Property Tax Reform:Property Tax Reform:

Insights from Brazil, using the Insights from Brazil, using the Municipality of Porto Alegre as Municipality of Porto Alegre as

a Case Studya Case Study

Property Tax Reform:Property Tax Reform:

Insights from Brazil, using the Insights from Brazil, using the Municipality of Porto Alegre as Municipality of Porto Alegre as

a Case Studya Case Study

Claudia M. De CesareClaudia M. De Cesare

cmdecesare@smf.prefpoa.cocmdecesare@smf.prefpoa.com.brm.brcmdecesare@smf.prefpoa.cocmdecesare@smf.prefpoa.com.brm.br

PhD Civil, MSc, Diploma, BSc PhD Civil, MSc, Diploma, BSc Porto Alegre City Council, Brazil. Porto Alegre City Council, Brazil.

UFRGS: CEEAP. UFRGS: CEEAP. Advisory Boarding – IPTI. Advisory Boarding – IPTI. Teaching Faculty - Lincoln Institute of Land PolicyTeaching Faculty - Lincoln Institute of Land Policy

PhD Civil, MSc, Diploma, BSc PhD Civil, MSc, Diploma, BSc Porto Alegre City Council, Brazil. Porto Alegre City Council, Brazil.

UFRGS: CEEAP. UFRGS: CEEAP. Advisory Boarding – IPTI. Advisory Boarding – IPTI. Teaching Faculty - Lincoln Institute of Land PolicyTeaching Faculty - Lincoln Institute of Land Policy

OBJECTIVEOBJECTIVE

The revisThe revisionion of some of some initiatives on property initiatives on property tax reforms in Braziltax reforms in Brazil

lessons/reflections lessons/reflections

DOSDOS DON’TDON’T

Practices & Attitudes

The Porto Alegre experience

BA

SED

ON

BA

SED

ON

INSIGHTSINSIGHTS

I. IMPORTANCEI. IMPORTANCE

II. BASIC FRAMEWORKII. BASIC FRAMEWORK

III. CASE STUDY – POA’ ReformIII. CASE STUDY – POA’ Reform

IPTUIPTUIPTUIPTUFiscalFiscalFiscalFiscal

PR

OP

ER

TY

P

RO

PER

TY

TA

XTA

X

IV. INSIGHTSIV. INSIGHTS

PART I PART I PART I PART I

IMPORTANCE OF PROPERTY TAXIMPORTANCE OF PROPERTY TAXIMPORTANCE OF PROPERTY TAXIMPORTANCE OF PROPERTY TAX

BRAZILBRAZIL

0

5

10

15

20

25

30

35

40

19

60

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

Year

% o

f G

DP

Source: Rezende and other (1989); Villela (1991); Afonso(1992); Afonso Source: Rezende and other (1989); Villela (1991); Afonso(1992); Afonso (1993); From 1993-2000, BNDES (1993-2000); Inland Revenue (2001); (1993); From 1993-2000, BNDES (1993-2000); Inland Revenue (2001); Instituto Brasileiro de Planejamento Tributário (2002)Instituto Brasileiro de Planejamento Tributário (2002)

Total Tax Burden as a % of GDP Total Tax Burden as a % of GDP

2002: 2002:

>36% >36% GDPGDP

2002: 2002:

>36% >36% GDPGDP

Taxation Pattern in Brazil - 2001Taxation Pattern in Brazil - 2001Taxation Pattern in Brazil - 2001Taxation Pattern in Brazil - 2001Rank LG Year % of GDP %

1 State Value added sales tax (ICMS) 7.96 23.17

2 Federal Income Tax 5.81 16.91

3 Federal Social Security Contribution 5.16 15.02

4 Federal Cofins 3.84 11.18

5 Federal FGTS 1.78 5.18

6 Federal Excise Tax (IPI) 1.63 4.74

7 FederalContribution on Capital Bonds (CPMF) 1.45 4.22

8 Federal PIS/PASEP 0.94 2.74

9 FederalTax on Exportations (Foreign Trade) 0.77 2.24

10 Federal Contribution on Net Profit 0.76 2.21

11 MunicipalTax on Services (Local Business Tax) 0.57 1.66

12 StateTax on Vehicles Circulation (IPVA) 0.53 1.54

13 State Social Security for Public Sector 0.52 1.51

1414MunicipMunicipalal PROPERTY TAXPROPERTY TAX 0.45 0.45 1.311.31

.... .... ..... ... ...

24 Municipal Tax on Real Property Transfers 0.08 0,23

25 Municipal Betterment Contribution 0.04 0,12

.... .... ..... ... ...

29 Federal Tax on Rural Property (ITR) 0.02 0,06

Total 34.36 100

Consumption -> regressive in

nature

Consumption -> regressive in

nature

Poor Poor performance as performance as

a revenue sourcea revenue sourceLati

n A

meri

ca

Lati

n A

meri

ca

International termsInternational terms

Argentina: 1.47 Uruguay: 1 Colombia: 0.5 Costa Rica: 0.24 Mexico: 0,20 ...

Argentina: 1.47 Uruguay: 1 Colombia: 0.5 Costa Rica: 0.24 Mexico: 0,20 ...

% of GDP

UK, Canada, US: > 2.5 – 3.3 1% -> common..

UK, Canada, US: > 2.5 – 3.3 1% -> common..

Source: Inland RevenueSource: Inland Revenue

Importance of Property Tax

Importance of Property Tax

Local Taxes% of GDP %

Tax on Services (Business Tax) 0,57 37,01

Property Tax 0,45 29,22

Fees 0,29 18,83

Social Security for Public Sector 0,11 7,14

Tax on Real Property Transfers 0,08 5,19

Betterment Contributions 0,04 2,60

Total -2001 1,54 100

+/-+/- 30% of Revenue from local taxes, 2nd most 30% of Revenue from local taxes, 2nd most importantimportant

Revenue from local taxes:

31.7% of Local revenue

+/-+/- 9.5% of Local Revenue9.5% of Local Revenue

revenue source

revenue source

Other aspects

Other aspects

Contribute towards improving the knowledge Contribute towards improving the knowledge about the territory, as long as the cadastre about the territory, as long as the cadastre contains information on land use, property contains information on land use, property values, land ownership ... values, land ownership ...

PART II PART II PART II PART II

GENERAL FRAMEWORK OF PROPERTY TAXGENERAL FRAMEWORK OF PROPERTY TAXGENERAL FRAMEWORK OF PROPERTY TAXGENERAL FRAMEWORK OF PROPERTY TAX

Institution & Administration

Local Government 89.4% of 5.507 Municipalities (FGV 2000)

Local Government 89.4% of 5.507 Municipalities (FGV 2000)

Definition (IPTU) an annual tax on urban land and buildingsan annual tax on urban land and buildings

Tax Legislation

Brazilian Constitution/National Fiscal Code

Brazilian Constitution/National Fiscal Code

taxpayer tax base general exemptions

Local legislation-> Chamber of Councilors tax rate, additional exemptions,

etc any new valuation list -> Local Law

decision

X

Tax base

Owner, possessor or title-holder Owner, possessor or title-holder Taxpayer

Tax Policy – Major Tax Policy – Major

FeaturesFeatures

Tax Policy – Major Tax Policy – Major

FeaturesFeatures

Market value, considering land and improvementsMarket value, considering land and improvements

Tax rates

Single (uniform)

Selective (differential)

Progressive

- Simple - Simple (“KIS”)(“KIS”)

- more - more acceptable(acceptable(?!)?!)

raterateraterate≠≠==

f (use)f (area)f (location)

- land land development development

- ability-to-payability-to-pay

- public equipment public equipment and serviceand service

raterate≠≠f (classes of assessed value)

-ability-to-pay-ability-to-pay

Statutory RatesStatutory Rates

= Effective rate??= Effective rate??

Belém do Pará 6 1.0 - 3.5 4 0.5- 2.0 4 0.3- 0.6

- Selective f(use)

- progressive

Florianópolis 5 0.5 - 2.0 4 1.0 - 1.7 4 0.5 - 1.2 - Selective f(use and area)

São Paulo 4 1.2 - 1.8 4 1.2 - 1.8 5 0.8 - 1.6

- Selective f(use)

- progressive

Non- residential

Criteria

0.6

- Selective f(use)

- Uniform

0.35 - 1.8

- Selective f(use)

- progressive0.2- 1.1

RatesCla

sses

5

J uiz de Fora

Porto Alegre 9 1.5 - 6.0

1.3 - w/ fence

1.6 - no fence2 - 0.6

-

-

1.0 - 3.0 9

- 0.851.1

- Selective f(use)

- progressive - vacant site

RatesMunicipality

Vacant Site Residential Cla

sses

Rates Cla

sses

Curitiba 5

Cadastre

Tax Administration and Tax Administration and

AssessmentAssessment

Tax Administration and Tax Administration and

AssessmentAssessment

LEGAL city X REAL city: INFORMALITY !!!

- Land areas already developed, but without building permits (illegally)

- Property occupied by possessors

- Building areas added without declaring them

Taxable basis is reduced Potential for revenue collection is reduced

Updating the cadastre -> High cost Updating the cadastre -> High cost activityactivity

GIS?? GIS??

Assessment

Method: ample use of cost approach

- Common to identify inconsistencies in the valuation model - Sometimes, use of arbitrary factors- MRA -> Land values for cost approach Lack of control over assessment performance

High political influence over AV-> Legislation

Long assessment cycles are also observed

In general, poor assessment performance

StandardsStandards

National standards for valuation Specific standards for valuation for taxation purposes Standards for ratio studies(assessment performance)

YES

NO

NO

Evasion

Tax collection ratio > 80%: 13% of the municipalities (IBGE 2001)(IBGE 2001)

Mix of reasons!!

Mix of reasons!!

No enforcement measures/no No enforcement measures/no applicationapplication Fiscal policy or bad administration -Fiscal policy or bad administration -> > stimulate evasionstimulate evasion Strategy –> postponing the Strategy –> postponing the payment payment Perception of unfairnessPerception of unfairness

Facts

on

Port

o A

leg

reFacts

on

Port

o A

leg

reFacts

on

Port

o A

leg

reFacts

on

Port

o A

leg

re

area: 470 Km2 (urban zone)

population: 1.4 million or 2.900/km2

GDP: US$ 4.7 billion or US$ 3,531 per capita

GINI index: 0.58 – High income concentration

Labour Party (PT) in charge of Local Government since 1988 (won 4 elections), but without majority in the Chamber of Councillor

“World Social Forum” “World Social Forum”

“Participatory Budget Scheme”

“Participatory Budget Scheme” Orçamento participativo

Case Study: Property Tax ReformCase Study: Property Tax Reform

PART III PART III PART III PART III

Experience in Porto Alegre (2 Experience in Porto Alegre (2 proposals)proposals)

Proposal 1 – IPTU’2001Proposal 1 – IPTU’2001Objective:

increasing fiscal equity

enhancing the importance of the tax as a revenue source

creating more efficient administration of the property tax

Motivation:

I. poor performance of the tax as a revenue source: +/- 20% of potential revenue

II. need to increase public investment -> demands

III. strong inequities in the tax burden distribution

All possible problems ...

Assessment Performance – Basic Measures:

Vacant Site Apartments Houses

Median 27.11 17.72 30.64 -> Low assessment level

COD (%) 69.72 59.65 62.02 -> Low degree of uniformity

AV AV

MV -> SPMV -> SP

- Long assessment cycle -> 10 years- Use of capping systems- Inconsistencies in the valuation approach

Strong pressure for reviewing exemptions:

• Properties used for agricultural purposes • Environmental preservation areas

Coverage of the cadastre

26% of the residential property were out of cadastre (Census’02)

Tax evasion-> (2nd Stage)

Collection

Performance

74% of tax revenue

expected Evasion -> high-valued vacant sites

Government’s perception on the unfair distribution of the tax burden

PT’s Flag Progressive rates

Inherent regressivity of property tax -> tax levy= F(income) Perverse income concentration/social inequality

Its updating -> HIGH COST

Project

General valuation (Mass appraisal techniques)

Progressive rates according to classes of AV

Tax relief to properties used for agricultural purposes and preservation areas +...

Since there were many different problems in the current system, we decide to focus initially on three of them only:

TeamTeam

Local authority members - valuers, property tax experts, and urban and environmental planner

University

Local authority members - valuers, property tax experts, and urban and environmental planner

University

Other areas, such as updating cadastre -> covered in the next year

Modifying taxes is not an easy task: losers X winners

Neutrality

Data sample -> 10,000 sales

Study of segmentation variables -> homogeneous region

Structure of the regression models -> non-linear regression models

Validation of models (holdout sample)

Preliminary data analysis -> subsets of data, variables, hypothesis

Definition of valuation technique -> MRA: no’black-box’

Assessment – Stages of WorkAssessment – Stages of Work

Sales Comparison Approach

MRA models -> vacant sites, apartments, houses, offices and car parking spaces

INN

OV

ATIV

E C

HA

RA

CTER

Validation (holdout sample)

25% of data25% of data

AV

SP

BASIC MEASURE MEDIAN

Vacant Sites

Apartments

27.1 -> 99.6

17.7 -> 99,9

30.6 -> 102.3

Houses

69.7-> 29.1

59.6 -> 12.8

62.0 -> 22.5

COD - %

Offices, car parking spaces > similar to Apartments

IAAO: COD- 10-15%IAAO: COD- 10-15%

New Rates for the Property TaxNew Rates for the Property Tax

Progressive f (classes of Assessed Value)Progressive f (classes of Assessed Value)

Gradual scale of progressivityGradual scale of progressivity

Reduction in the statutory rates for the majority of units (increase Reduction in the statutory rates for the majority of units (increase of Assessment Level)of Assessment Level)

1a DF 2a DF 3a DF

less than 10.500 0.2 0.4 3.5 1.5 1.0

from 10,500 to 24,500 0.4 0.6 4.0 1.9 1.3

from 24,500 to 56.000 0.6 0.8 4.5 2.3 1.6

from 56.000 to 98.000 0.8 1.0 5.0 2.7 1.9

from 98.000 to 140.000 1.0 1.2 5.5 3.1 2.2

more than 140.000 1.2 1.4 6.0 3.5 2.5

AV - R$

PROPOSED RATES (%)

Residential

Non-

Resid.

Vacant Sites

CURRENT RATES 0.85 1.10 1.5 -> 6.0 %

(‘sliding rates’)

Lack of consensus

Tax ReliefTax Relief

1. Exemption to up to 300,000 m22. Reduced rates

1. Reserves 2. Defined in the urban planNeed to be maintained preserved

Exemption according to AV, increased from R$ 5,000 to R$ 14,000

Exemption for pensioners, increased from 3 to 4 SW

Other measures -> More supporters, without significant financial impact

Financial ImpactFinancial Impact

Global impact: 10-15% in Revenue - Global impact: 10-15% in Revenue - moderatedmoderated

Impact at the individual level- strong Impact at the individual level- strong

Exemption: 9%Exemption: 9%

Tax reduction: 20%Tax reduction: 20%

Tax increase up to 25%: 15%Tax increase up to 25%: 15%

Tax increaseTax increase 25-50%: 14%25-50%: 14%

Tax increaseTax increase 50-100%: 50-100%: 18%18%Tax increase > 100%: 24%Tax increase > 100%: 24%

As a % of Properties:

Criticisms – Media scandals ?!?!

Councilors/Associations: Black-box ?! Impossible to understand

Economists: Why was not used a panel, a dynamic model !?

Independent (private) valuers: similar reaction

Reliability of data sample was questioned

Council of Economy: “Out valuers” Mistake in the work: Undertook without their participation!

Continued...

Councilors/Associations: Fiscal fury (greed) – no need for $$ ?! Tax burden is excessive and unbearable

From the potential losers: progressivity was confiscatory/unfairFrom the potential winners: silence

Farmers/growers : ‘la tratorada´ a march by tractors in the downtown

Councilors + LA: Concerns on the impact at the individual level

General criticism of lack of transparency

APPROVAL of the PROJECT -> IMPOSSIBLE

Proposal 2 – IPTU’2001Proposal 2 – IPTU’2001

Project

Assessment ->Adjustments in AV- 10.000 units

Tax relief to properties used for agricultural purposes and preservation areas

Major areas covered by proposal – less ambitious

Initially -> Similar revolts, the same associations involved

media exploitation again

Councilors -> Announced in the media their future votes: “no”

Local Authority + Associations

Approval of Proposal

Councilors -> “yes”

- Improved their understanding - Accepted minor suggestions- Assumed a political commitment for the next year – Committee

Ideally: Political Activities X Technical Activities -> LEGISLATION Ideally: Political Activities X Technical Activities -> LEGISLATION

PART IV PART IV PART IV PART IV

Insights-> Practical LessonsInsights-> Practical LessonsInsights-> Practical LessonsInsights-> Practical LessonsDOSDOS

Assessment -> politicians are not capable to evaluate them Assessment -> politicians are not capable to evaluate them

Rates - StructureRates - Structure

Assurance of regular (short) assessment cycles by law Standards for ratio studies – acceptable assessment performance in Brazil

Assurance of regular (short) assessment cycles by law Standards for ratio studies – acceptable assessment performance in Brazil

Changing the paradigm: - Dealing step by step (participatory approach)...

- More transparency in the process - (room for International support..)

Changing the paradigm: - Dealing step by step (participatory approach)...

- More transparency in the process - (room for International support..)

DON’TDON’T

Improving assessment - > challenges to be faced in political sphere Improving assessment - > challenges to be faced in political sphere

Adverse Political Atmosphere

DOSDOS DON’TDON’T

Investigation of non-conventional solutions. Ex. Cadastre: Two strategies – surveying and self-”assessment (registration)”

Investigation of non-conventional solutions. Ex. Cadastre: Two strategies – surveying and self-”assessment (registration)”

Do not ignore other complementary/alternative revenue sources:

- permissions for the use of public space – underground

- transfers (sale) of building rights (Solo Criado)

- negotiation for altering the building permits (when possible) for private land developments for low income families

Do not ignore other complementary/alternative revenue sources:

- permissions for the use of public space – underground

- transfers (sale) of building rights (Solo Criado)

- negotiation for altering the building permits (when possible) for private land developments for low income families

Identification of tax limits and controversial policies -> Correct!! Identification of tax limits and controversial policies -> Correct!!

Polemic Issues. Ex. Progressivity: Look at alternative solutions and acceptability Polemic Issues. Ex. Progressivity: Look at alternative solutions and acceptability