Fiscal and Regulatory Instruments for Value Capture

The Case of Santo Andre

In Santo Andre and all Brazilian cities, the value per square meter of land is fixed by law, thus hindering the capacity of the city administration to tax real estate property according to its market value. In 1993 the Santo Andre city administration passed a law to grant a 40 percent discount on the property tax, which was to be valid only for that year. However, this reduction has been maintained as a result of several legal clauses that determined that the value of the tax in the current year could not exceed its value in the previous year, thus establishing a tax cap.

Value capture in Santo Andre

The Lincoln Institute of Land Policy and the Municipality of Santo Andre in Sao Paulo State organized a three-day program on "Instruments and Techniques for Land-based Finance for Urban Development" in May 1998 where organizers and participants shared their expertise on zoning instruments, value capture, and local economic development in such diverse settings as New York City, Mexico City and Colombia. Their discussions addressed three broad topics: value capture and urban finance; urban planning and the land market; and negotiations and public/private partnerships.

This article explores the lessons learned from the Santo Andre program and the need to develop better measurements of land value increments resulting from zoning changes to promote value capture through more efficient taxation systems.


In many Brazilian cities, land and building taxes are significantly underutilized. According to data from the Brazilian Institute of Municipal Administration (IBAM), for example, in half of the municipalities with more than 50,000 inhabitants the property tax represents less than 30 percent of total tax resources. Considering that for most of these municipalities, local tax revenues represent less than 30 percent of total resources, the property tax does not amount to more than 10 percent of financial resources (including intergovernmental transfers). These percentages are even less in smaller municipalities. Other land-based taxes, such as the real estate transfer tax and betterment tax, show a similarly disappointing pattern.

Especially since Brazil's new constitution of 1988, when the major responsibility for land use planning was transferred to the local level, municipalities have become increasingly aware that land use regulation and public investments in infrastructure create changes in land values. Many public officials are now looking for planning strategies aimed at capturing part of the "unearned" benefits that may result. In addition, local governments are facing problems with traditional planning instruments such as the Plano Diretor, a constitutional provision that requires cities with a population of 20,000 or more to develop a master plan. These cities have become increasingly involved in the debate about the flexibility of the regulatory framework on land use. Consequently, the idea of flexible zoning in exchange for developers' contributions has also become popular.

To investigate the economic, financial and urban planning aspects of these negotiated land use changes, the Lincoln Institute and the Municipality of Santo Andre in Sao Paulo State organized a three-day program on "Instruments and Techniques for Land-based Finance for Urban Development" in May 1998. During the first two days, municipal officials from Santo Andre met with invited guest speakers who shared their expertise on zoning instruments, value capture and local economic development in such diverse settings as New York City, Mexico City and Colombia. Their discussions addressed three broad topics: value capture and urban finance; urban planning and the land market; and negotiations and public/private partnerships.

The program ended with a public debate involving a regional audience of some 200 planners, developers, and representatives from non-governmental organizations, the private sector and local communities within the Greater ABC region-(seven municipalities around Sao Paulo, including Santo Andre, which constitute the densest industrial core area in Latin America). A panel discussion on the effectiveness of land-based negotiations and public/private partnerships in the Brazilian context included the participation of guest speakers from the University of Sao Paulo, the real estate sector and the local governments.

A number of conclusions were drawn from this program. First, negotiated land use changes typically proliferate in an environment where property taxes do not work well. In Santo Andre, for example, existing legal and operational restrictions make it difficult to overhaul the property tax system. (See Figure 1.)

Second, negotiated land use changes in Santo Andre seem to accompany the ongoing shift from industrial land uses toward uses associated with the tertiary and modern service sector. Through the negotiation process more flexibility is brought to the existing legal framework, as is seen in recently completed negotiations between the Plaza ABC shopping center and Pirelli, the multinational tire company.

Third, although land use negotiations apparently fulfill expectations in terms of complementing the dynamics of the local economy, there is no well-established methodology and framework to allow transparent and stable rules based on solid cost-benefit analysis. Compared with international experiences, for example in New York, it remains difficult to predict what monetary compensations can be expected in Brazilian cities and whether these compensations are really Pareto efficient compared to situations where the development permit would have been denied.

Finally, negotiated land use changes should be seen as an essential element of the overall local economic development strategy. In the Greater ABC region, various strategic partnerships among key stakeholders from the private and public sectors are increasingly important in light of the ongoing process of local and regional economic restructuring that has had dramatic negative effects on employment and income levels.

Among the lessons to be learned from the Santo Andre program is the need to develop better measurements of land value increments resulting from zoning changes in order to then develop the means to capture those values through more efficient taxation systems. The New York experience further shows that it is better to collect taxes at a lower rate through a universal and stable system rather than on an arbitrary, case-by-case negotiated basis that can be susceptible to abuse and corruption.

Jeroen Klink, an urban economist, is the adviser to the mayor of Santo Andre. He is a former Lincoln Institute Dissertation Fellow who is completing his Ph.D. thesis on "Sources of Urban Finance: The Applicability of the Standard Economic Model to the Brazilian Case" at the School of Architecture and Urbanism, University of Sao Paulo, Brazil. Luis Carlos Afonso, an economist, is the secretary for finance in Santo Andre. Irineu Bagnariolli Jr., an urban sociologist, is the secretary for housing and urban development in Santo Andre.

Figure 1: Restraints on Revising the Property Tax

In 1993 the Santo Andre city administration passed a law to grant a 40 percent discount on the property tax, which was to be valid only for that year. However, this reduction has been maintained as a result of several legal clauses that determined that the value of the tax in the current year could not exceed its value in the previous year, thus establishing a tax cap.

Another restriction on a more aggressive use of the tax, especially as a way to promote more equity, is the interpretation given by the Supreme Court that the tax cannot be progressive. The only exception is its application as punishment for unused or underutilized property, a clause that itself depends on additional federal lawmaking and has not even been discussed by Congress. (See Claudia M. De Cesare, "Using the Property Tax for Value Capture: A Case Study from Brazil," Land Lines, January 1998.)

During 1990 and 1991, a previous Santo Andre administration had tried to give discounts on the property tax based on the physical characteristics, current use and size of the property, but that effort was subsequently rejected by Court rulings because of its supposed hidden progressive character. Thus, the cap on the property tax, despite being formally revoked by a subsequent law, remains basically unchanged because if taxes were increased the poorer segments of the population would be most negatively affected.

Finally, in Santo Andre and all Brazilian cities, the value per square meter of land is fixed by law, thus hindering the capacity of the city administration to tax real estate property according to its market value.

Economic Development, Land Use Planning, Land Value, Municipal Fiscal Health, Property Taxation, Public Finance, Taxation, Value Capture, Zoning

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