How Property Taxes Can Help Low-Income Countries to Develop

IMF Blog, November 11, 2024

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Authors: Martin Grote, Mario Mansour, Jean-François Wen
Publication date: November 11, 2024
Major finding: Taxing property more efficiently can play a meaningful role in raising revenue at the local level and allow countries to invest more in their people.
Global revenue need: Governments must raise an additional $3 trillion to achieve sustainable and inclusive economic growth goals this decade.
Fiscal burden by country group: The cost equals 4 percent of gross domestic product for emerging markets, and 16 percent for low-income countries.
Potential tax revenue gain (prior IMF research): up to 5 percentage points of GDP over two decades.
Current property-tax performance:
- more than 1 percent of GDP on average in OECD countries,
- nearly 3 percent in some advanced economies,
- around 0.1 percent of GDP in emerging Asia and Africa.
Ambition with reforms and technology: recurrent property tax revenues in developing countries should be at least 10 times higher than current levels.

Benefits of well-designed property taxes:
- reliable and progressive municipal financing,
- enhance accountability of local governments since proceeds fund local public services,
- tax increases in wealth from construction-intensive urbanization and public-infrastructure development.
Political advantages:
- locally collected and spent taxes may be politically less challenging than broad-base national taxes,
- the tight link between local revenue and spending shields property taxes from national politics and raises accountability standards for local councils.
Legislative and design guidance:
- national legislation should regulate how much property taxes can differ across a country to limit divergences in local public-service levels,
- municipalities should limit exemptions to a narrow range of public organizations,
- forgone revenues from exemptions should be regularly reported.
Protection for “asset-rich but cash-poor” households:
- soften impact by deferring taxes until the property is sold, at which point full payment is due.

Recommended sequencing:
- take a gradual approach to property-tax reform,
- initially broaden coverage using area-based taxes (fixed rate per square meter),
- transition to full value-based property taxes as valuation capacity and market price information improve.
Role of modern mapping technology:
- satellite imagery and aerial photography by drones can fast-track expansion and coverage to all parcels that ought to be included in the fiscal register,
- increased precision enables accurate measuring of surface areas and development of fiscal-register maps that depict buildings and their alterations,
- area-based taxes can be rolled out quickly while market-value valuation capacity matures.
Capacity demand and implementation support:
- demand for capacity development from the IMF indicates many countries are seeing benefits from combining policy reforms with technology enablers,
- effective communication of objectives to the public makes property-tax reform politically appealing.

India:
- officials in Delhi and the greater Bangalore metropolitan area have started using satellite imagery to map properties in a geographic information system.
Africa:
- several municipalities have made impressive strides.
- Lagos increased tax collection fivefold to more than $1 billion in 2011 by broadening the base of its property tax, coupled with better enforcement.

Improve property-tax coverage and valuation capacity to reverse revenue underperformance.
Use modern mapping technologies (satellites, drones) to create fiscal-register maps and measure surface areas accurately.
Implement area-based taxes initially, migrate to market value-based property taxes over time.
Regulate national limits on local tax divergence and require reporting of forgone revenues from exemptions.
Provide mechanisms to defer payment for vulnerable property owners (tax deferral until sale).
Communicate reform objectives clearly to the public to build political acceptability.

Source: How Property Taxes Can Help Low-Income Countries to Develop (IMF, November 11, 2024).