Property Tax Reform:

1
Property Tax Reform Insights from Brazil, using
the Municipality of Porto Alegre as a Case Study
Claudia M. De Cesare
PhD Civil, MSc, Diploma, BSc Porto Alegre City C
ouncil, Brazil. UFRGS CEEAP. Advisory Boarding
IPTI. Teaching Faculty - Lincoln Institute of
Land Policy
cmdecesare_at_smf.prefpoa.com.br
2
OBJECTIVE
The revision of some initiatives on property tax
reforms in Brazil
lessons/reflections
INSIGHTS
Practices Attitudes
BASED ON
The Porto Alegre experience
3
IPTU
Fiscal
I. IMPORTANCE
II. BASIC FRAMEWORK
PROPERTY TAX
III. CASE STUDY POA Reform
IV. INSIGHTS
4
PART I
IMPORTANCE OF PROPERTY TAX
BRAZIL
Total Tax Burden as a of GDP
2002 36 GDP
Source Rezende and other (1989) Villela (1991)
Afonso(1992) Afonso (1993) From 1993-2000,
BNDES (1993-2000) Inland Revenue (2001)
Instituto Brasileiro de Planejamento Tributário
(2002)
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Taxation Pattern in Brazil - 2001
Consumption - regressive in nature
of GDP
Argentina 1.47 Uruguay 1 Colombia 0.5 C
osta Rica 0.24
Mexico 0,20 ...
Latin America
International terms
UK, Canada, US 2.5 3.3 1 - common..
Poor performance as a revenue source
Source Inland Revenue
6
Importance of Property Tax

Revenue from local taxes 31.7 of Local revenue
revenue source
/- 9.5 of Local Revenue
/- 30 of Revenue from local taxes, 2nd most
important
Other aspects
Contribute towards improving the knowledge about
the territory, as long as the cadastre contains
information on land use, property values, land
ownership ...
7
PART II
GENERAL FRAMEWORK OF PROPERTY TAX
Definition (IPTU)
an annual tax on urban land and buildings
Local Government 89.4 of 5.507 Municipalities
(FGV 2000)
Institution Administration
Tax Legislation
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
X
decision
8
Tax Policy Major Features
Owner, possessor or title-holder
Taxpayer
Tax base
Market value, considering land and improvements
Tax rates
Single (uniform)
Selective (differential)
Progressive
?
rate
?
rate

rate
f (use) f (area) f (location)
f (classes of assessed value)
- Simple (KIS) - more acceptable(?!)
land development ability-to-pay public equip
ment and service
-ability-to-pay
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Statutory Rates
Effective rate??
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Tax Administration and Assessment
Cadastre
LEGAL city X REAL city INFORMALITY !!!
Land areas already developed, but without
building permits (illegally) Property occupied b
y possessors Building areas added without declar
ing them
Taxable basis is reduced Potential for revenue
collection is reduced
Updating the cadastre - High cost activity
GIS??
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Assessment
Method ample use of cost approach
Common to identify inconsistencies in the
valuation model Sometimes, use of arbitrary fac
tors MRA - Land values for cost approach
Lack of control over assessment performan
ce High political influence over AV- Legislation
Long assessment cycles are also observed
In general, poor assessment performance
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Standards

National standards for valuation
YES
Specific standards for valuation for taxation
purposes
NO
NO
Standards for ratio studies (assessment performa
nce)
Evasion
Tax collection ratio 80 13 of the
municipalities (IBGE 2001)
No enforcement measures/no application
Fiscal policy or bad administration -
stimulate evasion Strategy postponing the p
ayment Perception of unfairness
Mix of reasons!!
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PART III
Case Study Property Tax Reform
Experience in Porto Alegre (2 proposals)
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
Facts on Porto Alegre
World Social Forum
Participatory Budget Scheme
Orçamento participativo
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Proposal 1 IPTU2001
Objective
increasing fiscal equity enhancing the importan
ce of the tax as a revenue source
creating more efficient administration of the
property tax
Motivation
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 distrib
ution
All possible problems ...
15

AV
Assessment Performance Basic Measures
MV - SP
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





- Long assessment cycle - 10 years
Use of capping systems Inconsistencies in the v
aluation approach





Strong pressure for reviewing exemptions
Properties used for agricultural purposes
Environmental preservation areas

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Coverage of the cadastre
26 of the residential property were out of
cadastre (Census02)
Its updating - HIGH COST
Tax evasion- (2nd Stage)
Collection Performance
74 of tax revenue expected
Evasion - high-valued vacant sites
Governments perception on the unfair
distribution of the tax burden
Inherent regressivity of property tax - tax
levy F(income) Perverse income concentration/so
cial inequality
PTs Flag
Progressive rates
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Since there were many different problems in the
current system, we decide to focus initially on
three of them only
Project
General valuation (Mass appraisal techniques)
Progressive rates according to classes of AV
Tax relief to properties used for agricultural
purposes and preservation areas ...
Other areas, such as updating cadastre - covered
in the next year
Modifying taxes is not an easy task losers X
winners
Team
Local authority members - valuers, property tax
experts, and urban and environmental planner
University
Neutrality
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Assessment Stages of Work
Sales Comparison Approach
Definition of valuation technique - MRA
noblack-box
Data sample - 10,000 sales
Preliminary data analysis - subsets of data,
variables, hypothesis
MRA models - vacant sites, apartments, houses,
offices and car parking spaces
INNOVATIVE CHARACTER
Study of segmentation variables - homogeneous
region
Structure of the regression models - non-linear
regression models
Validation of models (holdout sample)
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25 of data
BASIC MEASURE
MEDIAN
COD -





Vacant Sites
27.1 - 99.6
69.7- 29.1






Apartments
17.7 - 99,9
59.6 - 12.8







30.6 - 102.3
Houses
62.0 - 22.5







IAAO COD- 10-15
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New Rates for the Property Tax
Progressive f (classes of Assessed Value)
Gradual scale of progressivity
(sliding rates)
Reduction in the statutory rates for the majority
of units (increase of Assessment Level)
CURRENT RATES
0.85
1.10
1.5 - 6.0
Lack of consensus
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Tax Relief
Exemption to up to 300,000 m2 Reduced rates
Reserves Defined in the urban plan Need to be m
aintained preserved
Other measures - More supporters, without
significant financial impact
Exemption according to AV, increased from R
5,000 to R 14,000
Exemption for pensioners, increased from 3 to 4
SW
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Financial Impact
Global impact 10-15 in Revenue - moderated
Impact at the individual level- strong
As a of Properties
Exemption 9
Tax reduction 20
Tax increase up to 25 15
Tax increase 25-50 14
Tax increase 50-100 18
Tax increase 100 24
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Criticisms Media scandals ?!?!
Councilors/Associations Black-box ?! Impossible
to understand
Economists Why was not used a panel, a dynamic
model !?
Reliability of data sample was questioned
Council of Economy Out valuers
Mistake in the work Undertook without their
participation!
Independent (private) valuers similar reaction
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Continued...
Councilors/Associations Fiscal fury (greed) no
need for ?! Tax bur
den is excessive and unbearable
From the potential losers progressivity was
confiscatory/unfair From the potential winners s
ilence
Councilors LA Concerns on the impact at the
individual level
General criticism of lack of transparency
Farmers/growers la tratorada a march by
tractors in the downtown
APPROVAL of the PROJECT - IMPOSSIBLE
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Proposal 2 IPTU2001
Major areas covered by proposal less ambitious
Project
Assessment -Adjustments in AV- 10.000 units
Tax relief to properties used for agricultural
purposes and preservation areas
Initially - Similar revolts, the same
associations involved media exploitation again C
ouncilors - Announced in the media their future
votes no
Improved their understanding
Accepted minor suggestions Assumed a political
commitment for the next year Committee
Councilors - yes
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PART IV
Insights- Practical Lessons
DOS
DONT
Improving assessment - challenges to be faced
in political sphere
Ideally Political Activities X Technical
Activities - LEGISLATION
Assessment - politicians are not capable to
evaluate them
Rates - Structure
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 - (ro
om for International support..)
Adverse Political Atmosphere
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DOS
DONT
Polemic Issues. Ex. Progressivity Look at
alternative solutions and acceptability
Identification of tax limits and controversial
policies - Correct!!
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 pu
blic 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