Who Captures the Gain from Urban Land Value?

By |2024-01-03T14:59:37+01:00June 4th 2019|Finance, Good Governance|

Urban land offers governments in developing countries a vital opportunity for self-financing development. While authorities often see these taxes as administratively burdensome and politically impossible, this doesn’t have to be the case.

As the city of New York rapidly developed in the 19th century, it was the site of rising living standards and economic opportunity for its citizens, for the country as a whole – but for no one more so than John Jacob Astor. In the early 1800s, anticipating the expansion of the city, Astor used the profits from his fur trade to invest heavily in real estate in Manhattan and other parts of New York.

Instead of building on this land, he leased it to developers. As people flocked to the city seeking jobs and services, private investments in residential and commercial buildings and public investment in necessary infrastructure meant that the property he owned dramatically increased in value. Rapidly rising land rents made Astor the wealthiest man in America.

This story is not unique to New York. In cities all over the world, urban development generates wealth that is capitalised in rising land values. In Kigali, Rwanda, for example, rapid urbanisation has resulted in parts of peri-urban land in the city increasing in value over 1000-fold in the last 10 years. Without active policy, these gains are often enjoyed solely by private landowners.

But rising urban land values are not just the result of investments made by landowners. Instead, this appreciation is in large part due to ongoing migration into cities that raises demand for urban space, and public investments in roads, railway lines and other infrastructure and services that make different areas of a city more attractive places to live and work. The question for policymakers is who captures this gain–wealthy landowners, or city governments? And how?

“…the most just and equal of all taxes…”

Harnessing land values for the public good is crucial for developing cities, where urban authorities are often tasked with providing vital goods and services to citizens with extremely limited budgets. By tapping into the rising value of land in a city, governments are able to recover some of the value that is created as a direct result of public investments on this land.

In Hong Kong, public ownership and taxation of land allowed the government to recoup approximately 80 per cent of the value of infrastructure investments it made between 1970 and 1991. In this way, developing cities can unlock a virtuous cycle, whereby rising land values are reinvested into the city in the form of needed public investments that result in further appreciation.

There are a number of ways in which governments can ‘capture’ the value of rising land for the public good. The most obvious is to own the very land on which cities develop and thrive. By retaining control over urban land and leasing it out to developers for periods of time, governments can earn annual rents from this valuable asset, as well as large lump sum payments for leases. But across developing countries, large scale government ownership of urban land is the exception, rather than the rule. In these cases, taxing the value of urban land is a more realistic option.

Land taxes don’t just offer a vital source of revenue for developing cities. By using revenues from these assets to finance public goods and services, these taxes effectively redistribute wealth in a city towards those who need it most. As well as being ethical, these taxes are also efficient: the fixed supply of land in a city means that taxing it cannot discourage investment in the same way taxing income can discourage people from working.

The value of simplicity

But in many developing cities, taxing urban land is a daunting task. Incomplete and out of date land and property registers limit the tax base significantly, while in many cities systems of land valuation based on square footage are unable to capture rising values across a city. At the same time, effective collection of revenues requires credible and transparent systems of enforcement that are often beyond the capacity of tax officials.

Successful examples of reform offer some key lessons in overcoming these challenges. Large scale participatory land registration using local para-surveyors allowed Rwanda to cost effectively expand the tax base and increase land-related revenues five-fold between 2011 and 2013, while high quality GIS imagery has expanded the scope for easy property identification. Similarly, simplified valuation systems that can proxy land values in the absence of well-functioning markets have proved vital in expanding property tax revenues in cities in Malawi and Sierra Leone.

Far more difficult to overcome is the resistance to such taxes by those liable for land taxes. In cities such as Kampala, efforts to maintain political support from landowners have meant that vacant land and owner-occupied property is often exempt from taxes, resulting in a huge revenue loss for the city. Across the world we see limited impetus from governments to improve accuracy of valuation or to expand the tax base for land and property taxes. It’s not surprising that council taxes on properties in the UK are still pegged to 1991 property values; there is both a political and administrative cost to reassessment.

Sometimes criticism of land and property taxes by owners is justified. Without careful design, these taxes can result in gentrification of central urban areas as long-time residents are unable to keep up with tax payments. But policy can be designed around this to allow asset rich, cash poor individuals time-bound or permanent exemptions on the grounds of social cohesion and urban planning. In most cases, the major challenge presented to policymakers is overcoming politically powerful landowners who stand to lose out on premiums they have previously enjoyed. Overcoming this is difficult, but it must be done if urban land is to serve the interests of the majority of its citizens.

Give and take

Experiences from a number of cities suggest that in the long run, the most effective way to build support for land taxes is to actively link them to public investment. Cities such as Arusha, Hargeisa and Lagos have able to increase land-based revenues while using these to pay for visible and popular infrastructure and services to maintain public support. By learning from these successes, governments across the globe can begin to leverage land taxes as the legitimate price of badly needed public investments.

Priya Manwaring
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