Download Taxing agricultural land

Taxing agricultural
land
Malcolm Childress, David Solomon
and Rogier van den Brink
What is a land tax?
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“land tax” is a tax on the value of land, which is
paid by the owner.
Different from a property tax:
land tax taxes the value of the land only
 property tax taxes the value of the land and the fixed
improvements made on it (e.g. a house, a farm
building, and irrigation canal).
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History: the “ideal tax”
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long been considered an “ideal tax” by a wide range of
scholars and politicians:
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17th century philosopher John Locke
18th century revolutionary Benjamin Franklin
19th century politician Henry George:
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Hence the term “Georgists”, who want the land tax to be the only tax
Example from 1990:
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several leading economists—including four Nobel prize winners—
wrote to then President Mikhail Gorbachev, suggesting that Russia
use land taxation in its transition towards a free market economy
Economic arguments
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does not distort economic incentives (because the
overall supply of land is fixed);
fair, because it specifically targets unearned income (a
rent):
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the value improvements of land caused by public investment
(owners are taxed on what was there originally—the potential
of the land) and not an economic activity of the owner;
provides a disincentive to land speculation in both
urban and rural areas; and
relatively easy to administer, because
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it is impossible to hide land
Most rural communities have an idea of what land is worth
Does a land tax redistribute land?
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Recall that the price of land in the market reflects:
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Farmers can typically only afford to pay the agricultural
value
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Income stream from agriculture
Plus value as asset, hedge against inflation
So will be outbid in the land market by the rich
Need to remove all distortions favoring large farmers
Need subsidies for the poor
And a land tax can help, because it reduces the land price and
its speculative value
See: Binswanger, Hans, Klaus Deininger and Gershon Feder. 1995. “Power, Distortions, Revolt and Reform in
Agricultural Land Relations.” In Jere Behrman and T.N. Srinivasan (eds). Handbook of Development
Economics. Vol. 3B. Amsterdam: Elsevier.
Does a land tax redistribute land?
continued
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In practice, it has not:
Usually rates set very low;
 Low assessment values
 Example from Brazil:
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tax locally administered, and large landowners used their
influence to evade the tax
 Taxed “unused” land which is very difficult to define—
hence easy to evade
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Reasons for adoption of land tax:
very diverse
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As part of land restitution: Estonia
As a form of land reform: Brazil
As a mechanism for defining property rights: Brazil
To create property valuation capacity.
Defuse transitional tensions: Eastern Europe
Build on existing fiscal systems
Discourage foreign absentee land ownership: Australia
Discourage speculation: Singapore, Jamaica
Low cost of assessment: South Africa, Kenya
Part of local economic development: Pittsburgh, Harrisburg,
Queensland, NSW, Brazil
Equity: Australia, Denmark
International Best Practices
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Land taxes should be local:
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Basis of assessment should be simple and able to be monitored
for consistency. All the following are suitable:
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rate-setting, discovery, assessment, billing and collection
They should be administered along with the urban rates
Area
Self Assessment,
Geographic Banding
CAMA
Community based value factor identification and application
It is most important to ensure that the base is capable of being
fairly administered.
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This may be more important than the choice of the base.
…… Best Practices ……
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There should be zero-rated thresholds, phasing in, “circuit
breakers”, capping of increases,
Should be tailored to local agricultural circumstances in the
municipal property rates policy
Assessment should not be index-linked to agricultural risk
factors such as rainfall and commodity prices
Rate should be differentiated from the urban rate.
Rate should not be progressive (the base is already distributed
progressively)
There should not be a tax on land market transactions.
There should be an accessible transparent appeal process.
There should be on-going monitoring of assessment quality to
ensure sound administration
Defining land value
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“market value”: value as if land was currently sold in the market
without any duress by a willing seller to a willing buyer,
unencumbered by any loans or other financial obligations.
“prairie value”: value as if there were no improvements or any
geographical advantages relating to infrastructure or
improvements.
“use value”: as opposed to “highest and best use” in situations
where the value of the land includes the potential for future
development, usually for urban residential use.
Agricultural land is often valued only on the current use, i.e.
agricultural, not on the basis of potential future uses.
Use of its “rental value” will also achieve that objective
Area-based land tax
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In some countries, the land tax is not based on
the actual land value of each individual farm,
but on a standardized price per hectare, adjusted
by a fertility or location factor.
This is in effect a simplified valuation, aimed at
reducing the cost of assessment.
E.g. Namibia
Self-appraisal
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When the taxpayers themselves provide the assessment of the
taxable value of the property, the process is known as selfappraisal.
It has an advantage in that it is simple to administer, as the cost
of appraisal is shifted to the taxpayer.
In practice, taxpayers often have access to this information,
having conducted valuations for other purposes.
Self appraisal gives them an opportunity to provide this
otherwise confidential information voluntarily.
Under-appraisal is often discouraged by a provision that
expropriation can take place at the declared value.
Community-assessment.
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International experience: even in very remote areas, the
local population has a pretty good idea of land values,
even if these are not correctly reflected in legal
documents.
For instance, local mayor (tribal chief) and agricultural
extension agent know what land is generally worth.
This "community perception" is a promising avenue,
which has been tested out successfully in several
countries.
Banding
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A method of lowering the cost of appraisal
Banding requires the assessing officer to assign
each property to one of several value bands
Instead of performing a detailed valuation in
each case.
Computer Aided Mass Appraisal.
(CAMA).
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A means of performing valuations en masse by
determining the key value creating variables by
statistical analysis
estimating values by applying the estimated
statistical coefficients to locally collected data.
CAMA is reported to be much less expensive
than conventional valuation.
Thresholds
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Many jurisdictions place a minimum threshold
of land value, below which no tax is charged.
Dual function: it both provides relief for the
poor and lowers the cost of administration by
avoiding the need to conduct a detailed
valuation on a very large number of small
properties.
Eases the transition when an area is absorbed
into the tax base.
South Africa:
Municipal Property Rates Act
MPRA conforms to “best practice”:
 Gives proper basis for taxing all real estate, including
agricultural
 Agricultural land is already part of the municipal tax
base. (has been since “wall-to-wall local government”)
 Allows differential rates
 Requires certain reliefs, eg threshold, phasing in
 Requires a properly consultative “rates policy”
But in the old Transvaal….
farm example
area (ha)
value (R)
R/ha
100
400,000
4,000
Mogale City
(Krugersdorp)
tariff
bracket (ha)
7.62%
agricultural
rebate
factor
Madibeng
(Brits)
Merafong
(Carltonville)
17.33%
Mbombela
(Nelspruit)
13.00%
24.18%
Tax payable (R/year)
1
100%
304.86
693.20
520.00
967.20
4
25%
228.64
519.90
390.00
725.40
20
10%
487.77
1,109.12
832.00
1,547.52
>20
1%
243.88
554.56
416.00
773.76
1,265.15
2,876.78
2,158.00
4,013.88
total
How hard would it be to implement
a land tax in SA?
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Effective rate can be very low, half to one percent
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Enabling legal framework is in place (MPRA)
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Half a percent on half of the land would yield significant
revenue
Can differentiate between categories of land use.
But national guidelines needed, as per Section 5 (2) b of
MFMA
Could be integrated with work on municipal financial
framework
Namibia
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Land taxation rate is set at 0.75 percent of the unimproved value
of the farmland
land values determined using a standardized metric per hectare
and by accounting for the size of the farm.
Raises substantial revenue for land reform programs
reduces inefficient use of land
encourages an increased land supply and moderate pricing of
agricultural land,
as well as to specifically defend against land speculation and
foreign ownership:
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charges an additional 0.25 percent of land value annually for every extra
farm owned
charges foreigners a higher land tax rate of 1.75 percent rather than 0.75
percent
Implementation challenges
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iso-value metric does not account for minor
topographical variations that alter land values.
extra charges for additional farms do not
account for the aggregate size of all farms:
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an individual holding several farms with a total of
10,000 hectares could be taxed more heavily than an
individual owning a single 15,000 hectare farm.
Conclusion
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Economic rationale for land tax is sound, in
theory and in practice
Administration is not as difficult as earlier
observers had thought
Land tax can never be the only instrument to
promote land redistribution
But should be seriously considered as part of
the “package”