34

externalities from owner-occupation.62 Opposition to the property tax has in a number of

countries led to capping of the year-to-year growth of individual property tax liabilities.63 A
problem with capping is that, by driving a wedge between tax liability and the market value,
the tax may be transformed to something else than a real property tax, with the consequences
that may have for economic efficiency, revenue raising, and fairness.64
As discussed earlier, increased use of property taxes also raise complex issues of
intergovernmental fiscal design, involving inter alia transfer systems. Particularly in many
transition countries, democratization underpinned by decentralization programs has made the
property tax an increasingly important instrument of local government financing.65 As also
discussed above, the use of taxes on business property raise particular issues that require
attention inter alia to avoid that costs are raised disproportionately on businesses that use
relatively more property as factor input.
By virtue of not being directly proportional to income, property taxes are also frequently
considered to be unfair. This issue has been addressed in different manners, for example, by
taxing property only above a certain threshold, or by exempting sectors characterized by a
high frequency of low-income earners, such as agriculture in developing countries.

V. A STRATEGY FOR REFORM

The administrative and political economy challenges discussed above are not trivial, and
require resolute action and careful planning. First and foremost, reforms require strong
political will to introduce, enforce, and maintain a property taxpolitical will that must
address the variety of policy and administrative challenges discussed in this note, and often
in the face of strong popular opposition. These challenges cannot be resolved overnight but
must be addressed through a medium-and long term reform strategy which has to be carefully
calibrated to fit the particular circumstances of individual countries.66 In particular, reform
62

See IMF (2009) which also illustrates the point that property taxation is only one element in determining
effective tax rates on property, interest deductibility and (non-)taxation of imputed rent and capital gains being
others.

63

A well-known case in the US was proposition 13, an amendment to the Constitution of California enacted in
1978, which capped both property value increases (at 2 percent per year) and the tax rate (at 1 percent), but
capping is now in force in most US states (Lutz et al., 2010). Capping is also in place in other cities and
countries such as Buenos Aires, Bogota, and Latvia.

64

Ihlanfeldt (2011) discusses the potentially adverse impact of capping on housing and labor market mobility,
and tests for these effects in the case of Florida.

65

66

Bahl (2009) refers to several such programs (p. 5).

A particular timing issue in this respect is that the government that takes pain in initializing reform may not
be the government that also reaps the benefits of reform.