Improving the Performance of the Property Tax in Latin America

Policy Focus Report • Lincoln Institute of Land Policy

claudia M. DE Cesare Improving the Performance of the Property Tax in Latin America Claudia M. De Cesare

Policy Focus Report Series The policy focus report series is published by the Lincoln Institute of Land Policy to address timely public policy issues relating to land use, land markets, and property taxation. Each report is designed to bridge the gap between theory and practice by combining research findings, case studies, and contributions from scholars in a variety of academic disciplines and from profes- sional practitioners, local officials, and citizens in diverse communities.

About This Report Property taxation is one of the core topics of the Lincoln Institute of Land Policy and is of central importance in Latin America, where the property tax remains the best way to support local public expenditures. While there is great diversity in property tax administration among Latin American countries, most have a poor performance record in terms of efficient tax collection. Even though aggregate revenue figures are low, many jurisdictions have embarked on successful property tax reform with tangible benefits for financing urban development and enhancing the sustainability of local governments. These cases demonstrate that there is ample room for improvement throughout the region.

This report reflects years of extensive research and practical insights gained from training and demonstration projects as part of the Lincoln Institute’s property tax programs in Latin America. One such initiative is Capacity Building for the Property Tax in Brazil, a program designed to assist more than 5,600 municipalities in their fiscal administration of the property tax and to provide training on issues associated with cadastres, property valuation, and tax assessment.

The report also draws on the results of an ongoing survey of property tax systems across Latin America. This survey provides financial, legal, and administrative data on a large number of jurisdictions, along with indicators on tax performance as a revenue source, efficiency in tax collections, assessment practices, and use of cadastres. The information is systematically recorded to allow comparative analyses across countries and is constantly updated on the Lincoln Institute website at http://www.lincolninst.edu/subcenters/property-tax-in-latin-america.

113 Brattle Street Cambridge, MA 02138-3400 USA Phone: 617-661-3016 or 800-526-3873 Fax: 617-661-7235 or 800-526-3944 On the cover: Email: [email protected] Contrasting low- and high- Web: www.lincolninst.edu income areas in Caracas, Venezuela, are emblematic of conditions throughout ISBN 978-1-55844-240-5 Latin America. Policy Focus Report/Code PF033 © Alvaro Uribe ......

Contents

2 Executive Summary

4 Chapter 1. Challenges and Benefits of Property Taxation 5 Principles of Property Taxation 6 Special Obstacles in Latin America 7 Benefits of the Property axT

9 Chapter 2. Current Property Tax Performance in the Region 9 Contribution of Property Taxes to GDP 10 Variations in Property Tax Revenues 11 Municipal Performance Comparisons

14 Chapter 3. Determinants of Property Tax Performance 14 Factors Affecting Revenue Generation 17 Institutional Arrangements and Responsibilities 22 Summary

23 Chapter 4. Property Tax System Components 23 Cadastral Records 24 Assessment Practices 26 Collection and Enforcement 27 Summary

28 Chapter 5. A Framework for Reform 29 Cadastral Records 30 Assessment Practices 33 Collection and Enforcement 35 Fiscal Culture and Performance Monitoring

36 Chapter 6. Conclusions and Recommendations 37 Tax Policy Choices 37 Administrative Reforms

39 Appendices 40 References 41 Acknowledgments 41 About the Author 41 About the Lincoln Institute of Land Policy

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Executive Summary

A low-middle-class he challenges of establishing a including operational efficiency, technical neighborhood of successful and sustainable property expertise, available data, administrative transitional formal tax in Latin American countries capacity, and political will. and informal development in are numerous and varied, yet Certain conditions in Latin America Rio de Janeiro, Tmany jurisdictions are implementing viable compound these difficulties. Large dispari- Brazil, presents reforms. Public officials responsible for tax ties in income and wealth complicate the challenges for administration often face intense political setting of equitable property tax rates, and property classifi- pressure because the property tax is univer- as a result some municipalities are under- cation, valuation, sal and highly visible. Public dissatisfaction resourced to support efficient property tax and taxation. arises because the property tax requires collection. Limited access to data on prop- payment independent of a property trans- erty sales prices hampers accurate valuations, action. Moreover, equitable property tax as does the great diversity in land tenure assessment depends on a variety of factors, and occupation patterns in the region.

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An added difficulty is the distrust of public support under-resourced cities and towns, and authorities by many taxpayers in view of guarantee the universality of the tax. These weak governance and corruption. goals can be achieved by adopting policies that Widespread informal land occupation also adhere to basic principles of equity, ability to complicates matters. Excluding informal prop- pay, universality, legality and certainty, effective erties limits the universality of the tax and its administration, and transparency. ability to generate revenue, but including such properties requires significant efforts to update Tax policies. Certain tax policies—such as cadastral records. How residents of informal those benefiting tax delinquents and limiting the areas perceive the tax is another concern. universality of the tax—create inequities and Reports on property tax revenues in Latin inefficiencies in the system. Other policy choices America are not consistent, the quality of the can help create sustainable property tax systems, data is less than satisfactory, and collections such as having the same level of government vary greatly across jurisdictions and countries. both decide on public expenditures and set The available evidence indicates that the prop- property tax rates. erty tax is of limited importance as a source of revenue to support local expenditures. As Assessment practices and collection a result, it is easy to understand why using fees procedures. Some of the shortcomings in and charges instead of reforming the property tax administration relate to property cadastre tax might be less influenced by political factors, systems, which may be more sophisticated than easier to administer, more efficient, and more local technical capacity can support or cost capable of generating revenue. more than the revenues produced by the prop- Nevertheless, property taxation remains erty tax. Better tax administration thus requires the best way to support local public expendi- increased efforts to design cadastres for sustain- tures for several reasons, including its familiarity ability and the application of more flexible to taxpayers, its progressivity relative to taxes cadastral and valuation approaches to improve on consumption, and the difficulty of tax avoid- the accuracy and uniformity of valuations. ance. Indeed, a growing number of municipali- Encouraging tax payments, negotiating tax ties demonstrate the feasibility of operating debts, and consistently applying sanctions in efficient property tax systems. Based on their cases of tax evasion can all help to improve experiences, this report presents a comprehen- collections. Effective public information cam- sive framework that could help overcome many paigns on taxation procedures and on the use of the traditional roadblocks to successful prop- of tax revenues can strengthen fiscal culture erty taxation in Latin America. Recommended and promote trust. reforms focus on three areas. Municipalities that implement these reforms Fiscal policy. The structure of own-source can benefit from greater revenues to invest in revenue and tax-sharing arrangements affect local public services. Improvements in property the need for and the willingness of local govern- tax collections should strengthen local gover- ments to collect property taxes. Fiscal policies nance while underscoring the shared respon- should support local autonomy, avoid duplica- sibility of citizens and public authorities for tion of effort across levels of government and/ urban development. or agencies, improve clarity of legislation,

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Chapter 1 Challenges and Benefits of Property Taxation

Guatemala any Latin American countries Property tax revenues in the 2000s aver- City has a strong have instituted fiscal decen- aged 0.6 percent of gross domestic product heritage of public tralization and increased local (GDP) and 2.4 percent of total govern- support for urban planning and government responsibility for ment expenditures for developing countries, design and is Mexpenditures. There is a growing awareness while for countries in the Organisation for working on a that transfers from higher-level governments Economic Co-operation and Development viable property are unlikely to be able to sustain local govern- (OECD) the shares were 2.12 percent of tax program. ment’s rising share of public expenditures, GDP and over 4 percent of total govern- and that local government will have to bridge ment expenditures (Bahl and Martinez- the expected revenue gap with increased Vazquez 2008). Accordingly, an expanded own-source revenues. Experts on public property tax is an obvious candidate for finance view the property tax as a particu- local governments to explore. This report larly efficient and appropriate tax instrument reviews recent experience with property for local governments. tax reform in Latin America and recom- However, developing countries gener- mends necessary and desirable steps ally do not depend on property taxation. toward implementation.

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Principles of poor valuation practices and political Property Taxation interference. Real property taxation presents several chal- While tax policy choices can vary widely lenges in any context. Due to its visibility, depending on government beliefs, public the property tax tends to generate a variety commitments, and regulatory goals, they of political and economic concerns. Author- must adhere to certain basic fiscal principles. ities in charge of property tax administration • Equity. Tax equity refers to equal treat- are subject to intense pressure because tax- ment of similarly situated taxpayers. In payers clearly take note of unfairness, ineffi- the case of the property tax, assessed ciency, and administrative problems (Kitchen values should be consistent with market 1992). In addition, the universality of the values across and within property groups. tax raises social concerns about placing a In certain circumstances, the equity prin- relatively higher burden on low-income ciple allows for differential treatment for citizens. taxpayers based on economic, social, Collection of the property tax is another and other policy goals. problematic aspect. Focusing primarily on • Ability to pay. A frequent criticism of developed economies, Youngman (1997) the property tax is that it may place high- found that the property tax requires pay- er burdens on low-income taxpayers due ments independent of income flow, and to assessment errors. This type of inequi- cash-poor owners can lose their properties ty creates systematic differences in assess- if they cannot keep up with their tax bills. ments for groups of properties defined The liquidity problem of owners lacking by value, as when high-value properties the ready cash to make tax payments is are under-assessed relative to low-value a major concern. properties. While correcting regressive Moreover, accurate property assessment assessments is a priority, it is also impor- requires operational efficiency, technical tant to identify the inequities caused by expertise, and administrative capacity. As- certain patterns of housing expenditures sessing the tax depends on sustained local and to implement relief measures to efforts to record property characteristics protect families that cannot afford the and ownership data. In addition, estimating tax payments. the market value of properties for assessment • Universality. In theory, every family purposes involves setting the most likely price should contribute toward local public a property would bring in a competitive and expenses. In practice, though, allowing open market where the seller and the buyer preferential tax treatment or in-kind are acting prudently and knowledgeably. services in lieu of taxes is a reasonable However, market value is essentially solution for families unable to pay taxes unobservable. As Evans (1995) explains, the directly. Widespread informality in Latin market value of a given property is expressed American cities calls for treating occu- not as a single figure but as a range of prices. pants and property owners similarly for It is also possible to find different prices for property tax purposes. Tax authorities similar properties due to market imperfec- should minimize exemptions and other tions. Any valuation model thus contains concessions in most cases. market errors (unpredictable components) • Legality and certainty. Legislation that reflect the intrinsic nature of property that clearly defines tax obligations and pro- prices. Most assessment biases result from cedures is essential to a well-performing

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property tax system. When the law is too of excluding informal properties from complex or ambiguous or it changes fre- the tax base reduces the universality of quently, uncertainty leads to payment de- the tax, with a consequent loss of poten- lays and encourages tax evasion. For tax- tial revenues. The high incidence of ation purposes, the “keep it simple” prin- informality also means that great effort ciple is best. is required to keep property cadastres • Effective administration. Good tax updated. In addition, the cost of using administration practices avoid duplication conventional cadastral and mapping of efforts. Greater efficiency also leads to techniques is much higher in informal more affordable costs for tax collection areas than in legally occupied areas. and related activities. • Diversity in land tenure and occu- • Transparency. Transparency in pation. The wide range of formal and property tax administration reduces tax informal settlement patterns means that evasion. This can be achieved through properties in Latin American cities tend wide dissemination of information to to be more heterogeneous than those in citizens, disclosure of assessment prac- developed countries. The multiple forms tices and results, and accurate informa- of tenure also can result in more assess- tion on the uses of property tax revenues. ment errors. Public participation in local revenue and • Lack of market transparency. expenditure decisions, along with public Neither the tax authorities nor the public relations programs, also can improve in Latin America has ready access to real fiscal accountability. estate market information. Real estate registries are often unwilling to disclose Special Obstacles sales prices and do not record informal in Latin America property transactions. Sellers often under- While these principles are common to any declare sales prices to avoid registration property tax system, several conditions spe- costs and taxation. Realtors are also re- cific to Latin America add to the complexity luctant to disclose their records, claiming of levying and collecting property taxes. customer confidentiality, and some also • Income inequality. Latin America argue against disclosure based on security is highly urbanized with relatively high per concerns. Imperfect information affects capita GDP, but it also has much more the market by increasing the variability income inequality than the 34 OECD in sales prices, which in turn tends to countries. Bolivia, Brazil, and Haiti are increase assessment error and inequality. extreme regional examples (De Cesare and Lazo 2008). This inequality raises Property tax revenues are relatively limited concerns about the many families that in Latin America compared to their share cannot afford to pay the tax and juris- in other global regions. As a result, tax- dictions under-resourced to administer payers and tax authorities alike generally the tax. view assessment inequities and collection • Housing informality. Informal settle- inefficiencies with a certain tolerance. In ments and other types of irregular occu- most cases, eliminating those biases and pation are widespread in the region, par- inefficiencies would shift the distribution ticularly in the larger cities (Smolka and of the tax burden, no doubt raising dissatis- De Cesare 2011). The common practice faction among citizens facing significant tax

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alegre

municip al

go v ernment

increases. To avoid this political fallout, tax properties, and this progressive effect is New transportation authorities in Latin America often resist especially attractive in countries where infrastructure in making the reforms necessary to improve wealth is more highly concentrated than Porto Alegre, Brazil, exemplifies the their property tax systems. income. Taxes on goods and services, urban services which are essentially regressive, currently that benefit from Benefits of prevail in the region. Indeed, consump- local property tax the Property Tax tion taxes represent more than 50 per- revenues. Despite these challenges, the property tax cent of the tax burden in Latin America remains the best option for raising revenues on average compared with 31.7 percent to pay for local public services in Latin in OECD countries (De Cesare and American countries and cities, for several Lazo 2008). reasons. • Regulatory impacts. A vigorous tax • Tradition. Records of taxes levied on on real estate can be instrumental in im- land and buildings date back more than printing discipline in urban land markets. 200 years, indicating a reasonable degree In particular, it can improve land use of familiarity and acceptance among efficiency. It can also help to prevent the citizens, as well as awareness of tax spread of housing informality. Informal procedures among public administrators. settlements receive little attention from • Progressivity. Direct taxes such as the public officials because they do not property tax place heavier tax burdens contribute to public revenues, and they on the owners of more highly valued remain informal and off the tax rolls

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stitute the primary source of revenue for de

C maintaining local urban infrastructure omunica and services. çã o

S A growing number of municipalities in ocial Latin America now recognize the benefits , P of improving those aspects of the property refecture tax system that lie within their sphere of influence. The recent experience of Belo

of Horizonte, Brazil, illustrates how the choice B elo of appropriate policies and procedures

Hori can yield positive results (Domingos 2011). z

onte Property tax reform in Belo Horizonte started in 2010 with the revision of land value maps to increase coverage, eliminate Residents of Belo Horizonte, because of this neglect. Taxing informal distortions, and improve technical standards. Brazil, receive assistance properties could reorient the provision Promotion of a new fiscal culture made it at one of several taxpayer of public services, reduce the extraordi- possible to institutionalize the periodic up- service centers. narily high land prices in third world dating of property values used to calculate cities, improve the efficiency of serviced the tax. Citizens and public authorities land, and increase land titling (Smolka alike supported a permanent process of and De Cesare 2010). updating property valuations to reflect • Taxpayer awareness. Property taxa- market changes. tion may help to build a positive fiscal Key elements of the city’s reform culture by making citizens more aware program included positive interaction of their responsibility for the cost of public between the executive and local legislation, services. Not surprisingly, many in Latin a broad public information campaign, and America refer to the property tax as technical innovations to ensure the fairness “the citizen tax.” and accuracy of valuation practices. In • Government transparency. The addition, the reform introduced tax relief visibility of the property tax, often con- measures intended to limit the impact of sidered a liability, in fact helps to increase the property taxation changes in the short the transparency of local government term. Disclosure of assessment practices and encourages fiscal accountability when and results and dissemination of informa- the tax system is equitable and revenues tion on the uses of property tax revenues are used properly. As a result, property contributed to a 19 percent increase in taxation may serve to improve governance revenues in the first year. This positive trend and raise taxpayer confidence in local has continued, corroborating the principle government. that transparency reduces tax evasion.

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chapter 2 Current Property Tax Performance in the Region

here is broad consensus regarding tax performance and the national tax burden the limited capacity of the property (figure 2.2). In countries such as Brazil and tax to generate revenue in Latin Argentina, which have a high tax burden America. (above 25 percent of GDP), the property T tax has moderate importance. In Colombia Contribution of and Chile, where the tax burden is around Property Taxes to GDP 15–20 percent of GDP, property tax reve- Statistics for 16 Latin American countries nues are more important. Figure 2.3 also corroborate other findings that average shows no correlation between per capita property tax revenues represent only a small GDP and property tax revenues. share of GDP (figure 2.1). However, prop- Considering all taxes on property, includ- erty tax performance varies significantly ing recurrent taxes on real estate and per- among these countries, with Chile reporting sonal property (such as taxes on real estate the highest share (0.81 percent) and the Do- transfers, succession, donation, and inheri- minican Republic the lowest (0.03 percent). tance), the combined revenue in Latin Data for the same sample of 16 countries America represents 0.94 percent of GDP show no direct relationship between property on average.

Figure 2.1 Property Tax Revenue as a Percentage of GDP in the 2000s

1.00

0.90

0.80

0.70

0.60

0.50

0.40

0.30

0.20

0.10

Chile Peru Bolivia Brazil Uruguay Panama Mexico Ecuador Colombia Argentina Honduras Paraguay Nicaragua Costa Rica Guatemala DominicanRepublic

Source: Prepared by the author based on data sources listed in Appendix A.

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Variations in Property 2000–2010 decade vary greatly, suggesting Tax Revenues that broad factors cannot explain revenue Property tax revenue growth in Latin Amer- changes in the region (figure 2.4). ica over the past decade shows no clear trend Property tax revenues represent a rela- across countries. Annual levels and growth tively stable share of GDP in Brazil (0.43– rates in eight selected countries over the 0.47 percent) and Peru (0.15–0.20 percent),

Figure 2.2 Property Tax Revenue and Tax Burden as a Percent of GDP in 2010

0.90 40

0.80 35

0.70 30 0.60 25 0.50 20 0.40 15 0.30 10 0.20 5

Property Tax as a % of GDP (bars) 0.10 2010 Tax Burden as a % of GDP (line) 0 0

Peru Chile Bolivia Brazil Mexico Panama Ecuador Uruguay ColombiaParaguayHonduras Argentina Guatemala DominicanRepublic Costa RicaNicaragua

Source: Prepared by the author based on data sources listed in Appendix A.

Figure 2.3 Property Tax Revenue and Tax Burden as a Percent of GDP and Per Capita GDP in 2010

0.90 14,000

0.80 12,000 0.70 10,000 0.60

0.50 8,000

0.40 6,000 0.30 4,000 0.20

2,000 2010 GDP Per Capita (line) 0.10 Property Tax as a % of GDP (bars) 0 0

Peru Chile Bolivia Brazil Ecuador Panama Mexico Uruguay HondurasParaguay Colombia Argentina Nicaragua Guatemala DominicanRepublic Costa Rica

Source: Prepared by the author based on data sources listed in Appendix A.

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while in Costa Rica and Guatemala the and Colombia, the share is relatively high, share rose significantly, indicating that large contributing more than 4.5 percent of the improvements can occur over a relatively tax burden. Most other countries had shares short period. Ecuador experienced several between 1 and 3, except the Dominican fluctuations that ended with moderate Republic whose contribution is unusually gains. Chile saw two distinct trends during low. Because the overall tax burden in the decade: from 2003 to 2006, property OECD countries (37 percent) is nearly twice tax revenues declined as a percentage of that of Latin American countries (19 per- GDP, but after its 2006 reform revenues cent), the mean contribution from all real rose sharply. Property tax revenues in the and personal property taxes, such as taxes Dominican Republic remained a small on automobiles, is nevertheless about (0.03 percent) share of GDP, except in 2005 5 percent in both regions. and 2006. Argentina is the only country where the importance of the property tax Municipal Performance decreased significantly, with revenues falling Comparisons from 0.64 percent to 0.35 percent of GDP. Several studies have found pronounced This reflects the economic crisis of the differences in tax collections within as well 2000s as well as the fact that the property as across countries. National property tax tax is a provincial not a municipal tax. revenues in Latin America reflect primarily Provinces have other sources of revenue the performance of the larger cities, which that are less visible and easier to collect, thus collect more property tax per capita on reducing their reliance on the property tax. average than smaller cities and towns. For On average, property tax revenues in example, property tax revenues in Mexico 16 sample countries accounted for about City (Federal District) represented 0.42 per- 2 percent of the national tax burden in the cent of GDP in 2004, and accounted for 2000s (figure 2.5). However, like the country about 30 percent of the total property tax shares as a percentage of GDP shown in collected in the country, even though only figure 2.1, these shares vary widely. In Chile 9 percent of the Mexican population lives

Figure 2.4 Annual Growth of Property Tax Revenue as a Percentage of GDP, 2000–2010

0.90 0.80 Chile 0.70 Brazil Argentina 0.60 Costa Rica 0.50 Guatemala 0.40 Peru Ecuador 0.30 Dominican 0.20 Republic

Property Tax as a % of GDP Tax Property 0.10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Prepared by the author based on data sources listed in Appendix A.

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Figure 2.5 Property Tax Revenue as a Percentage of the National Tax Burden in the 2000s

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

Property Tax as a % of Burden 1.0

0.5

Chile Peru Bolivia Brazil Uruguay Panama Mexico Ecuador Colombia ParaguayHonduras Argentina Nicaragua Costa RicaGuatemala DominicanRepublic

Source: Prepared by the author based on data sources listed in Appendix A.

in the capital (De Cesare 2008). Depend- more than proportionally from the Brazilian ing on the municipality, revenues from the model of intergovernmental transfers. property tax in Mexico varied from US$1.20 Property tax collections as measured by to US$385 per capita in 2004. a Lincoln Institute survey sample of 37 cities Similarly, larger cities of 100,000 or show a mean of 0.55 percent of municipal more inhabitants in Brazil accounted for GDP in the 2000s (figure 2.6). Although the approximately 85 percent of total property shares vary widely across jurisdictions (with tax revenues in 2005, but they had only 57 a coefficient of variation of 64 percent), percent of the country’s population (De property tax collections above 1 percent of Cesare 2008). This concentration of prop- GDP are atypical. Revenues in most Latin erty tax revenues in larger cities is due to American jurisdictions account for between higher property values and to economies 0.20 and 1.0 percent of municipal GDP. of scale in implementing and updating the Based on a different sample of 64 cities, cadastres, performing property assessments, survey results also found that the property and collecting and enforcing the tax. Smal- tax as a share of revenue collected from ler municipalities may find that establishing local taxes varied widely between 2.53 and and managing such complex systems is too 83.37 percent, with a mean value of 23.78 expensive relative to tax collections, or they percent. Only six cities in the sample had may be too poor to develop the necessary property tax collections that exceeded institutional capacity. It is also important 45 percent of local tax revenues.Thus, prop- to note that small municipalities benefit erty taxes account for a reasonably large

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share of locally raised revenues in a few cities, although such revenues still constitute a small share of total revenue. In summary, property taxation in general plays a small role in the local budgets of most Latin American jurisdictions, but its importance is nevertheless increasing— particularly in the larger cities. Relatively little effort is given to the implementation of a comprehensive property tax system in most places. Nevertheless, the wide variation in the ability of the property tax to raise revenue suggests the potential for improvement across the region. a k Innovative modular houses in Guayaquil, mol

Ecuador, comply with building regulations . S and are affordable for low-income resi- O

dents, but are not necessarily recorded artim

for tax purposes. © M

Figure 2.6 Property Tax Revenue as a Percentage of Municipal GDP in 37 Cities, 2003–2010

1.60

1.40

1.20

1.00

0.80 0.55% of GDP 0.60

0.40 Property Tax as a % of GDP 0.20

0 Mean PE Lima BR Tarija BR Recife BR Olinda BR Belém CO Bogotá BR alvador BR Itupeva BR Aracajú BR Brasilia AR Rosario BR Goiânia BR Curitiba BR Joinville AR Córdoba BR Gravataí BR Guaxupé BR Cascável BR Fortaleza BR Camaçari BR Santarém BR Campinas BR Blumenau BR São Paulo BR Guiratinga BR Porto Alegre BR Juiz de For a BR Florianópolis BR João Pessoa BR Campina Gde. BR Rio de Janeiro BR Belo Horizonte BR Campo Grande BR Gov. Valadares BR Cabo St Agostinho BR Vitória da Conquista BR Jaboatão dos Guararapes

Source: Lincoln Institute Survey (Appendix B). Note: Country abbreviations: Argentina (AR); Brazil (BR); Colombia (CO); Peru (PE).

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chapter 3 Determinants of Property Tax Performance

haracteristics such as population taxes in Argentina, Brazil, and Colombia. size, level of income, and socio- This chapter shows that although nation- economic development directly al and even global factors beyond the con- affect a municipality’s capacity trol of local jurisdictions are indeed relevant, Cto raise own-revenues. As property values their impact on property tax collections grow, property tax revenues also may in- varies significantly depending on how local crease, reflecting the expansion of the tax governments choose to administer the tax. base. The performance of the property tax is also influenced by the fiscal structure and Factors Affecting national tax policies adopted by each coun- Revenue Generation try. For example, the level of fiscal decen- Several country-specific factors affect the tralization, the tax-sharing arrangements, ability of the property tax to generate reve- and the system of intergovernmental trans- nue, both directly and indirectly. These fac- Development of the fers may encourage or discourage efforts by tors fall into three categories: socioeconomic former Puerto Madero local governments to collect own-revenues. characteristics of the jurisdiction; tax policy port area in Buenos In certain countries, subnational governments and legal arrangements; and property Aires, Argentina, created an up-scale gentrified have been given some taxation powers that assessment and administrative practices. area and expanded the have crowded out the property tax, as in the The fiscal capacity of jurisdictions—their city’s property tax base. cases of payroll taxes in Mexico and sales ability to impose and collect property taxes

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—varies according to their socioeconomic potentially encourage or discourage local characteristics, such as the size of the real government efforts to collect property taxes. estate stock, real estate prices, personal in- Inadequate design of fiscal decentralization come of residents, poverty levels, income accounts, at least in part, for the weak perfor- distribution, degree of urbanization, eco- mance of the property tax in Latin America. nomic base, and prevailing property rights Findings from recent studies by Sepulveda and land tenure. Tax officials must consider and Martinez-Vazquez (2011) and Afonso these conditions, but have no power to et al. (2010) suggest three reasons: modify most of them at the local level. • Intergovernmental transfers negatively Tax policy and legislative decisions in affect property tax revenues. Regardless Latin America are rarely made by the same of the level of fiscal autonomy, local tax level of government. The distribution of efforts decrease with higher transferred certain fiscal powers and functions directly revenues. While it is a worthy goal to affects the capacity of jurisdictions to raise equalize the fiscal capacity of jurisdic- revenue. Even when local governments are tions, the challenge of intergovernmen- empowered to impose property taxes, a tal transfers seems to be in finding a for- higher level of government often sets assess- mula that does not discourage property ment parameters or statutory tax rates. For tax efforts. example, states in Mexico must approve • Conversely, the share of subnational the value maps used at the local level. In revenue (a proxy for autonomy) relates Colombia the central government exercises positively to property tax collections. fiscal oversight of municipalities. Although • Smaller jurisdictions that benefit relative- local authorities have no decision-making ly more from intergovernmental transfers power over many aspects of tax policy, they tend to show limited tax collection effort. do have the capacity to exert political lead- Property tax revenues are more impor- ership to promote change. tant in larger jurisdictions. Subnational governments in most Latin American countries generally have responsi- Institutional arrangements and the level bility for tax assessment and administration. of institutional development also matter. For Their actions therefore have great potential instance, when local governments have the to boost property tax revenues. In standard power to impose taxes that are less visible property tax legislation, improved perfor- and easier to administer, such as sales and mance depends primarily on the tax author- service taxes, the property tax is likely to ity and its practices related to the cadastre, become a lower priority because it is more property valuation, and tax collection and difficult and costly to administer and may enforcement. generate less revenue than other taxes. Sim- Other factors indirectly determine ilarly, when municipalities can make expen- property tax revenues, such as the extent diture decisions but have no power to set of fiscal decentralization, institutional key revenue determinants, such as tax rates, development of the judiciary and legislative they have limited ability to improve prop- branches of government, and political erty tax performance. considerations. The functioning of the legislative and Fiscal decentralization can play an im- judiciary branches of government also affects portant role for several reasons. In particular, property tax performance, and political goals incentives built into such a system can often drive legislative tax decisions, particu-

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larly at the local level. In Bogotá, Colombia, dently of legislative approval, and paved for example, the legislative council blocked the way for subsequent tax reform (Pinilla property tax reform in 2001 until an initia- and Florián 2011). tive of the mayor called for a voluntary Similarly, the judiciary in most countries additional tax payment. Approximately is responsible for guaranteeing enforcement 63,500 taxpayers participated in the and resolving property tax disputes and campaign by making a 10 percent voluntary appeals, but often carries out these functions contribution to the industry, commerce, with limited knowledge of property tax and advertisement tax (ICA), the automo- issues. This is especially so in high-level bile tax, and the property tax. This result courts. Specialized tax tribunals do not exist demonstrated taxpayers’ willingness to pay, in Latin America, and the courts often dis- succeeded in raising tax revenues indepen- regard tax legislation under the guise of

Table 3.1 Allocation of Property Tax Responsibilities by Level of Government in Selected Countries Tax Responsibilities Tax Native Name Scope of the Legislation Tax Fiscal Country of the Tax Tax Base Institution Assessment Tax Rates Oversight Tax Collection Argentina Impuesto inmobiliario Rural and urban Provincial Provincial Provincial Provincial Provincial Bolivia Impuesto sobre la Rural and urban Central Central/ Central Central/ Central/ propiedad de bienes Municipal Municipal Municipal inmuebles Brazil Imposto sobre a Urban only Central/ Municipal Municipal Municipal Municipal propriedade predial e Municipal territorial urbana Imposto territorial rural Rural only Central Central Central Central Central Chile Impuesto terrotirial Rural and urban Central Central Central Central Central Colombia Impuesto predial Rural and urban Central/ Central/ Central (range)/ Central/ Central/ unificado Municipal Municipal Municipal (rates) Municipal Municipal Costa Rica Impuesto sobre bienes Rural and urban Central Central/ Central Central/ Central/ inmuebles Municipal Municipal Municipal Ecuador Impuesto sobre los Urban only Central/ Municipal Central (range)/ Municipal Municipal predios urbanos Municipal Municipal (rates) Impuesto sobre los Rural only Central/ Municipal Central (range)/ Municipal Municipal predios rurales Municipal Municipal (rates) Guatemala Impuesto único sobre Rural and urban Central Municipal Central Municipal Municipal inmuebles Honduras Impuesto sobre bienes Rural and urban Central Municipal Central (range)/ Muncipal Muncipal inmuebles Municipal (rates) Mexico Impuesto predial Rural and urban State Municipal Municipal Municipal Municipal

Paraguay Impuesto inmobiliario Rural and urban Central/ Central/ Central Municipal Municipal Municipal Municipal Venezuela Impuesto sobre Urban only Municipal Municipal Municipal Municipal Municipal inmuebles urbanos Impuesto sobre Rural only Central Central Central Central Central inmuebles rurales

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protecting human rights. For example, courts rural-urban distinction leads to duplication seldom exercise the right to seize and sell of efforts because it requires two teams property when taxes go unpaid. of assessors and different cadastre systems. This structure also makes it harder for Institutional Arrangements the municipality to establish an integrated and responsibilities land policy for its entire territory. Latin American countries distribute tax Duplication of effort also occurs in responsibilities among different levels of Argentina, where provincial and municipal government (table 3.1). It is important to governments perform functions that demand understand how they regulate specific essentially the same tasks. The property tax elements of the property tax—in particular, is a second-tier (provincial) government tax, the definition of the tax base, the univer- while municipalities set fees and charges to sality of the tax, preferential treatment fund urban public services. These fees and of certain taxpayers, establishment of charges have similar regulatory features tax rates, and distribution of tax revenues. as the property tax, apply to all real estate Policy choices in all these areas have direct properties, and require many of the same implications for how well the property efforts, such as recording property charac- tax performs. teristics, identifying property rights, verify- ing the provision of public services, and Taxation Responsibilities estimating assessed values. Moreover, the By design, the purpose of the property estimation of property values at the provin- tax is to support local government activities. cial level tends to be less accurate than the In Latin America, however, the division valuations done at local level. of tax responsibilities is not always clear or The capacity of municipalities to carry consistent. Marked differences exist between out property taxation functions also varies federal systems and unitary systems of widely within and across Latin American government. In federal countries such as countries. In decentralized property tax Brazil and Mexico, subnational governments systems, such as urban areas in Brazil, have a considerable amount of control, Venezuela, and Ecuador, municipalities and municipal governments in particular are fully responsible for tax assessment often have relative autonomy regarding and administration, regardless of their level property taxation, although not necessarily of institutional development. Some under- in all aspects. resourced municipalities are simply incapa- Responsibility for property taxation also ble of achieving good results, however, and varies according to the geographic definition require the support of higher levels of of the tax base. In Brazil, Ecuador, and government to perform these functions. Venezuela, for instance, property taxation Countries approach the problem of un- operates differently in rural and urban even local institutional capacity in different areas, with the tax on rural property set at ways. In Mexico, for instance, municipalities the national level and that on urban prop- lacking the technical capacity to assess real erty set at the municipal level. In Brazil, estate property can transfer that responsibil- however, municipalities can assume respon- ity to the second-tier state government, where sibility for fiscal oversight and collection of cadastre institutes are common. In Colom- the rural property tax when they demon- bia, cadastre and tax assessment functions strate the capacity to do so. In general, the are centralized, but municipalities with

De cesare � Property Tax in Latin America 17 ......

demonstrated capacity, such as Bogotá, may Using market value as the basis for prop- assume responsibility for these activities. erty tax assessment has several advantages. In other countries, first- or second-tier When assessed values are estimated accu- levels of government generally monitor tax rately, the property tax serves as an efficient assessment to ensure equity. For example, in instrument for value capture. In addition, Costa Rica and Bolivia the central govern- market value assessment is likely to improve ment exercises fiscal oversight over munici- perceptions of fairness and thus promote palities. Local governments in Costa Rica greater acceptance of the tax. are legally responsible for property valuation, Furthermore, an accurate assessment but must use central government valuation informs taxpayers about the value of their models. Their only choice is which particu- properties and is useful for auditing declared lar version of the model to use. Unclear sales prices for taxes on real estate transfers. division of responsibilities reduces account- The property transfer tax is almost as ability and can result in failure of both popular as the property tax in the region. levels of government to produce accurate Although they have a similar tax base, these assessed values. More research is needed to two taxes are not always administered at determine whether centralized or decentral- the same government level. Even when ized administration of the property tax they are both administered at the municipal works better for lower income countries. level, as in Brazil, Mexico, and Venezuela, their implementation does not always Tax Base overlap and may produce administrative In most Latin American countries, the inefficiencies. national government defines the base for While most Latin American countries the property tax, generally including the assess each property individually, Ecuador, value of both land and buildings. A few Guatemala, Nicaragua, and Peru assess the jurisdictions deviate from this pattern, such tax based on the sum of the values of all as Mexicali, Mexico, where the tax base is properties owned by a single taxpayer. The the land value only. The states of Zacatecas drawback to this approach is that objection and Estado de Mexico in Mexico, as well to the assessment of one property prevents as a few jurisdictions in Argentina, rely collection of taxes for all of that taxpayer’s on area-based systems. properties. At the same time, owners who Regardless of how the tax base is de- cannot afford to make tax payments for all fined, most Latin American countries do their properties cannot make payments for not require that market value be the basis a single property. Taxing individual rather for assessments. Instead, tax legislation com- than multiple properties has the added ad- monly uses ambiguous terms such as fiscal vantage that it is easier to use the property valuation or value, cadastral value, official as guarantee against nonpayment. appraisal, fiscal appraisal, cadastral appraisal, or taxable value that may or may not Universality of the Tax correspond to market value. This practice The property tax not only legitimizes citizens’ leaves room for arbitrary assessments, which rights to demand public services, but also in turn erodes the ability to evaluate tax raises public awareness about the responsi- appeals fairly because assessed values can bility to pay for those services. In theory, the be whatever the tax authority determines property tax should be universal, covering them to be. owners as well as occupants of informal

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properties who may own the house but lack title to the land. Basing the tax on both property ownership and occupation is good practice in several Latin American countries, including Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Guatemala, Hon- duras, Mexico, and Uruguay. In Ecuador, however, only owners pay the property tax. Excluding occupants from the tax rolls not only reduces tax revenues but also creates inequity by treating otherwise similar properties differently depending on land tenure. Conversely, taxing proper-

ties that lack registered titles could reorient a the provision of public services to informal k mol settlements, among other benefits. O. S O.

Tax Exclusions, Exemptions, artim and Other Preferential Treatment © M Constitutional restrictions on the right to people, widows, pensioners, and orphans Clandestine additions impose property taxes reduce universality (De Cesare 2008). in high-income residen- by excluding certain types of property from Some countries or jurisdictions exempt tial neighborhoods of the tax base. In Brazil, for example, the con- an especially large share of properties, Rio de Janeiro, Brazil, add to property values, stitution forbids taxation of state and feder- creating inequities and perhaps unduly but lax assessment al properties. The exclusion applies even reducing the universality of the tax. In the and enforcement means when such properties are not used by the Dominican Republic, only real estate with these improvements government, as when rented or occupied by a value of more than about US$150,000 are not fully taxed. private parties. The exclusion of public sec- is subject to the tax. In Chile, only residen- tor properties from the tax rolls shifts the tial properties valued at more than about tax burden to private owners who actually US$30,000 are taxed. As a result, more pay the property tax. The fact that public than 60 percent of properties recorded entities tend to own properties in high-value in the cadastre are exempt. Carrying ex- urban areas only exacerbates the problem. empt properties on the tax rolls is useful Providing free public services and urban since the exemptions may change over time. infrastructure to government properties Whether other countries besides Chile do thus imposes a high cost on the community. that is an interesting question for further Tax exemptions have similar effects. research. Exemptions are established by law and In São Paulo, Brazil, approximately 40 allow otherwise taxable properties to pay no percent of residential properties are exempt taxes. In general, exemptions are intended from the property tax including residences for such social purposes as protecting fami- of retirees, all properties valued less than lies that cannot afford the tax. Concern US$43,000, and residential properties valued about ability to pay takes several forms in less than US$56,800. Municipal law grants Latin America, including exemptions for a tax discount of approximately US$22,700 low-income families, retired and elderly out of the value of residential properties

De cesare � Property Tax in Latin America 19 ......

assessed at more than US$56,800 but less region, among other factors). Indeed, pro- than US$113,600. viding such breaks can erode the local tax The most common exemptions in Latin base, resulting in cutbacks in public services American are for embassies, religious prop- that ultimately reduce the attractiveness of erties, and schools and other facilities used the city as a center of economic activity. for educational purposes (De Cesare 2008). Other exemptions adopted in some countries Tax Rates apply to properties used by political parties The power to set property tax rates ideally or unions, charity organization, sports and should rest with the level of government recreational associations, and hospitals. that makes expenditure decisions, preferably Bolivia, Ecuador, and Peru have considered the local government. The central govern- exempting communally owned property ments in Brazil and Venezuela set rural as well. property tax rates, but Brazil, Venezuela, Preferential tax treatment in Latin and Uruguay allow municipalities to set America may include tax amnesty (waiving urban property tax rates. The national gov- of tax debt or late payment penalties) and ernment sets property tax rates in Bolivia, abatements (reduction of tax liability). From Chile, Costa Rica, the Dominican Republic, 2000 to 2006, approximately 100 jurisdic- Guatemala, Nicaragua, Paraguay, and Peru. tions in Brazil, Ecuador, Guatemala, Hon- In Colombia, Ecuador, and Honduras, duras, and Uruguay provided tax amnesty, municipalities can set property tax rates while 27 offered abatements (De Cesare within a range defined by the national 2008). Tax breaks reported by 30 jurisdic- government. Such a policy may in fact be tions include discounts for advance payment appropriate during the early stages of fiscal and for land parcels under construction, decentralization, as it tends to discourage as well as deductions of other taxes. Tax complaints from taxpayers and reinforce amnesty and abatement are unfair to those local autonomy. In Argentina, property who actually pay the full tax bill and are tax rates are set at the provincial level. likely to encourage tax evasion by others While the primary function of tax rates expecting similar treatment. Further research is to define the amount of contributions, is needed to assess the results of amnesties, they may also serve to redistribute the tax especially considering their widespread burden among distinct classes of taxpayers. use in the region. Under the simplest scheme, a flat rate applies Inequity may also result from granting to all taxable properties. In this case, levies tax incentives to private firms, a strategy are proportional to assessed values and used by several jurisdictions to attract new therefore do not affect distribution of the economic activity and create more jobs. tax burden. Costa Rica, the Dominican The municipality of Camaçari, Brazil, Republic, Nicaragua, and Paraguay all recently used this strategy, and as a result apply a flat rate countrywide. raised taxes for both local residents and More complex schemes, including selective pre-existing firms. As Slack and Bird (2006) or differential tax rates, progressive rates, or discuss, most firms would locate in a partic- mixed criteria, are also common. Colombia’s ular area regardless of these benefits, be- national law requires property tax rates to cause property taxes are not a key element be selective and progressive, and to consider in business location decisions (as compared the socioeconomic status of taxpayers, the with the economic characteristics of the use of urban land, and the date of the last

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cadastre update, among other factors. Such complex rate structures can be counter- productive, however, to the extent that they may foster tax evasion, perceptions of unfairness, and limited compliance. In Bogotá, for example, tax rates vary according to property size, encouraging taxpayers to under-report building area (Puentes 2002). Property use is one of the most common criteria for applying selective tax rates in Latin America. In Chile and many jurisdictions in Argentina and Brazil tax rates are higher for unoccupied and undeveloped land. This is a well-known and largely accepted strategy for deterring land speculation and promoting more efficient land use. Some jurisdictions also impose higher tax rates on properties located in zones with better services and infrastructure. In theory, though, if assessed values reflect market values, public investment in infrastructure and public services is already capitalized into property prices. As such, the application of differential rates

according to service levels in effect imposes a k

an additional burden (“value capture”) on mol

the property. S O. The perception that progressive tax rates distribute the tax burden according artim © M to ability to pay is widespread in the region. As a result, higher tax rates for high-value Rates that exceed the taxpayer’s ability Speculation of vacant properties have popular support. Bolivia, to pay tend to encourage tax evasion and land, as shown on the outskirts of Guatemala produce unrecoverable losses to the public Chile, Guatemala, Peru, and many muni- City, promotes inefficient cipalities in Brazil set progressive rates. treasury. In the 2000s, the rates applied to land use and informality, Although there is no evidence that this vacant land in Porto Alegre, Brazil, were as and raises interest in strategy improves income distribution, high as 6 percent of assessed value, while those imposing progressive some tax officials and taxpayers (especially for occupied residential and nonresidential tax rates. those benefiting from lower rates on their property were only 0.85–1.15 percent of own properties) consider a progressive rate assessed value. This policy led to evasion of structure to be fair. The exemption of 67 percent of the tax on vacant land, com- lower-value properties from the tax can pared with less than 15 percent on occupied be seen as having a similar effect as pro- properties (De Cesare and Lazo 2008). gressive tax rates. Although easier to implement than progressive tax rates, exemptions Revenue Distribution unquestionably reduce the universality Municipalities collect and control prop- of the tax, as noted earlier. erty tax revenues in most Latin American

De cesare � Property Tax in Latin America 21 ......

countries—even those with highly central- in the region. National governments pri- ized fiscal structures. Revenue distribution, marily exercise the function of setting fiscal however, varies within the region (table 3.2). policy, making it difficult for local govern- In Argentina and Chile, redistribution is ments to have a significant voice. Similarly, intended to improve equity across muni- the socioeconomic and other characteristics cipalities. In Costa Rica, the Dominican affecting the revenue-raising capacity of the Republic, and Peru, property tax revenues property tax lie outside the decision-making support cadastral and property valuation sphere of local jurisdictions. Nevertheless, activities, among other expenditures. local taxing authorities can still have an impact on performance by addressing aspects Summary of the property tax system for which they The institutional arrangements described are directly responsible. here largely determine property tax policy

Table 3.2 Distribution of Property Tax Revenues in Selected Countries Country Recipient of Property Tax Revenues Argentina There is no single rule. In general, property tax revenues are included in the intergovernmental revenue-sharing fund, transferred from provinces to municipalities. Bolivia Municipalities. Brazil (rural) Federal government, except when the responsibility for fiscal oversight and collection has been transferred to municipalities. In that case, revenues accrue to the municipality. Brazil (urban) Municipalities. Chile Municipalities. A 40-percent share goes to the jurisdiction generating the revenue, and 60 percent goes to a fund that redistributes the revenue to municipalities according to a formula that considers exemptions and poverty levels. Colombia Municipalities, with 10 percent earmarked for the national social housing fund. Costa Rica Municipalities, with 1 percent dedicated to the technical regulatory agency ONT (Órgano de Normalización Técnica); 3 percent to the national cadastre; and 10 percent to the Board of Education. Dominican Municipalities receive 20 percent while the central government receives 80 percent. The Republic central government share is earmarked to finance housing programs and to improve the efficiency of the General Cadastre Administration. Ecuador (urban) Municipalities. Guatemala Municipalities and the corresponding second-tier government entities. Those municipalities responsible for overall administration and tax collection keep the entire amount. Honduras Municipalities. Mexico Municipalities. Nicaragua Municipalities. Paraguay Municipalities and departments, with 70 percent to the municipality generating the revenue; 15 percent to the department; and 15 percent to a fund distributed among municipalities with low resources. Peru Municipalities, with 5 percent earmarked for maintenance of the district cadastre, and 0.3 percent for the National Tax Council (which determines property valuations). Uruguay Departments. Venezuela (urban) Municipalities.

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chapter 4 Property Tax System Components

of B ogot á

ractices related to cadastral record- with geographic information systems (GIS). An online cadastre map keeping, tax assessment, and col- Some municipalities have already developed outlines properties in a lection and enforcement are key multipurpose cadastres—cost-effective sys- neighborhood of Bogotá, Colombia. elements of a property tax system. tems that integrate parcel-level data from TheP following review of current procedures public and private entities. Participating reveals multiple opportunities for reform in institutions provide, share, and upgrade how Latin American countries manage information continuously using common their property tax systems. alphanumeric and cartographic standards. This technique is gaining wide support in Cadastral Records Latin America. For example, the Ministry Property cadastres in Latin America tradi- of Cities in Brazil developed the National tionally have several shortcomings: exclusion Guidelines for Multipurpose Land Cadastre of informal properties; lack of connection (Diretrizes Nacionais para o Cadastro Territorial with the public property registry; and Multifinalitário, CTM) in 2009 to promote the omission of relevant information. However, practice at the municipal level (Ministério in his extensive reviews of recent cadastre das Cidades 2009). practices, Erba (2006; 2007; 2008) found Many countries, including Chile, Hon- that much progress has occurred in the duras, and Nicaragua, use modern land region over the past 20 years. information systems that incorporate geo- Most jurisdictions now use digital systems, spatial data. For example, Chile’s National and numerous cadastres have been upgraded System of Land Information Coordination

De cesare � Property Tax in Latin America 23 ......

(Sistema Nacional de Coordinación de Información mation by using integration agreements that Territorial, SNIT) integrates information so provide for periodic or ongoing exchanges that systems managed by different govern- of data in Costa Rica, Guatemala, Hon- ment departments and entities can interact duras, and Peru. Colombia has pioneered with one another. “urban observatories” to share information To ensure a satisfactory level of unifor- on real estate property, particularly apprais- mity of land information across countries, al and sales price data. Several partners either national or regional cadastral stan- can potentially cooperate in these ventures, dards have been developed in Argentina, including public registries, agencies respon- Bolivia, Brazil (rural cadastre), and Mexico. sible for issuing subdivision and building International organizations, including permits, public and private utility compa- the Canadian International Development nies, firms providing urban services, land Agency, Inter-American Development Bank, developers, realtors, valuation institutions, Organization of American States, The World and other similar organizations. Bank, and the United States Agency for In summary, efforts to improve property International Development, have provided cadastral systems are clearly on the agendas technical and financial assistance for cadastre of countries in Latin America, and many modernization to such countries as Argen- of these initiatives are aimed at implement- tina, Costa Rica, Ecuador, Honduras, and ing multipurpose cadastres. Frequently Paraguay. Some countries also provide missing, however, is a strategy to make the funding to local governments to update new cadastral systems sustainable by imple- their cadastres as part of an effort to in- menting regular and systematic updates. crease property tax revenues. Improving cadastral systems is one of the principal Assessment Practices goals of the Brazilian federal program Current property assessment in Latin Amer- to modernize public administration and ica takes two complementary forms—self- taxation at the municipal level. assessment and mass appraisals—although Several countries, including El Salvador, some jurisdictions still retain the traditional Honduras, and Nicaragua, have instituted method of direct inspection by valuators or innovative ways to finance the maintenance assessors. Colombia, Guatemala, Honduras, of cadastral systems, including sales of digi- Mexico, Peru, and Venezuela use self-assess- tal maps, cadastral data, and other products. ment, although not exclusively. This approach Other countries have developed new strat- generally requires legislation to set limits egies for expanding cadastral coverage on reported values. For example, the self- at relatively low cost to the government. assessed value cannot be lower than the pre- Argentina and Uruguay require that land- viously assessed value for the same property. owners pay for certified land surveys at the Self-assessment works best when it uses as time of property transfers. Self-reporting, a reference the typical land and building a scheme widely used in Colombia and values calculated by the tax authority. The Peru, is another productive way to update most well-known self-assessment success cadastral information, provided the tax story is that of Bogotá, Colombia, where authorities have reference parameters the practice quickly increased assessment to ensure accuracy. levels, significantly expanded tax rolls, and Some jurisdictions have overcome the reinforced public confidence in the tax resistance of public registries to share infor- system (Puentes 2002; Dillinger 2000).

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O in a colonial section of . S

mol Lima, Peru, are difficult to assess for tax k a purposes. Other Latin American countries favor (De Cesare 2010). In 25 percent of the cases, mass appraisals based on cost or other crite- cycles reached 10 years. The maximum was ria. The most common valuation methods usually 25 years, although one outlier was are calculation of an average value per unit 60 years. In Chile, Colombia, Costa Rica, of land area per homogeneous zone, based and Guatemala, the law sets a maximum on sale prices of parcels and adjusted for of five years between mass assessments. parcel characteristics and similar factors; Federal guidelines in Brazil also recommend application of multiple regression analysis; a five-year interval, although this is not a and use of spatial (geostatistical) models. legal requirement; for smaller municipali- A more arbitrary way of establishing ties with fewer than 20,000 inhabitants the land values is through a valuation commit- recommended interval is eight years. tee made up of politicians, public officials, Assessed values must be adjusted annual- technicians, and representatives of the real ly between mass assessments, especially un- estate market and the building industry. The der highly inflationary conditions. However, committee estimates values using average data on the same sample of 83 cases show cost per unit of floor area for various types yearly adjustments in only 50 jurisdictions and styles of buildings. The base for estimat- (about 60 percent). In most cases, the adjust- ing the property value is typically the build- ment involved applying general inflation ing cost per unit multiplied by the floor area rates (80 percent), although some jurisdictions and discounted by a depreciation factor, and used property price indexes (20 percent). then adjusted with other factors such as the To achieve equity, assessment levels position of the parcel in the block. Estimates should be close to 100 percent and uniform of land values are often based on homo- across all properties. However, most muni- genous zones registered in the cadastre. cipalities do not measure the accuracy of The intervals between mass assessments assessed values. Whenever jurisdictions do in Latin America tend to be long. In a study disclose valuation records, it is clear that of 83 cases, the cycle averaged six years assessed levels are low.

De cesare � Property Tax in Latin America 25 ......

The Institute for the Technical Devel- • The great diversity in property character- opment of Public Treasuries in Mexico istics and tenure arrangements leads to (Instituto para el Desarrollo Técnico de las Haci- wide variation in sales prices, even for endas Públicas: INDETEC 2005) reports properties in the same neighborhood, and large disparities between assessed values increases the errors in valuation models. and market values, ranging from 10 per- • Even when assessment standards are in cent to 90 percent depending on the juris- place, they tend to focus on procedures diction. Anecdotal evidence suggests that rather than on parameters to test the assessments in Colombia average about accuracy of assessed values. 40–50 percent of market value. In Porto Alegre, Brazil, assessed values of residen- Collection and tial properties in the late 1990s were only Enforcement 19.2 percent of property sales prices Property tax collection in Latin America (De Cesare 2003). is often inefficient. Data from the 2000s These disparities arise for several reasons. indicate that only 67 percent of the tax • The cost approach to valuation largely assessed was actually collected (figure 4.1). disregards property characteristics. The Only 25 percent of the jurisdictions analyzed same valuation model applies to any type collected more than 80 percent of the tax of property, whether it is a house or a assessed. This ratio is relatively low and like- large industrial complex, thus introducing ly reflects weak enforcement of the tax. Tax valuation errors. Some assessors justify administrators tend to attribute such lack- this approach in the mistaken belief that luster results to a “culture of nonpayment,” it ensures uniform treatment of taxpayers. although a “culture of noncollection” may • Valuation models often omit important be a better explanation. variables, thus creating assessment biases. The following common practices in the • Assessments of residential and nonresi- region limit effective revenue collection. dential property have two components— • Taxpayers may be responsible for picking land value and building costs—but the up their own tax bills at the city hall. calculation method used is not always • Tax assessment and collection are not clear. Some jurisdictions use arbitrary integrated activities. factors to adjust average land values and • Generous amnesties and abatements building costs rather than calibrate their encourage tax evasion because other models through market analysis. taxpayers expect preferential treatment. • Because the property tax is highly visible, • Enforcement is difficult—particularly many municipalities consider reassess- in its most severe forms, such as seizure ment politically risky and allow long in- of property due to nonpayment of the tervals to occur between mass appraisals. tax—because the judiciary is lenient and • Real estate sales prices in most Latin often rules against such actions. American countries are not readily avail- • Collection attempts may occur after the able, adding to the difficulty of perform- statutory period for recovering the tax ing reliable market analyses. (usually five years), which has the same • The cadastre is frequently incomplete. effect as a tax write-off or no enforcement. Data may be recorded incorrectly or • Cadastral errors or long intervals between omit important property characteristics updates lead to misidentification of delin- that explain the variability in sales prices. quent taxpayers in court. This precludes

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Figure 4.1 Revenue Collected as a Percentage of Property Tax Assessed in 37 Cities, 2000s

100 90 67% 80 70 60 50 40 30 20 10 0 Mean PE Lima EC Quito BR Recife BR Belém VE Baruta CR Nicoya CR Escazú MX Saltillo CO Bogotá VE Chacao BR Aracajú BR Curitiba BR Salvador AR Santa Fe UY San Jose MX Acapulco BR Camaçari PE San Borja EC Guayaquil BR Santarém BR Blumenau BR São Paulo PE Cajamarca MX Hermosillo CR Corredores UY Montevidéu BR Juiz de Fora BR Porto Alegre BR Brasília (DF) BR Florianópolis BR João Pessoa AR Buenos Aires BR Rio de Janeiro BR Belo Horizonte BR Campo Grande BR Gov. Valadares BR Vitória da Conquista

Source: Lincoln Institute Survey (Appendix B). Note: Country abbreviations: Argentina (AR); Brazil (BR); Colombia (CO); Costa Rica (CR); Ecuador (EC); Mexico (MX); Peru (PE); Uruguay (UY); VE (Venezuela).

recovery of the tax and undermines the strengthen the fiscal culture in the jurisdic- credibility of the tax system. tion. Penalties may involve restrictions on property transfers, transactions with pub- Notwithstanding these problems, some lic agencies, access to public benefits, or jurisdictions have introduced collection access to bank credit. and enforcement best practices with good results, including public campaigns that Summary explain procedures to taxpayers and indi- As more Latin American cities are moving cate how tax revenues are used, as in Belo to improve the performance of the property Horizonte, Brazil. Other practices include tax as a source of revenue to finance urban intensive use of the Internet to inform tax- development, they are finding ways to ad- payers and facilitate payments, hiring a pro- dress difficult administrative problems related fessional team to negotiate tax debts, and to cadastral recordkeeping, property valua- better integration of tax assessment with tion, and tax collection and enforcement. the collection and enforcement systems. An Local governments are also making progress effective way to disseminate good practices in overcoming political hurdles through is for national governments to encourage more transparent taxation practices. Larger interchange of information across jurisdic- cities implement these reforms more often, tions, giving local officials and residents since they can take advantage of economies the opportunity to compare performance. of scale, greater institutional capacity, and Imposing and actually implementing a larger tax base compared to smaller severe penalties for tax evasion also can jurisdictions.

De cesare � Property Tax in Latin America 27 ......

The renovated well-functioning property tax • Property cadastres should be uniform historic public system that is fair, efficient, and within jurisdictions and record information marketplace sustainable reflects sound fiscal on both informal and formal properties. and new transportation principles. The system must also In planning for cadastre modernization, facilities beA comprehensive enough to cover all the jurisdictions should assess possible im- reinvigorated main components affecting performance provements according to technical capacity, the central area and provide instruments to monitor and cost-benefit analysis, and sustainability. of Porto Alegre, evaluate results systematically. Based on • Property assessment requires uniform Brazil, and the principles outlined in this report, it valuations at levels approximating market enhanced its tax base. is possible to set clear goals for property values. Shorter intervals between general tax reform in Latin America. valuations as well as yearly adjustments • Tax policy should set tax rates in line are necessary, especially under highly with revenue needs, while also eliminating inflationary conditions. A technical preferential tax treatment that encourag- approach that overrides political consid- es tax evasion and allowing exemptions erations is the best way to ensure equity only for families that are unable to pay. and efficiency in the tax system.

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• Property tax collection and enforce- • Identify relevant institutions and their ment must be connected to tax assess- interest in sharing data; ment and cadastral records. Several • Develop interinstitutional agreements; methods are available to encourage • Use existing cartographic documents; tax payment and improve the efficiency • Make alphanumeric databases of collections and enforcement, including compatible; and expanding the ways and places where • Unify the cadastre of public roads, taxpayers can pay their taxes, allowing streets, and avenues. electronic payments, and handling tax delinquency primarily through debt The construction and operation of the prop- negotiations. erty cadastre involves continuous, periodic, • Fiscal culture should be strengthened and complementary activities (table 5.1 and through public relations campaigns and figure 5.1). Citizens can call for updates, other methods that improve the trans- or tax authorities can update records when parency of property tax administration, inconsistencies are identified. Mass updates thereby building taxpayer confidence occur at the time of global aerial and land in the system’s equity and promoting surveys or when institutional data are compliance. Tax authorities can improve integrated. collections by disclosing assessment prac- The use of GIS facilitates integration of tices and results, disseminating informa- databases as well as visualization of the data tion on the uses of property tax revenues, to reveal patterns and trends. The areas and providing other accurate and timely covered by specific cadastres (also referred information to the public. to as thematic cadastres) are usually the

The following sections offer guidelines for reforming specific components of the Table 5.1 Key Activities Related to the Property Cadastre property tax system that can be adapted Continuous . Reception, analysis, and verification of building plans according to the goals, legal requirements, Activities and land development projects and major characteristics of the country . Maintenance of the cartographic base and local jurisdiction. . Assignment of cadastral codes to new parcels and properties . Updating of alphanumeric data Cadastral Records . Integration of alphanumeric data and maps using GIS Property cadastres assemble data on . Data transfers to other areas, when necessary parcels and buildings, property rights, prop- Periodic . Identification of cartographic gaps erty use, property value, public equipment Activities . Identification of inconsistencies between cartographic and services, and other relevant attributes of and alphanumeric data . real estate properties. The property cadastre Production of statistics . Incorporation of data on informal property works best when linked to a cadastre of . Mass exchange of data taxpayers whose personal data are also reg- . Validation of data to be available on the Internet istered and linked. Integrating the institu- . Implementation of special land surveys tions that manage geospatial information Complementary . Management of tax complaints over property characteristics at the parcel level also enhances the sustain- Activities . Preparation of contracts for cooperative agreements ability of the property cadastre. and liaisons The following actions are conducive . Preparation of contracts for global land surveys to institutional integration: and aerial photography

De cesare � Property Tax in Latin America 29 ......

Figure 5.1 parts of GIS that include information on Operational Framework of the Property Cadastre environmental factors (land, geology, and vegetal coverage); public infrastructure INDIVIDUAL CASES PARCEL BUILDINGS (road systems, utilities, and hydrographs); land use regulations; public equipment; and Citizens Land plan Cadastral forms socioeconomic characteristics. Local inter- ests and needs may dictate the inclusion of more attributes in the cadastre. Cartographic base Alphanumeric base

Assessment Practices Creation of the parcel’s ID code The major activities related to property assessment are outlined in table 5.2. There GIS INTEGRATION are several methods for carrying out property valuations based on sales comparisons, INDIVIDUAL CASES cost, income, or self-assessment. Depending Internal updates Informality on the property type and the data available, a mix of valuation approaches is likely to Merge data and geographic coordinates yield the best results. Regardless of the method used, however, assessed values for all properties must bear a close and consis- MASS UPDATES tent relationship with market values. To Databases Cartographic data Alphanumeric data ensure equity, tax authorities should use an independent data sample to assess the ratio between market and assessed prop- Table 5.2 erty values. Key Activities Related to the Property Assessment If the sales comparison method is used, Structuring . Definition of goals and priorities market value should be based on the prices Activities . Evaluation of current valuation standards and legislation of properties sold during a period close to Continuous . Collection of sales prices for all property types the assessment date. In addition, valuation Activities . Updating of the database on sale prices models should be developed for each type . Verification of data consistency . Calculation/monitoring of building costs of property (such as houses, apartments, . Calculation/monitoring of price indexes, inflation rates, and offices). This method requires a repre- and other economic indicators sentative sample of sales prices per property Periodic . (Re)definition of homogeneous land values zones type. When sales prices are either unreliable Activities . Analysis of the effects of key variables on prices of different or unavailable, asking prices can be used. types of properties When neither sales nor asking prices are . Development and application of valuation models available, external appraisals or the opinions . Validation and calibration of valuation models of experts can be used as reference. . Application of adjustment factors for lags between mass valuations Multiple regression analysis is the tech- Complementary . Presentation and discussion of results to groups representing nique traditionally used to evaluate the Activities the community and local legislators relevance of different price determinants . Communication of results to taxpayers and to estimate assessed values. When the . Management of complaints and appeals of assessed values cadastre is integrated with GIS, multiple . Statistical control of level and uniformity of assessed regression analysis significantly improves values over time the spatial analysis of property prices. Since

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prices vary with location, the use of geo- of property cadastres, especially when prop- graphically weighted regression analysis also erty information is incomplete or nonexis- improves the accuracy of tax assessments. tent or when sale prices are unavailable. This method is being adopted by an in- Instituting a means to ensure the reliability creasing number of jurisdictions. of reported values—such as using declared The cost method is the traditional and values for expropriation purposes or impos- most commonly used approach to estimate ing severe penalties for intentional under- assessed values for tax purposes in Latin estimation—is clearly essential. America. It involves data on building costs Individual appraisals are the best approach and depreciation factors, and is likely to for accurately valuing atypical properties. yield more accurate estimates when the Such properties may be large industrial model is calibrated using market analysis. facilities, commercial developments, historic The income approach to valuation is only heritage buildings, hospitals, and hotels. In applicable to properties for which current or individual appraisals, it is important to verify potential rental income data are available. the consistency of assessments through cross- Self-assessment is a valuation approach data examination and graphic analysis. that helps keep taxpayers aware of their Figure 5.2 depicts how the valuation responsibility for public expenditures. Self- process should function. Accurate calibra- reporting or self-assessment schemes also tion of property valuation models requires have the benefit of improving the coverage dividing the database into two samples,

Mortgage lenders and real estate

De cesare � Property Tax in Latin America 31 ......

according to major classes of properties. to understand. Recommended standards One sample is used to develop the model include the following: and another to measure the accuracy of • Control valuation accuracy. Tech- market value estimates. Another important nical parameters, such as calculation of step is communicating assessed values to assessment levels and assessment unifor- taxpayers before delivering the tax bills to mity, are important to control accuracy. ensure there is time to make any necessary In contrast, approving valuations through corrections. a political process may prolong the It is now common practice in Latin assessment interval and exacerbate America to discuss property valuation inequities. methods and results publicly. This process • Present clear information on valua- often involves discussions with representa- tions to taxpayers. Providing informa- tives of groups interested in property assess- tion on a small sample of similar, recently ment, such as politicians, private assessors, sold properties can help assure taxpayers realtors, and community leaders in addition about the accuracy of the assessments and to the public. The use of valuation standards promote confidence in the tax system. can improve the quality and acceptability • Select a maximum valuation cycle. of property valuations for tax purposes and Keeping assessed values closely correlated make the information easier for taxpayers with market values requires that the

Figure 5.2 Operational Framework of the Property Valuation

CADASTRAL DATA SALES PRICE SEGMENTATION DATA COLLECTION DATABASE OF DATABASE • Sales price • Costs • Real estate statistics Sample 1 Sample 2

Preliminary data analysis

Development of VALIDATION valuation models

CADASTRE NO Is the YES degree of accuracy Application satisfactory? of models

Communication of results TAXPAYERS

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Table 5.3 Key Activities Related to Tax Collection and Enforcement Collection . Produce tax bills based on the tax assessment intervals between valuations be short— . Distribute tax bills to taxpayers in most cases, three to five years. . Guarantee access to tax bills on the Internet • Provide support to smaller jurisdic- . Distribute the database containing the tax bills to the bank tions. The International Property Tax system and other authorized collection agencies; use of Institute (2007) reports that valuation costs diverse payment modes facilitates collections . Advertise tax obligations and their deadlines drop sharply when the number of prop- . Monitor tax payments erties exceeds 750,000. This suggests that Recovery . Identify tax debtors a state or central agency should provide . Classify tax debtors according to different criteria cadastral and valuation services to small- . Establish collection strategies according to taxpayers’ class er jurisdictions unable to afford the costs. . Distribute official tax debt notices . Contact first the taxpayers with high-value debts and Collection and reliable tax assessments Enforcement . Negotiate tax debts Tax collections relate directly to assess- . Monitor payments of tax debts ments, which in turn rely on cadastral data. Enforcement . Identify uncollected debt situations and their status Having the correct addresses and telephone . Verify if the collection procedures were carried out according to the law (double-check official notices, tax complaints, etc.) numbers of taxpayers is a precondition for . Inventory tax debtors’ assets improved property tax collection and en- . Prepare certificates of tax enforcement (fiscal prosecution) forcement. Also critical is the use of auto- . Distribute certificates in court matic collection systems that are integrated . Follow-up on the execution of the process in court until with the cadastre in a way that allows con- either the judicial order mandates compensation or an agreement is reached tinuous updating. Table 5.3 lists the main activities related to collection, recovery, and enforcement of property taxes. penalties to make late payments less attractive, Figure 5.3 presents the general frame- and should evaluate the reasons for nonpay- work for property tax collection. The tax ment to help devise more effective collection assessor is usually responsible for calculating strategies. Installment payments may be an the tax, after which tax bills are prepared option for some delinquent taxpayers. This and distributed. Tax bills should also be option would require no previous agreement, accessible on the Internet and available and taxpayers could simply enroll in the at taxpayer service centers. Tax authorities program by paying the first installment. should publicize the tax calendar and tax The use of private tax collectors is not com- payment options using all available means, mon practice and has had mixed results in including the Internet, radio and television, the region. This option should not be ad- billboards, local newspapers, and brochures. opted without careful consideration. On In addition, payment options should include the other hand, tax authorities may give in- direct debit, debit or credit cards, telephone centives to taxpayers who pay in advance banking, and bank transfers. Experience with good collection results, as for example shows that payments by mail are less in Belo Horizonte (Domingos 2011). efficient. In cases of nonpayment of taxes, nego- Throughout the year, tax authorities tiation of tax debt is always the preferred should monitor payments and enforce com- option, rather than enforcement of maxi- pliance on a timely basis, and establish a mum penalties, and tends to achieve a high- dedicated unit for collecting unpaid taxes. er recovery rate than judicial action. But This unit should be empowered to impose when tax authorities have exhausted all

De cesare � Property Tax in Latin America 33 ......

opportunities for negotiation, enforcement property characteristics must be accurate. may be necessary. Nevertheless, court action Then the tax authority may use the property should occur only when the amount due is as a guarantee for tax recovery. Depending substantial and exceeds the cost of enforce- on specific tax legislation, the property ment. Imposing maximum penalties for may be sold at public auction to pay the nonpayment of property taxes is rare. Still, back taxes, or the amount due may be enterprises are closed down if they do not deducted from the taxpayer’s other assets. pay value added taxes and they may have Negotiating the payments should still be services cut off when utility bills go unpaid. an option throughout the legal process, and This indicates that rigorous enforcement is all taxpayers must have the right to appeal. not incompatible with the Latin American Fairness in evaluating objections to the culture. property tax is essential to build confidence To bring cases to court, the identity of in the tax system. Establishing administra- the taxpayer, the assessed value, and the tive tax tribunals is one way to improve

Figure 5.3 Framework for Tax Collection

TAX ASSESSMENT COLLECTION AREA AREA

Announcement of Tax Calendar

Production of Tax Bills

Distribution of Tax Bills

Transfer of Financial Data COLLECTION AGENTS Treasury Bank System CREDIT Is the Other Agencies RECOVERY AREA NO tax paid?

YES

End

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the quality of resolutions of tax objections light the importance of systematical moni- and appeals. toring and evaluation. A sustainable property tax system is one that generates data Fiscal Culture and that can be used to evaluate trends. On- Performance Monitoring going evaluation of results allows the tax A strong fiscal culture reflects taxpayers’ authority to guide revenue and expenditure awareness that public services and property decisions, identify strengths and weaknesses, taxes should be aligned, and therefore raises measure progress, establish new goals, and the productivity of the tax. A strong fiscal correct the course of action. culture also leads to more scrutiny by tax- The measures for evaluating performance payers of how the tax is administered, which should include both global and intermedi- in turn serves as a broad-based monitoring ary indicators. Global indicators help assess system that can be an incentive for local tax the overall ability of the property tax system authorities to strive for better performance to raise revenue while intermediate indica- of the property tax system. tors capture the performance of key system Public outreach plays an integral role components (table 5.4). in an efficient property tax system. Ideally, a single agency, such as a taxpayer tribunal, responds in a timely manner to such re- Table 5.4 Global and Intermediate Indicators to Measure Performance quirements as information on legal issues, of the Property Tax System standards, procedures, and deadlines. The Type Proposed Indicators same agency can also update taxpayer data, receive self-reports on property characteris- Global Issues . Fiscal independence, i.e., degree to which the tax authority has power to define key system components tics and self-assessments, produce tax cer- . Share of the property tax compared to total local tax revenues tificates, record complaints, pay financial . Property tax revenue per capita compensation, negotiate debts, and set . Property tax revenue as a percentage of the tax assessed guidelines for tax exemptions and other . Administrative efficiency (administrative costs vs. revenue) concessions. Simplifying the procedures for Cadastral . Cadastre coverage ratio handling tax appeals and using standards Records . Cadastre coverage of informal property to evaluate claims are also priorities. . Degree of continuity in updating property data The media can help disseminate infor- . Degree of accuracy and completeness of recorded property mation and provide more active, fluid, and characteristics . Degree of integration among institutions that manage transparent communication between tax geospatial data and the cadastre authorities and citizens. Larger municipali- . Consistency of alphanumeric data exchanged among ties might institute call centers to allow institutions that manage geospatial data and the cadastre taxpayers to complete some procedures . Consistency of cartographic data exchanged among on the phone rather than in person. Publi- institutions that manage geospatial data and the cadastre . Degree of linkage among alphanumeric and cartographic data cizing information on the use of property tax revenues is another effective way to Property . Assessment level (valuation ratio relative to market value) Assessment . strengthen the local fiscal culture by under- Assessment uniformity scoring the public’s shared responsibility Tax Collection . Collection ratio as apercentage of total tax liability and Enforcement for urban services. . Collection ratio of tax debts Lessons from successful property tax Public . Degree of taxpayer satisfaction Relations reforms in some cities and countries high- . Number of claims and appeals

De cesare � Property Tax in Latin America 35 ......

chapter 6 Conclusions and Recommendations

estate market in Santiago, artim Chile, justifies efforts to O S implement a sophisticated mol property tax collection k system. a

lthough the property tax is not tion over the property tax. Technical and yet a significant evenuer source in administrative capacity is also widely avail- most of Latin America, a number able, at least in large cities, and acceptance of jurisdictions in every country of the property tax is growing. Most of administerA well-performing property tax these improvements take place without the systems that support local public expendi- need for changes in existing laws and the tures. The fact that municipal successes constitutional framework. occur in cities of varying population size, By highlighting common weaknesses socioeconomic base, and location or level in current practices and procedures, this of informality suggests that no major impe- report has demonstrated that there is ample diments stand in the way of broad improve- room for improvement in all components ments for property taxation in the region. of property tax systems, including cadastral Indeed, most cities have mature real records, property assessment, tax collection estate markets, which provide a solid base and enforcement, and fiscal culture. The for implementing the tax. In addition, fiscal basic framework for reform outlined here decentralization in recent decades has granted focuses on two major sets of actions: mak- local governments additional responsibilities ing better tax policy choices and administer- and resources and, in many cases, jurisdic- ing property tax systems more efficiently.

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Tax Policy Choices complex property tax-related tasks. Along Policies conducive to well-performing with supplying direct services, agencies cre- property tax systems should incorporate ated for this purpose can help build local five key requirements: capacity by providing standards and bench- • reinforce local autonomy; marks, oversight, training, and tech-nical • avoid duplication of effort; assistance. • guarantee universality of the tax; • insist on clear legislation; and Administrative Reforms • provide support for under-resourced Good management is central to property jurisdictions. tax reform in Latin America, particularly for local governments with the most deci- Local governments should have the power sion-making power. Based on the experi- to set property tax rates in most cases. Only ences of jurisdictions that have instituted in the early phases of its fiscal decentraliza- well-performing systems, a successful tion process should the national government program should: set tax rate parameters. In addition, the same • rely on transparency; level of government that makes expenditure • tax properties individually; decisions should also have responsibility for • upgrade technology periodically; levying property taxes. This institutional • design cadastres for sustainability; structure minimizes duplication of effort, • extend the tax to informal properties; and promotes greater consistency across tax • improve the accuracy and uniformity of bases, and improves taxpayer compliance. valuations and the efficiency of collections. To facilitate implementation, the language of tax laws should be unambiguous, leav- The test of whether a system is transparent ing no room for misinterpretation of or not comes when both tax authorities and responsibilities. taxpayers are able to provide the same an- Given widespread informality in Latin swer to the question: “What is the purpose American cities, tax policy aimed at univer- of the property tax?” This means that tax sality must apply to both owners and occu- authorities must disclose the types of services pants of properties. Eliminating the large funded by the tax, ideally allowing commu- number of tax exemptions and concessions nity participation in public spending deci- currently allowed by local authorities will sions. Transparency in both revenues and directly improve universality, equity, and expenditures can serve to build greater collections. confidence in government. Unambiguous legislation regarding tax Taxation of individual parcels rather than obligations and procedures is essential to a single assessment on multiple properties ensure consistency in property taxation of the same owner is desirable as a standard practices and, more importantly, avoid de- that benefits collections. Levying a single tax traction from sound fiscal principles. More- on all of a taxpayers’ properties means that over, national and subnational laws should an objection to the assessment on one prop- complement each other in supporting an erty prevents payment for all properties. efficient tax administration. Similarly, clustering several properties for tax Finally, national governments or a second- purposes makes it difficult to expropriate tier government agency should support juris- any single property or to use a given prop- dictions that lack the resources to perform erty as a guarantee against nonpayment.

De cesare � Property Tax in Latin America 37 ......

on unreliable data that are

very costly to update. To address the problem of taxing informal property, local jurisdictions should consider innovative approaches to cadastral recordkeeping and valuation. In particular, self- reporting and self-assessment are more flexible and less costly when applied to informal properties. Jurisdictions can also use nontraditional approaches— such as allowing low-income taxpayers to provide community services or neighborhood © M improvements in lieu of taxes. artim Improving the accuracy

O S and uniformity of valuations mol must be an ongoing priority. k a Jurisdictions can achieve that goal by maintaining technical An expensive new When updating technology for tax rather than political control over assess- bridge next to a administration, local governments should ments, keeping assessments close to market slum in São Paulo, ensure the best fit between the technology values, and disseminating information on Brazil, highlights and the local jurisdiction’s needs and capa- valuations to taxpayers. Similarly, jurisdic- contrasts in the use of public tax bilities. Therefore, decisions to adopt new tions should continuously strive to improve revenues and raises technologies must be grounded in cost- tax collections. Efforts to encourage tax concerns about benefit analysis and evidence that novel payments, negotiate tax debts, and apply the distribution ways of doing things will in fact be penalties for tax evasion also strengthen of tax benefits. sustainable. efficiency. When building a comprehensive cadas- The full potential of property taxation tre, simplicity, accuracy, and low cost should is currently unexplored in Latin America. be the guiding principles. To meet these cri- Despite the significant challenges in the teria, tax authorities should conduct cost- region, more functional property tax systems benefit analyses and assess the feasibility clearly are achievable. Successful outcomes of updating cadastral information before will depend to a large extent on sensible adding new attributes. It is better to have a policy choices and administrative efforts. simple cadastre that records a few attributes The fiscal and regulatory benefits of an accurately and updates them regularly than effective tax on land and buildings amply to have a large number of attributes based justify these reforms.

38 policy focus report � Lincoln Institute of Land Policy ...... appendix A Data Sources

Country, year, and • Guatemala (2006); Intendencia • Peru (2009): Cuenta General data sources for de Recaudación y Gestión; Supe- de la República-MEF; Banco figures 2.1 and 2.4 rintendencia de Administración Central de Reserva del Perú; • Argentina (2010): Contaduría Tributaria (SAT); Ministerio Instituto Nacional de Estadística General de la Provincia y Direc- de Finanzas Públicas; Banco e Informática ción Nacional de Coordinación de Guatemala • República Dominicana (2010): Fiscal con las Provincias; CEPAL • Honduras (2005): Secretaria Dirección General de Impuestos • Bolivia (2006): CEPAL de Gobernación y Justicia; Internos; Oficina Nacional • Brazil (2009): Secretaria do CEPAL de Estadística (ONE) Tesouro Nacional; Instituto • Mexico (2006): Instituto para • Uruguay: Sepulveda and Brasileiro de Geografia e el Desarrollo Técnico de las Martinez-Vazquez (2011) Estatística (IBGE) Haciendas Públicas (INDETEC) • Chile (2009): Tesorería General • Nicaragua (2010): data provided Data sources for de la República; Instituto by a respondent of the Lincoln figures 2.2, 2.3, and 2.5 Nacional de Estadísticas (INE) Institute of Land Policy’s survey Appendix A sources and the • Colombia (2006): data provided on the property tax Statistics and Economic Indicators by a respondent of the Lincoln • Panama (2006): Ministerio de prepared by CEPAL (Comisión Institute of Land Policy’s survey Economía y Finanzas; Informe Económica para América Latina y on the property tax; CEPAL Económico Anual 2006. el Caribe). CEPAL covers national • Costa Rica (2009): Contraloría • Paraguay (2006): Ministerio tax burden statistics for Argentina, General de la República; Instituto de Hacienda, Subsecretaria de Bolivia, Brazil, Chile, Costa Rica, Nacional de Estadística y Censos Estado de Administración and Mexico only; statistics for the (INEC) Financiera; CEPAL other countries report the taxes • Ecuador (2010): Banco del Estado; collected at the central govern- Banco Central del Ecuador ment level. appendix B Lincoln Institute of Land Policy Online Survey

he Lincoln Institute tax administrators from various coun- the ongoing nature of the survey, maintains an online survey tries and jurisdictions in the region. the number of jurisdictions varies questionnaire on property The survey results are collected in a for each period during which taxation in Latin America, database that is expanded periodi- analyses are conducted. Further Tand information is collected regu- cally by adding new members to the information is available at http:// larly. Respondents include public network of respondents and having www.lincolninst.edu/subcenters/property- administrators, tax agents, revenue registered respondents update the tax-in-latin-america. agents, legislators, academics, and data for each jurisdiction. Due to

De cesare � Property Tax in Latin America 39 ......

references

Afonso, José Roberto R., Erika Amorim Araujo, Domingos, Omar Pinto. 2011. Implementing Puentes, C.R. 2002. Evaluación del impuesto and Marcos Antonio Rios da Nóbrega. 2010. local property tax reform in Brazil. Land Lines predial como instrumento para el logro de O imposto predial e territorial urbano (IPTU) 23(1). Cambridge, MA: Lincoln Institute of objetivos de política pública en Bogotá. Resumen no Brasil. Um diagnóstico sobre o grau de apro- Land Policy. ejecutivo. Bogotá, Colombia: Alcaldía Mayor veitamento do imposto como fonte de financia- de Bogotá. mento local. Working Paper. Cambridge, MA: Erba, Diego A. 2008. El catastro territorial en los Lincoln Institute of Land Policy. países Latinoamericanos. Cambridge, MA: Lincoln Sepulveda, Cristian F., and Jorge Martinez- Institute of Land Policy. http://www.lincolninst.edu/ Vazquez. 2011. Explaining property tax collec- Bahl, Roy, and Jorge Martinez-Vazquez. 2008. pubs/PubDetail.aspx?pubid=1373 tions in developing countries: The case of Latin The determinants of revenue performance. In America. Working Paper 11-09. Atlanta, GA: Making the property tax work, eds. Roy Bahl, Jorge ———. 2007. Catastro multifinalitario aplicado a International Studies Program, Andrew Young Martinez-Vazquez, and Joan Youngman, 35–57. la definición de políticas de suelo Urbano. Cambridge, School of Policy Studies, Georgia State Cambridge, MA: Lincoln Institute of Land MA: Lincoln Institute of Land Policy. http://www. University. Policy. lincolninst.edu/pubs/PubDetail.aspx?pubid=1306 Slack, Enid, and Richard Bird. 2006. Taxing land De Cesare. Claudia M. 2010. Overview of the ———. 2006. Sistemas de información geográfica and property in emerging economies: Raising property tax in Latin America. Working Paper. aplicados a Estudios Urbanos: Experiencias Latinoameri- revenue…and more? International Tax Program Cambridge, MA: Lincoln Institute of Land canas. Cambridge, MA: Lincoln Institute of Land Papers 605. Toronto: Institute for International Policy. Policy. http://www.lincolninst.edu/pubs/PubDetail. Business, Joseph L. Rotman School of Manage- aspx?pubid=1174 ment, University of Toronto, Canada. ———. 2008. Elaboración de un modelo integral de modernización catastral, dirigido a mejorar la Evans, A. W. 1995. The property market: Ninety Smolka, Martim O, and Claudia M. De Cesare. eficiencia, la eficacia y la equidad de las contribu- per cent efficient? Urban Studies 32(1):5–29. 2011. Property tax and informal property: The ciones inmobiliarias, con enfasis en el impuesto challenges of third world cities. In Innovative land predial. Proyecto México: BANOBRAS–INEGI. Instituto para el Desarrollo Técnico de las and property taxation: Policy, tools and practices for Haciendas Públicas (INDETEC). 2005. sustainable urban development. Nairobi, Kenya: ———. 2003. O cadastro como instrumento www.indetec.gob.mx UN-HABITAT. de política fiscal. Cadastro Multifinalitário como Instrumento de Política Fiscal e Urbana. Brasília, International Property Tax Institute. 2007. Youngman, Joan M. 1997. Henry George, Brasil: Ministério das Cidades. Assessment and tax agency benchmarking study, property rights, and taxation. In Land use and phase II. Toronto, Canada. taxation: Applying the insights of Henry George, ed. De Cesare, Claudia M., and José Francisco Lazo. H. James Brown. Cambridge, MA: Lincoln 2008. Impuestos a los patrimonios en América Kitchen, H. M. 1992. Property taxation in Institute of Land Policy. Latina. Serie Macroeconomía del Desarrollo 66. Canada. Canadian Paper no. 92. Toronto: División de Desarrollo Económico. Comisión Canadian Tax Foundation. Económica para América Latina (CEPAL). Naciones Unidas. Santiago de Chile, Chile. Ministério das Cidades. 2009. Diretrizes para a criação, instituição e atualização do cadastro Dillinger, W. 2000. Brazil–Financing municipal territorial multifinalitário (CTM) nos municipios investment: Issues and options. Report No. brasileiros. Portaria ministerial no. 511. 203130BR. Washington, DC: World Bank, Brazil December. Brasília, D.F. Country Management Unit–Finance, Private Sector and Infrastructure, Latin America and Pinilla, Juan Felipe, and Alejandro Florián. 2011. the Caribbean Region. Experiencia ee Innovación en Cultura Tributaria. La Campaña del 110% con Bogotá. Unpublished report. Cambridge, MA: Lincoln Institute of Land Policy.

40 policy focus report � Lincoln Institute of Land Policy Acknowledgments Ordering Information To download a free copy of this report or For their valuable contributions to the framework on reforming the to order copies of the printed report, visit property tax system in Latin America, I thank Diego Erba, a fellow in www.lincolninst.edu and search by author or title. the Lincoln Institute’s Program on Latin America and the Caribbean; For additional information on discounted Charles Johnstone, managing director of Property Taxation and prices for bookstores, multiple-copy orders, Valuation Services, AEC International, Toronto, Canada; and Luis and shipping and handling costs, send your Alberto Arias Minaya, INDE Consultores SAC, Universidad de Lima inquiry to [email protected]. and Universidad Católica y Escuela Superior de Adminisractión de Negocios (ESAN), Peru. I also acknowledge Roy Bahl for his insight- ful and useful comments on the text. Special thanks to Martim Production Credits Smolka, director of the Lincoln Institute’s Program on Latin America Project Manager & Editor and the Caribbean, for encouraging me to research and prepare this Ann LeRoyer report, and to Anna Sant’Anna, senior research associate in the Design & Production program, for her careful editing and revisions. DG Communications/NonprofitDesign.com Printing Recycled Paper Printing, Boston About the Author

Claudia M. De Cesare is a civil engineer and a graduate of the Pontifícia Universidade Católica in Rio Grande do Sul, Brazil. She 92% has a masters degree from the Universidad Federal do Rio Grande Cert no. SCS-COC-001366 do Sul and a Ph.D. from the University of Salford, England. She currently works in the Tax Management Division of the Office of the Municipal Secretary of the Treasury in the Prefecture of Porto Alegre, Brazil. She is also a professor and researcher, and a member of the Advisory Board of the International Property Tax Institute. She is on the teaching faculty of the Lincoln Institute of Land Policy. She developed the Property Tax Support Program for Municipalities coordinated by the Lincoln Institute in partnership with the Ministry of Cities of Brazil.Contact: [email protected]

About the Lincoln Institute of Land Policy www.lincolninst.edu The Lincoln Institute of Land Policy is a leading resource for key issues concerning the use, regulation, and taxation of land. Providing high- quality education and research, the Institute strives to improve public dialogue and decisions about land policy. As a private operating foundation whose origins date to 1946, the Institute seeks to inform decision making through education, research, policy evaluation, demonstration projects, and the dissemination of information, policy analysis, and data through our publications, website, and other media. 113 Brattle Street By bringing together scholars, practitioners, public officials, policy Cambridge, MA 02138-3400 USA makers, journalists, and involved citizens, the Lincoln Institute integrates theory and practice and provides a nonpartisan forum Phone: 617-661-3016 or for multidisciplinary perspectives on public policy concerning land, 800-LAND-USE (800-526-3873) both in the United States and internationally. Fax: 617-661-7235 or 800-LAND-944 (800-526-3944) Web: www.lincolninst.edu Email: [email protected] Improving the Performance of the Property Tax in Latin America

he challenges of establishing a successful and sustainable property tax in Latin American countries are numerous and varied, yet many jurisdictions are implementing viable reforms. Public officials responsible for tax administration Tface intense political pressure because the property tax is universal and highly visible. Public dissatisfaction arises because the property tax requires payment independent of a property transaction. Moreover, equitable property tax assessment depends on a variety of factors, including operational efficiency, technical expertise, available data, administrative capacity, and political will.

In spite of these and other challenges, property taxation remains the best way to support local public expenditures for several reasons, including its familiarity to taxpayers, its progressivity relative to taxes on consumption, and the difficulty of tax avoidance. This report presents a comprehensive framework that could help overcome many of the traditional roadblocks to successful property taxation in Latin America. Recommended reforms focus on three areas.

• Fiscal policy. Property tax reforms should support local autonomy, avoid duplication of effort across levels of government and/or agencies, improve clarity of legislation, support under-resourced cities and towns, and guarantee the universality of the tax. These goals can be achieved by adopting policies that adhere to basic principles of equity, ability to pay, universality, legality and certainty, effective administration, and transparency.

• Tax policies. Certain tax policies—such as those benefiting tax delinquents and limiting the universality of the tax— create inequities and inefficiencies in the system. Other policy choices can help create sustainable property tax systems, such as having the same level of government both decide on public expenditures and set property tax rates.

• Assessment practices and collection procedures. Better tax administration requires increased efforts to design cadastres for sustainability and apply more flexible cadastral and valuation approaches to improve the accuracy and uniformity of valuations. Encouraging tax payments, negotiating tax debts, and consistently applying sanctions in cases of tax evasion can help to improve collections. Effective public information campaigns on taxation procedures and the use of tax revenues can strengthen fiscal culture and promote trust.

Municipalities that implement these reforms can benefit from greater revenues to invest in local public services. Improvements in property tax collections should strengthen local governance while underscoring the shared responsibility of citizens and public authorities for urban development.

ISBN 978-1-55844-240-5

ISBN 978-1-55844-240-5 Policy Focus Report/Code PF033