An optimal property tax : concepts and practices

This session provides Autonomous local governments require that they generate adequate own-source revenues to provide the level and quality of services demanded by residents and businesses. In short, to make local autonomy meaningful, subnational governments need adequate locally controlled revenues. The power to tax is essential to sustainable, accountable local government. Although they can play a vital role, intergovernmental transfers are not sufficient if local government truly is to be a separate, independent, sphere of government. Without an adequate revenue source that it controls, local government lacks autonomy - it is merely an arm of national or provincial government. Ideally, for full autonomy, local governments should have discretion in determining the base of the tax and tax rates. The property tax is the single most important local tax in developing countries. Internationally, over 130 countries have some form of tax on property, albeit the relative importance varies substantially across countries. The purpose of this chapter is to discuss the concepts and issues associated with designing and implementing an optimal property tax system. The issues discussed include both policy issues and administrative issues. Property tax reform must address both sets of issues if the benefits of such reform are to be fully realized. The remainder of this section discusses why the property tax is an important source of local own-revenues. The next section discusses the characteristics of an optimal property tax system.