SA44. Answering questions to UN Habitat 3 Financing Urban Development‏ by Alanna Hartzog

1.     What challenges are local urban authorities facing to mobilize financial resources for urban development in developing countries? What are some solutions to these challenges?

Local urban authorities are searching for a sustainable and equitable source of public finance, one that can fund infrastructure, education and other public goods while also addressing poverty, wealth inequality and the need for affordable housing for all.

As stated in the Vancouver Action Plan – the 1976 founding document for UN- Habitat:

Social justice, urban renewal and development, the provision of decent dwellings and healthy conditions for the people can only be achieved if land is used in the interests of society as a whole…. Excessive profits resulting from the increase in land value due to development and change in use are one of the principal causes of the concentration of wealth in private hands.

Taxation should not be seen only as a source of revenue for the community but also a powerful tool to encourage development of desirable locations, to exercise a controlling effect on the land market and to redistribute to the public at large the benefits of the unearned increase in land values…

The unearned increment resulting from the rise in land values resulting from change in use of land, from public investment or decision or due to the general growth of community must be subject to appropriate recapture by public bodies (the community).

Many cities and towns have underutilized vacant lots, shoddy dwellings, and abandoned buildings. Land speculators sometimes hold onto these properties for many years, hoping that someday they can be sold for a high rate of return. All of these negative situations can be remedied by capturing the land rent that society as a whole generates while removing taxes from wages and production. This correctly harnesses incentives for private improvements and at the same time secures a revenue source that adequately funds infrastructure and other needed public goods.

2.     What challenges limit the provision of public services in metropolitan areas / peri-urban areas / smaller urban centers? What successful experiences can you share?

UN Habitat should establish best practices training for land value taxation to public officials so that they can fund and thus provision public services.

A number of economists are now speaking to the benefits of the land value taxation approach. For example, Dr. Paul Collier, author of The Bottom Billion and Professor of Economics at Oxford University said this in his speech titled Land as a Key Development Issue: Insights and Implications for the Policy and Research Agenda:

Density is valuable and that value is reflected in the price of land. In the urban centers there are enormous rents on rising land value. The taxation of land appreciation offers huge scope for financing the cost of urban infrastructure.   

The 1996 UN HABITAT II Action Agenda holds a similar perspective stating:

The failure to adopt, at all levels, appropriate rural and urban land policies and land management practices remains a primary cause of inequity and poverty. It is also the cause of increased living costs, the occupation of hazard-prone land, environmental degradation and the increased vulnerability of urban and rural habitats, affecting all people, especially disadvantaged and vulnerable groups, people living in poverty and low-income people.” [B.75]

The Action Agenda makes these recommendations: “Apply transparent, comprehensive and equitable fiscal incentive mechanisms, as appropriate, to stimulate the efficient, accessible and environmentally sound use of land, and…[76(d)] Consider the adoption of innovative instruments that capture gains in land value and recover public investments.”[76(h)]

Thus the International Union for Land Value Taxation believes that it is time to do more than state the preferred public finance approach over and over again. It is time for Habitat to focus on conducting training programs for the implementation of best practices for land value taxation.

3.     What are the political economy challenges facing urban authorities in developing countries in generating revenue from local sources? What are some solutions?

They simply need good training about how to implement a robust system of land value taxation. Jurisdictions that use land value taxation possess a vital key to distributive justice: the benefits given by society are reflected in land value which is returned back to society in order to fund the public benefits. This is a virtuous cycle that sustains a self-financing, self-renewing city and furthers economic opportunity for all. It is a key policy for funding and achieving many of the Sustainable Development Goals.

Recovered land value (rent) can be used to 1) operate, maintain and extend existing services and infrastructure; 2)  fund revolving loans for housing and micro enterprises; 3) pay for environmental restoration and protection; 4) repay bonds issued to provide other public facilities; and 5) replace taxes on labor and production.

Land value taxation also secures another important social and environmental benefit: rational, balanced development. Growth radiates smoothly from more intensive use in the urban centers to rural areas without pockets of vacant or poorly utilized land in between. Urban sprawl is curtailed and rural land is more readily retained in its natural state, available for parks and nature preserves. There is also less pressure to build on agricultural land near urban areas. Rational and balanced development decreases costs for transportation, utilities, fire and police protection and other public services, all of which further results in increased social cohesion and an interesting, safe, “walkable” city. This form of public finance is thus an essential component of good urban planning and can readily fund the SDGs.

What are the basic requirements for the implementation of a land value taxation system of public finance?

A successful land value taxation system requires the following:

1. A cadastre (land register), transparent and freely available to the public, documenting the location, boundaries and physical qualities of each land parcel. Today’s high-resolution satellite imaging, GPS technology and computerized surveying make assembling a cadastre much easier and considerably less expensive than in the past.
2. Descriptions of private and/or communal rights to possession and use of each parcel, including the landholder’s identity, the nature and terms of tenure, designated uses (zoning), easements, and usage restrictions for the purpose of environmental or resource conservation.
3. Accurate assessments of the annual rental value of each parcel, and capital value where applicable. Computerized calculation of land value and GIS land value maps allow assessment of most sites quickly and at little cost relative to benefits.
4. Methodology for determining the percentage of land rent to be captured from each land parcel through a five to ten year period.
5. Means of collecting the funds.

All such information must be accurate, current, and readily accessible. To keep the system free of favoritism and corruption, citizens must be able to challenge erroneous information and anomalous assessments. The recorded information should be freely available to citizens, preferably both on paper in public offices as well as on the Internet. A “participatory budget” process whereby citizens decide at least a portion of how funds received are then spent should also be considered.