Property Tax Rates
MVV182K Property-related Taxation: Issues and
Trends
Masaryk University
Brno, Czech Republic
30 September 2015
Prof Riël Franzsen
South African Research Chair in Tax Policy and Governance
Director: African Tax Institute
University of Pretoria
South Africa
Introduction (1)
• Tax base
• Property discovery
• Valuation
• Assessment
• Tax rates
• Tax relief
• Billing
• Collection
• Enforcement
• System Management
Introduction (2)
• Determining an appropriate tax rate constitutes a
critically important step in the context of any property tax
system
• Tax rate = converting assessment into a tax bill
• The tax rate depends primarily on the revenue
requirements of the taxing authority and the nature and
extent of the tax base
• An important policy decision must be taken on how often
rates are determined –
– Annually
– Regularly
– Irregularly
Tax Rates
Third important policy decision:
• Who determines tax rates?
– Central/state government or local government?
– Local government with central government oversight?
• How are tax rates determined?
– Fixed in national legislation
– Annually (in terms of regulation or by-law)
• Minimum or maximum rates?
• Uniform or differential tax rates?
Tax Rates Oversight
Tax rates (maximum)
Namibia’s Local Authorities Act, 1992:
Section 73(3): “A rates shall not be determined
under subsection (1) –
(a) by the municipal council of a municipality… in
excess of two and a half cent per rand of the
valuation of any rateable property…
except with the prior approval in writing of the
Minister.”
Tax Rate Differentiation
Tax rates (differential rates)
Swaziland’s Rating Act, 1995:
Section 5(1): “Notwithstanding Section 4, the local
authority may make, assess and levy a differential
rate, which may be higher or lower than the general
rate, upon specified categories of residential or nonresidential
immovable property.”
Section 5(3): “The categorization of immovable
property for differential rating shall be subject to the
approval of the Minister.”
Revenue: The Basics
Policy variables
Tax ratexRevenue Tax base=
Values versus Tax Rate (1)
1 42 3 5 6 7
Years
Valuation Cycles
Tax Rate
8 9 10
VR Values
Revenue
!!!!
Values versus Tax Rate (2)
1 42 3 5 6 7
Years
Valuation Cycles
8 9 10
VR Values
Revenue
!!!!
Tax Rate
Values versus Tax Rate (3)
1 42 3 5 6 7
Years
Valuation Cycles
8 9 10
VR Values
Revenue
Tax Rate
Revenue Mobilization Model
Policy variables Administration variables
CR: Coverage ratio
VR: Valuation ratio
Col R: Collection ratio
Source: Kelly (2000)
Revenue =
Tax
base
Tax
rate
VR Col Rx x x xCR
Tax Base versus Rate
• Tax base is an important determinant for
the tax rate
• The approach to tax base:
– Narrow base = High nominal tax rate or rates
– Broad base = Low nominal tax rate or rates
Revenue v Rate
• Revenue is also an important determinant for
the tax rate
• The approach to revenue:
– “How much do we need?”
– “How much can we get?”
• The answer to these questions may be very
different – and has a fundamental impact on the
setting of tax rates
– Is property tax a primary or a residual source of
revenue?
• What should the tax rate be?
Examples: Residential Tax Rates…
• Kingstown, Saint Vincent (2014): 0.08%
• Dar es Salaam, Tanzania (2012): 0.1%
• Cape Town, South Africa (2014): 0.45%
• Toronto, Canada (2015): 0.7056037%
• Nairobi, Kenya (2014): 34%
• Mumbai, India (2011): 276%
Examples: Residential Tax Rates…
• Kingstown, Saint Vincent (2014): 0.08%
– Revenue neutral tax reform
• Dar es Salaam, Tanzania (2012): 0.1%
– Tax base – capital value of buildings only; very poor community
• Cape Town, South Africa (2014): 0.45%
– Market value, first year of new valuation roll
• Toronto, Canada (2015): 0.7056037%
– Market value; affluent community; tax also funds education
• Nairobi, Kenya (2014): 34%
– Land value only,; last valuation done in 1982
• Mumbai, India (2011): 276%
– Annual rental value; rent control enforces an artificial ceiling value
So, do not compare apples with apples!
Relationship: Tax Rate and Tax Base
Land ($200,000) + Building ($800,000) = $1,000,000
Annual yield is 10% = $ 100,000
Base = Total Value = $1,000,000
Tax @ 1% = $ 10,000
Base = Land Value = $ 200,000
Tax @ 5% = $ 10,000
Base = Building value = $ 800,000
Tax @ 1,25% = $ 10,000
Base = Annual value = $ 100,000
Tax @ 10% = $ 10,000
Tax Rate Comparisons
• Rate comparisons are difficult because –
– Tax bases differ (nature)
– Narrow base versus broad base (i.e. extent)
– Valuation assessment levels may differ
– Ages of valuation rolls may differ
– Importance of property tax as a source of revenue differ
– Expenditure responsibilities differ
– Expenditure needs differ
• Tax administration may also be a determinant –
– Weak collection may necessitate higher rates
– Improved base coverage may result in lower rates
– Regular revaluations may result in lower nominal rates
Tax Rate Design
• Flat rate versus progressive rates
– Why a flat (single) rate?
– Why progressive rates?
• Uniform rate versus differential rates (also
referred to as “classified rates”)
– Why a uniform rate?
– Why differential rates?
Rate and Tax Incidence
• Proportional rate
– As the value of property rises, tax liability rises by the same
percentage
– Thus, the tax constitutes a constant percentage of value at all
value levels
• Progressive rates
– As value rises, taxes take an increasing percentage of value
– i.e. increasing effective tax rate
• Regressive rates
– As value rises, taxes take a smaller percentage of the value
– i.e. decreasing effective tax rate
Progressive Tax Rates (1)
• Basis for progressive rates:
– Size
– Value
– Property use
• Actual use
• Zoned use
– Land versus improvements
Progressive Tax Rates (2)
• Why?
– Perceived ability to pay
• Larger size and/or higher value = greater ability?
– Land reform initiatives
• Administration
– Single parcels versus multiple parcels
• Linking properties to single owner
– Billing and collection
– Complexity
– Corruption
• Examples:
– Value-based systems (e.g. until recently, Jamaica)
Source: Rosengard, 1998.
Fewer than 5% of properties constitute about 30% of the
total value and is liable for more than 60% of the revenue.
Differential Tax Rates
• Basis for different rates:
– Property use categories
• Actual use
• Zoned use
– Land versus improvements
– Size
– Value
Differential Tax Rates
• Reasons:
– Equity
– Political
– Non-revenue reasons
• Absenteeism
• Vacant land
• Speculation
• Issues:
– Administrative costs
– Number of differential rates
City of Perth (Western Australia)
Tax Rates for 2015/2016
Land use category Rate
(c/$ of gross rental value)
Ratio in relation
to residential
Residential 4.4107 1:1
Hotel 5.0032 1:1.13
Commercial 5.0032 1:1.13
Retail 5.0032 1:1.13
Office 2.9079 1:0.66
Vacant land 5.8157 1:1.32
Source: www.perth.wa.gov.wa (2015)
City of Toronto – 2015 Property Tax Rates
Description City Tax Rate %
Education Tax
Rate %
Transit Tax Rate % Total Tax Rate %
Residential 0.5081190% 0.1950000% 0.0024847% 0.7056037%
Multi-Residential 1.5290188% 0.1950000% 0.0025294% 1.7265482%
New
Multi-Residential
0.5081190% 0.1950000% 0.0024847% 0.7056037%
Commercial
General
1.5361843% 1.2278260% 0.0025294% 2.7665397%
Residual
Commercial Band
1
1.2811685% 1.2278260% 0.0021095% 2.5111040%
Residual
Commercial Band
2
1.5361843% 1.2278260% 0.0025294% 2.7665397%
Industrial 1.5301969% 1.2946100% 0.0025294% 2.8273363%
Pipelines 0.9773995% 1.5065730% 0.0047794% 2.4887519%
Farmlands 0.1270297% 0.0487500% 0.0006212% 0.1764009%
Managed Forests 0.1270297% 0.0487500% 0.0006212% 0.1764009%
Property
categories
Cape Town eThekwini Johannesburg Tshwane
c/R Ratio c/R Ratio c/R Ratio c/R Ratio
Residential 0.6931 1.00 1,115 1.000 0.6531 1.00 1,013 1.00
Com & Bus 1.2508 1,80 2.528 2.267 1.8287 2,80 3,056 3.02
Industrial 1.2508 1,80 3,262 2.926 1.8287 2,80 3,056 3.02
Vacant land 1.2508 1,80 4.998 4.483 2.6124 4.00 6,573 6.49
Agricultural 0.1251 0.18 0.279 0.250 0.1632 0.25 0.253 0.25
State-
owned
- - - - 0.9796 1.50 3,056 3.02
PSI 0.2234 0.18 0.279 0.250 0.1632 0.25 - Tax
Rates and Ratios for 2015/2016:
4 Metropolitan Municipalities
Source: Metropolitan Municipalities
Split-Rate Tax Rates: Example
Mbabane, Swaziland Tax Rates for 2014/2015
Category Land Value Improvements
Developed Residential 1.29% 0.21%
Undeveloped Residential 1.51% Developed
Commercial 2.53% 0.7%
Undeveloped Commercial 2.22% Public
Open Spaces 1.82% Source:
City of Mbabane
Split-rate Structure
• Efficiency and equity considerations
– Incentive to develop?
• Cost of valuations
– Credible values for improved property, the land only,
as well as improvements
– Improvements or land as residual value?
• Examples:
– Namibia, Swaziland and South Africa
– Pittsburgh, Pennsylvania, United States
– Botswana…
Who determines Tax Rates?
• What does the law dictate or allow?
• Central government
– Fixed in law (e.g. Cameroon, Uganda)
• Shared tax versus shared revenue
– Cameroon (pre- and post-2007) versus Uganda
• Local government:
– Complete freedom
– Direct oversight and/or central government approval (e.g. Botswana)
– Indirect oversight (e.g. South Africa)
• Ratios pertaining to differential rates
• Compliance with constitutional guidelines
– Statutory limitations (maximum and/or minimum rates) (e.g. Uganda)
– Citizen oversight (e.g. California)
• Tax competition
Local Rate Setting
• Advantages:
– Local accountability is increased
– Fiscal capacity and tax effort
– Efficiency: Better relationship between local revenue
and expenditure decisions
• Disadvantages:
– High rates to account for poor administration
– Complex rate structures complicates administration
and increases administrative discretion (and
corruption)
– Distortions in economic decisions
How and When are Rates Set?
• Annually
– “Budget residual option”
Tax rate = (Expenditure – other revenues)
Total assessed value
Tax rate = ($50,000,000 – $20,000,000)
$2,000,000,000
= 0.015
= 1.5%
= 1.5c in the $
Annual Rates versus Fixed Rates (1)
Determining tax rates annually
– Advantages:
• Incremental increases to allow for –
– Fixed value base (between revaluations)
– Increasing revenue demands
– Inflation
– New valuation roll
– Disadvantages:
• Taxpayer uncertainty
• “Once-off” high rates on certain property
categories
Annual Rates versus Fixed Rates (2)
Fixed rates
– Advantages:
• Certainty (local government and taxpayers)
• “Fixed rate incentives”
– Maximizing base coverage
– Maximizing valuation coverage
– Maximizing collection efforts
– Disadvantages:
• No proper link between expenditures and revenues
• Lack of buoyancy with no annual adjustment for fixed
assessment base and/or inflation
Nominal versus Effective Rates
• Whether set locally or
nationally, and whether fixed
or set annually, the nominal
rate tend to be higher than the
effective rate
• Effective rate = Tax
amount/Property value
• Reasons:
– Value reductions
– Assessment ratios
– Rebates
– Exemptions
Example
Property value $100,000
Value reduction $15,000
Assessment
ratio
0.8
Nominal tax rate 1.5%
Rebate 10%
Tax Amount $918
Effective tax rate $918/$100,000
= 0.918%
Tax Rate Issues
• Tax rates versus “tax effort”
• Levels of local discretion
– Limited discretion + possible statutory overrides
• Ideally: Effective rates should be as close as possible to
statutory (i.e. nominal) rates – implying few reductions,
rebates, etc.
• Fewer rates imply reduced administration and
compliance costs
• Do not off set the costly efforts of tax base coverage and
assessment coverage through too low tax rates
• Narrow base = high rates
Trends: Tax Rates
• Uniform versus differential tax rates in the
Commonwealth of Nations:
– Africa: Majority allow for differential rates
• South Africa – new MPRA (s 19)
– Caribbean: Majority allow for differential rates
– Asia and the South Pacific: Majority allow for
differential rates
• Tax rates: Annual versus static
– Static rates: Ghana, Tanzania
• Nationally set rates or at least oversight
– The vast majority of countries provide at least for
some central (or provincial/state) oversight or
control over locally-set tax rates
Conclusions
• Recommendations for tax rate design
– Keep it simple - equity comes with a price tag
• Where differential (i.e. classified) rates are used, limit the
number of tax rates
• Justify (and quantify) the differentiation
• The rate should be such that the revenue at least recover
the costs related to all of the steps in the comprehensive
property tax model