3. Property tax administration

In OECD countries, costs related to the administration of recurrent taxes on immovable property vary widely and can be, as a share of property tax revenues, as high as 10% (Almy, 2014[1]) or as low as 1% or less (e.g. in some US states).1 That is because these costs can be drastically reduced when more advanced methods are used such as Computer-Assisted mass Appraisal (CAMA). Despite this high share of costs in tax revenues, it is still challenging to reduce it further without affecting the operational effectiveness of the property tax system, which could defeat the purpose of having this levy in the first place. Differently than for most other taxes, recurrent taxes on immovable property are levied on notional property values, which requires expertise on the part of the assessors and a sound appeal system so taxpayers can contest the estimations. Thus, in summary, the collection of these taxes requires labour-intensive steps, as follows: 1) fiscal cadastre maintenance; 2) valuation of properties; 3) billing, revenue collection and enforcement; and 4) appeal.

As a result of this costly administration, officials might be tempted to reduce the costs of the property tax system through the postponement of revaluations (the most expensive task in the tax administration)2 and by neglecting the necessary training that the staff requires to perform satisfactorily the necessary operational activities. In the short term, a reduction in costs might increase the net property tax revenues, but in the long run this effect will be reversed and, in addition, vertical and horizontal imbalances in the valuation and collection processes may arise. The latter is particularly damaging for a property tax administration since, in many cases, policy makers might face popular resistance to re-invest in a dysfunctional property tax system, further harming the perceived fairness of the system, in a vicious cycle that, in some cases, can contribute to the total discontinuation of the levy on immovable property (see Box 3.1 on the French case). Thus, balancing administrative costs and operational effectiveness is a major challenge of managing a property tax system.

The following conceptual model shows the administration role in revenue collection for this type of tax (Kelly, 2012[2]):

Eq 3.1   Tax Revenue = (Tax Base x Tax Rate) x (Coverage Ratio x Valuation Ratio x Collection Ratio)

  1. 1. The coverage ratio can be defined as a measure of the amount of taxable property that is registered within the government, compared to the total amount available (both registered and unregistered). As such, one of the key steps in a recurrent property tax reform is to identify the properties being taxed, in essence, preparing a cadastre.

  2. 2. The valuation ratio compares properties’ value as appraised by the government with its real market value.

  3. 3. The collection ratio is the ratio of the tax revenue collected versus the total tax billed for a fiscal year. In order to guarantee a high collection ratio, both positive and negative incentives can be used.

The tax base and rate are defined in the tax design process while the coverage, valuation and collection ratios depend on the tax administration. As a result, much of the tax revenue that is collected from taxes on immovable property is a result of administrative efforts rather than policy choices.3 The effects of all these ratios on the tax revenue are multiplicative and, thus, no ratio can be low for the system to be effective.

Some of these ratios are easier to increase than others. The priority in establishing a tax system with more coverage and higher liability for taxpayers is necessary before the valuation ratio becomes the focus, especially due to the difficulty and expense of determining an accurate market value of all taxable properties. Thus, in many cases, although the valuation ratio still holds its importance, focusing on the other administrative ratios will theoretically increase the tax revenue more significantly at the early stages of the introduction of the property tax.

In addition to revenue collection, other potential aims of the property tax system, such as those related to land use and equity, are unattainable in case the tax administration is inefficient (Kelly, 2012[2]). For instance, if fiscal cadastres do not cover some types of property (e.g. this happen, for instance, in the case of informal settlements),4 if property valuation assessments are biased (i.e. they estimates values that are systematic higher for some types of property in comparison to others), the distributional and allocative effects of the property tax system are going to be different than the intended. Hence, it is absolutely crucial for a property tax system to be properly administered, otherwise the design features of the tax are going to be drastically hampered.

The second chapter of this report focused on the design features of recurrent taxes on immovable property. This third chapter focuses on the administration of recurrent tax on immovable property. The next three sections focus on the main steps described above: fiscal cadastre management, property valuation and administrative measures for collection of tax revenues. The last section of this chapter focuses on the delineation of responsibilities related to property tax administration across levels of governments.

Fiscal cadastre is a term that usually refers to the repository in which the information about properties and taxpayers are stored for the purpose of managing a property tax system. This cadastre is distinct from the cadastre of property rights (the legal or juridical cadastre), which contains information about the persons who possess the right to property. Such distinction is usually justified on the ground that landlords should not believe that one of the costs of a title registration is the property taxation, which could, as a result, generate an incentive for them to avoid registration. Nevertheless, having both the fiscal and the legal cadastre merged in a multipurpose cadastre brings benefits – more notably a better data consistency and co-ordination across cadastres. Managing such multipurpose cadastres has become easier due to the computerisation of cadastral maps and records. Therefore, although historically different agencies were responsible for fiscal and legal cadastres, the number of countries with single multipurpose cadastres is growing – examples include Iceland, Northern Ireland and New Zealand (Almy, 2014[1]).

According to Enemark (2004[9]), these multipurpose cadastres have four main functions: land tenure (securing and transferring rights in land); land value (valuation and taxation of land and properties); land use (planning and control of the use of land and natural resources); and land development (utilities, infrastructure, construction planning, permits and implementation). It is worth noting that having a complete and multipurpose cadastre yield benefits beyond the collection of revenues through the tax system – fiscal cadastre can be a useful source of information for other policies and activities related to, for instance, urban planning, environment protection, transportation, housing and community amenities, recreation, social policies, mortgage finances (e.g. Denmark, Sweden), fire/home insurance (e.g. Iceland) and expropriation (e.g. Spain).5

Although it is not necessary to have all this information for tax purposes, it is crucial for a well-functioning fiscal cadastre to have the necessary information to calculate tax obligations – not only for the recurrent taxes on immovable property but also for other taxes such as transaction taxes, capital gain taxation (e.g. Finland), net wealth taxation (e.g. Austria and Switzerland), water use taxation (e.g. Netherlands) and imputing the income derived from owner-occupied property (e.g. Italy, Netherlands).6 Thus, the necessary information that a fiscal cadastre should have depends greatly on its purpose and, in case of recurrent taxes on immovable property, on the valuation method employed. Below there is a non-exhaustive list of items that fiscal cadastres may contain (not all information presented below should, in principle, be collected by the managers of the fiscal cadastre – it can be gathered through an integration with other cadastral systems managed by other levels of government or agencies):

  1. 1. Land use (e.g. business, rural, industrial or residential), since property tax rates and incidence may depend on it;

  2. 2. In case of residential properties, personal information, since property taxes’ obligations may vary depending on the characteristics of the taxpayer (i.e. deferrals, allowances and exemptions are, in some cases, based on characteristics of the taxpayer such as his/her income, family size, etc.);

  3. 3. In case of non-residential properties, business information, since taxes’ obligations may also vary depending on the characteristics of the corporate taxpayer such as revenues, number of employees, business sector, among others;

  4. 4. General property information that are useful for estimating a property’s value, such as, among others, the year of construction, size, date and value of the last purchases, state of the building, number of rooms, etc.;

  5. 5. Geographical records that clearly delineate properties’ boundaries and locate them with precision – agencies are increasingly using computerised Geographic Information System (GIS) and oblique aerial photographs of buildings to capture the current state of the building through the detection of physical changes (UN Habitat, 2013[10]);

  6. 6. Records of tax obligations and benefits, such as exemptions, deferrals and allowances.

Some types of property, such as public rights-of-way and routes of transportation (waterways, state-owned railroads, streets and roads), are often excluded from cadastres on grounds of administrative convenience (Almy, 2013[11]). That is, they are not considered a taxable asset since the administrative costs to register and value these types of property might exceed the tax revenues that stems from them. In such cases, policy makers decide to exchange cadastre completeness and horizontal equity for administrative convenience.

An effective fiscal cadastre increases property taxes revenues through both a higher coverage ratio and collection ratio (i.e. due to increased compliance), which tend to justify the need for a substantial up-front investment to have an accurate and complete cadastre. In other words, investments in fiscal cadastre management may bring positive returns in terms of tax revenues. In many cases, however, local governments don’t have the necessary resources to make these investments, leading to a dysfunctional cadastre. In such cases, horizontal or vertical co-ordination might fill this gap (see Box 3.2 for Brazil’s and Mexico’s cases).

It is worth noting that although there is some overlap between the process of updating fiscal cadastres and the process of re-valuing properties, they are not the same activity. The former refers to keeping the property and taxpayer information updated, potentially increasing the number of properties to be appraised whereas the latter usually refers only to update of the information that is used to reassess properties’ values. Most developed nations, when improving their property tax system, focus more on the update of the values of the property, since they usually have a high coverage ratio, meaning that their records already capture most properties. Nevertheless, this is not the case for some developing countries, which usually struggle to have a complete record of the taxable properties. More precisely, OECD countries have coverage ratios close to 100%, while developing and transitional countries can have ratios of only 40-60% (Kelly, 2012[2]). Therefore, collection-led property tax reforms may generate even more tax revenues for developing nations (or any nation with a low coverage ratio) in comparison to valuation-led reforms, although the latter is substantially more common worldwide.

Regarding cadastre coverage, one of the main problems in developing countries regards informal settlements, which are particularly challenging to register. This challenge is especially important for China, since its rapid urbanisation has created a number of houses with limited property rights,7 normally situated on residual rural construction land that has been developed by rural collectives to meet the demand for low-cost housing (World Bank/Development Research Center of the State Council, the People’s Republic of China, 2014[12]).

A Municipality in Brazil (Belo Horizonte) was able to alleviate this problem by carrying out field inspection and registering informal settlements, while giving possession certificates for tax purposes – this policy has been very well received amongst the benefiting communities, since these certificates have been the only legal document of their properties available to them, while the property tax charged has been very low or they are exempted (Junior, 2017[13]).

Smolka and De Cesare (2012[14]) argued that even if the property tax revenues from informal settlements are small, they may generate significant benefits to the community. First, they contribute to the creation of a fiscal culture. Second, they increase the completeness of the fiscal cadastre, which, as mentioned previously, is used for other purposes ranging from private activities such as mortgages and insurance to policy targeting. Third, the payment of property taxes may legitimise dwellers’ right to use public services, potentially creating incentives for public officials to invest in urban improvements in the area. Fourth and lastly, access to credit of taxpayers might be facilitated since they have a property tax certificate.

Smolka and De Cesare (2012[14]) highlighted three reasons that might make it easier to register informal settlements. First, the benefits mentioned in the previous paragraph may help authorities to map these informal houses since dwellers might self-report their informal settlements to enjoy these benefits. Second, informal settlements tend to have vibrant property markets and, thus, valuation of properties might be feasible using similar methods to formal markets. Third, when only legal properties are taxed, potential taxpayers might be reluctant to regularise their properties in order to avoid tax obligations. In this light, the presence of informality might reduce the completeness of cadastre system only in case the cadastre policy neglects the fact that these informal settlements can actually be registered for tax purposes.

Property valuation is considered to be among the costliest activity in property tax administration and is usually the task to which most attention is devoted. Without a proper valuation system, recurrent taxes on immovable property fail to have the expected outcome. A well-designed tax rate and base system may fail to have their intended outcome in case properties are assessed in an unfair and inequitable manner. In other words, even if nominal rates are identical for all types of property, effective rates can differ by property type if property valuation rules differ by type of property, causing horizontal inequalities. Moreover, the buoyancy of recurrent property taxes can only be sustained in a fair manner over time through frequented revaluations. Nonetheless, revaluations that lead to a significant increase in tax obligations are very unpopular and, thus, sometimes blocked politically. As a result, although a well-functioning property valuation process is crucial for the success of property tax reforms, the implementation of such a system is far from trivial and sometimes may suffer political resistance.

Good practices with regard to property valuation are described below – based on Rosengard (2012[17]), Franzsen and McCluskey (2012[18]) and Almy (2014[1]):

  • All things being equal, it is generally preferred to align the relative value of properties with their “true” market values. In that manner horizontal and vertical inequities are minimised, improving the credibility of the tax system in the eyes of the taxpayers, which can increase compliance and reduce resistance for future investments on the property tax system.

  • It is better to be approximately right than precisely wrong. It is worth highlighting that the purpose of property valuation is to calculate a tax levy and not to purchase a property and, thus, approximations are acceptable.

  • It makes more financial sense to spend most of the administrative efforts on the types of properties that generate more tax revenues. The bulk of property tax revenues usually come from one or two types of properties. By trying to assess precisely the value of all properties, the valuation costs may skyrocket, damaging the net revenue raising capacity of the recurrent property tax.

  • The tax administration should, when possible, avoid abrupt tax hikes from one year to another even in case property values did increase.8 Since property values are based on the state of the real estate market, they might not be directly related to taxpayers’ income. Therefore, abrupt increases on tax obligations might create liquidity problems. Such abrupt movements can be alleviated through frequent revaluations, indexation or linear increase of property values during the period in between property appraisals.

The first step in property valuation refers to the definition of property value basis. Property values can only be estimated, and countries employ different measures of value. The three most common approaches in determining property values are the capital value,9 the annual value and the notional value (i.e. usually based on properties’ features such as area, region, etc.). The first refers to the net present value of future rents, and thus, in principle aims to estimate the market price of a property assuming a perfect market. The second, on the other hand, uses only a single year’s rental value as a proxy for the value of the property. The third is less employed and regards the notional value, which aims at estimating a value that can be used in an adequate manner to calculate tax obligations – it may not be consistent with capital or rental values. In all cases the tax rate is multiplied by the value estimated and, as a result, the definition of the tax rate is heavily dependent on the definition of the tax basis for property values. Table 3.1, below, summarises the main advantages and disadvantages of each value basis.

By and large capital values are the most used value basis for recurrent taxes on immovable properties. Figure 3.1, below, reveals that in 21 out of 39 countries capital values are the sole value basis for recurrent taxes on immovable property. In 12 countries multiple value basis are used while only in 3 countries an area basis and annual value basis are used alone. One potential explanation for this prominence of capital value basis is that some of the benefits from property taxation can only be reaped when the tax base is value-based. Value-based tax bases: 1) have a stronger link to taxpayers’ income, enhancing progressivity; 2) are more sensitive to the level of economic development, which greatly affects the revenue-raising capacity of the tax in the long run, without resorting to unpopular increases in tax rates; 3) can be more effectively used as a tool to reduce the volatility of house prices since the higher the volatility the higher its effect on property values; 4) are less distortionary and more equitable than area-based taxes (Thomas, 2021[19]); and 5) are also used as a tax base for other taxes such as capital, inheritance and transaction taxes, leading to economies of scope for tax departments.

Despite these benefits, capital value basis can only be effectively employed when real estate markets are sufficiently well developed because capital values are commonly estimated using data on recent property transactions. As real estate markets have developed over a number of decades, OECD and partner countries have been able to gradually shift toward capital value basis for their recurrent taxes on immovable property (Almy, 2014[1]).

The second step in designing a property valuation system is the definition of the method employed to estimate properties’ value. The three most common valuation approaches are sales (or rent) comparisons, income capitalisation and cost approach. In general, the approach selected usually depends on the type of property being appraised. The income approach is especially employed for expensive income-producing properties, such as office buildings, hotels and retail malls, for which it is less challenging to forecast a property’s future cash flows. Properties for which there is a substantial amount of data on sales, such as small offices, retail, and most residential properties, are commonly appraised through the sales comparison approach. Lastly, specific properties for which there is almost no sales or no easy way to forecast their income, such as factories, industrial properties, and transport infrastructure, are commonly valued using the cost approach. The rule of thumb is that for the cases in which there is sales data available, the preferred approach is sales comparisons, since it directly estimates the capital value (when, as in most cases, the capital value basis is used). The Table 3.2, below, summarises the main features of these three approaches.

Figure 3.2 reveals that the sale comparison method is the most used in OECD countries (23 out of 24 of the countries in the sample, being the sole approach employed in 13 countries). Ireland, which is the sole exception, relies heavily on self-assessment (for the role of self-assessments in property valuation check Box 3.3). Furthermore, in ten countries a combination of these three methods is employed, which reflects the fact that some methods are better for some types of properties depending on their sale and rental data availability.

It is worth highlighting that there are also other less employed valuation methods such as property value banding, used, for instance, in the United Kingdom and Ireland (Slack and Bird, 2014[20]). The general idea is to classify properties into different categories (in general from five to a dozen categories) that represent their value. As a result, the valuation task is heavily simplified at the cost of precision. The discrete nature of this system may create unfair valuations, especially to taxpayers located in a boundary of a band.

Another consideration regards taxable properties that are not being used in a manner that maximises their market values. In many situations, restrictions on use imposed under regulatory regimes (including zoning) influence market values, and any property valuation method can take these restrictions into account in determining assessed values (for tax purposes). For instance, buildings of architectural or historic interest have limited uses other than their existing use, but the site may well have a high value due to the location of the property (Franzsen and McCluskey, 2012[18]). Another example regards land that can only be used for agricultural uses, especially when this land is located near or in metropolitan areas. In this case, the basis for determining assessed value is the use value of the land (e.g. New Zealand employs this approach for agricultural land).

One of the main difficulties in property tax management is to keep values updated. In many of the OECD reviewed surveys, severely out-of-date assessed property values are highlighted as a serious obstacle to boosting revenues from property taxes. These include Estonia, Finland, France, Germany, Greece, Indonesia, Mexico, Portugal and Sweden (Hagemann, 2018[3]). Revaluations tend to be not only expensive, but also unpopular. When a country doesn’t update property values for a couple of years or decades, there often is substantial popular resistance against revaluations since they may increase abruptly and significantly tax obligations. Thus, the more property values are outdated, the more opposition there is to re-valuate them. Another problem regards the fact that when property valuations are defined by law (i.e. a law is required to trigger a revaluation process), the popular resistance can be especially efficient to block revaluations since in this case the valuation process depends on a political rather than technical decision. Sometimes even when legislation specifies a revaluation schedule, revaluations are not performed.

When property values are not reassessed frequently, recurrent property tax revenues may not increase with economic activity. That is, the increase in tax revenues resulting from an increase in cadastral values caused by appraisals will not occur. Nevertheless, it is possible to not reassess property values and still maintain some buoyancy. There are two commonly employed solutions, the first one is indexing. Indexing refers to the update of property values by some index or factor, such as the inflation rate or other price index more related to property prices. In that manner, cadastral values are going to increase in line with an index, potentially making tax revenues buoyant in case this index is correlated with economic activity. A second solution is to increase tax rates. When tax rates increase in line with the economic activity, tax revenues will follow.

It is worth noting that these two solutions increase buoyancy at the cost of fairness because they fail to capture the asymmetrical growth in property values and, thus, if used extensively without revaluations, they will create distortions. For instance, in many jurisdictions, especially cities, property values rise rapidly in some areas (e.g. due to gentrification) and stagnate or even decline in others. Without re-evaluation, the effective tax rates of households in locations where values appreciate would be smaller than the relative effective rates of households in areas with stagnating values. If, as is often the case, higher income households live in value-appreciating areas, the net result is an increase in the tax regressivity. As a result, in the long run, indexing and uniform increases in tax rates can have a similar distortionary effect as the non-revaluation of properties.

Figure 3.3 depicts the methods used to update property values across OECD countries. In most cases (19 out of 24), revaluations are used alone. In three countries (Spain, Finland and Norway) revaluation and indexing are used jointly. In five countries only indexing is used. Although, in principle, most countries rely on revaluations of property to keep the values current, in some cases properties are not re-valued for decades. Belgium, for instance, plans to re-value properties once every ten years but the last valuation was in 1975. In Germany, the last valuation occurred in the first half of the last century. In the United Kingdom, bands for residential property were established and have not been changed since 1991. The last valuation in Estonia was in 2001.

In a number of countries, though, properties are updated frequently. In Hungary, Korea, Mexico, Netherlands they occur every year; in Australia, Japan, New Zealand and Portugal every three years; in Chile every four years; Lithuania every five years; in Norway as the general rule every 10 years but varies (main residence valued every year if valued according to a model based on market value). Most of these countries follow IAAO (2017[21]) guidelines that recommend that property characteristics should be reviewed and updated at least every four to six years. The IAAO (2017[21]) suggest three ways to achieve this goal: 1) Re-inspection of all properties at periodic intervals; 2) Re-inspection of properties on a cyclical basis (e.g. one-fourth or one-sixth each year); and 3) Re-inspection of properties on a priority basis as indicated by ratio studies or other considerations while still ensuring that all properties are examined at least every sixth year.

In the United States, the frequency of reassessments depends on the state and, in some cases, on local governments. Higginbottom (2010[22]) revealed that most states follow IAAOs recommendations and reassess properties at least once every six years. More precisely, 26 states reassess property values at least once every six years10 while 10 states do it annually. Two notable exceptions are the state of New York and California – they reassess properties only when new improvements are made or ownership is changed, respectively. Figure 3.4, below, summarises the minimum requirements for frequency of property reassessment imposed by American states – see Higginbottom (2010[22]) for details.

In many countries, computer assisted mass appraisals have changed the process of property re-appraisals, leading to, in a number of cases, a substantial reduction in costs. The term “mass appraisal” refers to the procedure in which a group of properties are jointly appraised, following standardising procedures and testing. While similar to a single property appraisal, the key difference is its scale and methods. Usually, mass appraisals are based on mathematical modelling (most commonly a multiple regression analysis).

Due to its heavy data reliant nature, mass appraisals are better implemented when aided by computer assisted valuation techniques, which is then referred to as CAMA or automated valuation model (AVM). The International Association of Assessing Officers (2018[23]) defines AVM as follows:

“A mathematically based computer software program that market analysts use to produce an estimate of market value based on market analysis of location, market conditions and real estate characteristics from information that was previously and separately collected. The distinguishing feature of an AVM is that it is a market appraisal produced through mathematical modelling. Credibility of an AVM is dependent on the data used and the skills of the modeller producing the AVM. AVMs should be developed by appropriately qualified market analysts, e.g. appraisers/valuers, who use statistically based applications to analyse data and select the best simulation of market activity for the analysis of location, market conditions and property characteristics from previously collected data. AVMs are designed to generate value estimates for properties at specified points in time (retrospective or prospective dates as required by client).”

In order to set up a mass valuation system many steps are required. The International Association of Assessing Officers (2018[23]) suggests the following nine steps: creation of a scope of work, identification and acquisition of property data, exploratory data analysis, stratification, determination of data representativeness, model specification and feature selection, model calibration, quality assurance and model application and value review. Among these nine steps, two steps are highlighted here. First, regarding data gathering, it is worth noting that a CAMA system requires a substantial amount of high-quality property data (i.e. physical attributes of the property), locational data (i.e. market demographics, traffic, land-use policies and other geographic factors), and market data (i.e. sales, income and replacement cost information).11 It is crucial that the data represents all types of properties whose values are being modelled. In some cases, this data can be obtained in the private sector. A second point that is worth highlighting is the quality assurance. The performance of the model should be compared with a minimum set of standards regarding accuracy and uniformity. That is, it is important for modelers to check whether the values given by the model to comparable properties are similar and whether the error terms are correlated with property values.

CAMA systems perform even better when integrated with a Geographic Information System (GIS), which is used for input, storage, processing and retrieval of spatial data. The integration of both is particularly valuable because the location of a property and the properties in its vicinity are important elements of a property price. Combining GIS with CAMA might significantly increase efficiency and reduce staff costs (see Box 3.4 for an example of a well-functioning CAMA system integrated with a GIS in China). According to Almy (2014[1]), the cost of operating a system which uses CAMA (in combination with GIS) is about EUR 20 (based on experience in Canada, Netherlands and the United States) compared to EUR 50 per property of a comprehensive revaluation, which is about one-tenth of the cost of an appraisal of a house for mortgage purposes.

Mass appraisal has a lot of benefits (McCluskey et al., 2013[24]): 1) valuates properties in a standardised and accurate way; 2) can provide a large number of valuations in a short scope of time; and 3) is a system that gets better accuracy and consistency over time (if given proper attention). Despite these benefits, mass appraisal is not recommended for all governments due to constraints and limitations. Mass appraisals require staff with technical expertise and high-quality data on property features, location and transactions. The modelling maxim “garbage in, garbage out” also applies to CAMA – when the data has poor quality, so the model outcomes. Problems in the model may generate mass horizontal (in case similar properties are valued differently) or vertical (in case high end values are valued as a lower percentage of the “true” market value than low end properties) inequities. The number of properties analysed should be sufficient to cover the up-front investment necessary to design a CAMA – at least in the longer term. In this light, similarly to the discussion on fiscal cadastre, local governments with limited capacity can make co-operative arrangements with other governments in order to fund a proper CAMA system12 (see Box 3.8).

Almy (2014[1]) raised another (solvable) issue with mass valuation systems: they might be too complex to explain to the average taxpayer. The author suggested two approaches to communicate better model outcomes to taxpayers: 1) strive for simpler models that can be presented with ease, highlighting how features of their properties affect the assessed value; and 2) convert multivariate models into a series of tables that display prices per unit of area for different classes of properties. Although not trivial, some countries have successfully implemented and communicated model outcomes to taxpayers, and they have a small appeal rate. For instance, the Netherlands made models public and taxpayers can request a valuation report that includes valuation data for several comparable properties (see more on the Dutch case in Box 3.9, at the end of this chapter).

After having the taxable properties registered in a cadastre along with an estimation of their values, the third and last step is to effectively collect tax revenues, giving room for taxpayers to contest the assessed value of their property, in case they consider it to be inaccurate. These activities are the ones that determine the collection ratio, which is the ratio of the tax revenue collected versus the total tax billed for a fiscal year. The collection process encompasses mainly four main activities: 1) assessment of tax liability for each taxable property; 2) proper delivery/billing and accounting of tax obligations; 3) reinforced taxpayer compliance; and 4) administration of appeals.

For tax revenue maximisation, all these activities should be performed in a manner that taxpayer compliance is maximised. For such, the following set of principles are generally followed – based on Kelly (2012[2]):

  1. 1. The process should be transparent. Ideally timely information should be available for taxpayers, so the process is as predictable as possible;

  2. 2. Procedures should be as seamless and convenient as possible to minimise governmental and compliance costs;

  3. 3. Computer assistance and automation can be used to treat taxpayers in an equitable and fair manner and to minimise employee workload and costs; and

  4. 4. Ideally taxpayers should be previously educated on the tax policies and payment process – fiscal culture is considered an important aspect for increasing voluntary compliance.

In regard to the appeal system, differently than other taxes, the taxable value of property taxes is notional – that is, exists only in theory and, thus, should be estimated. It contrasts heavily with, for instance, a transaction tax in which the value of the property is an element of the transaction. Therefore, the tax authority and taxpayers might disagree with regard to estimated property value and appeals are key to ensure a balance between them. In order to be as fair as possible, appeals usually are judged by multiple institutions/committees in a hierarchical structure. Initially appeals are head by assessors, then by committees (sometimes partially composed by ordinary citizens) and, lastly, by specialised tribunals/courts (Almy, 2013[11]).

Following the good principles mentioned in this section, the appealing system should be as transparent and as convenient as possible, stating in which conditions, when and how can the taxpayer appeal to his/her tax obligation so the whole appeal process is done smoothly and predictably. It is worth noting that appealing against valuation rules is normally different than appealing against a single property-specific appraisal. The tax department can organise the appeal process in a manner that appeals against the valuation method occur in a different period than appeals against property assessments in order to avoid the simultaneous judgment of multiple appeals of different nature, which may reduce the operational effectiveness of the appealing system.

Nevertheless, as important as having an efficient appeal system is to reduce as much as possible the number of appeals. For that avail, taxpayer education and transparency are important but are not the only strategies. Some countries only allow appeals in case the alleged error is higher than a certain threshold (e.g. 20% for Estonia).13 Others use information from taxpayers not only to improve data collection but also as a manner to legitimise the appraisal and, thus, reducing the number of appeals (e.g. Netherlands, explored in Box 3.9, found at the end of this chapter). Lastly, conservative valuations (that is, that aims at estimating a value slightly below property value) might also significantly reduce appeals since when taxpayers believe that the assessed value is below market values they are less likely to appeal. The last practice is found in Denmark (who aims to produce values that are about 5% less than actual market prices) and in some Canada and US states, which aim to estimate values up to 10% lower than those of the market (UN Habitat, 2013[10]).

Figure 3.5 illustrates the responses from a questionnaire handled by Dobay et al. (2019[26]) about property tax appeal process in some OECD countries, Singapore, South Africa, and Australian states, Canadian provinces and US states.

Regarding the right to appeal, it is common for property tax administrations to grant to taxpayers a right to review their assessments and introduce new facts that could change the assessments (53 out of 78). Nevertheless, some tax administrations impose restrictions on assessment reviews or do not fully provide an independent court for the judgment. For instance, in the state of New York/US the appeal right only applies to small assessment review claims. In Indiana/US appeals are judged by the Indiana Board of Tax Review, not the Tax Court. Rarely can the taxpayer not challenge valuations on the grounds that they are out of line with comparable properties (18 out of 78). However, in most cases challenging on such grounds can only be made under certain conditions, or if more information is provided. For instance, in the Netherlands only residential properties can be challenged on these grounds. In Alabama/US, additional evidence on the top of a difference in assessed values is required.

When it comes to notification, in most cases (62 out of 78) some information regarding the appeal process comes in the valuation notice. In some cases, the appeal form comes together with the note as well (e.g. in many Canadian states and in four US states). In some US states the state does not require that such information is given in the valuation notice, but some counties do include (e.g. Alabama/US). In the most complete case, the notice letter includes all the details and also the instructions of how to appeal but not the appeal forms (e.g. Spain, Florida/US, Kansas/US, the Netherlands, among others). In a small number of cases the notice does not include any specific information on appeal, but the information can be found elsewhere (e.g. in Oregon/US the information can be found in counties’ websites).

Only a few tax administrations do not send a valuation notice in case there is no valuation change (only 13 out of 38 do not). 37 do send such notices – for instance, Spain, Singapore and South Dakota/US send annually while many US states (e.g. Virginia/US, Texas/US, among others) send always when there is a revaluation even if there is no significant change in cadastral values. In other cases, the note is only sent in case the value changes (e.g. Kentucky/US), increases (e.g. Delaware/US) or increases above a certain threshold (e.g. 15% in Louisiana/US, USD 1 000 in South Carolina/US,14 among others).

Concerning the evidence used for analysing appeals, in most cases (67 out of 78) assessors produce evidence upon which valuations are based. Most tax administrations provide appraisal reports upon request (e.g. the Netherlands, Virginia/US, among others). In some cases, the complete information is given only during the appeal process (e.g. Louisiana/US, Missouri/US, Northern Ireland/UK, among others). In some rare cases the information is either not given (e.g. Ohio/US, New York/US, among others) or only given after the taxpayer has provided supporting evidence (e.g. England/UK).

When it comes to the burden of proof, the balance is a bit more skewed towards the taxpayers – they have to generate evidence in 26 cases (out of 78), against only 11 cases in which assessors bear the burden of proof. The most common situation, though, is in between – in 41 cases both the taxpayer and the tax administration bear some burden of proof. That is, equal weight is generally given to evidence provided by both parties, however, the burden is on the taxpayer on a preponderance of evidence basis (e.g. Scotland/UK, England/UK, Idaho/US, among others). In some exceptional cases, this definition depends on the type of property (e.g. in Kansas/US the burden of proof is on the appraiser, except for leased commercial and industrial property, where it is on the taxpayer by preponderance of the evidence).

With reference to appeal deadlines, the most common situation is when taxpayers have between 30-59 days to file the initial appeal assessment or to appeal to an independent tribunal. Notably tax administrations in the United Kingdom tend to give taxpayers more than 60 days to file appeals. Most tax administrations grant at least 30 days. The tightest deadlines are generally given by some US states and are, roughly, 13-15 days (e.g. Vermont/US, Kentucky/US, among others).

Regarding the costs, in most cases there is no fee requirement to file an initial tax appeal (39 out of 78). In some cases, some fees might apply at a later stage or only under certain conditions. For instance, in Scotland there is no fee for submitting an appeal to the tax administration, but fees are payable for appeals to the Lands Tribunal for Scotland. In Wisconsin/US, fees are only applicable for state assessed manufacturing property. Often they are also progressive – the higher the value of the property the higher the fee. For instance, in New South Wales/AUS there is no fee for the initial objection, but on a later stage appeal fees range from AUD 336 to 1 912. In Northern Ireland fees are 1% of the pre-appeal value to a max of GBP 15 000. When they are fixed, they tend to be small. In Vermont/US it is USD 75 and USD 30 in New York/US.

In most cases (47 out of 78) an appeal submission does not suspend the obligation to pay the property tax bill (e.g. Spain, New Zealand and most US, Canadian, British and Canadian states). Not rarely only a portion of the tax obligation should be paid. For instance, in South Carolina/US 80% of the disputed tax must be paid if an appeal is likely to extend beyond the end of the fiscal year. In Maine/US the undisputed amount must be paid to advance an appeal in case the case’s value is greater than USD 500 000. In the Netherlands it depends on the case – the municipal tax administration can grant a suspension of payment for the assessment that is contested, but it may charge interest if the objection is dismissed.

Many lessons can be drawn from the experience of these countries. First, it is important to grant to taxpayers a right to challenge assessments and, ideally, an independent institution (in most cases a tribunal) should be involved in the judgment. Second, the valuation notice is a very effective and widely used tool to convey the necessary information for taxpayers to appeal. A good practice is to send the appeal form with the notice or, at minimum, instructions on how to appeal. In that light, sending revaluation notices frequently (even when the value assessed does not change) can provide greater transparency. Third, evidence used to appraise properties is normally provided to taxpayers in case they request. Nevertheless, in most cases further evidence is necessary for taxpayers to be able to appeal. Pieces of evidence have, in principle, equal value regardless of who is providing them. Fourth, most tax administrations give at least 30 days for taxpayers to file an appeal, but rarely more than 60 days. This seems sufficient for taxpayers to prepare an appeal case. Fourth, typically there are no required fees to make an initial appeal. In case there are, they can be made progressive or small, so they do not represent a significant burden to taxpayers. A fair system should allow all taxpayers to appeal in case they deem necessary. Fifth and lastly, an appeal submission typically does not suspend the obligation to pay the property tax bill. Two potential reasons for this are to not incentivise appeals just to postpone payments and to maintain a predictable inflow of tax revenues.

One way to facilitate the payment process is through the provision of multiple payment methods. Examples include cash, e-banking and credit/debit cards though commercial banks, regional tax centres and post offices (Kelly, 2012[2]). When payments can be made in conjunction with other bills such as mortgages and utility, compliance tends to increase (for instance, in the case of Netherlands, the payment is made together with the charges from the Real Estate Tax Water board). For that purpose, some innovative methods have been employed recently, such as the Irish case of allowing property taxes to be deducted at source from salary or occupational pensions (for more on the Irish case see Box 4.1 in the next chapter). Payment in instalments is also a good practice to help illiquid taxpayers to make the payment – usually instalments are offered along with an option of an early lump payment with a discount to encourage compliance (see Box 3.5).

The billing process can also be used to increase transparency. So as to make the process more transparent, the tax bill notification may serve as a communication channel, in addition to other channels such as television, newspapers and posters advertisements. It is important for taxpayers to know the role of the property tax in funding public services, the billing and appeal processes and channels (e.g. website, telephone) for gathering further information. Box 3.5 covers how the compliance rate can be improved through better communication with country examples.

In addition to convenience and transparency, another tool to increase compliance is the penalisation of non-compliant taxpayers. In general, the most common penalties are the imposition of fines and tax liens, incidence of interest rates on the arrears, impediment of the use of certain government services, “shaming” through the publication of delinquency list and, ultimately, property seizure (Kelly, 2012[2]). In order to avoid penalising taxpayers unfairly, such more extreme non-financial penalties can be employed only in case of a lasting delinquency (typically ranging from one to three years), stipulated beforehand. The tax system is considered fairer when penalties are transparent and predictable. For instance, in the specific case of property seizure, the taxpayer should be informed of the deadlines of all steps in advance, such as demand notice, warnings, periods to respond to each demand, judgement, release period and sale/auction.

Figure 3.6 reveals practices employed by property tax administrations across countries with regards to collection, transparency and penalisations. Concerning due dates for property tax filling and payments, in most cases (43 out of 78) the country/state defines the due date. Due dates vary widely and can be as early as January 31 (e.g. Singapore) or at as late as December 31 (e.g. for the 2nd instalment in Oklahoma/US). Usually instalments are apart from one another by roughly 3-6 months. Due dates can also vary by property type (e.g. in Wisconsin/US and Wyoming/US). Some tax administrations (18 out of 78) have limited freedom to set their own filing and payment dates. For instance, in Western Australia/AUS, payment dates for Land Tax are consistent across tax administration but not the payment dates for the Council Rates. In Spain, local governments can choose the date, but the taxpayer must have at least two months to pay. Lastly, in a minority of states/countries due dates are not consistent across jurisdictions (17 out of 78).

Upper levels of government often standardise the forms that local governments provide to taxpayers (31 out of 78). Occasionally upper levels of government do not provide a form for local governments (12 out of 78). It is, however, more common for standard forms to be provided by upper levels, but not required to be used – in this case localities may use their own preferred forms and the forms sent by upper levels work as a suggestion (35 out of 78).

With regards to transparency, websites are a widely used tool to both provide general explanations and information about property taxation and to provide forms to taxpayers. The majority of state/central governments (42 out of 78) have a centralised website in which standard forms can be found and further information is provided. For instance, in the Netherlands the Council for Real Estate Assessment has a website that gives comprehensive details about property tax assessment. In Northern Ireland/UK, The Land & Property Services (LPS) website (part of ni.gov.uk) provides links to other sites providing property tax information. In South Africa the Cooperative Governance Traditional Affairs website provides an explanation of the rates system, valuation, rate setting and the appeal process. In most cases (43 out of 78) these websites also provide the forms to taxpayers. In some cases, though, not all forms are provided on the same website. For instance, in New South Wales/AUS, Objection forms are on the state website while forms for rebates and exemptions are on the individual Council websites. Exemption forms are not provided by some tax administrations in their websites (e.g. Arkansas/US, Kentucky/US and West Virginia/US).

Lastly, with regards to interest rates payable on unpaid property tax and refunds, the largest group of tax administrations (38 out of 78) applies a higher rate to unpaid property tax than to tax refunds. Annual interest rates applied to unpaid property taxes range from less than 2% (e.g. Oregon/US) to 15-18% in some US states (e.g. 15% in Alaska/US, 16% in Arizona/US, 18% in Wyoming/US). On the other hand, interest rates applied to tax refunds (overpayment) are generally lower than 2% and their values are equal or similar to rates applied to underpayment in a minority of countries/states (22 out of 78). Some states/countries work with a variable interest rate (e.g. in Ohio/US, the interest rate applied to both over and under payment is 1/12th of the federal short-term rate per month).

Many lessons can be drawn from the experience of these tax administrations. First, country/state-wide standardisation with regard to due dates and forms is relatively common, which reveals that the upper levels of government do have some role in setting guidelines for lower level of government’s procedures. Second, there is no clear period of the year in which tax obligations are paid but, in general, multiple instalments tend to be spaced by 3-6 months. General guidelines can be given to establish a minimum period for payment (e.g. Spain). Third, websites are a widely used tool to increase transparency and to provide forms in a convenient manner. Commonly states/countries have a centralised website that provides general information and forms to the taxpayers. Websites can provide a wide range of information with regards to rates system, valuation, rate setting and the appeal process. Fourthly and lastly, interest rates are commonly used to penalise taxpayers given that interest rates applied to underpayment tend to be higher than market rates and the rate applied to overpayment. It is worth noting that a penalisation of underpayment can also be achieved with a fee plus an interest rate in line with market rates.

There are multiple reasons to give SNGs some autonomy over tax rate setting. First, much of the economic and political benefits of decentralised public finance come from the ability of SNGs to make their own decisions about taxation. That is, SNGs should be autonomous enough to define its taxation in line with the level of spending that they deem necessary to provide public services for its citizens. Without that discretion, SNGs cannot be fully accountable for a fiscal crisis or poor-quality public services since they are not able to raise the necessary revenues to balance their budgets or to improve public services. As Ahmad (2017[36]) puts it, “direct linkage between taxes and spending, especially at the local and city level, is critical for both accountability and good governance and sustainable development”. Second, tax bases are unevenly distributed across regions and, thus, when the tax rates are set by the central government, local governments would not be able to compensate for their regional differences, creating regional asymmetries in terms of revenue capacity. Thus, tax rate and relief settings are considered a key element of subnational autonomy (Dougherty, Harding and Reschovsky, 2019[37]), without which hardly one can consider a government autonomous. Some authors, such as Ahmad (2017[36]), consider the control over rates at the margin even more important than the decentralisation of the tax collection.

Despite this important role of tax rate and base setting for subnational autonomy, an excessive discretion over elements of a subnational property tax policy poses some risks. First, it is common for inter-governmental grants' systems to have an equalisation component that provides more funds for SNGs that have, in comparison to other jurisdictions, less own revenues15 and, as a result, SNGs might be tempted to use their tax power to under-tax their own citizens16 since their losses in tax revenues will be compensated (partially or fully) with higher equalisation grants. Second, SNGs might use their tax power to minimise the tax burden on their citizens and maximise the burden on citizens from other jurisdictions, such as by setting lower tax rates for residential properties and higher tax rates for business properties, which can lead to tax exporting. Third and lastly, asymmetrical tax bases and exemptions across jurisdictions leave room for horizontal inequities within a country – that is, taxpayers in some jurisdictions might be disproportionately taxed in comparison to taxpayers from other jurisdictions. Sizeable differences of tax burden across jurisdictions can affect behaviour and lead to distortions. Thus, although subnational autonomy to set tax rates and bases is desirable, granting too much autonomy to SNGs can also be problematic.

When limiting subnational autonomy to set tax rates, it is important to also limit local autonomy to change effective tax rates through tax administration policies, otherwise SNGs may seek ways to overcome these restrictions as a means of asserting more local fiscal control (see Box 3.6 in the Israeli case).

For instance, SNGs can influence effective tax rates by 1) under/over-valuing some types of property; and 2) classifying properties in a manner that the desired statutory tax rate is applied to them (in case there are a myriad of tax rates depending on the type of property). Tax policy can be (and often is) decentralised in a manner that SNGs have control over their tax policy while horizontal inequities and distortions are minimised.

One option is to give SNGs only the control over tax policies that have limited impact outside their jurisdictional borders (i.e. over recurrent taxes on residential properties, while tax policy regarding recurrent taxes on business property is assigned to upper levels of government). A second option is to limit the potential differences in tax rates across jurisdictions so these differences will be unlikely to cause a change in taxpayers’ behaviour. In the latter case, small differences in tax obligations would be outweighed by other factors that are relevant in the decision-making process and, thus, distortions would be minimised. A third option is to grant to upper levels of government the responsibility of providing tax reliefs and/or exemptions. A fourth and last option is to increase subnational autonomy in the form of supplemental rates on an upper level of the government’s tax base (see Box 3.7 on piggybacking in some OECD countries). There is room for adopting multiple options simultaneously.

In OECD countries, it is common for local governments to have a limited discretion over tax rate, base and exemptions of their recurrent taxation on properties. Usually local governments 1) can set tax rates within bands set by the upper levels of government; 2) can only create exemptions in a limited manner; and 3) have no or little discretion over tax bases. It is worth noting that these tax rates’ bands can be used to limit not only discrepancies across jurisdictions but also discrepancies between different tax bases within a jurisdiction (i.e. business and residential properties). As mentioned above, when tax bases differ widely in terms of tax rates, taxpayers might try to avoid taxes by concealing the true nature/use of their properties.

Table 3.3 reveals the degree of decentralisation of property taxation policy in multiple countries. In most countries in the sample (31 out of 35) local governments have some autonomy over tax rate setting (usually subjected to limits) whereas only in a few (5 out of 35) they can define tax bases. Regarding exemptions, in less than one third of them (10 out of 35), local governments have discretion over exemptions and reliefs.

In China, local government’s expenditure as a share of general government expenditure has been increasing while, at the same time, their tax revenues as a share on general government tax revenues has been decreasing. As a result, the vertical fiscal gap is widening (CDRF, 2020[39]), which can have many adverse effects (this topic was discussed in detail in the first chapter).

Moreover, China’s local governments have little to no discretion over a great portion of their revenues, which hinders local fiscal policy to adapt to local needs and conditions. Liu (2021[40]) explains that a tax-sharing system currently in place in China in which local taxes are collected and fully retained by local governments while some taxes are collected by the central government and shared in a predetermined proportion with lower levels of government. In this system lower levels of government have autonomy only over small local taxes.

In these conditions, it may be difficult to hold local authorities accountable for their fiscal outcomes given that they cannot choose the necessary level of taxation to fund public services. In addition, Ahmad and van Rijn (2020) suggest that when subnational governments have little to no revenue sources over which they can exert control, subnational fiscal rules are not credible and funding through a municipal bond system or the use of public-private partnership are impaired. In this light, if China were to follow the most adopted practice of giving to local governments some autonomy in tax rate setting for recurrent taxes on immovable property, local governments’ autonomy would be improved, with overarching positive consequences throughout the intergovernmental fiscal system. As explored in the first chapter, since recurrent property taxes tend to generate a substantial amount of revenue, often being the most important local tax in OECD countries, the impact on local autonomy can be significant.

After having discussed decentralisation of tax design, it is worthwhile to discuss decentralisation of tax administration. In principle taxes need not be administered by the government that levies them. There are multiple examples of taxes for which tax revenues are accrued to one level of government but tax administration is assigned to another level of government. The choice of the level of government responsible for tax administration generally involves a trade-off between technical capacity and incentives (Mikesell, 2012[38]).

On the one hand, upper levels of government tend to have more resources to fund a better technical capacity and they may also enjoy economies of scale and scope. Economies of scale are obtained, in the case of property taxes, mostly by using the same fiscal cadastre and mass valuation systems and they can not only reduce costs but also improve the scope and quality of fiscal cadastres and valuations. On the other hand, lower levels of government tend to have more incentives to collect tax revenues that are accrued to them, which can affect all phases of revenue collection, from cadastre management to settle disputes over regional interests. According to Mikesell (2012[38]), slow and inaccurate payment has been a common complaint among localities in the United States when local governments depend on taxes that are administered by state governments. The same author also mentioned that when US states have budget problems, they sometimes delay scheduled payments to their local governments. Another advantage of having local tax administrations refers to the fact that local governments tend to have more information on the local conditions due to their licensing and regulatory responsibilities, which may help them to run a property tax administration system and to create a fiscal culture, necessary for compliance. The case for federalism as a “laboratory for democracy” works in tax administration as well: effective tax systems in place in some jurisdictions can be “exported” to different regions,17 promoting innovation across jurisdictions. Lastly, economies of scale can also be obtained through inter-governmental co-ordination arrangements (see Box 3.8 on the US case).

Tax administration involves multiple activities and only some portion of them can be decentralised, which generates a myriad of possible administrative arrangements depending on how the distribution of activities across levels of government is organised. China, for instance, has a strong central tax department (the State Administration of Taxes, SAT) that defines the guidelines and oversees the tax administration that is performed by subordinated SNGs tax departments. The revenues are accrued to upper levels of government and, then, partially shared with lower levels of governments through an inter-governmental transfer system and revenue sharing system. With these systems, the discretion for setting tax policies are centralised and, thus, to a great extent also the tax policy accountability.

Regarding recurrent taxes on immovable property, the delineation of activities involves the distribution across levels of government and agencies of the main steps discussed throughout this chapter: fiscal cadastre, property valuation and tax collection. Although there is no arrangement that is superior to others in all possible criteria, it is paramount for the different levels of government and/or agencies involved in the process to co-operate and communicate efficiently. The data that is gathered for the fiscal cadastre is the data used in the property valuation step and both the valuation and the fiscal cadastre data are used for billing. Thus, data flows should be smooth and integrated across levels of government/institutions. Moreover, in case guidelines and policy aspects are defined by upper levels of government and lower levels of government only execute the policy, there is a need for a supervisory or monitoring activity.18 Box 3.9, found at the end of this chapter, shows the Dutch case, which is a good example of an effective property tax administration that applied these principles.

In European countries, fiscal cadastres are normally managed at the central level (UN Habitat, 2013[10]), provides country-specific information on fiscal cadastres). European central governments usually either consolidate the data obtained through self-assessments or assessments done by SNGs or gather the data themselves through subsidiaries. For instance, according to UN Habitat (2013[10]), in Belgium, Denmark, Italy, Latvia, Lithuania, Norway, the Slovak Republic, Spain, Sweden and Turkey there is a central agency or department responsible for maintaining property records; Germany is a noteworthy exception as fiscal cadastral systems are managed by state governments; in Hungary both local government agencies and a central government ministry are involved in the cadastral maintenance; in the Netherlands, municipalities are required to continuously update the sales register, which is managed at the central level by a cadastral agency.

This situation heavily contrasts with the United States, where fiscal cadastres are administered at the subnational level, resulting in a wide variety of cadastral procedures and standards across the country. Nevertheless, since all other activities related to property tax administration are also performed at the subnational level, for the sole purpose of recurrent taxes on immovable property administration, there is no need for federal integration.

It is worth noting that China already has in place a decentralised property cadastre management system. In this situation, special attention should be given to asymmetries in local capacity and harmonisation of cadastral procedures and standards. Local capacity is sometimes an issue for local governments that don’t have the necessary scale to operate a fiscal cadastre efficiently. This problem can be tackled with inter-governmental co-operation – horizontal or vertical (Box 3.2 and Box 3.8 covered this topic). Regarding oversight, China’s upper levels of government already have the role of ensuring that cadastres are coherent with one another and sufficiently accurate and complete.

Concerning the responsibility to assess property values, there is significant variation not only regarding the level of government responsible for it but also regarding the type of agency that performs the valuation. In a sample of countries, Almy (2014[1]) identified that the central government is responsible for valuation in 12 countries; regional governments in 3; local governments in 7; and mixed arrangements in 10. Regarding the type of agency responsible for property valuation, the same author identified that a tax or revenue agency was responsible for that task in 12 countries; a cadastral agency in 7; a standalone agency in 1; and mixed arrangements in 5. Figure 3.7, below, reveals how OECD and partner countries assign valuation responsibilities.

In all countries that are among the 15th largest in terms of territory (i.e. Australia, Brazil, Canada, India, Mexico, Russia, the United States), and thus, with a territory size closer to China’s, SNGs are involved in property valuation.19 In large countries, differences between regions tend to be wider, making the familiarity of subnational administrations with regional and local conditions especially relevant.

Co-operative arrangements can also be used in property valuation as a way to increase local capacity. Scope of these co-operative arrangements vary widely (Mikesell, 2012[38]). For instance, a co-operative agreement might not necessarily involve all types of properties. Non-residential properties that have an illiquid market – such some specific industry factories, football stadiums, and transportation infrastructure like train stations – are challenging to appraise and co-operative arrangements can be made to deal only with these more complex properties.

Figure 3.7 also revealed that in 10 countries different levels of government are involved in the valuation process. In some cases, this involvement is voluntary but in others it is mandatory. In these mixed arrangements a good delineation of activities coupled with inter-governmental co-ordination might combine the benefits of a larger fiscal capacity with the local familiarity of conditions and local autonomy, resulting in more uniform and precise valuations. In these arrangements upper levels of government are typically involved in the definition of valuation standards and guidelines, while local governments perform the valuations based on these guidelines.

Billing and tax collection are usually decentralised to local governments. These activities can be assigned to local governments through a central/federal legislation that provides local governments with the authority to levy and collect property taxes. In no country in the sample of OECD and partner countries state/regional governments are responsible for collecting recurrent taxes on immovable property. Figure 3.8 reveals that in 18 out of 31 countries in the sample local governments are the sole responsible for these activities and only in 7 countries central governments are the sole responsible for them.

There are multiple reasons for this prominent role of local governments in the administration of billing and tax collection activities. First, recurrent taxes on immovable property revenues typically accrue to local governments, which put local governments at the level of government that has the highest stake in their collection. Second, tax billing and collection involve important definitions that directly impact cash flow management such as regarding the distribution of the receipts over time in a given fiscal year (i.e. that is, in which months the parcels must be paid) and regarding the trade-off between increasing compliance at the cost of a higher discount for up-front payments.

Nevertheless, central administration of tax collection and billing activities also has its advantages. When central governments administer the billing and collection systems, the same enforcement system can be used across jurisdictions, which enhances the overall consistency of the tax policy and reduces costs. Central administration can also centralise communication and collection of multiple taxes, making it more unlikely for taxpayers to get confused about which tax department he/she should contact in case of necessity.

It is worth mentioning that since recurrent taxes on immovable property often generate a substantial amount of revenues, China’s local governments might have more incentives to invest in local tax administration in case they are in charge of the collection of property tax revenues. Today China’s local governments are in charge of multiple minor taxes,20 which, alone, cannot be used to raise their local revenues substantially through only an improvement in tax administration. In this regard, recurrent taxes on immovable property can play an important role to boost investments in local tax administration, also helping to create a fiscal culture.

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Notes

← 1. See Walters and of Assessing Officers Research Comittee (2014[41]).

← 2. See Almy (2014[1]).

← 3. This dependency on the tax administration for the collection of tax revenues is not exclusive for recurrent taxes on immovable property.

← 4. Topic explored in more detail in the Fiscal Cadastre section.

← 5. Almy (2014[1]).

← 6. Almy (2014[1]).

← 7. According to CDRF (2020[39]), this refers to the situation in China in which farmers sell their houses to urban residents, which is not recognised and protected by the law – rural residential land is collectively owned, and villagers only have the right to use the land. As a result, dwellers cannot apply for land-use certificates, property ownership certificates, tax deed certificates, etc. Through an on-going national programme, it is estimated that more that approximately three-quarters of rural, collectively owned land has gone through a land ownership registration process.

← 8. It is worth mentioning that calculations of market value should be independent from decisions about property tax revenues. Tax hikes can be avoided without changes in tax rates. Some tools implemented for that purpose are discussed in depth in the fourth chapter on property tax reforms.

← 9. In the case of capital values, it is important to know the taxable items since valuations aim at estimating only the values of these items. As shown in Figure 2.1, in the previous chapter, taxable items refer to land and improvement. In most OECD countries (26 out of 31 in the sample) both lands and buildings are taxed; only three OECD countries feature a pure land tax; and only two a pure land tax. Having both land and improvements as taxable items make it easier to use a property’s market value, which captures both land and improvements simultaneously.

← 10. Four every two years, five every three years, eight every four years, seven every five years and two every six years.

← 11. For instance, in case the cost approach is used.

← 12. This topic will be covered in more detail at the end of this section.

← 13. Country examples based on Almy (2013[11]).

← 14. This is what the South Carolina/US Law requires but often the note is also sent even in the absence of such an increase in assessed property values.

← 15. Revenue equalisation systems are often based on revenue capacity. Nevertheless, it is not uncommon for countries to assess revenue capacity with actual tax revenues (Dougherty and Forman, 2021[42]).

← 16. It is worth noting that tax benefits can also be granted through valuation policies (e.g. not updating property values, deliberately under-valuating properties, etc.).

← 17. This occurs frequently in the United States due to their heavily decentralised tax system.

← 18. Note that these recommendations of clearly delineating responsibilities and enhancing inter-governmental co-ordination apply to many other aspects of fiscal decentralisation, as explored in Forman, Dougherty and Blöchlinger (2020[6]).

← 19. Although only India has a comparable population to that of China, aside from Australia and Canada, all these countries are among the 10th largest in terms of population.

← 20. Business tax and urban construction tax (some industries excluded), city and town land-use tax, farmland conversion tax, land appreciation tax, property tax, vehicle and vessel tax, deed tax, slaughter tax, feast tax and tobacco tax (CDRF, 2020[39]).

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