property tax revenue only in school year/fiscal year 2010; however, with net and adjusted property tax bases declining on a per capita basis for most counties in 2009 through 2011, it is unlikely that the freeze has constrained assessments.

Foreclosures

Table 1 provides the statewide mean and median number of foreclosures by zip code for 2006 through 2011. Total foreclosures almost doubled between 2006 and 2010, before declining in 2011. The mean number of foreclosures is much larger than the median, implying that the distribution is highly skewed.

Table 2 shows the distribution of Georgia zip codes by the number of years that the zip code had non-zero foreclosures. Over 65 percent of the zip codes had foreclosures in each of the six years, while only 7 percent had no foreclosures in all six years. This distribution suggests that very little of the state was immune to the foreclosure crisis.

Figure 3 (p. 25) shows the distribution of foreclosures across the state over the period 2006 through 2011. Because zip codes differ in size and housing density, we also map the number of foreclosures per owner-occupied housing units for 2010 in figure 4 (p. 25). Note that zip codes marked in white either have no foreclosures or are missing foreclosure data. As one would expect, urban and suburban counties (particularly in the Atlanta metropolitan area) have the most foreclosures. However, there are large numbers of foreclosures in many of the less urban zip codes as well.

Figure 5 shows the annual distribution of foreclosures per hundred housing units in each of Georgia’s 159 counties. Note that the bar in the box represents the median value, the box captures the observations in the second and third quartile, the “whiskers” equal 1.5 times the difference between the twenty-fifth and seventy-fifth percentiles, and the dots are extreme values. The median number of foreclosures by county increased from 0.17 per 100 housing units in 2006 to 1.18 per 100 units in 2010—more than a sixfold increase in the median. There is a high positive correlation between foreclosure activity in 2006 and 2011 across the counties. This correlation is 0.78 when measured relative to housing units and 0.74 when measured on a per capita basis, indicating that counties with above (below) average foreclosure activity before the housing crisis remained above (below) average at its peak.

Property Values

As for changes in property values, figures 6 and 7 show the distributions of annual changes, respectively, in the per capita net property tax base and in the per capita adjusted 100 percent property tax base across the 159 counties from 2001 through 2011. Studies suggest that foreclosures may have spillover effects on the market values of other properties in the jurisdiction (Frame, 2010). We attempt to estimate the effect of foreclosures on market values as measured by the adjusted 100 percent property tax base.

Our results are preliminary, in that the analysis included only Georgia data. Even so, they suggest significant negative effects of foreclosures on property values, controlling for year-to-year percent changes in income, employment, and population. The coefficient estimates on the foreclosures variable suggest that a marginal increase of one foreclosure per 100 homes (or approximately the increase in median foreclosures from 2006 to 2011) is associated with a roughly 3 percent decline in the adjusted 100 percent property tax base over each of the two following years. Similarly, an increase of one foreclosure per 1,000 population is associated with nearly a 1 percent decline in the adjusted 100 percent property tax base after one year, and a slightly lower percent decline in the following year.

Property Tax Revenues

We also explore the effect of foreclosures on property tax revenues. Figure 8 (p. 27) depicts the distribution of nominal changes by county in total maintenance and operations property tax revenues since 2001, showing considerable variation across the school systems in the annual changes in property tax revenues. Even in the latest three years of declining property values, at least half the counties annually realized positive nominal growth in property tax revenue. To understand the effect of foreclosure activity on local government property revenues, we estimate regressions that relate foreclosures to property tax levies and to actual property tax revenues.

We find that a rise in foreclosures is associated with a reduction in the levy, after controlling for changes in the property tax base as well as fluctuations in income, employment, and population. An increase of one foreclosure per 100 housing units is associated with about a 1.5 percent subsequent decline in the levy, all else held constant. We also find that foreclosures have a negative impact on revenues, all else constant. Like our earlier estimates, these results are for Georgia only, but they indicate a significant negative relationship between foreclosures and local government property tax levies and revenues. It may be that higher foreclosure activity makes local officials hesitant to raise property tax rates to offset the effect of foreclosures on the tax base.

Conclusions

How have foreclosures driven by the Great Recession affected property values and property tax revenues of local governments? Our results suggest that foreclosures have had a significant negative impact on property values, and, through this channel, a similar effect on property tax revenues, at least in the state of Georgia. Our results also suggest additional effects on levies and revenues after controlling for changes in the tax base. Further work is required to see whether these results extend to other states.

About the Authors

James Alm is a professor and chair of the department of economics at Tulane University.

Robert D. Buschman is a senior research associate with the Fiscal Research Center in the Andrew Young School of Policy Studies at Georgia State University.

David L. Sjoquist is a professor and holder of the Dan E. Sweat Chair in Educational and Community Policy in the Andrew Young School of Policy Studies.

Resources

Alm, James and David L. Sjoquist. 2009. The Response of Local School Systems in Georgia to Fiscal and Economic Conditions. Journal of Education Finance 35(1): 60–84.

Alm, James, Robert D. Buschman, and David L. Sjoquist. 2009. Economic Conditions and State and Local Education Revenue. Public Budgeting & Finance 29(3): 28–51.

Alm, James, Robert D. Buschman, and David L. Sjoquist. 2011. Rethinking Local Government Reliance on the Property Tax. Regional Science and Urban Economics 41(4): 320–331.

Anderson, John E. 2010. Shocks to the Property Tax Base and Implications for Local Public Finance. Paper presented at the Urban Institute-Brookings Institution Tax Policy Center and the Lincoln Institute of Land Policy Conference, “Effects of the Housing Crisis on State and Local Governments,” Washington, D.C. (May).

Bourdeaux, Carolyn and Sungman Jun. 2011. Comparing Georgia’s Revenue Portfolio to Regional and National Peers. Report No. 222. Atlanta, GA: Fiscal Research Center, Andrew Young School of Policy Studies, Georgia State University.

Boyd, Donald J. 2010. Recession, Recovery, and State and Local Finances. Paper presented at the Urban Institute-Brookings Institution Tax Policy Center and the Lincoln Institute of Land Policy Conference, “Effects of the Housing Crisis on State and Local Governments,” Washington, D.C. (May).

Doerner, William M. and Keith R. Ihlanfeldt. 2010. House Prices and Local Government Revenues. Paper presented at the Urban Institute-Brookings Institution Tax Policy Center and the Lincoln Institute of Land Policy Conference, “Effects of the Housing Crisis on State and Local Governments,” Washington, D.C. (May).

Frame, W. Scott. 2010. Estimating the Effect of Mortgage Foreclosures on Nearby Property Values: A Critical Review of the Literature. Economic Review 95(3): 1–9.

Jaconetty, Thomas A. 2011. How Do Foreclosures Affect Real Property Tax Valuation? And What Can We Do About It?” Working paper presented at National Conference of State Tax Judges, Lincoln Institute of Land Policy, Cambridge, MA (September).

Lutz, Byron, Raven Molloy, and Hui Shan. 2010. The Housing Crisis and State and Local Government Tax Revenue: Five Channels. Paper presented at the Urban Institute-Brookings Institution Tax Policy Center and the Lincoln Institute of Land Policy Conference, “Effects of the Housing Crisis on State and Local Governments,” Washington, DC (May).

Antes de incorporarme al Instituto lincoln de Políticas de Suelo, tuve la responsabilidad de hacer el seguimiento de la ciudad de detroit para la fundación ford durante casi una década. Allí pude ser testigo de primera mano de los desafíos sin precedentes que implicaba la tarea de revertir la suerte de la que fue la ciudad más poderosa e importante de los Estados Unidos de mediados del siglo XX. La magnitud de estos desafíos requirió la coalición de algunos de los mejores y más brillantes reconstructores de comunidades con los que he tenido el privilegio de trabajar. La calidad y el compromiso de este enérgico grupo de funcionarios públicos, líderes cívicos y comunitarios y visionarios del sector privado ayudaron a Detroit a recuperar un futuro brillante.

Uno de los proyectos distintivos llevados a cabo por esta asociación filantrópica pública y privada fue la planificación, la construcción y el financiamiento de la primera inversión de Detroit en obras de transporte público durante más de cinco décadas: el ferrocarril M1, que se inauguró en julio de 2014 gracias a una inversión de fondos privados combinados de más de US$100 millones. El liderazgo de este proyecto no sólo construyó una línea simbólica de ferrocarril liviano de 5,3 kilómetros a lo largo de la avenida Woodward, el eje de la ciudad, sino que también aprovechó la inversión privada para garantizar el compromiso del gobierno estatal y el gobierno federal de crear la primera autoridad para el transporte de la región.

Algunos filántropos líderes a nivel municipal y nacional también recaudaron más de US$125 millones para lanzar la Nueva Iniciativa Económica, un proyecto de 10 años destinado a revitalizar el ecosistema empresarial en la región a través de la incubación estratégica de cientos de nuevos negocios, miles de empleos nuevos y una duradera colaboración a largo plazo entre empleadores y desarrolladores de la fuerza laboral. Además, en lo que podría considerarse como el proyecto colectivo más controvertido y heroico de esta Iniciativa, estos filántropos trabajaron junto con el estado de Michigan para recaudar más de US$800 millones para The Grand Bargain (El gran pacto), mediante el cual no sólo se salvó la legendaria colección del Instituto de Artes de Detroit de la subasta, sino también las futuras pensiones de los funcionarios públicos de Detroit.

Increíblemente, mientras los empresarios sociales hacían lo imposible por recaudar cientos de millones de dólares para ayudar a Detroit, supuestamente la ciudad devolvía al gobierno federal sumas similares en concepto de subvenciones de fórmula no utilizadas. Una ciudad con más de 100.000 propiedades vacantes y abandonadas e índices de desempleo cercanos al 30 por ciento no lograba encontrar una manera de utilizar las subvenciones de las que disponía libremente: sólo debía solicitarlas y monitorear su uso. Los funcionarios públicos de la atribulada Detroit, que se vieron diezmados debido a la pérdida de población y a la insolvencia fiscal de la ciudad, no tenían la capacidad ni los sistemas para gestionar de manera responsable las normas sobre subvenciones federales ni para cumplirlas. Y, en este sentido, Detroit no es muy diferente a otras ciudades industriales históricas u otros lugares con problemas fiscales.

En un informe de marzo de 2015 elaborado por la Oficina de Rendición de Cuentas Gubernamental, denominado “Municipalities in Fiscal Crisis” (Municipios en crisis fiscal) (GAO-15-222), se analizaban cuatro ciudades que se habían declarado en quiebra (Camden, Nueva Jersey; Detroit, Michigan; Flint, Michigan; y Stockton, California), y se llegaba a la conclusión de que la incapacidad de estas ciudades para utilizar y gestionar las subvenciones federales se debía a una inadecuada capacidad del capital humano, a las reducciones de personal, a una capacidad financiera reducida y a sistemas de tecnología informática desactualizados. Los autores del informe también se lamentaban de que estas ciudades no sólo eran incapaces de utilizar las subvenciones de fórmula (por ejemplo, los subsidios en bloque para el desarrollo comunitario que se distribuyen de acuerdo con criterios objetivos, tales como el tamaño de la población o las necesidades de la comunidad), sino que también se privaban repetidamente de solicitar fondos competitivos. En un análisis independiente del año 2012, llevado a cabo por el senador Tom Coburn (Republicano de Oklahoma) y denominado “Money for Nothing” (Dinero para nada), se detectaba una suma de aproximadamente US$70 mil millones en fondos federales que no se utilizaron “debido a leyes mal redactadas, obstáculos burocráticos y mala administración, así como también a una falta generalizada de interés o de demandas por parte de las comunidades a las cuales se habían asignado los fondos”.

¿Cómo puede ser que las ciudades más necesitadas sean incapaces de utilizar la ayuda que tienen a su disposición? No es de sorprender que una ciudad como Detroit, que perdió casi dos tercios de su población en seis décadas, viera una reducción de personal y una disminución de las capacidades de los empleados en las oficinas municipales. Tampoco no es de sorprender que Detroit no tuviera sistemas de tecnología informática actualizados. Cuando un municipio enfrenta problemas fiscales, la infraestructura siempre queda en el último lugar. La incapacidad de utilizar los fondos asignados probablemente no es un pecado de comisión sino una lamentable omisión mucho más profunda que debe solucionarse. Pero ¿dónde comenzamos? Veamos lo que nos dicen los datos. ¿Qué programas de subvenciones de fórmula tienen el menor rendimiento? ¿Cuáles son las ciudades con el peor aprovechamiento? Sin lugar a dudas, no lo sabemos. Y si las agencias federales saben cuáles son los programas y las ciudades que se encuentran en las listas de los mejores y peores, evidentemente no están informando de ello. Además, la mayoría de los ciudadanos en Detroit, que soportan una de las tasas más altas del impuesto sobre la propiedad del país, no saben que su ciudad está desaprovechando millones de dólares en subvenciones federales cada año.

El verano pasado, sin bombo ni platillo pero con gran ambición, el Instituto Lincoln lanzó una campaña mundial para promover la salud fiscal municipal. Esta campaña centra su atención en varios factores que impulsan la salud fiscal municipal, entre los que se incluye el papel que desempeñan los impuestos sobre el suelo y la propiedad con el fin de brindar una base de recaudación estable y segura. En este número de Land Lines, analizamos algunas maneras en que las ciudades y regiones están desarrollando nuevas capacidades (tales como un monitoreo fiscal confiable y una administración transparente de los recursos públicos; comunicación y coordinación efectivas entre el gobierno federal y los gobiernos municipales, de los condados y de los estados; etc.) para superar las barreras económicas y medioambientales más importantes. Analizamos la forma en que las ciudades están mirando dentro y fuera de sus límites para obtener ayuda de otras fuentes. Esperemos que estas historias nos inspiren a trabajar para encontrar formas más amplias, más profundas y más creativas de progresar juntos, en lugar de luchar en soledad.

Dos herramientas tecnológicas que presentamos en este número están modificando la forma en que se organiza y se comparte la información financiera municipal. Estas herramientas permiten a los ciudadanos y al electorado pedir la rendición de cuentas a sus líderes comunitarios y asegurarse de que, una vez que se accione el interruptor de la ayuda económica, se complete el circuito. PolicyMap (pág. 18) se fundó con el objetivo de fundamentar la toma de decisiones públicas basada en datos. Los investigadores de PolicyMap han organizado docenas de bases de datos públicas y han desarrollado una sólida interfaz en la que los usuarios pueden visualizar los datos en mapas. Esta herramienta contiene miles de indicadores que rastrean el uso de los fondos públicos y el impacto que tienen. La ciudad de Arlington, Massachusetts, ha desmitificado sus finanzas municipales mediante el Presupuesto Visual (pág. 5), un programa de código abierto que ayuda a los ciudadanos a entender en qué se gastan los impuestos que pagan. Tanto PolicyMap como el Presupuesto Visual tienen el potencial de rastrear todas las fuentes de ingresos y gastos de una ciudad y hacer que la administración sea transparente para los contribuyentes. Para aquellas ciudades o agencias federales que desean divulgar este tipo de información, estos emprendimientos sociales están listos para rastrear e informar del uso (o la falta de uso) de los fondos públicos.

La alineación vertical de varios niveles gubernamentales para lograr la meta de salud fiscal municipal no sólo es una solución en este país. Nuestra entrevista con Zhi Liu (pág. 30) contiene información sobre las medidas tomadas por el gobierno central de la República Popular China para desarrollar una base de recaudación estable en cada gobierno municipal a través de la promulgación de una ley del impuesto sobre la propiedad; esta medida ayudará a los gobiernos municipales a sobrevivir a las arenas movedizas de la reforma del suelo.

En nuestro informe sobre Working Cities Challenge (Desafíos para Ciudades en Funcionamiento) (pág. 25), los investigadores del Banco de la Reserva Federal de Boston identifican lo que posiblemente es la capacidad más importante para promover no sólo la salud fiscal municipal sino también ciudades prósperas, sustentables y resilientes: el liderazgo. El liderazgo —que puede provenir de funcionarios públicos visionarios, emprendedores cívicos audaces o implacables académicos peripatéticos— está en la esencia de otros casos inspiradores que analizamos en este número. Los líderes en Chattanooga (pág. 8) hicieron una apuesta fuerte por la infraestructura (servicio de Internet de altísima velocidad a bajo costo, proporcionado a través de una red municipal de fibra óptica) con el fin de ayudar a la ciudad a pasar de ser una ciudad industrial retrógrada y contaminada a un centro tecnológico moderno y limpio. Y funciona.

Super Ditch (pág. 10) es otro ejemplo de cómo varios gobiernos pueden trabajar junto con el sector privado con el fin de encontrar soluciones creativas para los desafíos conjuntos. Super Ditch está innovando la gestión del agua urbana y agropecuaria a través de nuevos acuerdos entre el sector público y el sector privado que detienen las antiguas estrategias de “buy-and-dry” (comprar y secar) practicadas por las ciudades con escasez de agua y continúan supliendo la demanda municipal de agua sin despojar a las principales tierras de cultivo de este recurso.

Antes de que nos hallemos inmersos en una interminable polémica partidista acerca de si los gobiernos nacionales deberían rescatar a las ciudades en quiebra, tal vez deberíamos encontrar una forma de garantizar que, en primer lugar, estas ciudades no lleguen a la quiebra, mediante el uso de la ayuda que ya hemos prometido. Sólo un sádico o un cínico pondría intencionalmente estos recursos a la vista pero fuera del alcance de las personas o ciudades necesitadas. Si invertimos sólo una fracción de los fondos no utilizados con el fin de desarrollar las capacidades municipales adecuadas, las comunidades podrán solucionar sus propios problemas. Ya sea mediante una asociación filantrópica pública y privada, una herramienta tecnológica innovadora o una nueva forma de cooperación entre los gobiernos y el sector privado, los emprendedores sociales están ampliando la inventiva humana para ayudarnos a superar el mayor desafío que enfrentamos: encontrar nuevas formas de trabajar juntos para no perecer en soledad.

Over the past decade of transition from communist to market economies, property taxation has taken on economic, political and legal importance as the countries in Central and Eastern Europe have developed new fiscal policies and new approaches to property rights. Taxes on land and buildings have served not only as revenue instruments but also as adjuncts to decentralization and privatization. In spite of the complex and varied national differences in this region, a number of common issues have emerged in regard to property-based taxes.

A period of transition places a premium on revenue sources that impose a minimum burden on the functioning of nascent market economies. Many of these postcommunist nations seek to strengthen local government, and all must adjust their tax systems to account for emerging markets for land and buildings at a time when state administrative capacity is challenged by the introduction of new income and consumption taxes. There is often strong support for retaining a public interest in land as a fixed, nonrenewable element of the common heritage which, once sold, cannot be reproduced. This sentiment coexists with an equally strong impetus for development of private business and private ownership of property. Each of these concerns raises special questions with regard to the role of land and building taxes in the transition.

Such taxes on land and buildings have already been designated as local revenue sources in many nations of Central and Eastern Europe. As a tax base that cannot relocate in response to taxation, real property permits an independent local revenue source. Times of fiscal stringency at national government levels dramatize the importance of such revenue for local governmental autonomy. Moreover, the goal of eventual international integration through the European Union and other trade arenas encourages development of taxes not subject to international competition.

Two primary difficulties confront efforts to implement land and building taxes in these countries. First, in the absence of developed property markets, the tax base requires a choice among formulary values, price approximations, and non-value means of allocating the tax burden. Second, times of financial hardship present special problems in imposing taxes on assets that do not produce income with which to pay the tax. This dilemma has left many property taxes at nominal levels.

These problems are closely related because the lack of reliable market prices, together with the legacy of officially determined price levels, can encourage legislation that assigns specific, sometimes arbitrary values to various classes of property for tax purposes. Given these difficulties, it is particularly significant that many of these nations have either adopted or are seriously considering some form of value-based taxation of immovable property as a source of local government finance.

The Case of Lithuania

Since declaring its independence from the USSR in 1991, the Republic of Lithuania has made rapid strides in economic reforms, privatization and government reorganization. Its plans for market value-based taxation of land and buildings reflect the country’s transition to a market economy and private ownership of property. Municipalities will receive the revenues from the new tax and will have the power to choose the tax rate, subject to an upper limit set by the national government. The Lithuanian Parliament has recently prepared draft legislation for this tax which assigns responsibility for developing a valuation system to the State Land Cadastre and Register (SLCR).

The SLCR was created in 1997 to consolidate a number of functions: registration of property rights, maintenance of a cadastre of property information, and valuation of real property for public purposes, including taxation. Since then the agency has organized a central data bank for legally registered property rights, land and building information, and Geographic Information System (GIS) maps. The data bank currently holds information on more than four million land parcels and structures, and it is linked to mortgage and other related registers and to branch offices throughout the country.

The proposed market value-based real property tax will replace two existing taxes on real property commonly found in post-Soviet systems: a land tax on privately owned land and a property tax on buildings and other property (not including land) owned by corporate entities, enterprises and organizations. Taxable values are currently set by the SLCR through application of varying “coefficients” that adjust base prices to reflect land use and location. The resulting values do not reflect current market prices. The tax rate of 1.5 percent of the taxable value for land and 1 percent of the taxable value of property yielded represent approximately 7 percent of local budgets and 2.5 percent of the national budget in 2000.

Lithuania’s growing demand for market-based property valuation data requires an increase in professional appraisal skills and experience with assessment administration. To address these needs, an Association of Property Valuers and a system of professional certification were established in the mid-1990s, in collaboration with other international valuation associations. Lithuania has also joined Estonia and Latvia in publishing periodic reviews of real estate markets in the Baltic states. Information regarding market activity is posted on the SLCR’s website www.kada.lt.

Lincoln Course

The Lincoln Institute has taught courses on property taxation in transition countries for nearly a decade, and in February the Institute collaborated with SLCR to develop a curriculum for seven senior public officials from Lithuania. The week-long program was based on the course that the Institute presented, in cooperation with the Organisation for Economic Cooperation and Development (OECD), in the Lithuanian capital of Vilnius in December 1997, for government officials from Estonia, Latvia and Lithuania. Recognizing the importance of this year’s program to Lithuanian public policy, the United Nations Development Programme (UNDP) provided support for the delegation’s travel to Cambridge.

The program offered a policy-oriented analysis of issues relating to market-based tax systems. It included guidance in developing a strategic plan and a legal and administrative framework for a computer-assisted mass appraisal (CAMA) system suitable to Lithuania. Technical subjects were presented in the context of larger economic and political issues in land and property taxation. The course combined lectures, discussions with experienced practitioners, case studies, and field visits to state and local agencies in Massachusetts. Lectures addressing introductory, policy-focused subjects were supplemented by more specialized presentations covering market value appraisal techniques, mass appraisal, CAMA and tax law.

The Lincoln Institute will offer similar courses to public officials from other transition countries, and is continuing to develop other educational programs with Lithuania and its Baltic neighbors.

Jane H. Malme is an attorney and a fellow of the Lincoln Institute in the Program on Taxation of Land and Buildings. She has developed and taught courses on property taxation and has been a legal advisor to public finance officials in Central and Eastern Europe. She is co-editor with Joan Youngman of The Development of Property Taxation in Economies in Transition: Case Studies, a book being published in 2001 by the World Bank.

Public officials from Lithuania and Lincoln Institute faculty members met at Lincoln House in February to learn from each other about market value-based taxation policy and plans for introducing property taxation in Lithuania.

Delegates from Lithuania: Arturas Baksinskas, Vice-Minister of Finance; Dalia Bardauskiene, Advisor to the Prime Minister on Rural and Urban Development and Planning; Algirdas Butkevicius, Member of Parliament on Budget and Finance Committee; Rimantas Ramanauskas, First Deputy Director, SLCR; Albina Aleksiene, Advisor to the General Director on Property Valuation, SLCR; Arvydas Bagdonavicius, Deputy Director, SLCR; Algimantas Mikenas, Deputy Head of Property Valuation and Market Research Department, SLCR.

Lincoln Institute Faculty: Joan Youngman, Senior Fellow and Director, Lincoln Institute Tax Program; Jane Malme, Fellow, Lincoln Institute Tax Program; Dennis Robinson, Vice President, Lincoln Institute; Richard Almy and Robert Gloudemans, partners, Almy, Gloudemans, Jacobs and Denne , LaGrange, Illinois; John Charman, Consultant Valuation Surveyor, London; David Davies, Director of Information Technology, Massachusetts Department of Revenue; Jeffrey Epstein, Consultant, Quincy, Massachusetts; Sally Powers, Former Director of Assessment, City of Cambridge.

The demand for urban services surpasses the financial capacity of most cities around the world. To address this problem, many municipal governments successfully use the property tax, combined with other management instruments, to raise needed revenues. In Central America, El Salvador is the only country that does not currently have a tax on land and buildings. However, public officials, academic experts and business leaders have begun to discuss the necessity of establishing a property tax system and strategies for its implementation.

El Salvador’s taxation system is recognized as being inequitable and the amount of tax actually collected is very low, thus affecting the level of public investment. Decades of civil war and economic chaos left the country without an established tradition of fiscal management and controls. Changes in the taxation system began in 1993 when the former patrimonial tax on personal and business property, including real property, and the 5-percent sales tax were both abolished and replaced by a 13-percent sales tax. These taxes, and an ongoing income tax, are all collected by the central government.

The only municipal tax is an archaic and complex tax based on commercial, industrial, financial and services activities. Because of their limited capacity to raise revenues, municipalities have few opportunities to contract loans from national banks and no possibility of obtaining loans from international financial institutions. Administrative deficiencies, cadastral problems and limitations of the legal framework also contribute to the weak financial base of the municipal governments. Since metropolitan San Salvador encompasses such a large part of this small country, local taxation and other fiscal planning programs introduced there have a significant impact on the entire country.

In 1998 the Municipal Council of San Salvador proposed increases in its business activity tax, raising immediate debate among business organizations and municipal officials. Business leaders argued that the proposed tax program would generate additional costs, compelling them to raise the price of goods and services and possibly provoking inflation. They demanded incentives for new development in exchange for any changes in the tax system. The Municipal Council defended its proposal, arguing that the current tax structure was seriously inequitable because it punished smaller enterprises while offering advantages to larger ones.

The Municipal Council of San Salvador and the Trade and Industry Chamber of El Salvador formed a joint commission to investigate the complex issues involved in the proposed tax reform, and the preconditions such as updated cadastres, the legal framework and technical training that would be necessary. While no concrete mechanisms for implementing land and building taxation were incorporated into the discussion, it was significant that these key stakeholders reached consensus on the need for a property tax in the future.

Benefits of an International Perspective

In a precedent-setting meeting of public officials and private stakeholders in January 1999, the Lincoln Institute and the Planning Office of the Metropolitan Area of San Salvador (OPAMSS) examined many issues regarding the development and implementation of a property tax system. This was the third in a series of Institute-sponsored programs designed to share international expertise and to help develop a new framework for a more equitable tax system in El Salvador.

Particularly in a small country like El Salvador, an adequate property tax system can have positive and strategic effects not only on local finances but also on macro-economic policies and on the re-engineering of a country’s financial sector. Alven Lam, a fellow of the Lincoln Institute, explained that restructuring the taxation framework has been essential to allow some Asian countries, such as Japan, Thailand and Indonesia, to recuperate from their economic crises. The recent fiscal problems in Brazil and ongoing debate about the functioning of the financial sector in El Salvador added a sense of urgency to this discussion of the broader economic context of a local property tax.

The seminar also addressed the importance of integrating land and building taxation as a fundamental tool to promote effective urban land management. Vincent Renard of the Econometric Laboratory of the Polytechnic School in Paris commended the initiative taken by the San Salvador Municipal Council and other local governments to modify their taxation structures, but stressed that these policies can not be isolated from an overall understanding of real estate markets. He also criticized urban planning approaches, such as the current tendency in El Salvador, to over-regulate land use through legal measures without any link to land taxation and fiscal incentives.

A third area of concern to the policy debate was the political and economic implications of property taxation. Among other things, it is critical that those involved in establishing a property tax system consider the political culture of the society, the consolidation of municipal autonomy, the transparency of real estate markets, and the use of the property tax as a tool for economic and social development. Julio Piza, from Externado University in Bogota, described different applications of the property tax in Colombia. He highlighted a common problem, the difficulty of measuring the land and building tax bases due in large part to obsolete current cadastres and the lack of other land information systems.

Although discussion of property tax reform in El Salvador has been overshadowed by recent national elections, the new president has expressed interest in land and tax policy. Among the seminar participants were many municipal and national leaders from the political and business sectors who are committed to modernizing their municipal taxation and fiscal management programs. The fact that they met to openly discuss these difficult issues is a hopeful sign. Key factors for future progress include the political will to promote a local property tax, the continued involvement of the business community, and recognition that the tax is both a practical financial instrument to meet immediate needs and an important tool for economic growth and urban development.

A major challenge for El Salvador, as for other countries experiencing social and economic transitions, is establishment of equitable and effective provisions for property valuation and tax collection. Starting with a simple rate structure and gradually introducing more sophisticated instruments can ease the implementation process. Issues such as innovative urban land management and the possibility to capture increments in land value are also critical for the future fiscal growth of El Salvador.

Patricia Fuentes is subdirector of Urban Development Control and Mario Lungo is executive director of the Planning Office of the Metropolitan Area of San Salvador (OPAMSS).

Municipal Revenues

Metropolitan Area of San Salvador, 1993

Sources of revenue:

a) Municipal taxes 41%

b) Tariffs and user fees 36%

c) Transfers from central government 8%

d) Other municipal revenues 5%

e) Loans 4%

f) Other sources 6%

Revenues per capita (US $) $15.59

Capital investment per capita (US $) $1.04

Debt service as a percentage of total expenses 6.55%

Source: Indicadores Urbanos y de Vivienda, Vice Ministerio de Vivienda y Desarrollo Urbano, 1996, San Salvador.

Q. You have been at the helm of the Lincoln Institute since May 1. What aspect of the program has captured most of your attention in the past few months?

A. My first task has been to work with the staff to develop a more focused direction for the Institute’s programs over the next several years. Without question, we are going to continue the Institute’s commitment to quality research, education and publications programs. We want to both raise the level of debate through our research and publications and also meet our educational objective of directly helping public and private decisionmakers improve their understanding of land-related issues.

To both sharpen and narrow our program focus, we have identified three substantive areas or clusters where we will concentrate our efforts:

• taxation of land and buildings;
• land values, property rights and ownership; and
• land use and regulation.

Q. Can you elaborate on these topics?

A. Sure, although it is hard to do so in a few words. We are still working on the language to better describe these important areas of inquiry.

In the area of taxation of land and buildings, we are interested in the special nature of taxes on real property, particularly those based on market value. We address the economic effects of such taxes, their legal structure and interpretation, especially with regard to valuation. We are also interested in political aspects of implementing property taxes, particularly as instruments of fiscal decentralization. Our work provides practical assistance to policymakers dealing with existing tax systems and also explores current tax reform efforts around this country and overseas.

In the area of land values, property rights and ownership, we consider the elements that determine land value and what portion of that value may properly be claimed by various sectors of society, including the public sphere. This focus area, therefore, touches upon the larger issue of property rights, the operations of formal and informal land markets in creating and distributing land value, and methods for recovering the costs of public investment in land.

In the area of land use and regulation, we focus on the process, plans and policies that affect the development of land, especially in urban “fringe” areas most at risk from changing land uses. We also investigate issues around the reuse of vacant and underutilized land and the conservation of undeveloped land. While we are interested in the economic efficiency of the use of land, we take a more comprehensive perspective for evaluating land use and its regulation. We seek to understand how the development, reuse and conservation of land affect other public values and goals, such as access to land, fairness, the character of society and the quality of life.

Q. How do you implement specific programs to address these issues?

A. The Institute has three major program components, each of which is involved with all three focus areas. Through our research program, we support scholarly projects to improve our understanding of land and taxation issues and to develop new ideas that integrate theory and practice. The education program presents courses, conferences, seminars and policy discussion workshops taught by scholars and practitioners with varied academic backgrounds and professional expertise. The publications program develops and produces newsletters, books, policy focus reports, working papers, and other media to communicate the results of our own research and education programs and the work of other colleagues in the field of land policy.

Q. Who are your major constituents and how do you reach them?

A. The Institute’s major constituents are public officials and other citizens who are actively involved in making decisions about the taxation, regulation and use of land. As an educational institution, we bring together varying viewpoints to expand the body of useful knowledge about land and tax policy and to make that knowledge accessible and comprehensible. Our objective is to provide practical assistance to policymakers, while at the same time exploring alternative approaches, both in the U.S. and internationally.

We are in the process of establishing advisory groups composed of scholars and practitioners to help us continue to refine the three focus areas. They will offer valuable assistance in guiding and evaluating the collaborative research, education and publications programs in each area. We are also developing a more focused approach to outreach and marketing. This will benefit individual courses and publications, as well as our overall goal of sharing ideas and resources through a growing variety of face-to-face meetings and electronic opportunities, such as our World Wide Web Home Page and other multi-media delivery systems.

Q. Looking forward to the Lincoln Institute’s 25th anniversary in 1999, how would you characterize the organization’s mission for the twenty-first century?

A. The Institute owes its existence to two visionaries who came of age in the late nineteenth century, Henry George and John C. Lincoln. George was an economist and social philosopher best known for his book, Progress and Poverty, in which he argued that the ownership, use and taxation of land has far-reaching effects on economic growth, social relations and politics. His work captured the attention of Cleveland industrialist John C. Lincoln, who established the Lincoln Foundation in 1947 to support further study and inquiry into George’s ideas.

Many of the problems that George decried in the late nineteenth century are still with us at the end of the twentieth. This summer I commissioned eight scholars to review George’s writings and document his insights on land use and taxation problems in terms of their relevance for the next century. We will report more on this research in subsequent issues of Land Lines.

It is my hope that all of us connected with the Institute–Board members, staff, research and faculty associates, and the policymakers and citizens whom we reach through our education and publications programs–can make progress on understanding contemporary issues of property valuation, taxation and land use. In the process we will fulfill our mission of contributing to the ongoing debate over land and tax policies that can benefit all sectors of society.

Last October the Lincoln Institute sponsored the fourth annual symposium for recipients of David C. Lincoln Fellowships in Land Value Taxation (LVT). This fellowship program was established to provide funding for in-depth research by scholars and practitioners working on various aspects of the tax and to present a forum for continued learning and sharing among the fellows and Institute faculty.

The fellowship topics include theoretical or basic research as well as research on practical aspects of the administration and implementation of LVT in the U.S. and around the world. This focus on practicality is appropriate since these fellowships are named for David C. Lincoln, the chairman of the Lincoln Foundation and founding chairman of the Lincoln Institute, who has continually challenged the Institute and the fellows to answer such questions as, how can we get LVT put in place and how can we demonstrate the impact?

This year’s symposium presentations reflect the diversity of the work supported by the program. Richard England reported on his efforts to measure the feasibility of getting a two-rate tax adopted in New Hampshire (see page 8 of this newsletter). He developed a model to estimate the number of taxpayers who would gain or lose with various forms of the two-rate tax. His research suggests that to gain support from taxpayers a new two-rate tax needs to be coupled with some kind of tax credit.

David Brunori conducted a national survey of state legislators who sit on finance or tax committees to determine their familiarity with land value or two-rate tax schemes. To his surprise most were familiar with the two-rate tax and believed that a movement to use it would stimulate economic development. Given that favorable view toward LVT, he was hard pressed to explain why so few policy initiatives have moved in this direction.

Other fellows focused on LVT experiences outside the U.S. Frances Plimmer and Greg McGill reported on their updating of the classic case study of property values in the town of Whitstable in the United Kingdom. Riel Franzsen and William McCluskey reported on their cataloging of all of the LVT efforts in 37 of the 54 member states of the British Commonwealth. Yu-Hung Hong described the existing tax structure on property in the People’s Republic of China and suggested alternative schemes for introducing an expanded LVT system as part of the taxation reform presently being considered there.

On a more empirical track, Suzi Kerr reported on efforts to measure the revenue requirements of growing and declining communities in New Zealand, and Courtney Haff reported on econometric efforts to estimate land value in New York City. All of these papers will be available on the Lincoln Institute’s website when they have been completed.

The list of fellows and their research topics for 2003–2004 is shown on pages 16-17 of this newsletter. Again, the diversity of topics reflects the Institute’s continued support for investigations into viable experiments with the LVT and examples of how to measure the impact. I look forward to the results of this work and the discussion at the next symposium.

Jeffrey Sundberg is associate professor of economics and business at Lake Forest College in Lake Forest, Illinois, where he has taught since 1989. He also serves as chair of the College’s interdisciplinary Environmental Studies Program. He earned his B.A. from Carleton College in 1982, and subsequently received an M.A. and Ph.D. in economics from Stanford University. His current research examines various aspects of public policy toward land conservation, including tax incentives for conservation easements and factors influencing voter approval for programs to protect open space. In a recent article in Land Economics, he examined membership patterns in land trusts across the country as evidence of private willingness to provide a public good (Sundberg 2006).

Sundberg’s interest in conservation extends to his volunteer activities as well. He currently serves as the vice president of the board of directors for the Liberty Prairie Conservancy, a countywide land trust in Lake County, Illinois, and is a past member of the board of directors of the Chicago Audubon Society. He initiated and directs an ongoing habitat restoration program on the grounds of Lake Forest College. A dedicated birder, he leads bird walks annually for several different organizations and volunteers as a bird-bander every spring.

Land Lines: Conservation easements are a topic of great interest to the Lincoln Institute. What specific aspects of them are you researching?

Jeffrey Sundberg: There has been quite a lot of research on the use of easements as a tool for conservation, and there is a growing interest in various legal aspects of easement policy. However, there has been relatively little work on the economic aspects of easements. The number and value of these incentives have increased over the past 20 years, and so has the number of acres under easement. This has had a largely unmeasured effect on tax collections at the local, state, and federal levels.

In collaboration with Richard Dye, my colleague at Lake Forest College and a visiting fellow at the Lincoln Institute, I am examining tax incentives for the donation of easements to nonprofit conservation groups and government agencies (Sundberg and Dye 2006). A broad range of incentives exists, and their effects may vary with the income and assets of the property owner, and the state in which the parcel is located.

An analysis of these tax incentives suggests certain conclusions about the type of property owner who is most able to benefit financially from such a donation. These incentives are likely to affect both the number of available easements and the cost to society of accepting the donations. The easement must have conservation value in order to qualify for the tax savings, but there is no benefits test that compares the amount of conservation value to the amount of tax revenue lost.

Land Lines: What are some of your findings?

Jeffrey Sundberg: Numerous publications, including Jeff Pidot’s recent work with the Institute (Pidot 2005), have speculated that under certain circumstances it would be possible for a landowner to receive tax savings that exceed the value of the donated easement. In fact, under certain conditions a taxpayer could receive more than two dollars of tax savings for every dollar of easement donation, even when future tax savings are discounted. The largest single potential benefit often stems from various estate tax reductions that result from the donation of a qualified easement. However, a donation could create a positive net present value even without qualifying for the estate tax benefit. Many states also have substantial incentives of their own in the form of income tax credits, property tax reductions, or both.

These incentives offer both good and bad news for conservation policy. While they certainly make it easier to persuade property owners to donate a conservation easement on their land, they also create an incentive for owners to take efficiency-reducing actions by tailoring their easements to create the maximum tax benefit, rather than the maximum conservation value. In addition, land trusts and other qualified organizations may have to spend time and energy evaluating relatively low-quality easements offered by financially motivated donors, who may be able to expend considerable effort to find a willing holder of an easement.

Land Lines: What are some public policy implications of your work?

Jeffrey Sundberg: It is important to distinguish between federal and state tax incentives in making policy recommendations. Federal incentives consist of tax deductions, which are most valuable to property owners who have substantial tax liabilities and face high marginal tax rates. Many land parcels with significant conservation value are owned by land-rich, low-income individuals who are unable to take any significant advantage of income tax deductions, and who may not be subject to the estate tax. Federal tax incentives offer relatively low benefits to this type of landowner, even with the recent change that allows a longer carry-forward period until those benefits expire.

State incentives typically offer credits that can be used to offset existing income taxes on a dollar-for-dollar basis. The benefit to the donors does not depend on their marginal tax rate, though high-income donors are still more likely to be able to use their credits. Most credits are not “refundable,” which means that a donor must have taxable income to make use of them. Two states currently allow donors to sell their excess credits, which increases the likelihood that they will be able to benefit financially by donating an easement. A move toward credits, rather than deductions, would allow low-income donors to receive more benefits without necessarily reducing the benefits to high-income donors. This should increase the number of high-quality parcels potentially available for conservation.

Our research also studies the possible impact of eliminating the federal estate (or death) tax. In 48 of the 50 states, estate tax savings are the single largest source of potential financial benefits to easement donors, so elimination of the tax could have a significant chilling effect on easement donations across the country.

Programs for the sale of easement credits highlight another area of concern, the potential for fraudulent activity. Needless to say, fraud is costly in terms of lost tax revenue, in the administrative burden it imposes on governments and conservation organizations that must resolve troublesome donations, and most of all in the loss of trust and goodwill for these important programs, which currently enjoy great public support.

Land Lines: How would an economic approach to easements differ from an environmental approach?

Jeffrey Sundberg: An environmental approach might consider conservation benefits in both ecological and human terms, with an eye toward preserving significant benefits for the future. Their existence would be enough to justify creation of the easement, without the need to set a monetary value. This view is similar to current easement policy, where there is no comparison of benefit to cost.

An economic approach would attempt to place a monetary value on those benefits, not because they can be bought and sold, but because this is the only way to make any kind of reasonable comparison between the benefit of the easement and its cost. Without having at least a rough estimate of these figures, it is impossible to ensure that any particular easement creates a net benefit for society. Under most current easement programs, the organization that accepts the easement only has to certify that some conservation value exists; the organization typically has little idea of the actual cost of the tax subsidy to the easement. The primary cost to the organization is likely to be the obligation to monitor and enforce the easement, which may be a widely varying fraction of the total cost of the easement.

Both environmental and economic approaches would agree that different easements will provide differing amounts and types of benefit, suggesting that the tax incentives should be tailored to encourage the donation of easements that provide the most overall value, whether measured in economic or environmental terms.

Land Lines: Are there alternatives to tax incentives for easement donations that might be more efficient?

Jeffrey Sundberg: It’s a little difficult to answer that, since there is so little data available about our current system. We don’t know what the magnitude of the costs have been, so it would be premature to claim that it has been clearly inefficient. What we do know is that the current system does not provide incentives for efficiency.

For example, consider the case of a land trust that accepts an easement that meets or exceeds several of the requirements for qualification; it provides both ecological and human benefits that are significant. However, the land trust does not have any idea of the amount of tax revenue lost as a result of the donation. Depending on various circumstances, including location of the parcel and the income and wealth of the donor, the tax savings might range from thousands to millions of dollars. There is no way to know the net benefit to society, or even if that net benefit is positive. All we can say is that benefits have been created, and costs incurred. Such a system does not create any expectation of efficient behavior. At best, organizations will accept only easements that generate high conservation benefits, with no regard to the actual cost of the tax benefits generated for the donor.

The problem is that other systems, such as requiring that easements be purchased rather than donated, also generate efficiency problems. Given how little we know about the magnitude of the benefits and costs being created, and the difficulty of predicting responses to a new set of incentives, I favor improvements to the existing system rather than beginning a new experiment.

Land Lines: What role do you see for economic analysis in shaping future environmental protection legislation?

Jeffrey Sundberg: Easement policy is like many kinds of environmental protection legislation—it tends to be benefit-based. Economic analysis can point the way to the creation of appropriate incentives that can reduce the cost of achieving those benefits. It can also suggest the kind of benefits that have greater value to society, and which should therefore receive higher priority.

It is not realistic, or desirable, to use economic analysis to evaluate each easement before a donation is accepted. However, economic analysis can be used to create incentives that are compatible with more efficient kinds of donations. For example, most federal incentives, and those of most states, apply equally to any easement that meets one or more of several possible qualifications, including habitat for endangered species or scenic value for local residents. Economic analysis could be used to suggest which qualifications are of the highest value to society, and tax incentives could then be tailored to provide the most payment for the easements likely to offer the greatest benefit.

References

Pidot, Jeff. 2005. Reinventing conservation easements: A critical examination and ideas for reform. Cambridge, MA: Lincoln Institute of Land Policy.

Sundberg, Jeffrey. 2006. Private provision of a public good: Land trust membership. Land Economics 82(3): 353–366.

Sundberg, Jeffrey, and Richard F. Dye. 2006. Tax and property value effects of conservation easements. Working Paper. Cambridge, MA: Lincoln Institute of Land Policy.

Faculty Profile of Paulo Sandroni

Land value capture is now a popular topic among practitioners of local public finance—in part because the recession-related decline in local government revenues has piqued interest in new revenue sources, and in part because of the need for new ways to finance local infrastructure that has been degraded by underinvestment. The Lincoln Institute’s sixth annual land policy conference in May 2011 addressed many aspects of value capture, drawing on both international and domestic experience.

Basics of Value Capture

Changes in the value of land often result from factors unrelated to the efforts of the landowner: actions by the community in the form of infrastructure investments; nearby growth in industrial, commercial, residential, or recreational activity; zoning that permits the owner to develop the land; or the incremental growth of the community. Value capture applies a tax or fee designed to return to the community some or all of the value added to land by community actions. Its application is particularly attractive when public investment—for roads, water supply, sanitation, or even local amenities such as street lights—increases property values.

International Experience

Land leasing. Perhaps the broadest and most comprehen-sive application of value capture is in China, where municipalities buy agricultural land from farmers at agricultural use prices, service it with infrastructure, and sell it to developers as urban land with permits for urbanization projects. The difference in price between the land’s urban and agricultural values accrues to the municipality, provides a large share of local revenue, and pays for the installed infrastructure.

Co-development. Transit companies in Hong Kong and Tokyo have used revenues from the co-development of residential communities and commercial areas around new transit stations to help finance their costly projects. In Tokyo nonfare revenue is 30 to 50 percent of total revenue for some transit lines. In both cities ongoing revenue from property management is becoming more important than profits from development projects and provides a sustainable income stream.

Development taxation. Attempts to tax betterment values in the United Kingdom began in 1909, but implementation was impeded by valuation and other challenges. Direct betterment levies were replaced by contracts with local authorities under which developers contribute to infrastructure and service provision, affordable housing, and other planning obligations. These contracts are evolving into community infrastructure levies, a betterment levy by alternative means. Following a different historic path, France also has a local infrastructure tax on new development.

Land pooling. India has experimented with land pooling in its implementation of new town planning schemes that replace the old master plans. The practice encourages owners of undeveloped or haphazardly developed land to pool their plots together and then receive a serviced parcel or constructed space when the development is completed. Ahmedabad’s approach uses 15 percent of the land for roads, 10 percent for parks, 15 percent for auction to others, and 60 percent for the pool members.

United States Experience

Among the specific U.S. policies that embody value capture are special assessment areas that often include betterment charges. For example, Community Facilities (or Mello-Roos) Districts apply fees paid by residents to retire bonds sold to finance developmental infrastructure. Business Improvement Districts and Tax Increment Finance schemes use earmarked tax or fee revenue from a designated area to fund improvements. Privately negotiated Community Benefit Agreements obligate developers to provide community facilities or economic benefits for local residents. Citywide development and impact fees used to finance infrastructure and related development investments are normally cost-based, but succeed only when the betterment value exceeds the cost.

Most notable about the U.S. experience is that the terms—betterment levies or value capture—are used rarely, even though their principles are practiced widely. Moreover, this country can learn some new value capture approaches from international experience.

The conference volume with papers and commentaries by more than 25 contributors will be published in May 2012.

From its initial economic reform in 1978 through its liberalization of foreign investment and private sector development from the mid-1980s to the present, China’s major economic reforms have given priority to achieving a high rate of economic growth. The policies worked so well that China’s constant dollar GDP per capita grew nearly 10 percent a year from 1980 to 2010. This growth performance is unparalleled for a large country, but it has been accompanied by unaccounted-for costs, including the structural transformation of the economy, social adjustment and migration, and environmental degradation. A new Lincoln Institute book, China’s Environmental Policy and Urban Development, edited by Joyce Yanyun Man, addresses the last of these topics. It reports estimates from governmental agencies of undocumented environmental costs associated with economic production ranging from 9.7 percent of GDP in 1999 to 3 percent in 2004.

Economic growth in low-income countries is typically accompanied by environmental costs. This tradeoff is embodied in the “environmental Kuznets curve,” which postulates that environmental quality deteriorates with economic growth at low income levels and then improves with growth at higher income levels. Estimates of the environmental Kuznets curve for Chinese cities over the years 1997 to 2007 as reported in this book show that measures of industrial pollution in China declined as incomes increased over this period, indicating that cities with higher incomes experienced improvements in these measures of environmental quality as their incomes grew.

Several chapter authors argue that China’s environmental policies and performance are in transition. Environmental indicators are improving in response to new policies and regulations while economic growth continues. At the same time, there have been setbacks. For example, extreme events, such as this winter’s combination of extremely cold weather and atmospheric inversions in Beijing, produced very high levels of particulate concentrations in that city.

The logic behind the environmental Kuznets curve involves elements of both demand and supply. On the demand side, higher income populations have a growing appreciation for environmental amenities, and they advocate for environmental improvements. On the supply side, investment in new capacity uses modern equipment with more environmentally friendly processes and more affordable control technologies. China’s recent environmental improvements also stem from its strengthened environmental regulatory institutions. In 1982 the role of the Environmental Protection Agency was mainly advisory. It was transformed into a national agency in 1988, became the more independent State Environmental Protection Agency in 1998, and then was elevated as the Ministry of Environmental Protection in 2008.

The growing influence of central environmental agencies has been accompanied by a change in the style of regulation. The earlier emphasis on command-and-control regulations (such as emission standards) was partially replaced by instruments based on economic incentives (such as taxes on inputs and a newly announced tax on carbon emissions). Research indicates that to date the commandand-control regulations generally have been more effective.

While central agencies set national standards, the responsibility for monitoring and enforcement was largely decentralized to municipal or metropolitan environmental bureaus. The performance of local managers is reviewed annually based on criteria that emphasize economic growth. Additional improvements in environmental outcomes may occur only when these criteria give greater weight to environmental improvements. For example, a rapid increase in the control of sulfur dioxide emissions from power plants followed the inclusion of reduced sulfur emissions as an annual performance criterion.

While China has much to do to reduce urban air pollution, clean up rivers and lakes, and improve energy efficiency, these objectives are becoming more important to its citizens. The increased availability of data on environmental indicators is stimulating the national dialogue on environmental quality. Professor Man’s new volume contributes to this dialogue by reporting on progress, identifying immediate challenges, and assessing new policies and regulatory approaches to environmental improvement.