Taxing agricultural land Malcolm Childress, David Solomon and Rogier van den Brink

What is a land tax? “land tax” is a tax on the value of land, which is paid by the owner. “land tax” is a tax on the value of land, which is paid by the owner. Different from a property tax: Different from a property tax: land tax taxes the value of the land only land tax taxes the value of the land only property tax taxes the value of the land and the fixed improvements made on it (e.g. a house, a farm building, and irrigation canal). property tax taxes the value of the land and the fixed improvements made on it (e.g. a house, a farm building, and irrigation canal).

History: the “ideal tax” long been considered an “ideal tax” by a wide range of scholars and politicians: long been considered an “ideal tax” by a wide range of scholars and politicians: 17th century philosopher John Locke 17th century philosopher John Locke 18th century revolutionary Benjamin Franklin 18th century revolutionary Benjamin Franklin 19th century politician Henry George: 19th century politician Henry George: Hence the term “Georgists”, who want the land tax to be the only tax Hence the term “Georgists”, who want the land tax to be the only tax Example from 1990: Example from 1990: several leading economists—including four Nobel prize winners— wrote to then President Mikhail Gorbachev, suggesting that Russia use land taxation in its transition towards a free market economy several leading economists—including four Nobel prize winners— wrote to then President Mikhail Gorbachev, suggesting that Russia use land taxation in its transition towards a free market economy

Economic arguments does not distort economic incentives (because the overall supply of land is fixed); does not distort economic incentives (because the overall supply of land is fixed); fair, because it specifically targets unearned income (a rent): fair, because it specifically targets unearned income (a rent): the value improvements of land caused by public investment (owners are taxed on what was there originally—the potential of the land) and not an economic activity of the owner; the value improvements of land caused by public investment (owners are taxed on what was there originally—the potential of the land) and not an economic activity of the owner; provides a disincentive to land speculation in both urban and rural areas; and provides a disincentive to land speculation in both urban and rural areas; and relatively easy to administer, because relatively easy to administer, because it is impossible to hide land it is impossible to hide land Most rural communities have an idea of what land is worth Most rural communities have an idea of what land is worth

Does a land tax redistribute land? Recall that the price of land in the market reflects: Recall that the price of land in the market reflects: Income stream from agriculture Income stream from agriculture Plus value as asset, hedge against inflation Plus value as asset, hedge against inflation Farmers can typically only afford to pay the agricultural value Farmers can typically only afford to pay the agricultural value So will be outbid in the land market by the rich So will be outbid in the land market by the rich Need to remove all distortions favoring large farmers Need to remove all distortions favoring large farmers Need subsidies for the poor Need subsidies for the poor And a land tax can help, because it reduces the land price and its speculative value And a land tax can help, because it reduces the land price and its speculative value See: Binswanger, Hans, Klaus Deininger and Gershon Feder “Power, Distortions, Revolt and Reform in Agricultural Land Relations.” In Jere Behrman and T.N. Srinivasan (eds). Handbook of Development Economics. Vol. 3B. Amsterdam: Elsevier. See: Binswanger, Hans, Klaus Deininger and Gershon Feder “Power, Distortions, Revolt and Reform in Agricultural Land Relations.” In Jere Behrman and T.N. Srinivasan (eds). Handbook of Development Economics. Vol. 3B. Amsterdam: Elsevier.

Does a land tax redistribute land? continued In practice, it has not: In practice, it has not: Usually rates set very low; Usually rates set very low; Low assessment values Low assessment values Example from Brazil: Example from Brazil: tax locally administered, and large landowners used their influence to evade the tax tax locally administered, and large landowners used their influence to evade the tax Taxed “unused” land which is very difficult to define— hence easy to evade Taxed “unused” land which is very difficult to define— hence easy to evade

Reasons for adoption of land tax: very diverse As part of land restitution: Estonia As part of land restitution: Estonia As a form of land reform: Brazil As a form of land reform: Brazil As a mechanism for defining property rights: Brazil As a mechanism for defining property rights: Brazil To create property valuation capacity. To create property valuation capacity. Defuse transitional tensions: Eastern Europe Defuse transitional tensions: Eastern Europe Build on existing fiscal systems Build on existing fiscal systems Discourage foreign absentee land ownership: Australia Discourage foreign absentee land ownership: Australia Discourage speculation: Singapore, Jamaica Discourage speculation: Singapore, Jamaica Low cost of assessment: South Africa, Kenya Low cost of assessment: South Africa, Kenya Part of local economic development: Pittsburgh, Harrisburg, Queensland, NSW, Brazil Part of local economic development: Pittsburgh, Harrisburg, Queensland, NSW, Brazil Equity: Australia, Denmark Equity: Australia, Denmark

International Best Practices Land taxes should be local: Land taxes should be local: rate-setting, discovery, assessment, billing and collection rate-setting, discovery, assessment, billing and collection They should be administered along with the urban rates They should be administered along with the urban rates Basis of assessment should be simple and able to be monitored for consistency. All the following are suitable: Basis of assessment should be simple and able to be monitored for consistency. All the following are suitable: Area Area Self Assessment, Self Assessment, Geographic Banding Geographic Banding CAMA CAMA Community based value factor identification and application Community based value factor identification and application It is most important to ensure that the base is capable of being fairly administered. It is most important to ensure that the base is capable of being fairly administered. This may be more important than the choice of the base. This may be more important than the choice of the base.

…… Best Practices …… There should be zero-rated thresholds, phasing in, “circuit breakers”, capping of increases, There should be zero-rated thresholds, phasing in, “circuit breakers”, capping of increases, Should be tailored to local agricultural circumstances in the municipal property rates policy Should be tailored to local agricultural circumstances in the municipal property rates policy Assessment should not be index-linked to agricultural risk factors such as rainfall and commodity prices Assessment should not be index-linked to agricultural risk factors such as rainfall and commodity prices Rate should be differentiated from the urban rate. Rate should be differentiated from the urban rate. Rate should not be progressive (the base is already distributed progressively) Rate should not be progressive (the base is already distributed progressively) There should not be a tax on land market transactions. There should not be a tax on land market transactions. There should be an accessible transparent appeal process. There should be an accessible transparent appeal process. There should be on-going monitoring of assessment quality to ensure sound administration There should be on-going monitoring of assessment quality to ensure sound administration

Defining land value “market value”: value as if land was currently sold in the market without any duress by a willing seller to a willing buyer, unencumbered by any loans or other financial obligations. “market value”: value as if land was currently sold in the market without any duress by a willing seller to a willing buyer, unencumbered by any loans or other financial obligations. “prairie value”: value as if there were no improvements or any geographical advantages relating to infrastructure or improvements. “prairie value”: value as if there were no improvements or any geographical advantages relating to infrastructure or improvements.  “use value”: as opposed to “highest and best use” in situations where the value of the land includes the potential for future development, usually for urban residential use.  “use value”: as opposed to “highest and best use” in situations where the value of the land includes the potential for future development, usually for urban residential use. Agricultural land is often valued only on the current use, i.e. agricultural, not on the basis of potential future uses. Agricultural land is often valued only on the current use, i.e. agricultural, not on the basis of potential future uses. Use of its “rental value” will also achieve that objective Use of its “rental value” will also achieve that objective

Area-based land tax In some countries, the land tax is not based on the actual land value of each individual farm, but on a standardized price per hectare, adjusted by a fertility or location factor. In some countries, the land tax is not based on the actual land value of each individual farm, but on a standardized price per hectare, adjusted by a fertility or location factor. This is in effect a simplified valuation, aimed at reducing the cost of assessment. This is in effect a simplified valuation, aimed at reducing the cost of assessment. E.g. Namibia E.g. Namibia

Self-appraisal When the taxpayers themselves provide the assessment of the taxable value of the property, the process is known as self- appraisal. When the taxpayers themselves provide the assessment of the taxable value of the property, the process is known as self- appraisal. It has an advantage in that it is simple to administer, as the cost of appraisal is shifted to the taxpayer. It has an advantage in that it is simple to administer, as the cost of appraisal is shifted to the taxpayer. In practice, taxpayers often have access to this information, having conducted valuations for other purposes. In practice, taxpayers often have access to this information, having conducted valuations for other purposes. Self appraisal gives them an opportunity to provide this otherwise confidential information voluntarily. Self appraisal gives them an opportunity to provide this otherwise confidential information voluntarily. Under-appraisal is often discouraged by a provision that expropriation can take place at the declared value. Under-appraisal is often discouraged by a provision that expropriation can take place at the declared value.

Community-assessment. International experience: even in very remote areas, the local population has a pretty good idea of land values, even if these are not correctly reflected in legal documents. International experience: even in very remote areas, the local population has a pretty good idea of land values, even if these are not correctly reflected in legal documents. For instance, local mayor (tribal chief) and agricultural extension agent know what land is generally worth. For instance, local mayor (tribal chief) and agricultural extension agent know what land is generally worth. This "community perception" is a promising avenue, which has been tested out successfully in several countries. This "community perception" is a promising avenue, which has been tested out successfully in several countries.

Banding A method of lowering the cost of appraisal A method of lowering the cost of appraisal Banding requires the assessing officer to assign each property to one of several value bands Banding requires the assessing officer to assign each property to one of several value bands Instead of performing a detailed valuation in each case. Instead of performing a detailed valuation in each case.

Computer Aided Mass Appraisal. (CAMA). A means of performing valuations en masse by determining the key value creating variables by statistical analysis A means of performing valuations en masse by determining the key value creating variables by statistical analysis estimating values by applying the estimated statistical coefficients to locally collected data. estimating values by applying the estimated statistical coefficients to locally collected data. CAMA is reported to be much less expensive than conventional valuation. CAMA is reported to be much less expensive than conventional valuation.

Thresholds Many jurisdictions place a minimum threshold of land value, below which no tax is charged. Many jurisdictions place a minimum threshold of land value, below which no tax is charged. Dual function: it both provides relief for the poor and lowers the cost of administration by avoiding the need to conduct a detailed valuation on a very large number of small properties. Dual function: it both provides relief for the poor and lowers the cost of administration by avoiding the need to conduct a detailed valuation on a very large number of small properties. Eases the transition when an area is absorbed into the tax base. Eases the transition when an area is absorbed into the tax base.

South Africa: Municipal Property Rates Act MPRA conforms to “best practice”: Gives proper basis for taxing all real estate, including agricultural Gives proper basis for taxing all real estate, including agricultural Agricultural land is already part of the municipal tax base. (has been since “wall-to-wall local government”) Agricultural land is already part of the municipal tax base. (has been since “wall-to-wall local government”) Allows differential rates Allows differential rates Requires certain reliefs, eg threshold, phasing in Requires certain reliefs, eg threshold, phasing in Requires a properly consultative “rates policy” Requires a properly consultative “rates policy”

But in the old Transvaal…. area (ha) value (R) R/ha farm example ,0004,000 Mogale City (Krugersdorp)Madibeng(Brits)Merafong(Carltonville)Mbombela(Nelspruit) tariff7.62%17.33%13.00%24.18% bracket (ha) agricultural rebate factor Tax payable (R/year) 1100% % % , , >201% total1, , , ,013.88

How hard would it be to implement a land tax in SA? Effective rate can be very low, half to one percent Effective rate can be very low, half to one percent Half a percent on half of the land would yield significant revenue Half a percent on half of the land would yield significant revenue Can differentiate between categories of land use. Can differentiate between categories of land use. Enabling legal framework is in place (MPRA) Enabling legal framework is in place (MPRA) But national guidelines needed, as per Section 5 (2) b of MFMA But national guidelines needed, as per Section 5 (2) b of MFMA Could be integrated with work on municipal financial framework Could be integrated with work on municipal financial framework

Namibia Land taxation rate is set at 0.75 percent of the unimproved value of the farmland Land taxation rate is set at 0.75 percent of the unimproved value of the farmland land values determined using a standardized metric per hectare and by accounting for the size of the farm. land values determined using a standardized metric per hectare and by accounting for the size of the farm. Raises substantial revenue for land reform programs Raises substantial revenue for land reform programs reduces inefficient use of land reduces inefficient use of land encourages an increased land supply and moderate pricing of agricultural land, encourages an increased land supply and moderate pricing of agricultural land, as well as to specifically defend against land speculation and foreign ownership: as well as to specifically defend against land speculation and foreign ownership: charges an additional 0.25 percent of land value annually for every extra farm owned charges an additional 0.25 percent of land value annually for every extra farm owned charges foreigners a higher land tax rate of 1.75 percent rather than 0.75 percent charges foreigners a higher land tax rate of 1.75 percent rather than 0.75 percent

Implementation challenges iso-value metric does not account for minor topographical variations that alter land values. iso-value metric does not account for minor topographical variations that alter land values. extra charges for additional farms do not account for the aggregate size of all farms: extra charges for additional farms do not account for the aggregate size of all farms: an individual holding several farms with a total of 10,000 hectares could be taxed more heavily than an individual owning a single 15,000 hectare farm. an individual holding several farms with a total of 10,000 hectares could be taxed more heavily than an individual owning a single 15,000 hectare farm.

Conclusion Economic rationale for land tax is sound, in theory and in practice Economic rationale for land tax is sound, in theory and in practice Administration is not as difficult as earlier observers had thought Administration is not as difficult as earlier observers had thought Land tax can never be the only instrument to promote land redistribution Land tax can never be the only instrument to promote land redistribution But should be seriously considered as part of the “package” But should be seriously considered as part of the “package”