Land taxes: an opportunity to make urbanisation self-financing Michael Blake International Growth Centre (IGC) (michael.blake@bsg.ox.ac.uk) Cities that Work March 2018

Outline How land taxes can enable self-financing urbanisation Land taxes are underutilised in African cities Overcoming challenges: Policy design Political opposition Administrative difficulties

Urbanisation and land values Urbanisation creates massive land value appreciation Seoul land values rose 33-fold from 1974-96 (Rii and Ahn, 2002) Parts of peri-urban Kigali have appreciated 1000-fold in the last 10 years (Kopanyi and Murray, 2016) Rising land values are created by: Rising overall demand for urban land Public infrastructure According to the Local Government Act of 1982, local governments in Tanzania are responsible for delivering basic education, health care, roads, water, agricultural services, local administration and other local government services such as the establishment and maintenance of community centres and public parks - Boex, “Final Report: Development of a Strategic Framework for the Financing of Local Governments in Tanzania.”

Who captures rising urban land values? Lucky landowners Duke of Westminster in London John Jacob Astor in New York “Could I begin life again…I would buy every foot of land on the island of Manhattan” The government East Asia: land values finance urban infrastructure Significant government land ownership and high land taxes Hong Kong: 80% of infrastructure spending from 1970-91 recouped through land-related revenues (Hong, 1996) According to the Local Government Act of 1982, local governments in Tanzania are responsible for delivering basic education, health care, roads, water, agricultural services, local administration and other local government services such as the establishment and maintenance of community centres and public parks - Boex, “Final Report: Development of a Strategic Framework for the Financing of Local Governments in Tanzania.”

Self-financing urbanisation through land Land value appreciation …funds the public investments …that make the city more productive

Land and property taxes Can capture land value through ownership or taxation Taxation can achieve similar results but politically easier For lumpy expenditures - annual tax flows as collateral; or betterment fees Taxing land is more efficient, taxing property is more progressive Land and property taxes underutilised across Africa 0.4% of GDP in Africa, 2% in OECD (Franzsen and McClusky, 2017) Under 1% of total tax revenues in most African countries, 6% in OECD Challenges: Policy design Political Administrative According to a report by PMORALG in 2013, weaknesses in internal control and monitoring of revenues of LGAs resulted in the failure to collect own source revenues amounting to Shs 8,008,669,844 in 2011/2012. Sample evidence suggests that between 40 – 60% of local revenue collections in 2005 were spent on local administration costs - Boex, “Final Report: Development of a Strategic Framework for the Financing of Local Governments in Tanzania.” Reforms to tax administration involve:   - Better identification of taxpayers; - Transparent process in assessing their liabilities; - Effective billing and collection; - Facilitating and monitoring compliance as well as dealing with non-compliance.

1) Gentrification and revaluation Exemptions (poor communities, the elderly) to prevent gentrification? Poorly targeted exemptions risk undermining the tax base (e.g. Kampala) Revaluation Land values rise faster than incomes Option 1: fix land values and change rates Nairobi valuation rolls based on 1980 values Unfair and results in a massive revenue loss (Kampala revaluation predicted to double revenues; Kopanyi, 2015) Option 2: update land values but reduce rates According to a report by PMORALG in 2013, weaknesses in internal control and monitoring of revenues of LGAs resulted in the failure to collect own source revenues amounting to Shs 8,008,669,844 in 2011/2012. Sample evidence suggests that between 40 – 60% of local revenue collections in 2005 were spent on local administration costs - Boex, “Final Report: Development of a Strategic Framework for the Financing of Local Governments in Tanzania.” Reforms to tax administration involve:   - Better identification of taxpayers; - Transparent process in assessing their liabilities; - Effective billing and collection; - Facilitating and monitoring compliance as well as dealing with non-compliance.

2) Link taxation to public investment Property tax reform in Lagos Equilibrium of non-compliance and poor service delivery Communicating the virtuous cycle of tax and investment 5-fold increase in state public revenues from 1999-2011. Re-election of Governors Tinubu and Fashola Own source revenues have continued to grow steadily, resulting in a fairer and sustainable improvement in municipal revenue .  

3) Complexity comes at a cost Land registration Cadastral surveys vs participatory satellite/photo mapping Survey cost per parcel: $160 in Tanzania vs <$10 in Rwanda (Ali. et al, 2014) Valuation systems CAMA vs area-based Move to area-based in Sierra Leone 2007-10 led to 300-500% revenue rise (Monkam and Moore, 2015) Own source revenues have continued to grow steadily, resulting in a fairer and sustainable improvement in municipal revenue .  

Summary The city authority has a clear ethical right to rising urban land values Land and property taxes can unlock a virtuous cycle where infrastructure investments finance themselves Learning from experiences to overcome challenges Own source revenues have continued to grow steadily, resulting in a fairer and sustainable improvement in municipal revenue .