Financing Smart and Sustainable Cities Hamid Rashid, Ph.D. Chief, Development Policy and Strategy United Nations Department of Economic and Social Affairs, New York This does not represent the views of the UN and/or its Member States

Outline A smart and sustainable city Externalities Smart finance for a smart city Why land value tax? Policy considerations This does not represent the views of the UN and/or its Member States

A smart and sustainable city Balanced growth – economic sustainability A positive-sum game Wealth, income and consumption inequality Access to services – social sustainability Health, educational and transportation services Special needs of children, elderly, disabled Environmental sustainability Mitigating pollution Adapting to climate change Technology keeps pace with human needs A sustainable city is a smart city This does not represent the views of the UN and/or its Member States

Externalities Cities are confronting challenges that are national, regional or even global in scale Policy externalities Macroeconomic policies Credit policies Social policies Environmental externalities Pollution Rapid technological change But cities have limited policy independence and only few instruments Smart cities must use these instruments wisely This does not represent the views of the UN and/or its Member States.

Financing Challenges Cities host 53% of world population but typically control less than 20% of tax revenue Depend on transfers Even in the United States with a decentralized structure, nearly 40% of city revenue comes from state and federal government Large mismatch between responsibilities and finance Economic dependence constraints the capacities of cities to design and implement smart policies Even when cities are able to tax, they rely on few sources of revenue, which are highly pro-cyclical Property tax Sales tax Fees for public services This does not represent the views of the UN and/or its Member States

Cities keep growing… This does not represent the views of the UN or its member states.

Local Government revenue shares and sources Share of revenues collected at local levels are too small to finance the needs of smart cities Cities are too dependent on grants and transfers Smart cities need alternative and more efficient revenue source This does not represent the views of the UN or its member states.

Smart Financing Most of these taxes are inefficient and distortionary Local taxes are inadequate to finance massive needs of cities A city’s biggest asset is its land, which makes a city a city Land value is determined by city level decisions, hence endogenous Land value tax (LVT) can kill many birds with one stone Least distortionary Cannot be hidden LVT taxes “undeserved gains” of landowners Prevents asset price and credit bubbles Removes dis-incentive of property development An eco-tax to encourage more efficient use of land This does not represent the views of the UN and/or its Member States

Why land value tax? “Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains - and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived,” Winston Churchill This does not represent the views of the UN or its member states.

Policy considerations Cities need sustainable source of finance to be smart and sustainable Central government transfers do not always allow cities to take smart decisions Transfer are often conditional and targeted Transfers can be volatile Land value tax can be a critical source of revenue for cities to Invest in infrastructure Expand access to services Prevent real estate and credit bubbles Reduce wealth and income inequality This does not represent the views of the UN and/or its Member States

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