The potential for sharp and unpredictable assessment increases is an important source of dissatisfaction with the property tax. Rapid price rises that are accurately and promptly reflected in assessed valuations can leave homeowners responsible for cash payments on paper gains that are unexpected, uncontrollable, and possibly short-lived. Two decades ago, this situation paved the way for adoption of California’s Proposition 13, which rejected fair market value as a basis for assessment.

Increasing valuations do not necessarily produce a corresponding rise in property tax bills, since a higher assessment base could raise equivalent revenue with a smaller tax rate. This solution is not feasible, however, when prices increase disproportionately only in particular neighborhoods or for particular types of property.

What other means are available to address price volatility and its impact on property tax rates? A number of states have recently introduced limitations on annual valuation increases. These measures avoid extreme assessment increases but may still allow assessments to match fair market values at some point in the future. They substitute a non-market value basis for assessment and diminish uniformity by distinguishing between those properties that are assessed on the basis of current values and those that are not.

Assessment Limitations in Washington and Texas

In the November 1997 elections, voters in Washington state approved a referendum generally limiting increases in assessed valuation to 15 percent a year on all classes of taxable property. If a property’s market value rises more than 60 percent, one year’s assessment may reflect no more than one-quarter of that increase. A similar measure strongly supported by business representatives was passed by the Republican legislature but vetoed by Gov. Gary Locke (D), who would have limited it to homeowners.

This case raises an important point concerning uniformity and distribution of the tax burden. Phase-in provisions ease the burden on owners of rapidly appreciating property but correspondingly increase the relative share of the tax borne by owners experiencing slower growth, or no growth, in property value. While tax limitations are generally promoted as protection for homeowners, residential benefits may pale in comparison to commercial gains.

Supporters of the Washington referendum urged passage “to soften a tax blow that could be devastating to a homeowner on a fixed income.” Yet major funding for the campaign came from industrial giants, including Microsoft, Intel, Hewlett Packard, Boeing and Weyerhaeuser. Opponents, including King County assessor Scott Noble, argued that the tax benefits “will go disproportionately to the large corporations that are bankrolling the campaign because of their much higher property values.” On the other hand, restricting such provisions to residential property introduces another level of non-uniformity to the tax.

Texas voters chose this split valuation alternative in November, approving a measure that limits increases in assessed values of residential homestead property, but not business property, to 10 percent a year. The president of the Texas Taxpayers and Research Association said this provision will “keep a terribly hot neighborhood from getting sort of a sticker shock.”

Critics saw the irony of this action. One wrote, “If the Texas Legislature had offered voters a chance to cap appraisal increases on their homes a few years ago, lawmakers would have been lauded as heroes. Angry homeowners were storming the offices of appraisal districts in the early and mid-1990s, demanding relief from double-digit increases in the appraised value of their homes and the prospect of significant property tax hikes. . . Nothing happened. Now that appraisal increases have fallen to three percent or so, the Legislature is offering voters a chance to cap the increases by changing the state Constitution. . . .” Ironically, before the price rises of the 1990s, Texas tax protests centered on whether assessments reflected falling property values quickly enough in the regional recession of the 1980s. For example, Harris County, which includes Houston, saw challenges to one-quarter of all its tax valuations in 1984 and 1985.

A Legislative Approach in Montana

Annual increases of 10 or 15 percent do not necessarily prevent assessed valuations from reaching full market levels. However, Montana lawmakers responded this year to dramatic value increases with an even more drastic measure. After studies reported that residential and commercial property values had increased by an average of 43 percent statewide since the last reassessment, the legislature required this change to be phased in at a rate of only two percent annually-taking 50 years to enter the tax rolls completely. Court challenges to this provision could raise an interesting question as to how long a phase-in period is compatible with state constitutional provisions requiring uniformity in assessment.

Assessment Reform in Ontario

Large valuation increases may be due to assessment lags as well as to price rises. One of the most startling examples of outdated tax valuation is found in Toronto-a surprise to U.S. observers who normally expect a high level of administrative efficiency from their northern neighbor. At the September conference of the International Association of Assessing Officers (IAAO) in Toronto, a panel of speakers brought together by the Lincoln Institute explored this situation. The potential for huge valuation increases stems not so much from extraordinary market activity as from extraordinary assessment inactivity. Metropolitan Toronto has not had a full-scale reassessment since1954-and that was based on 1940 market values.

Attorney Jack Walker described the public as generally supportive of current tax reform efforts, which encompass the entire province of Ontario. By contrast, a 1992 reassessment proposal for Metropolitan Toronto alone sparked such protest from residential and small business taxpayers that the proposal was abandoned. As a result, the 1997 measure explicitly addresses the concerns of many taxpayers groups. Professor David Amborski of Ryerson Polytechnic University explained that it would ensure current value assessments and regular updates. In addition, it will eliminate the business occupancy tax, permit different tax rates for different classes of property, provide special treatment for senior citizens and disabled taxpayers, and reduce taxes on agricultural and open space lands.

Thus, Toronto has also chosen to soften the impact of large assessment increases at the expense of uniformity. In this case, where municipal valuations were so out of date, the net effect may be judged an improvement in assessment equity. It will be important to evaluate the experiences of other jurisdictions struggling with the challenge of balancing uniformity and acceptability to see if they can make the same claim.

Joan Youngman is senior fellow and director of the Institute’s Program in the Taxation of Land and Buildings. An attorney specializing in property tax issues, she also writes a column for State Tax Notes, published by Tax Analysts.

Notes

Joseph Turner, “Ref. 47 Debate: Do Tax Savings Justify Change?” Takoma News-Tribune, October 23, 1997, p. A1 (quoting Rep. Brian Thomas (R-Renton))

2 Tom Brown, “Big Guns Back Property-Tax Lid,” Seattle Times, October 24, 1997, p. B3.

3Clay Robison, “Measure Would Cap Hike in Residential Appraisals,” The Houston Chronicle, November 2, 1997, p.2.

4Michele Kay, “Tax Appraisal Cap on Ballot,” Austin American-Statesman, October 20, 1997, p. A1.

Supporters of land taxation view it as an efficient and effective means of financing government, and the concept has wide appeal among public finance scholars. Many economists, including several Nobel Prize winners, actively endorse this method of taxation, which taxes land value separately and instead of buildings and improvements. At least from an academic perspective, then, the case for the efficiency and fairness of a land-based tax system seems irrefutable.

Despite that support, the concept of land taxation has not been widely embraced in the United States. Property tax bases are set by state constitutional or statutory law, so local governments cannot implement a land tax, or its split-rate variant, without authorization from their respective state legislatures. Other than a handful of Pennsylvania cities that have adopted split-rate or two-rate tax systems, no American jurisdictions currently place higher tax burdens on land than on buildings and other improvements. Virginia recently responded to interest in two-rate taxation with legislation allowing two local governments to adopt graded tax programs, but they have not yet done so. While split-rate taxation is discussed periodically as a reform measure, there are no current proposals for its adoption awaiting action before a state legislature (Brunori and Carr 2002).

Statutory or constitutional enactment of a land tax would entail revising property tax laws that have been substantially unchanged for more than a century. In general, state legislators are cautious about implementing dramatic reforms in any public policy area, and comprehensive tax reform has been a particularly elusive goal. Adoption of split-rate or land taxation would be a dramatic change, requiring significant awareness, advocacy and support in the ranks of the legislature and at the local level.

There are few areas of government finance in which scholarly opinion and actual public policy diverge so dramatically. This situation prompted me to undertake two nationwide research surveys. The first survey sought to ascertain the level of knowledge of land taxation on the part of the nation’s state legislators. Without an understanding of the issues presented by the taxation of land, legislators are unlikely to champion, advocate or even vote for such measures. I also surveyed local elected officials, because state legislators will not advocate any reforms without constituent support. Moreover, since the reforms at issue will affect primarily local government finances, any legislative body seeking to reform a tax system will solicit the views and advice of local officials.

The Survey Questions

To gauge general awareness of the concept of land value taxation, the survey began with a broad question, describing it as “taxing the full value of land but exempting buildings, structures and other improvements from tax.” The next question narrowed the scope to determine familiarity with split-rate taxation, the version of land taxation practiced in Pennsylvania and authorized in two Virginia municipalities. Because it entails less dramatic reforms, split-rate taxation is the version of land taxation most likely to be adopted in the U.S. This concept was described as “taxing land at a higher rate than buildings, structures and other improvements.”

Legislative research has long found that state lawmakers are likely to support policies that they believe will foster economic development and oppose policies perceived to deter development (Beamer 1999). Taxing land at a higher rate than improvements has historically been thought to encourage building and investment by eliminating or reducing the tax burdens of improving the land. Thus, the third question asked for the respondents’ opinion on the effect that taxing improvements at a lower rate than land would have on economic development, defined as capital investment and job creation.

The proliferation of suburban sprawl is a growing concern among legislators and local officials across the country. The vast academic literature suggests that policy makers view sprawl unfavorably and that most officials think that policies that promote sprawl are unsound. Some public finance scholars believe that adopting split-rate tax policies will limit the negative effects of sprawl (Brueckner 2001). If this belief is true, split-rate taxation could play an important role in the continuing debate over policies intended to deter suburban sprawl. Question four asked what effect taxing improvements at a lower rate than land would have on sprawl. Sprawl was not defined in the question because the term can refer to a number of developments affecting density, suburban growth, loss of open space and decrease in population. Indeed, scholars have lamented the lack of a single operational definition of sprawl. Still, the perception of sprawl as an undesirable land use pattern and policy outcome warranted inclusion of the question in the survey.

Finally, state and local legislators are influenced by the desires and concerns of their constituents. The more important a particular issue is to constituents, the better informed a legislator will become about that issue. Thus, survey participants were asked if during the past year any citizens or organizations had contacted their offices with respect to the issue of split-rate taxation, and if so, whether the constituent supported or opposed the idea.

State and Local Respondents

The first survey focused on state legislators who served on committees with primary responsibility for tax policy and local government finance during the period January–June 2003. There were 106 such committees in the 50 state legislatures, but I excluded those in Pennsylvania and Virginia. Since those states have either adopted or authorized graded tax systems, I assumed that their legislators would be more familiar with the concept and could bias the results.

For the second survey I chose city and county officials from 15 randomly selected local jurisdictions within the 25 largest metropolitan areas in the U.S. To insure a national perspective, I also included city council members from the largest city in each state. Again I focused on officials with primary responsibility for implementing and administering public finance policy and excluded all jurisdictions in Pennsylvania and Virginia.

The survey questions were sent to 1,284 legislators, of whom 780 responded (see Brunori 2003 for more information on methodology). An identical survey was sent to 3,298 city and county officials, of whom 430 responded. The response rate for the state legislators was far above national standards, and the response rate for the local officials was considerably below national standards, but both were statistically significant.

Before revealing the results of the survey research, I must confess that I entered this project with a bias. Having worked in the state and local tax field my entire professional life, as a lawyer, teacher and journalist, I think about tax policy more than any sane person should and have come to know many state legislators and local public officials. In my experience, these government officials are quite capable of finding revenues to pay the bills, but they generally have little in-depth knowledge of the more philosophical and theoretical underpinnings of tax policy. So I assumed that few of them would understand what I was talking about when I began asking questions about land taxation. After all, I did not think most politicians were using their spare time to read Henry George’s classic book, Progress and Poverty. I was quite surprised at the responses.

The Results

In a country where there are virtually no land tax policies in place, the survey results show that a vast majority of elected political leaders do know about land and split-rate taxation (see Table 1). More surprising, to me at least, most political leaders are aware of the benefits of adopting land tax policies. More than 70 percent of the state legislators and 65 percent of the local government officials responded that they were either very or somewhat familiar with the concept of land value taxation, and 67 percent of state legislators and 65 percent of local officials were very or somewhat familiar with split-rate taxation.

The single most important policy goal (after public safety) that concerns American politicians is economic development. When asked about the relationship between the economy and land taxation, more than 62 percent of state legislators and 76 percent of local government officials replied that adopting a split-rate tax system would promote economic development. About one-quarter of both state and local officials thought that taxing improvements at a lower rate than land would have no effect on economic development. These results are arguably consistent with the conventional view that land taxation would have a benign effect on economic decision making. Only 5 percent of the state legislators and no local officials believed that taxing land at a higher rate would deter economic development.

One of the common misperceptions about land taxation is that it will lead to more sprawl, and many, but not a majority, of the respondents shared that misperception. Forty-one percent of surveyed state legislators and 46 percent of local officials said they believed that adopting a split-rate tax system would lead to more suburban sprawl. About 51 percent of the state legislators and 53 percent of local officials surveyed said that split-rate taxation would have no effect on sprawl or would deter sprawl. The fact that so many respondents believe that split-rate taxation would foster more sprawl, presumably by encouraging development of open space in suburban and rural areas, should be troubling to advocates of land taxation.

Finally, a surprisingly small number of elected political leaders have been contacted by constituents regarding land taxation. Eleven percent of state legislators and 9 percent of local government officials said an individual constituent or organization had contacted them regarding the issue of land-based or split-rate taxation, and all were supporters of the idea.

What Does It All Mean?

What originally sparked my interest in this research project was the disconnect between scholarly opinion about land taxation and political action to promote it. I thought this discrepancy might be the result of ignorance of the concepts of land taxation on the part of state and local political leaders. If state legislators and city council members were unaware of land or graded taxation, then they could not be expected to champion such reforms.

The survey results show, however, that this discrepancy cannot be resolved by looking at level of awareness alone. Most state legislators and local officials involved in public finance and taxation issues are familiar with both land taxation and split-rate taxation, and they know that moving to a split-rate tax system would have a positive effect on economic development. Moreover, a slight majority of those surveyed believe that graded taxes would have no negative effects on sprawl.

Since state and local officials know about land taxation and believe it could lead to positive policy outcomes, why are so few local governments using this method of public finance? It is difficult to answer that question without eliciting views on more technical aspects of land or split-rate taxation. Implementation of land taxation raises complex issues as to the feasibility of adopting major property tax reforms, the effects on other revenue sources, and the administration of a land tax system, particularly with respect to valuation. Solving the mystery as to why more jurisdictions are not exploring the policy of taxing land at a higher rate than improvements may lie in analyzing these important operational factors.

References

Beamer, Glenn. 1999. Creative politics: Taxes and public goods in a federal system. Ann Arbor: University of Michigan Press.

Brueckner, Jan K. 2001. Property taxation and urban sprawl. In Property taxation and local government finance, Wallace E. Oates, editor. Cambridge, MA: Lincoln Institute of Land Policy.

Brunori, David. 2003. Awareness of land taxation: Survey of state legislators. Working paper. Cambridge, MA: Lincoln Institute of Land Policy.

Brunori, David, and Jennifer Carr. 2002. Valuing land and improvements: State law and local government practices. State Tax Notes (September 30):1023–1033.

David Brunori is contributing editor of State Tax Notes for Tax Analysts in Arlington, Virginia, and research professor of public policy at The George Washington University in Washington, DC. This article is based on research he conducted as part of a David C. Lincoln Fellowship in Land Value Taxation, awarded by the Lincoln Institute.

Most people are not particularly fond of paying taxes of any sort, but the discontent with one particular type of public levy, the local property tax, is gaining momentum across the country. Disgruntled homeowners are demanding that governors and mayors find alternative methods to raise revenue in order to relieve their own property tax burden.

Decades ago this discontent led to such tax limitation measures as Proposition 13 in California and Proposition 2½ in Massachusetts. More recently, this movement has been driven by sharply rising property tax levies in many cities and suburbs as a result of the extraordinary appreciation in property values over the past few years. The high visibility of the property tax, which in contrast to sales and income taxes is often paid annually in one or two large installments, makes this form of revenue generation an attractive target for taxpayer antipathy.

Municipalities around the country face a daunting fiscal crisis. Federal stimulus assistance has expired, and many states have made significant cuts in aid to municipalities. Meanwhile property values have declined 31 percent since their 2006 peak according to the S&P/Case-Shiller national home price index.

It will take several years to know how this historic decline will affect property tax revenues, because changes in property tax bills significantly lag changes in market values. However, cities faced declines in general fund revenues of 2.5 percent in 2009, and approximately 3.2 percent declines in 2010 (Hoene 2009; Hoene and Pagano 2010). Municipal responses to revenue shortfalls have included making cuts to personnel (71 percent of cities), delaying or cancelling capital projects (68 percent), and making across the board cuts (35 percent) (McFarland 2010).

To avoid further cuts, municipalities will need to raise additional revenues. But with anti-tax sentiment running high, many cities and towns may try to avoid raising tax rates and look instead to increased reliance on fees and other alternative revenue sources. One alternative that has attracted the attention of many local officials recently is payments in lieu of taxes (PILOTs) by nonprofit organizations.

PILOTs are voluntary payments made by tax-exempt nonprofits as a substitute for property taxes. These payments typically result from negotiations between local government officials and individual nonprofits, but the exact arrangements vary widely. PILOTs can be formal, long-term contracts, routine annual payments, or irregular one-time payments. The payments can go into a municipality’s general fund, or be directed to a specific project or program. PILOTs are most frequently made by hospitals, colleges, and universities, but also by nonprofit retirement homes, low-income housing facilities, cultural institutions, fitness centers, and churches. Some such payments are not even called PILOTs, but are know as “voluntary contributions” or “service fees.”

Since 2000, PILOTs have been used in at least 117 municipalities in at least 18 states (Kenyon and Langley 2010). These payments are concentrated in the Northeast, and especially in Massachusetts where they have been made in 82 out of 351 municipalities (figure 1). It is hard to make definitive statements about trends in the use of PILOTs, because there is no comprehensive source that tracks them, but press accounts suggest growing interest in PILOTs since the early 1990s, with a noticeable uptick in recent years. Major multiyear agreements have recently been reached in Pittsburgh and Baltimore; commissions have studied PILOTs in Boston, New Orleans, and Providence; and many smaller municipalities have reached new agreements with local charities.

The Revenue Potential of PILOTs

The revenue potential of PILOTs varies across municipalities because of large differences in the impact of the charitable property tax exemption on their tax bases. Figure 2 shows that in 23 large U.S. cities the value of tax-exempt nonprofit property as a share of total property value ranged from 10.8 percent in Philadelphia to 1.9 percent in Memphis and El Paso. Similarly, a fiscal year 2003 study of 351 municipalities in Massachusetts found that if the tax exemption for charitable and educational nonprofits were removed, these organizations would account for more than 10 percent of the property tax levy in 18 municipalities and between 2.5 and 10 percent in another 68, but less than 1 percent of the tax levy in 179 municipalities (McArdle and Demirai 2004).

Since nonprofit property tends to be highly concentrated in a relatively small number of municipalities, especially central cities and college towns, PILOTs have the potential to be a very important revenue source for some municipalities, even if they are unlikely to play a significant role in financing local government in the majority of cities and towns. Table 1 looks at PILOTs in ten municipalities where they rarely account for more than 1 percent of total revenues, but the dollar figures are often significant.

The impact of the charitable property tax exemption on municipal budgets also depends on the degree of reliance on property taxes as a revenue source. Local governments with a heavier reliance on sales and excise taxes, user fees, or state aid are in a better position to deal with forgone property tax revenues through those other sources.

Collaboration on PILOT Agreements

In seeking PILOT agreements, local officials sometimes resort to adversarial pressure tactics, which can backfire and jeopardize important relationships between municipalities and nonprofits. A more collaborative approach is usually more successful when local officials work to build genuine support among nonprofits for a PILOT program that is rooted in shared interests and mutual dependence for each other’s long-term success.

Many large nonprofits like hospitals and universities are quite immobile, and other smaller nonprofits may be committed to serving their local communities even if they could relocate with relative ease. The long-term success of these organizations depends on the municipality’s success. Because population loss, crime, and crumbling infrastructure can imperil a nonprofit’s future, having a local government with the capacity to provide quality public services is in its own self-interest.

Similarly, nonprofits are often major employers and provide services and activities that attract people to a city and improve the quality of life for local residents. Thus, the success of these organizations is also crucial for a municipality’s future. Even if the nonprofits are tax-exempt, their presence can significantly expand the local tax base by attracting businesses and homeowners.

Recognition of these shared interests by both sides is crucial to reaching sustainable PILOT agreements. Private conversations between high-ranking municipal and nonprofit officials can help break down barriers that sometimes block PILOTs. To make the case for PILOTs, municipalities often appeal to the nonprofits’ sense of fairness and community responsibility—arguing that it is fair for nonprofits to pay for the cost of public services they consume, and that a contribution will directly benefit the community.

These conversations should also touch on what the nonprofits need for their future success. In practice, municipalities are often most successful in obtaining PILOTs when nonprofits need something from the local government, such as building permits or zoning changes. The quid pro quo nature of these agreements is often viewed negatively—as a form of extortion or special treatment. However, accommodating these requests is often in a municipality’s own interest.

For major nonprofit development projects, a shortened approval process with less red tape can cut overall costs significantly, and such discussions can result in more creative arrangements. For example, as part of a 20-year PILOT agreement with Clark University, the City of Worcester, Massachusetts agreed to work with the university to convert a short section of a street into a pedestrian area.

When local officials use more aggressive tactics to obtain PILOTs, such as trying to shame nonprofits into making payments or threatening to challenge their tax-exempt status in court, the organizations may become defensive and less willing to cooperate. Charitable nonprofits have a strong record of defending their property tax exemptions, so such divisive tactics are likely to leave a municipality with no PILOT, potentially significant legal fees, and a damaged reputation.

Problems with PILOTs

PILOTs have the potential to provide crucial revenue for municipalities with large nonprofit sectors, but there are many problems with these payments compared to more conventional taxes and fees.

First, at the same time that municipalities face a fiscal crisis caused by the recession, nonprofits face their own fiscal crisis due to declining endowment values and donations. In addition, government contracts—a major funding source for health and human service nonprofits—were cut, and some government entities are delaying contracts or payments. A 2009 survey found that 80 percent of nonprofit organizations were experiencing fiscal stress in the wake of the recession (Center for Civil Society Studies 2009). To nonprofits facing uncertain financial futures, it appears unfair for local governments to begin requesting PILOTs at this time (National Council of Nonprofits 2010).

Second, some degree of horizontal and vertical inequity in PILOT programs is almost inevitable, because their voluntary nature means there is no way to ensure that nonprofits with similar property values make comparable PILOTs. For example, even with Boston’s long-standing PILOT program, the four largest universities in the city made very different contributions in fiscal year 2009. Boston University paid $4,892,138 (8.53 percent of what it would pay in property taxes if taxable); Harvard University paid $1,996,977 (4.99 percent); Boston College paid $293,251 (1.92 percent); and Northeastern University paid only $30,571 (0.08 percent).

Third, PILOTs are a limited and frequently unreliable revenue source, rarely accounting for more than 1 percent of total revenues. This limited revenue potential must be weighed against some potentially significant costs associated with reaching PILOT agreements, such as upfront administrative costs, time spent by high-ranking officials negotiating agreements, or costs to obtain accurate assessments of exempt properties. PILOTs can also be an unreliable revenue source from one year to the next if they rely on short-term agreements.

Finally, the process used to reach PILOT agreements is often contentious and secretive, with contributions determined in an ad hoc manner lacking objective criteria. A collaborative approach can make PILOT requests less controversial, but reliance on private conversations also makes the process less transparent.

Systematic Programs to Mitigate Problems

Many of these problems with PILOTs can be mitigated if municipalities set up a systematic program that does not rely solely on case-by-case negotiation, especially for municipalities with a large number of nonprofits. A framework that applies to all organizations can provide guidance and bring consistency to the negotiations with individual nonprofits. The recommendations of Boston’s PILOT Task Force provide a concrete example (box 1).

Baltimore, Maryland: The city reached a $20 million six-year PILOT agreement with hospitals and universities in June 2010, with $5.4 million to be paid in each of the first two years. In return, the city dropped a proposed $350 fee per dorm and hospital bed, and protected hospitals and universities from increases in telecommunications and energy tax rates over the next six years (Walker and Scharper 2010).

Boston, Massachusetts: Beginning in January 2009, a task force of representatives from nonprofits, city government, business, labor, and the community met with a goal of making the city’s existing PILOT program more consistent. The final report has recommendations on key features of a systematic PILOT program: only nonprofits with property values exceeding a $15 million threshold are included in the program; the target PILOT for each institution is equal to 25 percent of what it would pay in property taxes, because roughly one-quarter of the city’s budget is devoted to core public services that benefit nonprofits; assessed value is used as a basis for the payments; and guidelines determine which types of services will count for community benefit offsets (City of Boston 2010).

New Orleans, Louisiana: A Tax Fairness Commission has been tasked with recommending changes to make the city’s tax system fairer and to broaden the tax base. While the commission may consider PILOTs, it is particularly interested in narrowing the nonprofit property tax exemption (Nolan 2011). Louisiana has a very broad charitable exemption compared to most states, with all properties owned by eligible institutions exempt from taxation regardless of use, including those not typically tax-exempt such as fraternal organizations, labor unions, and trade associations (Bureau of Government Research 1999).

Providence, Rhode Island: The mayor and city council members sought to increase the amount of PILOTs from the city’s four colleges and universities, but the Commission to Study Tax-Exempt Institutions (2010) recommended against renegotiating the 20-year $48 million PILOT agreement reached in 2003. Instead the commission recommended that the city should focus on forming partnerships with local nonprofits to foster economic growth, and the state should provide full funding of its PILOT program and provide Providence with a share of new income and sales tax revenues that result from nonprofit expansion.

Municipalities interested in establishing a systematic PILOT program should consider the following features.

Use a threshold level of property value or annual revenues to determine which nonprofits to include in the PILOT program. Excluding from PILOT requests certain types of nonprofits, such as religious organizations or small social service providers, may be a popular notion, but it can result in arbitrarily targeting some nonprofits while ignoring others. A more systematic policy with a threshold approach is easy to administer and will exclude only those nonprofits that do not meet the financial threshold to make significant contributions, rather than favor some organizations based on the nature of their activities.

Set a target for contributions that is justified. Instead of reaching an arbitrary dollar figure in negotiations, a target that applies to all nonprofits in the program can reduce horizontal inequities and may raise more revenue by creating the expectation for a certain contribution. For example, the target can be justified by estimating the cost of local public services that directly benefit nonprofits, such as police and fire protection and street maintenance.

Use a basis to calculate suggested payments. Using a basis with the rate set to reach the target contribution will also promote consistency. The fairest basis is the assessed value of exempt property, because the PILOT request will be proportional to the tax savings each organization receives from the property tax exemption. However, municipalities that want to avoid having to accurately assess tax-exempt properties can use another basis, such as the square footage of property or the organization’s annual revenues.

Include community benefit offsets, so nonprofits can reduce their target cash PILOTs in return for providing certain public services for local residents. Charitable nonprofits are typically more willing to provide in-kind services than to make PILOTs, and are well positioned to leverage their existing expertise and resources to provide needed services. For example, nonprofit hospitals can set up free health clinics, and universities can establish after-school tutoring programs. Local officials should be clear and consistent about which services are most needed by local residents and will count for community benefit offsets, and should rely on nonprofits to estimate the cash value of these donated in-kind services.

Reach long-term PILOT agreements. Both municipalities and nonprofits are better off with a long-term approach that allows them to build predictable payments into their respective budgets. Additionally, because PILOT requests can require considerable time to negotiate, both parties will benefit from reaching an agreement and then moving on to focus on their primary missions and perhaps other partnerships to serve the community. Several municipalities have 20- or 30-year PILOT agreements in place.

Alternatives to PILOTs

Given some of the common problems with PILOTs, municipalities with large nonprofit sectors that face revenue shortfalls may want to consider alternative revenue-raising measures.

Increase reliance on traditional user fees or special assessments. This alternative may be the most palatable in the current anti-tax climate. One consideration favoring this option is that nonprofits are typically not exempt from these charges, so increasing reliance on such sources will obtain revenue from a broad group of entities, including tax-exempt nonprofits. For example, a municipality could finance garbage collection through a fee instead of the property tax, or use special assessments to pay for sewer hookups in new subdivisions.

Establish municipal service fees. Some municipalities have carved out specific services that are normally funded through property taxes and instead charged nonprofits a fee for the service. These fees may or may not be assessed solely against tax-exempt nonprofits, and they often use a basis for the payments related to the size of the property rather than the assessed value. For example, Rochester, New York, has a local works charge to fund snowplowing and street repair. It is applied to both taxable and tax-exempt organizations using the property’s street frontage as the basis. Minneapolis, Minnesota, has a street maintenance fee that also uses square footage as the basis, but is only charged to nongovernmental tax-exempt properties.

Develop agreements for needed services. Local officials can decide not to pursue cash PILOTs, but instead develop formal partnerships with nonprofits to provide specific services for local residents or work together to foster economic development. Direct provision of needed services, sometimes known as services in lieu of taxes or SILOTs, will help the fiscal situation of the municipality in the short run, while joint efforts to foster economic development can have significant long-run benefits.

Expand the tax options for municipalities. This final alternative would require a change in state law in many instances. Some municipalities across the country have the ability to levy sales taxes, special excise taxes such as hotel taxes, income taxes, or payroll taxes. But most cities in the Northeast do not have these alternative tax sources, and are especially reliant on the property tax, which can be problematic if the tax-exempt sector is large or growing rapidly.

Conclusion

PILOTs have the potential to provide crucial revenue for municipalities that have a significant share of total property value owned by tax-exempt nonprofits, both as a stop-gap in the current municipal fiscal crisis and in the future. However, PILOTs rarely account for more than 1 or 2 percent of municipal revenues, so expecting these payments to eliminate local government deficits is unrealistic. Furthermore, singling out nonprofits to help address a municipal fiscal crisis is unfair since they face their own challenges due to the recent recession.

Local officials who do want to pursue PILOT agreements must tread carefully if they want to avoid some common pitfalls. First, PILOT requests can be highly contentious when local officials resort to heavy-handed pressure tactics to reach agreements. It is preferable for local officials to work collaboratively with nonprofit leaders to craft PILOT agreements that serve their mutual interests. Second, the voluntary nature of PILOTs limits the revenue potential of these agreements, results in inconsistent treatment of nonprofits, and leads to other problems. Municipalities with a large number of nonprofits can mitigate these problems by establishing a systematic PILOT program to provide guidance and bring consistency to their negotiations with individual nonprofits.

About the Authors

Daphne A. Kenyon is a visiting fellow in the Lincoln Institute’s Department of Valuation and Taxation and principal of D. A. Kenyon & Associates, Windham, New Hampshire.

Adam H. Langley is a research analyst in the Lincoln Institute’s Department of Valuation and Taxation and a master’s student in economics at Boston University.

References

Bureau of Government Research. 1999. Property tax exemption and assessment administration in Orleans parish. New Orleans, LA.

Center for Civil Society Studies. 2009. Impact of the 2007-09 Economic Recession on Nonprofit Organizations. Communique No. 14. Baltimore, MD: Johns Hopkins University for Policy Studies. June 29.

City of Boston. 2010. Mayor’s PILOT task force: Final report and recommendations. December.

Commission to Study Tax-Exempt Institutions. 2010. A call to build the capital city partnership for economic growth: Report to the Providence City Council from the Commission to Study Tax-Exempt Institutions. Providence, RI. November.

Hoene, Christopher W. 2009. City budget shortfalls and responses: projections for 2010-2012. Washington, DC: National League of Cities.

Hoene, Christopher W. and Michael A. Pagano. 2010. Research brief: City fiscal conditions in 2010. Washington, DC: National League of Cities.

Kenyon, Daphne A. and Adam H. Langley. 2010. Payments in lieu of taxes: Balancing municipal and nonprofit interests. Cambridge, MA: Lincoln Institute of Land Policy.

Lipman, Harvy. 2006. The value of a tax break. The Chronicle of Philanthropy 19(4): 13.

McArdle, Regina, and Donna Demirai. 2004. A study of charitable and educational property tax exemptions. City and Town, January. Boston: Massachusetts Department of Revenue, Division of Local Services.

McFarland, Christiana. 2010. State of America’s cities survey on jobs and the economy. Washington, DC: National League of Cities.

National Council of Nonprofits. 2010. State budget crises: Ripping the safety net held by nonprofits. Washington DC. March 16.

Nolan, Bruce. 2011. N.O. Tax Fairness Commission begins rethinking property taxes. The Times-Picayune. February 3.

Walker, Andrea K., and Julie Scharper. 2010. Baltimore City Council committee backs $15 million in new taxes; deal with hospitals and universities announced for $20 million more. Baltimore Sun. June 10.

Adam H. Langley es analista senior de investigación en el Departamento de Valuación e Impuestos del Lincoln Institute of Land Policy. Previamente, Langley trabajó para la Asamblea del Estado de Nueva York. Obtuvo su licenciatura en Estudios políticos en el Bard College y una maestría en Economía en Boston University.

Las investigaciones de Langley han cubierto una serie de temas relacionados con las finanzas públicas estatales y locales, centrándose específicamente en el impuesto sobre la propiedad. Ha sido coautor de tres informes sobre enfoque en políticas de suelo del Instituto Lincoln: Property Tax Circuit Breakers: Fair and Cost-Effective Relief for Taxpayers (Fusibles para el impuesto sobre la propiedad: Alivio equitativo y económicamente efectivo para los contribuyentes) (2009), Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests (Pagos en lugar de impuestos: Equilibrando los intereses de las municipalidades y organizaciones sin fines de lucro) (2010), y Rethinking Property Tax Incentives for Business (Repensando los incentivos del impuesto sobre la propiedad para las empresas) (2012). También ha liderado varios proyectos para proporcionar datos en el sitio web del Instituto Lincoln, como la creación de la base de datos de Ciudades Fiscalmente Estandarizadas (Fiscally Standardized Cities o FiSCs) y un juego de datos con amplia información sobre organizaciones sin fines de lucro que efectúan pagos en lugar de impuestos, y las localidades que los reciben.

Sus artículos han aparecido en publicaciones como Regional Science and Urban Economics, Public Finance and Management, y Publius: The Journal of Federalism. Su investigación también ha sido cubierta por más de cien medios periodísticos, incluyendo The New York Times, The Wall Street Journal, The Economist, Governing, y The Boston Globe.

Land Lines: ¿En qué proyectos ha estado trabajando recientemente como analista de investigación senior del Instituto Lincoln?

Adam Langley: He estado trabajando en varios proyectos relacionados con las finanzas de los gobiernos locales. Un proyecto importante ha sido la creación de la base de datos de “Ciudades fiscalmente estandarizadas” (Fiscally Standardized Cities o FiSCs). Este subcentro del sitio web del Instituto Lincoln permite a los usuarios realizar comparaciones significativas de las finanzas de los gobiernos locales a nivel ciudad para 112 de las ciudades más grandes de los EE.UU. en los últimos 35 años. Utilicé estos datos en un artículo reciente sobre las finanzas municipales durante la Gran Recesión, que presenté en la 9.a Conferencia Anual sobre Política de Suelo el 2 de junio de 2014. También estoy creando una tabla resumida para describir los programas estatales de exención y créditos al impuesto sobre la propiedad, con información del subcentro “Características significativas del impuesto sobre la propiedad” del Instituto Lincoln. Pienso usar dicha tabla para estimar los gastos tributarios para estos programas en cada uno de los 50 estados.

Land Lines: Usted trabajó en varios proyectos para proporcionar datos en el sitio web del Instituto Lincoln. ¿Qué lo motiva a enfocarse en los datos?

Adam Langley: Estos proyectos de datos forman parte central de la misión del Instituto Lincoln de facilitar la toma de decisiones informadas sobre temas relacionados con el uso, la regulación y la tributación del suelo. Las bases de datos del Instituto han sido utilizadas por gestores de políticas, para ayudarles a guiar sus decisiones; por periodistas, para ampliar el contexto de sus notas; y por investigadores, para sus propios proyectos. El aprovisionamiento de datos accesibles sin cargo y fáciles de usar aumenta enormemente el alcance potencial del trabajo del Instituto en temas de políticas de suelo, porque permite a otros analistas realizar nuevas investigaciones sobre el tema.

También es esencial para el prestigio del Instituto Lincoln que nuestras recomendaciones de políticas se cimienten en un análisis de alta calidad y datos fidedignos. Para poder influir en las decisiones políticas, es fundamental que nuestras investigaciones sean ampliamente consideradas como objetivas, no partidistas y basadas en evidencias.

Land Lines: Usted dijo que la base de datos de “Ciudades fiscalmente estandarizadas” permite realizar comparaciones significativas de las finanzas de los gobiernos locales a nivel ciudad. ¿Qué tiene de malo la simple comparación de gobiernos municipales?

Adam Langley: Las responsabilidades de servicio de los gobiernos municipales varían mucho a lo largo del país. Mientras que algunas municipalidades brindan una oferta completa de servicios públicos a sus residentes, otras comparten estas responsabilidades con una serie de gobiernos independientes superpuestos. Debido a estas diferencias en la estructura de los gobiernos locales, la comparación simple de gobiernos municipales puede ser engañosa.

Por ejemplo, consideremos una comparación entre Baltimore y Tampa. El gobierno municipal de Baltimore gasta tres veces más per cápita que el gobierno municipal de Tampa (US$5.594 vs. US$1.829 en 2011). No obstante, la diferencia se debe casi por completo al hecho de que la ciudad de Tampa comparte el aprovisionamiento de servicios locales con un distrito escolar independiente y con el condado de Hillsborough al que pertenece, mientras que Baltimore no cuenta con ningún condado superpuesto, y las escuelas forman parte del gobierno municipal propiamente dicho. Cuando se tienen en cuenta todos los gobiernos superpuestos en la base de datos de FiSC, los gastos per cápita para los residentes de las dos ciudades son casi idénticos: US$6.083 en Baltimore vs. US$6.067 en Tampa.

Land Lines: ¿Puede explicar la metodología utilizada para crear las “Ciudades fiscalmente estandarizadas”?

Adam Langley: Las FiSC se construyen sumando los ingresos de cada gobierno municipal con la proporción pertinente de los condados superpuestos, distritos escolares independientes y distritos especiales. Los ingresos del condado se asignan a la base de datos FiSC según la proporción de la población del condado que vive en dicha ciudad; los ingresos escolares se asignan en base al porcentaje de estudiantes del distrito que vive en la ciudad central, y los ingresos de los distritos especiales se asignan en base a la proporción de los residentes del área de servicio del distrito que vive en la ciudad. Por lo tanto, la base de datos FiSC proporciona una representación plena de los ingresos recaudados de los residentes y comercios de la ciudad, ya sea por el gobierno municipal o por un gobierno separado superpuesto. Estas asignaciones se hacen para más de 120 categorías de ingresos, gastos, deudas y activos. La metodología de la base de datos FiSC fue desarrollada junto con Andrew Reschovsky, fellow del Instituto Lincoln, y Howard Chernick, profesor de Hunter College de la Universidad de la Ciudad de Nueva York. Calculamos las estimaciones usando datos fiscales de cada gobierno individual proporcionados por la Oficina del Censo de los EE.UU. y actualizamos la base de datos de FiSC con los datos de años posteriores, en la medida que se encuentren disponibles.

Land Lines: ¿Por qué es importante comparar las finanzas de los gobiernos locales a nivel de ciudad?

Adam Langley: Mucha gente quiere saber cómo se compara su ciudad con otras ciudades, pero al hacer estas comparaciones es fundamental contabilizar las diferencias en las estructuras de los gobiernos locales. La base de datos FiSC precisamente hace eso. Por lo tanto, se puede usar para comparar los ingresos del impuesto sobre la propiedad en dos ciudades, clasificar a todas las ciudades por su nivel de gasto escolar, investigar cambios en los salarios del sector público a lo largo del tiempo, o ver qué ciudades dependen más de la ayuda estatal para financiar sus presupuestos.

En otro proyecto, junto con Andrew Reschovsky y Richard Dye, estamos usando la metodología de FiSC para estimar los costos de las pensiones y otras obligaciones de los gobiernos locales de cada ciudad. La cobertura en los medios de comunicación a veces da la impresión de que todos los planes públicos de pensiones tienen dificultades, pero en realidad hay mucha variación en el país. Para poder investigar estas diferencias, es fundamental contar con datos comparables de costos de pensiones de todos los gobiernos locales de cada ciudad. Por ejemplo, las estimaciones iniciales muestran que en promedio la contribución requerida anual (annual required contribution o ARC) de los planes de pensiones locales en 2010 ascendía al 4,9 por ciento de los ingresos generales en las 112 FiSC de la base de datos. No obstante, la ARC era más del 10 por ciento de los ingresos tanto en Chicago (11,7 por ciento) como en Portland, Oregón (10,9 por ciento).

Land Lines: ¿La disminución de los ingresos durante la Gran Recesión varió mucho en las distintas ciudades?

Adam Langley: Sí, la disminución de ingresos varió significativamente en las 112 FiSC durante y después de la recesión. Cuando se tiene en cuenta la inflación y el crecimiento de la población, sólo los ingresos de ocho FiSC evitaron una disminución neta a finales de 2011. Calculé los cambios en los ingresos reales per cápita con respecto al máximo de cada FiSC hasta finales de 2011. Alrededor de un tercio de ellas tuvo una disminución del 5 por ciento o menos (41 FiSC), otro tercio sufrió disminuciones de entre el 5 y 10 por ciento (34 FiSC), y alrededor de un cuarto sufrió disminuciones superiores al10 por ciento (29 FiSC). Las FiSC con las mayores disminuciones de ingresos fueron Las Vegas (20,2 por ciento), Riverside (18,0 por ciento) y Sacramento (18,0 por ciento).

Land Lines: ¿Se han recuperado mucho los ingresos de los gobiernos locales desde el fin de la recesión?

Adam Langley: Todavía no, porque los cambios en el nivel de ingresos se retrasaron varios años con respecto a los cambios en la economía durante y después de la recesión. Los ingresos gubernamentales reales per cápita fueron estables a lo largo de 2009, disminuyeron un poco en 2010, y cayeron de forma importante en 2011. El último año con datos completos es 2011, así que combiné distintas fuentes de datos para estimar los ingresos a lo largo de 2013. Estos datos sugieren que los ingresos tocaron fondo en 2012, cuando fueron entre un 5 y 6 por ciento inferiores a los de 2007. Esto quiere decir que los ingresos no llegaron a su valor mínimo hasta tres años después de que la recesión terminó oficialmente. Los ingresos comenzaron a recuperarse en 2013, pero siguieron siendo más del 4 por ciento inferiores a los niveles previos a la recesión.

Este retraso se debe a cambios en la ayuda intergubernamental y los impuestos sobre la propiedad, que en su conjunto financian casi dos tercios del presupuesto de los gobiernos locales. La Ley de Recuperación y Reinversión Americana proporcionó a los estados alrededor de 150.000 millones de dólares en estímulos federales entre 2009 y 2011, con fondos de estímulo adicionales proporcionados directamente a los gobiernos locales. Sin embargo, la mayoría de los fondos de estímulo desaparecieron el año 2012, lo cual condujo a los mayores recortes de gasto estatales de los últimos 25 años. Más aún, los cambios en los impuestos sobre la propiedad normalmente se retrasan con respecto a los cambios en los precios de las viviendas entre dos y tres años, debido a que el monto se basa en la tasación de años anteriores, hay retrasos en la actualización de dichas tasaciones y otros factores. Este retraso hizo que los impuestos sobre la propiedad crecieran a lo largo de 2009, no disminuyeran hasta 2011, y cayeran a su punto mínimo en 2012.

Land Lines: ¿Puede darnos más detalles sobre su trabajo acerca de la exención de impuestos sobre la propiedad y los programas de crédito?

Adam Langley: Ya casi he terminado con la primera etapa de este proyecto, que consiste en crear una tabla con el resumen de los programas de exención y créditos estatales. La tabla contiene datos de 167 programas, con 18 variables que describen las características principales de cada programa. Hay información sobre el valor de las exenciones expresadas en términos de valor de mercado; criterios relacionados con la edad, discapacidad, nivel de ingresos y si el beneficiario es un veterano de guerra; el tipo de impuesto afectado; si la pérdida de ingresos tributarios la sufre el estado o el gobierno local; opciones locales; etc. Una vez que haya completado la tabla, escribiré un resumen de política para describir las características principales de estos programas. Toda esta información se deriva de la tabla “Programas de alivio tributario para propiedades residenciales” del subcentro “Características significativas del impuesto sobre la propiedad” del sitio web del Instituto. La tabla original de “Alivio residencial” brinda descripciones detalladas de cada programa, mientras que la tabla resumida será más útil para aquellos usuarios que quieran hacer una comparación rápida entre estados, o para investigadores que quieran realizar análisis cuantitativos.

En la segunda etapa de este proyecto, calcularé los gastos tributarios de mantener estos programas de alivio tributario del impuesto sobre la propiedad. A pesar de la preponderancia de estos programas y su a menudo considerable impacto en la carga tributaria sobre la propiedad, no existen estimaciones completas sobre su costo. Usando datos de la tabla resumida y microdatos de la Encuesta de Comunidades Americanas, calcularé para cada estado el porcentaje de residentes que pueden beneficiarse de los programas de alivio tributario sobre la propiedad, el costo total de dichos programas, el beneficio promedio para los beneficiarios y el porcentaje de residentes elegibles y el beneficio promedio por quin-til de ingresos. Estos cálculos proporcionarán nueva y valiosa información sobre el impacto de los programas de alivio del impuesto sobre la propiedad en los Estados Unidos.

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.

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.

La inversión de fondos públicos en áreas urbanas suele traer como resultado un aumento en el valor de la tierra que solamente beneficia a un grupo pequeño de propietarios privados. En una iniciativa sin precedentes, la ciudad brasileña de Porto Alegre está usando el impuesto a la propiedad como un instrumento para recuperar la plusvalía de los bienes raíces, con lo cual logran frenar la especulación en el mercado inmobiliario y promueven el desarrollo urbano racional.

Contexto económico y social

Porto Alegre es la capital y la ciudad más grande del estado brasileño de Río Grande do Sul, el más meridional del país. Con una población de 1,5 millones de habitantes y aproximadamente 450.000 unidades inmobiliarias en 1994, las autoridades de la ciudad estimaron una escasez de más de 50.000 unidades residenciales. No obstante, los mayores problemas económicos y sociales limitaban la capacidad que tenía la ciudad para proporcionar viviendas a las familias de ingresos bajos y medianos.

Al igual que en muchos países en desarrollo con ciclos económicos inestables, la tierra es uno de los principales medios para acumular riqueza en Brasil. En Porto Alegre, la existencia de grandes predios sin urbanizar cerca del centro de la ciudad propicia la propagación urbana en la periferia. El principal factor causante de esta situación es la especulación con las tierras por parte de propietarios adinerados que poseen grandes extensiones de terreno baldío y esperan un momento favorable para realizar inversiones o vender los terrenos con enormes ganancias.

A medida que las familias de ingresos bajos son empujadas hacia la periferia, su segregación lleva a una exclusión social más acentuada y mayores demandas de servicios. No obstante, la dotación de infraestructura básica, como los servicios de transporte público en rutas largas entre la periferia y los núcleos de comercio, industria o entretenimiento, exige que el gobierno haga inversiones considerables.

Las autoridades de la ciudad de Porto Alegre se habían fijado una meta fundamental de proveer servicios urbanos de calidad para la comunidad de las afueras, entre ellos una infraestructura básica, educación, transporte público, limpieza de calles y seguridad. Sin embargo, un diagnóstico financiero de los ingresos de la ciudad hizo que las autoridades se percataran de la escasez de recursos para tal inversión. En contraste, muchos distritos en áreas más centrales estaban bien dotados de infraestructura, equipos y servicios, y su densidad de población era menor a la prevista en el plan de desarrollo urbano de la ciudad.

Era obvio que la especulación obstaculizaba el desarrollo de la tierra, pero las autoridades gobernantes creían que el ambiente político era favorable para un cambio. Después de un período en el que el gobierno se enfrentó a una inflación crónica en Brasil, se introdujo un programa de estabilización económica en julio de 1994. Antes del plan económico, la inflación anual llegó a alcanzar el asombroso nivel del 7.000 por ciento. A partir de la aplicación del plan, el índice promedio de la inflación mensual osciló entre el 0,7 y el 1,7 por ciento. La medición de la economía en términos del producto interno bruto (PIB) arrojó índices positivos de crecimiento anual a partir de 1993. El gobierno local tenía confianza en que el momento era ideal para recuperar la inversión y las actividades productivas que se habían paralizado durante el anterior período de inflación alta.

En resumen, los siguientes factores fomentaron la iniciativa de Porto Alegre de usar el impuesto a la propiedad como instrumento para simultáneamente recuperar la plusvalía de la tierra, refrenar la especulación en el mercado inmobiliario y promover la justicia social y el crecimiento económico:

• Estimulación de la ocupación y desarrollo de tierras urbanas, puesto que el mercado privado no respondía de forma positiva a la demanda de los residentes de ingresos bajos y medianos.
• Reducción de la escasez de viviendas.
• Asistencia a las familias de bajos recursos, para garantizarles mejores oportunidades de vida y trabajo.
• Recuperación del valor de la tierra generado por la inversión pública, motivando a aquellos individuos que habían sido favorecidos por la inversión pública para que retribuyeran los beneficios a la comunidad.
• Limitación de las inversiones adicionales a gran escala en infraestructura y servicios públicos mediante la utilización racional de los recursos financieros.

Medidas gubernamentales

La constitución de Brasil (1988) define el impuesto a la propiedad como un tributo aplicado a la tierra e inmuebles urbanos y especifica que puede utilizarse como un instrumento de las políticas urbanas a fin de promover un uso racional de la tierra que genere beneficios sociales para toda la comunidad. Esta disposición permitió que Porto Alegre emprendiera las siguientes acciones:

• Definir las zonas urbanas prioritarias para el desarrollo y la ocupación. El proceso implicaba la selección de cinco áreas distintas caracterizadas por su alta calidad en infraestructura urbana, equipos y servicios. Estas áreas acogerían una mayor densidad de población sin necesidad de inversiones públicas adicionales.
• Localizar 120 predios vacantes, cuya área oscilaba entre 3.000 y 360.000 metros cuadrados (m2) en las zonas prioritarias.
• Introducir una legislación local que estipulaba el desarrollo de las propiedades seleccionadas en lapsos de tiempo específicos. La ley establecía que si no se cumplía con dichos lapsos para el desarrollo de los predios, se aplicaría progresivamente el impuesto a la propiedad correspondiente. La tasa del impuesto aumentaría en intervalos de 20 por ciento anualmente hasta alcanzar un tasa máxima del 30 por ciento. Las tasas básicas para tierras vacantes varían entre el 5 y el 6 por ciento del valor de la propiedad en el mercado.
• Otorgar prioridad a los proyectos de construcción en los terrenos seleccionados. Las entidades del Ayuntamiento encargadas de los permisos de planificación facilitarían la construcción y la ocupación.

Efectividad de la iniciativa

La legislación fue promulgada a finales de 1993 y el gobierno comenzó a aplicarla en 1994. La propuesta contó con el apoyo de los miembros del Ayuntamiento, tanto los pertenecientes al partido de gobierno como los de la oposición; esta instancia tiene la responsabilidad de aprobar las decisiones en materia de legislación municipal.

A la fecha de octubre de 1997 la iniciativa no ha dado los resultados esperados. Sólo se han desarrollado cinco de los 120 predios vacantes. Los propietarios de 50 inmuebles están pagando el impuesto a la propiedad con una tasa de aumento progresivo. Tres de las propiedades fueron eliminadas de la lista porque habían sido incluidas incorrectamente desde un principio debido a registros inexactos sobre sus características físicas.

No se ha descrito el estado de desarrollo de las 62 propiedades restantes. Algunas pertenecen a terratenientes acaudalados y políticamente influyentes que apelaron ante el Tribunal Supremo contra la constitucionalidad de las medidas aplicadas por el gobierno de la ciudad. De hecho, dos terratenientes (A y B) que poseen casi el 44 por ciento de los terrenos baldíos están apelando y otros terratenientes aparentemente están a la espera de la decisión judicial para tomar sus propias decisiones. (Véase el cuadro.)

Solamente será posible evaluar la efectividad que ha tenido la iniciativa del impuesto a la propiedad en Porto Alegre después de que se conozcan las decisiones judiciales sobre la materia, pero otros beneficios cruciales derivados de la experiencia ya han garantizado su éxito. La legislación ha dado lugar a un debate intenso en el ámbito nacional y local sobre los derechos políticos y privados, los derechos de propiedad y los intereses públicos. La experiencia también ha servido como ejemplo para que otras autoridades gobernantes tomen conciencia de la responsabilidad que tienen de fomentar el uso racional de las tierras urbanas.

En Brasil, los factores culturales y económicos parecen seguir propiciando la especulación con la tierra, en detrimento de las actividades productivas, y la dificultad para establecer límites entre los intereses públicos y los derechos privados es, sin duda, compleja. No obstante, los esfuerzos iniciales realizados en Porto Alegre representan un paso decisivo hacia el control de la especulación privada y el fomento del desarrollo urbano responsable. Otras iniciativas similares en otros lugares ahora tienen mayores posibilidades de convertirse en alternativas viables para lograr justicia en la distribución de los recursos públicos con ventajas sociales para la comunidad.

Claudia M. De Cesare trabaja para la Municipalidad de Porto Alegre y está postulada para cursar un doctorado en el Centre for the Built and Human Environment, de la Universidad de Salford, Inglaterra.

After spending more than a decade on restructuring central-provincial fiscal relations, the Chinese government is advancing its efforts to reform local public finance. In 2003 the central government issued a directive to ameliorate the real property tax system in China. To fulfill this mandate, tax authorities are reviewing international property taxation experiences, sending officials overseas to study pertinent models and inviting foreign experts to China for consultation. Yet comparable cases from which the government can draw relevant lessons for tailor-making a Chinese property tax system are few. The danger is that when public officials are under pressure to move the reform forward, they may be tempted to adopt concepts that do not match the country’s conditions.

One recent proposal that may develop into such a scenario is to establish an ad valorem property tax system in which leasehold land would be taxed as if it were freehold. This article explains what the Chinese government’s current proposal entails, why it may not be consistent with existing land tenure arrangements and, more tentatively, how the establishment of a land rent system could mediate potential contradictions of taxing land that is not private property.

China’s Property Tax Reform Proposal

The Chinese property tax system currently has as many as nine property taxes, depending on the definitions (see Hong 2003; 2004). The central government has proposed to consolidate three of these taxes into a single levy to simplify the existing tax structure. One of them is the Township and Urban Land Use Tax (LUT), which all land users (except foreign entities, government and nonprofit agencies, and agricultural industries) are required to pay. To collect this tax, local governments divide their jurisdictions into different taxing zones according to population size or land use. Land in different zones is taxed at an array of tax rates preset by the central government, ranging from 0.2 to 10 yuan per square meter (1 yuan = US$0.122). Some Chinese officials have admitted that the tax rates for the LUT have been set too low; hence its collections have little impact on local revenue. The government plans to eradicate this tax.

The other two taxes, the Building (or House) Tax and Urban Real Estate Tax (URET), will also be subject to reform. While the Building Tax is imposed on income-generating properties held by Chinese nationals, the URET is levied on all real estate owned by foreign entities and overseas Chinese. Both are ad valorem taxes whose bases can be the discount original purchasing cost, assessed capital value or gross annual rental value of the property.

When the assessed capital value (or the purchasing cost for the Building Tax) is used as the basis for tax assessment, the tax rate is 1.2 percent for the Building Tax and 1.5 percent for the URET. If an estimated rental value is used instead, the tax rates for the Building Tax and URET will be 12 and 15 percent, respectively. In some locales, like Beijing, if actual rental value is available because individual property owners rent their dwellings to another party at the market rate, the Building Tax rate will be 4 percent of gross rental income of the property. In view of this discrepancy in taxing local- and foreign-owned real estate, the government would replace these two levies with a single property tax as part of the upcoming reform.

The proposed new property tax would be imposed on both land and buildings at a uniform rate. The tax base would encompass all properties, domestic and foreign, located in rural as well as urban areas. As some public officials argue, a standardized property tax could have at least three advantages. First, the new property tax system may ease tax administration. Instead of administering the collection of the LUT, Building Tax and URET separately, local tax bureaus will be able to concentrate their effort on just one tax.

Second, the new property tax would be a value-based tax, which allows the government to capture future land value increments if property reappraisal can be done regularly. Third, one key purpose for creating the new property tax is to convert selected real estate development charges into a unified tax. Many scholars argue that some local governments might have abused the current system of user charges, thereby making payments for public services unduly cumbersome.

Collecting these charges through the new property tax may lower the transaction costs of doing business. As well-intentioned as the proposal may sound, policy designers might have underestimated the importance of one fundamental matter: the integration of the new property tax system with the current land tenure arrangements.

Property Taxation and Public Leaseholds

As specified in the Chinese Constitution, urban land is owned by the state and rural land is owned by collectives. Local governments, empowered by the state, can assign land use rights to users through a set of leasing arrangements. Lease terms are 40 years for commercial land, 50 years for industrial land and 70 years for residential land. If a local government wants to lease an urban land site to a private entity, it must be assigned through a bidding process. The winning bidder must pay the total set of leasing fees (including a “conveyance fee,” expropriation costs if land is acquired from the collective, and various land allocation charges) in a lump sum and immediately to obtain the land use rights.

The payment of the market-determined conveyance fee allows the lessee to transfer or rent the land use rights to another party and to use them as collateral. In the past, land rights were allocated mainly to private entities through negotiation, but this method failed to collect proper fees due to personal connections or corruption and it was suspended by the central government in 2002.

Users of land assigned administratively to public agencies or state-owned enterprises are not required to pay the conveyance fee, but must compensate the state for any allocation costs. The assignment of the land rights has no term limit. According to the law, if a state-owned enterprise wants to transfer its land rights to a private entity for commercial purposes, it must pay the conveyance fee to the state before doing so. For the transfer of rural land into urban uses or to nonmembers of the collective, the state will first expropriate the land from the collective with compensation and then lease the use rights to interested users for the payment of the conveyance fee and other leasing charges.

Owing to a long bureaucratic process and high transaction fees, many users have transferred their land rights to other parties without going through the proper procedure and registration. As such informal exchanges have gained in popularity, the official land leasing record is no longer reliable. Hence, any future attempt to identify the actual landholders, delineate their land rights, and estimate the leasehold value for tax purposes would no doubt be a difficult task.

The design of the new property tax system must take these unique land tenure arrangements into consideration. Aside from the extensive informality involved in land transaction and possession—a topic that is beyond the scope of this article—the most basic question is: How can the government convince lessees to pay property tax on lands that they do not own?

Certainly not all property tax systems are based on the premise that property owners should be taxpayers; occupiers are sometimes liable for tax payment. In some countries, such as Australia, the Netherlands and United Kingdom, taxes paid by occupiers are referred to as rates, a council tax or a user tax to avoid any confusion. Despite the different names, the calculation of these levies is still based on either the capital or rental value of the property, which is the same approach as for the property tax.

More fundamentally, since the supply of land is fixed, the landowner (the state government in the case of China) would bear the ultimate tax burden even if land users paid the property tax directly to the government. This is because the new tax would dampen the demand for land use rights and in turn reduce the fees that local governments could receive from leasing public land.

Because the Chinese government is both the landowner and property tax collector, lessees who leased land in the past and paid the entire leasehold value without anticipating the additional property tax burden would wonder why they should pay more land tax to the government. Thus it is essential to have a rationale for taxing leasehold land, so as to convince lessees to comply with their property tax obligation.

One way to analyze the matter is to treat property rights as a bundle of rights, which includes the right to own, use, develop, transfer, bequest and benefit from land. This bundle also comprises the right to exclude others from enjoying these privileges.

Viewing the Chinese land tenure arrangements through this lens, the government holds the ownership of land and leases other attributes of the bundle of land rights to private entities. So long as the privileges and obligations of holding the leased land rights are fully delineated and recognized, both legally and by the society, there is no reason why leasehold rights cannot be regarded as private property of the lessees for a specific period of time as stipulated in the lease.

In 1988 the Chinese National People’s Congress amended the Constitution to acknowledge the transferability of the right to use land. Further amendments are needed to explicitly recognize leaseholds as private property and empower the state to establish special legislation for the enforcement and protection of leasehold rights. In this way, the implicit contradiction in imposing property tax on leased public land would be clarified and resolved.

One technical issue remains, however: valuation of leasehold rights for tax purposes. Since the new property tax will be value-based, assessors will face the challenges of estimating the leasehold value of land independently, based on market data that normally reflect a combined value of land and all improvements. Most property valuation methods presume that land is freehold, and that developed real estate markets are present. Neither of these assumptions can be applied to China. Although there are practices that separate land and building values for tax purposes, the divisions are generally based on crude assumptions. How can assessors modify the existing (or invent new) valuation techniques to accommodate these special Chinese conditions?

More important, leasehold value is highly sensitive to the lease term and conditions, both of which can vary significantly from one case to another. At this moment, time-tested mass appraisal techniques for assessing large numbers of leasehold sites do not exist. Do these issues imply that property assessment for tax purposes under the Chinese leasehold system requires a case-by-case approach? If so, do local governments have the capability to carry out such detailed property appraisals for the collection of the new property tax? The Chinese government must find ways to deal with these practical matters if it decides to tax leasehold rights as private property.

It is also extremely important to educate would-be taxpayers and public officials about the distinctions between freehold and leasehold systems. Lessees must recognize that they possess only the leased land rights that are not designed to last in perpetuity. If the rights and obligations of both the state and lessees are not clearly delineated, taxing leasehold rights as if they were freehold could complicate the implementation of future land and tax policy. For example, in Canberra, Australia, and Israel, lessees are requested to pay the entire leasehold value up front, and thereafter they pay an annual property tax (or rates in Australia) for leasing public land. Lease terms in both cases are long and renewable—99 years in Canberra and 49 years in Israel with four automatically renewable terms totaling 196 years.

This method of collecting leasehold charges and taxes is tantamount to the payment system for land in countries where land is freehold. Due to this similarity, lessees have developed the perception that land is privately owned (Hong and Bourassa 2003). This view, albeit legally a fiction, has engendered the expectation that any government’s attempt to exercise its rights as the landowner to retake land for public uses or to demand additional payments from lessees for enlarging or extending land use rights would constitute an infringement on private property.

This expectation has added conflict to government efforts to redistribute land and land value between private landholders and the state on behalf of the public. As Neutze (2003) argued, had the Canberra government provided enough public education about its leasehold system, it would have spared the Australian capital from many intractable disputes over land ownership.

The Chinese government has no immediate plan to give fee simple deeds to private landholders. Thus, if local governments continue to collect all leasehold charges up front and then levy the new property tax on both land and buildings, they may be at risk of creating the same mistaken expectations, that is, that land is privately owned. This may put the government and lessees at odds with each other when there is a later need to reallocate land from private to public uses. Designing a real property tax that will not add more complications to the already unsettling land tenure system is a critical task that policy makers should not overlook.

Land tenure reform is a long, controversial process, however, and the Chinese government would be ill-advised to delay the implementation of the new property tax system until land reform is completed. What the government needs is a transition system in which property tax reform can proceed as planned without interfering with its endeavors to restructure land ownership. Establishing a land rent system seems to be an option.

Land Rent System

Under a land rent system, leasehold charges would be paid in the form of an annual land rent, not a one-time leasing fee. Local land bureaus could continue to assign land use rights by public auction, but the bidding would be to determine the amount of annual land rent. Similarly for lands that were assigned to state agencies administratively, users would pay their conveyance fee for transferring land rights to other private parties in annual installments, which would be equivalent to the yearly rental payments. The land rent system has pros and cons (see Hong 2004 for a detailed discussion); four important advantages are discussed here.

First, collecting a land rent is the most straightforward way to characterize the landowner-tenant relationships between the state and lessees. More important, requesting lessees to make their rental payments annually would serve as a constant reminder of their leasehold relationships with the state.

Second, if leasehold charges were paid in annual installments, local officials would no longer be able to generate a large amount of cash instantly to cover short-term fiscal shortfalls. This in turn may lower their incentive to lease land rapidly—a major malady of the current land leasing system.

Third, research using the input-output (I/O) technique and the 1997 I/O Table of China found that collecting land rent could facilitate the transition to the new property tax system (Hong 2004). Had the central government required all land users to pay an annual land rent in 1997, rental income would have added 29.8 billion yuan (US$3.6 billion) to the government treasury, representing a 2.9 percent increase in total tax revenue (see Table 1). This revenue increase would represent a net gain over estimated tax revenue losses under the proposed property tax reform.

The land rent system, however, may generate a cash flow problem for local governments. When leasing fees are deferred and paid by lessees in annual installments, fewer funds would be immediately available for local governments to cover public expenditures. To resolve this problem, local jurisdictions may borrow money from the central government or other financial intermediaries, using perhaps the future land rent collections as collateral. Loans would then be repaid in annual installments by funds gathered from yearly rental payments made by lessees.

Had the government decided to keep the total tax revenue approximately the same, it could have set the new property tax rate at 4 percent, which is the same as the Building Tax rate for personal dwellings rented at market prices, and then discounted the land rent by as much as 47 percent (see Table 1). With a reasonable tax rate and a substantial reduction on rental payment, taxpayers would be less resistant to the reform.

Table 1 also shows several possible combinations of rent level and property tax rate to produce a revenue-neutral shift. If the government were to increase the new property tax rate to deepen the tax reform, it could lower the rent level to avoid antagonizing taxpayers. This approach would provide local governments with an array of options to adopt the new property tax system in stages and at a pace that suits their economies.

Fourth, the proposed land rent system could keep future tenure choices open. If the sociopolitical sentiment of the country favors public leaseholds, local governments could continue to levy the land rent and property tax at the ratio that matches local needs. Subsequent adjustments to the rent-tax ratio could also be made when new circumstances arise.

If central authorities, in response to popular demand, were to grant fee simple deeds to all lessees, it could order local governments to phase out the collection of land rent and raise the new property tax rate accordingly. As shown in Table 1, directing the reform toward either path would not create adverse effects on local government budgets.

This analysis shows that choices available to the Chinese government are not limited to privatizing land ownership and relying solely on real property taxation to recoup land value. Undeniably, the Chinese government may eventually choose to do just that because it is indeed an option, but there are many other possibilities as well. Why, then, should the government make such a decision now, when there may be other viable alternatives that can keep all options open? Recognizing that there are many choices could unleash the creative powers of policy makers and scholars to imagine a unique Chinese system to capture land value.

References

Director General of State Statistics Bureau. 1999. Input-output table of China, 1997. Beijing: China Statistical Press.

Hong, Yu-Hung. 2003. The last straw: reforming local property tax in the People’s Republic of China. Working paper. Cambridge, MA: Lincoln Institute of Land Policy.

_____. 2004. Assessing property tax reform in China. Report for the David C. Lincoln Fellowship Program. Cambridge, MA: Lincoln Institute of Land Policy.

_____ and Steven C. Bourassa. 2003. Why public leasehold? Issues and concepts. In Leasing public land: Policy debates and international experiences, Steven C. Bourassa and Yu-Hung Hong, eds., Cambridge, MA: Lincoln Institute of Land Policy.

Neutze, Max. 2003. Leasing of publicly owned land in Canberra, Australia. In Leasing public land: Policy debates and international experiences, Steven C. Bourassa and Yu-Hung Hong, eds. Cambridge, MA: Lincoln Institute of Land Policy.

Yu-Hung Hong is a fellow of the Lincoln Institute of Land Policy. This article reports on selected preliminary results of his research funded by the David C. Lincoln Fellowship in Land Value Taxation.

The property tax has been subject to much popular criticism and political pressure in recent decades. Several states have implemented, or are considering, a variety of caps and limits on property assessments, property tax rates, or total revenue raised from the property tax. Perhaps the best-known example is California’s Proposition 13, which ties property assessments to the purchase price of a dwelling (rather than its current market value) and limits the tax rate that can be levied on homes. It is worth taking another look at the property tax and considering its strengths and weaknesses as a source of funding for local government services.

The betterment levy or special assessment (as it is known in the United States) is a “compulsory charge imposed by a government on the owners of a selected group of properties to defray, in whole or in part, the cost of a specific improvement or services that is presumed to be of general benefit to the public and of special benefit to the owners of such properties” (IAAO 1997, 10–11). In Colombia this levy, called Contribución de Valorización (CV), has been collected since 1921.

The betterment levy is addressed in the legislation of most Latin American countries, although its implementation often meets resistance. The main arguments against it claim it is impractical, technically cumbersome, beyond local capacity to implement, and unpopular. Colombia’s experience, however, seems to contradict these allegations, suggesting that the resistance is grounded more on prejudice, ideology, or lack of information. This instrument not only has a long history of continued (albeit irregular) application, but also a record of raising substantive revenues to fund public works.

Bogotá currently has about $1 billion worth of investment in public works from this levy, and eight other smaller cities combined have another $1 billion. More importantly, based on recent levies on 1.5 million properties in Bogotá, its collection has been generally accepted by taxpayers with relatively low default rates—in fact lower than for the property tax. Although its legitimacy is not questioned, even among the business community, controversies continue over how the charge is assessed and distributed among properties. This raises an interesting question: Why, in spite of its technical shortcomings, is the betterment levy well-accepted by society at large?

In spite of its relevance, there is very little literature available about this instrument in Colombia and in the rest of Latin America (Fernandes 1981; Bustamante 1996; Manon and Macon 1977). To fill this gap, my colleagues and I carried out a study of the methods used to assess the levy in Bogotá and Manizales—two cities that exemplify different assessment models used in Colombia (Borrero et al. 2011). This article summarizes the main findings of the study and, we hope, may be useful to other cities interested in applying betterment levies to finance urban development.

In Colombia the betterment levy has played a significant role in financing public works and has been a major contributor to municipal revenues, although collections have fluctuated over time. In the late 1960s, they accounted for 16 percent of total revenues in Bogotá and 45 percent of revenues in Medellín. In the beginning of the 1980s, the levy accounted for 30 percent of revenues in Cali, and in 1993 it represented 24 percent of revenues in Bogotá. Since 2000, the levy has been used more intensively in Bogotá, Medellín, Cali, Manizales, Bucaramanga, Barranquilla, and most other cities with a population of 300,000 or more.

We chose to study Bogotá and Manizales because these cities have used this instrument during the past 20 years to finance many roads and urban services. Each city developed its own distinct methodology, and has had ample experience advising other cities. For instance, Cali and Barranquilla have started collecting the levy for road construction using the Bogotá model, while Bucaramanga and Pereira have followed the Manizales model (also known as the Medellín model). Both approaches are legal in Colombia, but the methodology and focus used to allocate the levy are very different.

Colombian law stipulates three parameters used to calculate the betterment levy: (1) the cost of the construction project; (2) the value added to properties that can be attributed to the project; and (3) the affordability of the levy (i.e., the capacity of the property owners to pay). Law Decree 1604 of 1966 states that the upper bound of the levy is the lowest value among these parameters. For example, in Manizales one of the projects had small values added that were considerably less than the project cost; yet the levy was assessed based on the value added. The only city that does not comply with this norm is Bogotá, where the levy equals the cost of the project.

The Bogotá model uses a series of factors to represent the local benefit of the project in order to assess the levy, taking into account the payment capacity of the property owners and the different benefit levels. These factors include considerations such as improved mobility and welfare, but do not quantify the specific value added to the property by the project.

On the other hand, the Medellín model applied in Manizales calculates the value added to the property by the project using a dual appraisal method, and then distributes the levy among the property owners by taking into account their capacity to pay. Thus, the Bogotá model is similar to a general tax to finance public works, while the Medellin model is closer to the concept of value capture contribution to fund public works (Act 388 of 1997, Article 87; Doebele 1998).

The Experience of Bogotá

Bogotá, the capital of Colombia, is a city of 7.5 million people with an area of 1,587 square kilometers (613 square miles) on a flat savannah of the Andes mountain range. The administration of the betterment levy is the responsibility of the Urban Development Institute (Instituto de Desarrollo Urbano, or IDU), which is also in charge of identifying the main road construction projects to be financed by the levy. The levy is assessed on all properties affected by a given project (or set of projects) and is calculated by multiplying different benefit factors. Examples of recent projects with revenues from the levy are shown in table 1.

Area of Influence

In order to collect a betterment levy, the IDU defines the area of influence, that is, the area where the road construction project will provide benefits. The criteria used to establish the areas of influence and the level of benefit include proximity and accessibility to the project—which affords greater use of the road and thus increases property values—as measured by the project impact on the assessed value and the economic conditions of the real estate properties in the area.

To reduce the average amount of the levy, an effort is made to include the largest possible number of lots within the area of influence. When the levy finances multiple projects, the boundaries of the entire area of influence are defined by superimposing the individual areas of each project and adjusting them to account for the complementary effects of the benefits from the combined set of projects (Borrero et al. 2011, 22).

Measuring Project Benefits

The benefits resulting from the project or set of projects are calculated by city zone, taking into account benefit factors defined for each project. Using the example of a recent road project, the benefit factors are: (1) greater mobility, which translates into greater transit speeds, lower transit time, lower operating costs, and higher quality of life; (2) general urban planning benefits as the project normalizes the road network and rationalizes the use of public space; (3) changes generated in land use and stimulation of productive and commercial activities; (4) greater market value of nearby real estate properties; (5) integration of the project into the urban structure of the city; (6) optimization of circulation and mobility; and (7) recovery of deteriorated or depressed areas (Borrero et al. 2011, 84).

Once the benefits of the project are defined and its cost estimated, the distribution of the levy takes into account additional factors: the type of land use, density, degree of benefit allocated to each lot, and the payment capacity of the property owners as measured by household quality of life surveys. The Bogotá model is criticized primarily because the calculation of the project benefit does not measure the value added to the properties directly, but instead relies mostly on these indirect indicators.

The Experience of Manizales

Manizales is a city of 400,000 people located west of Bogotá, at the center of the coffee producing region. Its topography is mountainous, which implies high engineering costs. The city has extensive experience with road development and urban renewal financed with betterment levies, but it uses a different methodology from that in Bogotá and it requires a more detailed description. The institution that administers the levy with full authority delegated by the city legislature is the Instituto de Valorización de Manizales (INVAMA).

Over the past three years, Manizales has financed four major road and urban development projects with the levy: renewal of the Alfonso López Plaza; paving of Alférez Real road; renovation of Paseo de los Estudiantes; and development of the Eastern Area road network. All of the projects were funded by a single levy assessed on 80 percent of these properties, and collections amounted to US$24.6 million (table 2).

Measuring Project Benefits

Manizales applies the dual appraisal method to measure benefits—a methodology used for many years in Medellín, Bucaramanga, and other cities. This method identifies cadastre valuations for real estate properties in a second area comparable in its characteristics to the area affected by the designated projects. The assumption is that land values will behave similarly in both areas. Experts make an initial appraisal of a sample of properties in the area of influence of the proposed project to determine the present market values. To estimate the land values after the project is finished, they appraise the market values in the comparison area.

This method is based on information about the increase in value or benefit generated by previous infrastructure projects, referred to as ex-post evaluation. The City of Manizales initiated an ex-post analysis of the projects executed in past years to examine the value added to the land, but few other cities that collect betterment levies have done so.

The initial appraisal is intended to create a map of land prices (isoprices map) before construction, and the second appraisal determines the added value hypothetically generated by the new infrastructure project in the area. The lot or area where the “maximum added value” occurs (known as the “focal point”) is analyzed in detail to calculate the maximum percentage increase in value.

Critical Steps in the Dual Appraisal Method

1. Define the area of influence.This area is based on the improved mobility enabled by the road or infrastructure project, and its definition is similar to that used in Bogotá.

2. Calculate the benefit and generate an isoprices map based on a sample of properties. The criteria to measure distances and road networks are established within an initial zone defined as broadly as possible. A sample of lots is taken, representing the predominant, nonspecific features of the properties in the zone. Information collected on this sample is used to generate a map of land values before the project is constructed. The sample size is calculated statistically. For medium-size cities experts appraise between 100 and 200 properties, depending on the size of the area of influence and its heterogeneity. A second map of isoprices is then developed with the new expected property values, and a third map plots the differences in isoprices between the first and second map. This third map is used to distribute the betterment levy.

3. Estimate the benefit. To determine the added value or benefit accruing to a lot, an interdisciplinary team of experienced professionals carries out several studies: an economic study to define the mathematical formulas that qualify the parameters for the value-added criteria; a road network study to qualify and quantify the benefit, measured as a reduction in travel distance for the population in the affected neighborhoods; an urban study to measure the potential for different land uses in the area; and a real estate study to compare and quantify the level of benefit in specific areas.

4. Allocate the benefit. Each of the following factors is given a weight (shown in parenthesis): potential change of use, which generates the most added value even though it affects a small number of lots (40 percent); improved access to higher value areas or commercial areas (20 percent); (savings in commuting time is measured by reduction of travel time in the city, clearly determining times and distances (20 percent); and reduction in pollution or traffic congestion at specific areas where these problems occur (20 percent).

5. Establish the level of benefit (focal point). As mentioned above, the area of highest betterment in the entire area of influence, known as the focal point, is the lot or area that benefits most from the project, because of the confluence of the most important value-added factors. The expected added value is then calculated for this lot and the corresponding percentage is multiplied by the initial market value of lot. With these values, one builds the added value or isopricing map for the entire area expected to benefit from the project once it is finished. Ex-post studies performed in several cities found that road projects generate on average an actual added land value of 10 to 15 percent within three years following project completion. Assuming 15 percent incremental value for the lot with the highest benefit, it follows that a lot with 70 percent benefit has an expected added value of 10.5 percent.

6. Distribute the levy. Once the cost of the project has been defined and its value-added impact has been calculated, INVAMA proceeds to distribute the levy within the area of influence using models appropriate to the project. Manizales uses benefit factors to distribute the levy, as do most cities in Colombia. The method is based on defining a “virtual area” obtained by multiplying weighted factors given to property characteristics by the level of benefit and the physical area of the lot. Criteria to define benefit factors for distribution purposes may vary, but the point of reference is the total value of the property based on area of the lot plus construction (Borrero et al. 2011, annex 2).

7. Determine affordability. The levy is assessed by taking into account the capacity to pay of the contributors, and therefore it may be allocated differently depending on their socioeconomic level. Affordability is based on data from household income and expenditure surveys. Sometimes a comparative analysis is made between the betterment levy and other charges, e.g. the relationship between the levy and the utilities paid by the property owner, or the relation between the levy and the property tax.

8. Set the collection period. In Manizales, Medellín and Bucaramanga, the collection period generally coincides with project execution. Other cities have tried different approaches. In Cali, the most recent betterment levy collection started before construction, but will extend for a long time following project completion. Cities normally collect one betterment levy in each mayoral term (4 years), but recent projects in Bogotá and Cali have longer collection periods, extending over several terms.

9. The legal maximum collection term is five years following project completion, but the most successful experiences are completed in two years. Longer-term collections are more difficult and pose the risk of the municipality running into cash flow problems to finish the project. The betterment levy can be collected as early as two years before the initiation of construction, but that requires very efficient cost estimates and expedient project execution. In Bogotá, a recent experience in collecting the levy two years in advance of the construction start date generated controversy because the project started late and has progressed slowly. To avoid this problem, the proposed new Bogotá Betterment Statute stipulates that the levy shall be collected concomitantly with project execution.

Perceived Legitimacy

The betterment levy has a lot of support among city residents and property owners in Manizales, as shown by high levels of satisfaction in a recent survey (table 3). The levy was collected before the projects began and 80 percent of the payments were made in the first year of collections. This survey, taken after project completion, captures the perceptions of citizens regarding the way INVAMA managed two recent projects. Specifically, the results demonstrate a clear link between the benefit and the willingness to pay the levy—a higher compliance level than that of the property tax, even though the levy is higher than the tax. This finding contradicts the common believe that Latin American taxpayers have a culture of nonpayment. It also attests to the high level of legitimacy among the citizens and the good governance of the municipality’s management of the betterment levy

Concluding Remarks

Colombia’s experience with the betterment levy during the past 70 years demonstrates that it is a viable instrument to finance urban development and is capable of raising substantial revenues, even though the methodology to assess and distribute the levy is complex and can be perfected. Among the lessons to draw from that experience, the most important is the clear link between the provision of public benefits and the property owners’ willingness to pay the levy. Success depends on the legitimacy of the project and the institutional capacity and ethical standards of the agency administering the levy. To generate trust among citizens, success is also predicated on ensuring affordability, applying a fair distribution model, publicizing the social value of the project, and promoting participation during implementation.

About the Author

Oscar Borrero Ochoa is an economist, a certified appraiser, and a private consultant on property markets, real estate development projects, and management. He has been president of Camacol, the Colombian organization of the building industry, and Fedelonjas, the Colombian organization of property appraisers. He isa lecturer on urban economics at the University of Los Andes and the National University of Colombia, Bogotá, and is a frequent speaker in Lincoln Institute courses.

Acknowledgments

The author thanks his colleagues Esperanza Durán, Jorge Hernández, and Magda Montaña who were key contributors to the Lincoln Institute working paper and related research on which this article is based.

References

Borrero Ochoa, Oscar, Esperanza Durán, Jorge Hernández, and Magda Montaña. 2011. Evaluating the practice of betterment levies in Colombia: The experience of Bogotá and Manizales. Working Paper. Cambridge, MA: Lincoln Institute of Land Policy.

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Doebele, William A. 1998. The recovery of ‘socially created’ land values in Colombia. Land Lines 10(4).

Fernández Cadavid, Alberto. 1981. La contribución de valorización en Colombia, 2nd edition. Bogotá: Editorial Temis.

IAAO (International Association of Assessing Officers). 1997. Glossary for property appraisal and assessment. Chicago, IL: IAAO.

Manon, Jorge, and Jose Merino Macon. 1977. Financing urban and rural development through betterment levies: The Latin America experience. Westport, CT: Praeger Publishers, Inc.