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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 Council, Brazil.
UFRGS: CEEAP. Advisory Boarding – IPTI.
Teaching Faculty - Lincoln Institute of Land Policy
[email protected]
OBJECTIVE
The revision of some
initiatives on property tax
reforms in Brazil
lessons/reflections
INSIGHTS
BASED ON
DOS
DON’T
Practices & Attitudes
The Porto Alegre experience
PROPERTY TAX
Fiscal
IPTU
I. IMPORTANCE
II. BASIC FRAMEWORK
III. CASE STUDY – POA’ Reform
IV. INSIGHTS
PART I
IMPORTANCE OF PROPERTY TAX
BRAZIL
Total Tax Burden as a % of GDP
40
35
2002:
>36% GDP
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
20
15
10
5
0
1960
% of GDP
30
25
Year
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)
Taxation Pattern in Brazil - 2001
LG
Year
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
Federal
Contribution on Capital Bonds (CPMF)
1.45
4.22
8
Federal
PIS/PASEP
0.94
2.74
9
Federal
Tax on Exportations (Foreign Trade)
0.77
2.24
10
Federal
Contribution on Net Profit
0.76
2.21
11
Municipal
Tax on Services (Local Business Tax)
0.57
1.66
12
State
Tax on Vehicles Circulation (IPVA)
0.53
1.54
13
State
Social Security for Public Sector
0.52
1.51
14
Municipal
PROPERTY TAX
0.45
1.31
....
....
% of GDP
.....
...
...
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)
Total
Source: Inland Revenue
...
0.02
34.36
Consumption ->
regressive in nature
%
...
0,06
100
% of GDP
Latin America
Rank





Argentina: 1.47
Uruguay: 1
Colombia: 0.5
Costa Rica: 0.24
Mexico: 0,20 ...
International terms
 UK, Canada, US:
> 2.5 – 3.3
 1% -> common..
Poor performance
as a revenue source
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
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 ...
PART II
GENERAL FRAMEWORK OF PROPERTY TAX
Definition (IPTU)
Institution &
Administration
an annual tax on urban land and buildings
Local Government
 89.4% of 5.507 Municipalities (FGV 2000)
 Brazilian Constitution/National Fiscal Code
Tax Legislation
 taxpayer
 tax base
 general exemptions
 Local legislation-> Chamber of Councilors
 tax rate, additional exemptions, etc
 any new valuation list -> Local Law
X
decision
Tax Policy – Major Features
Taxpayer
Owner, possessor or title-holder
Tax base
Market value, considering land and improvements
Single (uniform)
=
Tax rates
rate
- Simple
(“KIS”)
Selective
(differential)
≠
rate
f (use)
f (area)
f (location)
- more
- land development
acceptable(?!)
- ability-to-pay
- public equipment
and service
Progressive
≠
rate
f (classes of
assessed value)
-ability-to-pay
Statutory Rates
= Effective rate??
Rates
Residential
Classes
Rates
Non-residential
Classes
Municipality
Classes
Vacant Site
Rates
Criteria
- Selective f(use)
Belém do Pará
6
1.0 -3.5
4
0.5-2.0
4
0.3-0.6
- progressive
- Selective f(use)
Curitiba
5
1.0 - 3.0
5
0.35 -1.8
9
Florianópolis
5
0.5 - 2.0
4
1.0 -1.7
4
0.2-1.1
- progressive
0.5 - 1.2 - Selective f(use and area)
1.3 - w/fence
- Selective f(use)
Juiz de Fora
2
1.6 - no fence
-
0.6
-
0.6
Porto Alegre
9
1.5 - 6.0
-
1.1
-
0.85
- Uniform
- Selective f(use)
- progressive - vacant site
- Selective f(use)
São Paulo
4
1.2 - 1.8
4
1.2 -1.8
5
0.8 - 1.6 - progressive
Tax Administration and Assessment
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
Cadastre
 Taxable basis is reduced
 Potential for revenue collection is reduced
Updating the cadastre -> High cost activity
GIS??
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
Assessment
High political influence over AV-> Legislation
Long assessment cycles are also observed
In general, poor assessment
performance
Standards
 National standards for valuation
YES
 Specific standards for valuation
for taxation purposes
NO
 Standards for ratio studies
(assessment performance)
NO
Tax collection ratio > 80%: 13% of the municipalities
(IBGE 2001)
Evasion
 No enforcement measures/no application
 Fiscal policy or bad administration ->
stimulate evasion
Mix of
 Strategy –> postponing the payment
reasons!!  Perception of unfairness
PART III
Case Study: Property Tax Reform
Experience in Porto Alegre (2 proposals)
area: 470 Km2 (urban zone)
Facts on Porto Alegre
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”
“Participatory Budget Scheme”
Orçamento participativo
Objective:
Proposal 1 – IPTU’2001
 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
AV
MV -> SP
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 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)
Its updating -> HIGH COST
 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
 Inherent regressivity of property tax -> tax levy= F(income)
 Perverse income concentration/social inequality
PT’s Flag
Progressive rates
Since there were many different problems in the current
system, we decide to focus initially on three of them only:
General valuation (Mass appraisal techniques)
Project
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
Assessment – Stages of Work
Sales Comparison Approach
Definition of valuation technique -> MRA: no’black-box’
Data sample -> 10,000 sales
MRA models -> vacant sites, apartments,
houses, offices and car parking spaces
Study of segmentation variables -> homogeneous region
Structure of the regression models -> non-linear regression models
Validation of models (holdout sample)
INNOVATIVE CHARACTER
Preliminary data analysis -> subsets of data, variables, hypothesis
Validation (holdout sample)
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
62.0 -> 22.5
Houses
25% of data
AV
SP
Offices, car parking spaces > similar to Apartments
IAAO: COD- 10-15%
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)
PROPOSED RATES (%)
Non- Vacant Sites
AV - R$
Residential Resid. 1a DF
less than
2a DF
3a DF
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
140.000
1.2
1.4
6.0
3.5
2.5
0.85
1.10
more than
CURRENT RATES
1.5 -> 6.0 %
Lack of
consensus
Tax Relief
1. Exemption to up to 300,000 m2
2. Reduced rates
1. Reserves
2. Defined in the urban plan
Need to be maintained 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
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%
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
Continued...
Councilors/Associations: Fiscal fury (greed) – no need for $$ ?!
Tax burden is excessive and unbearable
From the potential losers: progressivity was confiscatory/unfair
From the potential winners: silence
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
Proposal 2 – IPTU’2001
Major areas covered by proposal – less ambitious
Assessment ->Adjustments in AV- 10.000 units
Project
Tax relief to properties used for agricultural
purposes and preservation areas
Initially -> Similar revolts, the same associations involved
media exploitation again
Councilors -> Announced in the media their future votes: “no”
Local Authority + Associations
Councilors -> “yes”
Approval of Proposal
- Improved their understanding
- Accepted minor suggestions
- Assumed a political commitment
for the next year – Committee
PART IV
DOS
Insights-> Practical Lessons
DON’T
 Improving assessment - > challenges to be faced in political sphere
 Ideally: Political Activities X Technical Activities -> LEGISLATION
Rates - Structure
Assessment -> politicians are not
capable to evaluate them
 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)...
Adverse Political
- More transparency in the process
Atmosphere
- (room for International support..)
DOS
DON’T
 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 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