Property tax performance and potential in Brazil

Abstract

Despite the growing demand for infrastructure and social services resulting from urbanization and decentralization, many urban local governments in developing countries are failing to generate sufficient own revenues to meet this demand. Property taxes are often identified as a major source of local revenues, as they are economically nondistortive and have large, immovable, progressive and growing tax bases. Therefore, this study aims to estimate the current property tax performance and potential in Brazil and to propose feasible reforms taking into account the great heterogeneity amongst the 5,570 Brazilian municipalities. The study firstly focuses on the examination of property tax administration in 47 selected Brazilian municipalities that voluntarily provided information by replying to remitted questionnaires. These municipalities were divided into three strata of per capita income and location in metro areas, which was established as an indicator of their tax potential. Their results were used to assess and estimate the main elements of property tax performance and potential in respect of these municipalities, in order to extend the estimation to the rest of the country by using linear regression models. Consequently, the feasible property tax potential was established as being the percentiles 80 or 90 in each stratum. In presenting a general model of ratios that has been traditionally employed by literature, this study had to quantify: a) the size of property market values or the potential tax base; b) the property registration or the cadastral coverage; c) the property valuations or the assessment ratio; d) the extension of the exemptions or the taxable values; e) the taxation level or the tax rates values and structures; and f) the collection rates or the policies of billing, compliance and enforcement. The current property tax performance in Brazil has been approximately 0.5 percent of GDP and can be considered far below the 0.9-1.2 percent ratios as is found in Colombia, South Africa and Uruguay, which can be a feasible benchmark for developing countries. It was estimated that the current ratio in Brazil is a result of property market values of 2.6 percent of the country's GDP, cadastral values coverage of 82 percent, level of taxation on market values of 0.15 percent and a collection rate of 44 percent. However, taking into account the percentile 90 of the three strata of municipal income, it was assumed that the national ratios could feasibly achieve 95 percent of coverage, 0.41 percent of taxation on market values, and 69 percent of the collection rate. This would provide a revenue level of 1.13 percent of GDP. The local property tax performance in Brazil has been diverse due to the local particulars, the economic disparities and significant local autonomy related to property tax policies and administration. This study found that large municipalities need to update their cadasters, promote revaluations and, in some cases, also minimize exemptions and increase tax rates. Smaller municipalities, however, have to focus on managing their cadasters by updating property use and taxpayers' details, and performing collection-led strategies by reducing compliance costs and promoting better enforcement. Furthermore, any non-revenue purposes (e.g., more efficient land use) would also benefit if property tax administration were to be improved.