Guiding Pts for Property Tax Simulation

Initial Guiding Points & Work Plan: Tax Policy Reform : 

Initial Guiding Points & Work Plan: Tax Policy Reform Norman R. Ramos National Property Tax Adviser NTRC - LAMP 2

Outline of Presentation : 

16 Jul 09 Initial Guiding Points & Work Plan 2 Outline of Presentation Guiding Facts Revenue yield aspects Fiscal decentralization and growth aspects Administrative cost aspects Taxpayer resistance aspects Government viewpoint Points to consider Work Plan

Revenue Yield Aspects : 

16 Jul 09 Initial Guiding Points & Work Plan 3 Revenue Yield Aspects Property taxes in 29 selected developing countries including the Philippines for the years 2000 and 2001 constituted on the average 0.6% of Gross Domestic Product (GDP).1 In the Philippines, national property related taxes constituted 1.81% of total Bureau of Internal Revenue (BIR) collections in 2005 or a decline of 0.15% from its 1.96% share in 2001. 2 Relative to GDP National property-related taxes represented just 0.18% of GDP in 2005 or a decline of 0.03% from its 0.21% in 2001. 3 Local property-related taxes constituted 0.46% of GDP in 2005 or more than double its 0.15% share in 2001. 4 Combined the two, constituted 0.64% of GDP in 2005 or just about the average for developing countries. 4

Revenue Yield Aspects : 

16 Jul 09 Initial Guiding Points & Work Plan 4 Revenue Yield Aspects In comparison, the ratio in Organization for Economic Cooperation and Development (OECD) countries is about 2.12% or more than 3 times. 5 The International Monetary Fund (IMF) does not classify property taxes as a major tax. 5 Reduction or abolition of certain property taxes like the documentary stamp tax (DST) and the capital gains tax (CGT) could in the long-run enhance the volume of property market transactions and thus, enhance revenues from other property taxes.

Fiscal Decentralization and Growth Aspects : 

16 Jul 09 Initial Guiding Points & Work Plan 5 Fiscal Decentralization and Growth Aspects The property tax is an important component of fiscal decentralization. The share of local real property-related taxes to total local revenues is positively associated with local revenue size. 6

Fiscal Decentralization and Growth Aspects : 

16 Jul 09 Initial Guiding Points & Work Plan 6 Fiscal Decentralization and Growth Aspects Higher income countries and more decentralized countries use property taxes more intensively. 7 1990, 1995 and 2000 panel data from 70 countries show that expenditure decentralization and per capita GDP have significant positive effects on the effective property tax rate. 7

Administrative Cost Aspects : 

16 Jul 09 Initial Guiding Points & Work Plan 7 Administrative Cost Aspects Benchmark annual administrative costs (International Property Tax Institute) 8 2 to 5% of revenues in developed countries. 10% or greater are symptomatic of problems. Philippines 9 CGT : 1.28% Estate : 11.38% DST : 5.12% Donor : 17.22% VAT : 3.13%

Taxpayer Resistance Aspects : 

16 Jul 09 Initial Guiding Points & Work Plan 8 Taxpayer Resistance Aspects Visibility of property taxes relative to other taxes. People know how much property taxes to pay and the amount is paid in lump-sum. Who could even guess how much value added tax (VAT) they pay for the commodities and services they consume.

Taxpayer Resistance Aspects : 

16 Jul 09 Initial Guiding Points & Work Plan 9 Taxpayer Resistance Aspects Break between the amount of tax liability and the ability to pay. Issue of being “asset rich” and “cash poor” – property taxes being based on the accumulated value of the property rather than on the annual income derived from the property. Assessment is perceived to be judgmental.

Taxpayer Resistance Aspects : 

16 Jul 09 Initial Guiding Points & Work Plan 10 Taxpayer Resistance Aspects Special attachment to land especially in rural areas. Present levels of public service provision are considered not worth the property taxes they pay.

Government Viewpoint : 

16 Jul 09 Initial Guiding Points & Work Plan 11 Government Viewpoint Devolution of national property-related taxes desirable from BIR viewpoint since it would mean reduction in work effort with only a small (1.8%) reduction in revenues. LGUs would welcome devolution since it would mean a substantial increase in their local revenues with minimum additional administrative costs.

Government Viewpoint : 

16 Jul 09 Initial Guiding Points & Work Plan 12 Government Viewpoint The Department of Finance (DOF) is averse to any reduction in current national revenues, especially at a time of widening national budgetary deficits.

Points to consider : 

16 Jul 09 Initial Guiding Points & Work Plan 13 Points to consider Low revenue yields at the national level. Property taxes seem to work best as a local government tax. Administration is costly in terms of both the set-up and operating costs in comparison to current tax yields.

Points to consider : 

16 Jul 09 Initial Guiding Points & Work Plan 14 Points to consider Issue of “willingness to charge” by LGUs. LGUs postponing the introduction of new property valuation rolls. LGUs providing generous and regular property tax amnesties.

Points to consider : 

16 Jul 09 Initial Guiding Points & Work Plan 15 Points to consider Elected officials finding it politically difficult to bring aggressive enforcement measures against delinquents, especially against the politically powerful. For real property taxes (RPT), both provinces and municipalities have revenue to tax base elasticities that are less than 1 — 0.20 for provinces and 0.33 for municipalities — indicating their failure to fully capture the taxes due from the growing real property base proxied by the gross value added in real estate (REGVA). The cities are more aggressive in capturing the taxes due from their rapidly growing real property bases with an elasticity of 1.70. 10 There is a three-year revenue cycle associated with election years. Election years negatively affect major local revenue sources of LGUs. 10

Points to consider : 

16 Jul 09 Initial Guiding Points & Work Plan 16 Points to consider Trade-offs characterizes the development of property tax policy options Issue of piecemeal tax-by-tax reform that would yield marginal revenue improvements but less politically costly v.s. a comprehensive reform that will redefine the property tax as a consolidated package that has the potential to reach a revenue yield comparable to that of developed countries, say 1% of GDP or about half of that of developed countries at administrative costs no more than 5% of revenues.

Points to consider : 

16 Jul 09 Initial Guiding Points & Work Plan 17 Points to consider Trade-offs characterize the development of property tax policy options Devolution of national property taxes could enhance long-term revenue yields and the local tax revenues of LGUs, but reduce national revenues. Consolidating all real property-related transfer taxes under a high yield, low administrative cost VAT could result in higher net tax take for the government but could be regressive and could face significant taxpayer resistance and political costs, especially at the beginning .

Work Plan : 

16 Jul 09 Initial Guiding Points & Work Plan 18 Work Plan

Notes : 

16 Jul 09 Initial Guiding Points & Work Plan 19 Notes 1 See Bahl, Roy and Jorge Martinez-Vazquez (2008). “The Property Tax in Developing Countries: Current Practice and Prospects” in Making The Property Tax Work in Developing and Transitional Countries, ed. By Roy Bahl, Jorge Martinez-Vazquez and Joan Youngman. (Cambridge: Lincoln Institute of Land Policy). Computed by the authors from IMF (various years) Global Financial Statistics Data. 2 See Land Equity International Pty, Ltd. (December 2007). Report D-22: Review of National and Local Land-Related Taxes and Fees. Manila, December 2007. 3 Ibid. 4 Computed by the author from unpublished Statement of Income and Expenditure (SIE) data generously provided by the Bureau of Local Government Finance (BLGF) of the Department of Finance (DOF) and from national accounts data published in the 2007 Philippine Statistical Yearbook (PSY). 5 See Bahl, Roy and Jorge Martinez-Vazquez (2008). 6 See Ramos, NR et al. (2008). Survey of Public Perception on Real Property-Related Taxes and Fees. Manila, Philippines: Philippine-Australia Land Administration and Management Project Phase 2 (LAMP 2) and the National Tax Research Center (NTRC).

Notes : 

16 Jul 09 Initial Guiding Points & Work Plan 20 Notes 7 See Bahl, Roy and Jorge Martinez-Vazquez (2008). 8 See International Property Tax Institute (2007). Benchmarking 2007: Summary Report (Toronto, IPTI). 9 See Land Equity International Pty, Ltd. (December 2007). 10 See Asian Development Bank (ADB) and the Bureau of Local Government Finance (BLGF), (2007). Appendix D.1. “A Financial and Economic Model for Determining LGU Fiscal Capacity for use by the Bureau of Local Government Finance (BLGF).” Philippines: Local Government Finance and Budget Reform (ADB TA 4556) Final Report.

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