1. Governance
July 3, 2017updated 28 Jul 2021 2:10pm

Here’s why growing cities should tax land to pay for essential services

Africa is urbanising at an unprecedented rate. The continent’s urban areas are already home to over 427m people – but this number is expected to double in the next 25 years.

People moving from rural areas into the cities expect better public services and infrastructure. And yet, many municipal authorities lack the capacity to provide these.

Part of the problem is that city authorities are constrained in their ability to collect taxes at a local level. In developing countries, local taxation raises only around 2 per cent of GDP, as opposed to 6 per cent in the developed world.

The result is local authorities remain overly reliant on transfers from central governments. These are constrained in a number of ways and tend to be both unreliable and insufficient to support city growth.

Citizens of underfunded cities are at risk of not receiving basic services, including water, housing, electricity, and healthcare. Large, sprawling informal settlements emerge, which can spawn health risks and constrain incomes.

Local authorities can become better at raising their own revenues. The most obvious way for them to do this is through taxing land, still a major untapped source of revenue.

Economists have long argued that land taxes are the best source of revenue for funding cities’ growth. However, most land remains untaxed in the developing world – in part because imposing new taxes means going up against vested interests. When there is no land tax in place, private owners of land reap the gains from growth of and investments in a city without having to pay for them. They are likely to lobby hard against the introduction of taxes that enable the gains to be shared by all.

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City authorities are legitimate only to the extent that they represent this wider interest. Otherwise, rapid urban growth, without increased public investment, will result in numerous social and environmental problems.

Another challenge to implementing these types of taxes is unclear ownership structures that often lead to overlapping claims on land. Administrative reforms and technological improvements that formalise land rights not only provide the basis for taxation, but remove uncertainty that discourages investment. Such reforms, such as updating and digitalising the land registry, can also encourage more efficient and effective tax collection at the local level.

It is only fair that, as a government invests in infrastructure and services in a growing city, it should get some benefit from the commensurate increase in land and property values in that city. It is in the wider public interest for the government to see a return on its investment, which it can then re-invest in other areas.

With good citizen communication, city authorities can gain majority support to tax land. Otherwise they risk continuing to under-provide provide the adequate services and infrastructure their cities need to become productive places that support economic growth.

Our new brief Financing fast-growing cities looks at taxing land and other practical policies for city authorities to raise much needed revenue.

Paul Collier is a professor at the University of Oxford and the director of the International Growth Centre. Astrid R.N. Haas is senior country economist at the International Growth Centre.

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