The Municipality of Rio de Janeiro

Transcription

1 Property Tax Performance in Rio de Janeiro BY PEDRO H. B. CARVALHO, JR. The Municipality of Rio de Janeiro in recent years has faced significant financial challenges in relation to its urban infrastructure. Large housing and sanitation projects targeting poverty areas and two international events, the 2014 FIFA World Cup and the 2016 Olympic Games, have demanded massive public investment. These projects have most often been funded in a decentralised way at the municipal level although the federal and state governments, as well as some international financing institutions, have granted a generous amount of resources. Since 2007, the city has seen a high rate of growth in its gross domestic product (GDP) on the same path as the Brazilian economy; consequently, the real estate market has experienced a significant boom. However, these positive developments have not enhanced property tax revenues, which have been stagnant and have declined as a share of municipal revenues and as a share of the city s GDP. As a result, the assessment level has decreased since the last valuation roll update occurred in Developing countries historically have made relatively little use of property taxes. According to Bahl and Martinez- Vasquez (2007), property tax revenues in developing countries have been approximately 0.6% of the GDP. Brazil is no exception: property tax has remained at approximately 0.5% of GDP for a long time, even while the overall Brazilian tax burden has risen in the last decade. Therefore, there is great potential to strengthen property taxation. An important characteristic of property taxation in Brazil is that 50% of its collection nationally is concentrated in only 12 out of 5,536 municipalities. This level of concentration is higher than that of other economic indexes, such as population, income, or municipal GDP, which indicates a dual reality between the large and the small cities. According to data from the National Treasury, Pedro H. B. Carvalho, Jr., is pursuing a Ph.D. in tax policy at the African Tax Institute, University of Pretoria, South Africa. He has worked as a researcher for the Brazilian government s Institute of Applied Economic Research (IPEA) in its department of urban and regional studies. He holds a bachelor s degree in economics from Federal University of Rio de Janeiro (UFRJ) and a master s degree in economics from the University of the State of Rio de Janeiro (UERJ). Journal of Property Tax Assessment & Administration Volume 10, Issue 4 19

2 even measured in per capita terms, the median of the top 5% of the municipalities was R$159 which was 20 times higher than the rest of the municipalities (R$8). (R$100 equalled US$44.60 as of October 1, 2013). Nevertheless, implementing property tax reform is not easy in Brazil. Strict legal requirements for updating the valuation roll, the high dependence on governmental transfers, and the greater potential of other own revenues sources (such as the Tax on Services) are responsible for the low political will to undertake property tax reform. In Rio de Janeiro, these difficulties have been exacerbated by the housing price boom, which has increased income and spatial inequality. Efficient property taxation is considered a good policy for land value capture, as stated by Smolka and Schechinger (2005). Some studies have reported on the property tax situation in Brazil from an economic perspective, such as DeCesare and Ruddock (1999), Villela (2001), Carvalho Jr. (2006, 2009) and Afonso et al. (2010). Case studies have been provided by DeCesare (1999) for Porto Alegre; Oliveira (2004) for the metropolitan areas of Recife, Brasília, and Curitiba; Afonso et al. (2010) for Recife; Domingos (2011) for Belo Horizonte; and Carvalho Jr. (2012) for Rio de Janeiro. This article offers a different approach from previous case studies in Brazil in that it further focuses on the tax administration as well as the relevance of tax relief policies. In addition, a reviewed model of ratios is estimated to evaluate property tax performance and to indicate the main elements in a tax reform. The discussion is organised into five sections. In the first section, the legal system of property taxation in Brazil is briefly described. The second section details the sources of Brazilian municipal revenues and reviews the role of property taxes in the public finances of Rio de Janeiro. In the third section, the city s property tax administration is studied in detail as well as the tax roll coverage, the policies of tax relief, the assessment system, the taxes levied on property values, and the method of calculation. In the fourth section, a simple ratio-based model of property tax performance is specified for Rio de Janeiro and some evidence is offered in relation to the best avenues for improving the administrative practices and, therefore, the property tax revenues. The conclusion discusses the results and outlines the main challenges in starting up property tax reform in Rio de Janeiro. The Legal Aspects of Property Taxes in Brazil The property tax in Brazil is called the Imposto Predial e Territorial Urbano or IPTU. It is the most important tax on property in terms of tax base and revenues. Brazilian municipalities (the third tier of government) have broad autonomy in relation to the legislation and the administration of their own taxes. However, the 1988 Brazilian Constitution and the National Tax Code provide some general rules about the IPTU. Article 156 of the Constitution states that the IPTU must only be applied to urban properties. The National Tax Code provides the rules for the classification of urban and rural properties and establishes the tax base as the fair market value. The Brazilian Constitution also states that the IPTU can be progressive over time. This constitutional provision permits an annual increase in the statutory tax rates on land to induce development. Federal Law No. 10,257 of 2001 (named the City Statute) regulates the urban issues under the Constitution. In regard to a progressive IPTU over time, the City Statute provides that the statutory property tax rates can be increased, at most, to 15% over five years. After five years, if land development has not occurred, the property can be expropriated and 20 Journal of Property Tax Assessment & Administration Volume 10, Issue 4

3 the landowner indemnified. Despite the legal permission, municipalities have not applied this provision. Political fallout, administrative costs, and bureaucratic rules are some reasons for the low effectiveness of this land-based instrument. In 1997, the Brazilian Federal Constitutional Court (STF), confirming the decisions of the state courts (TJs), established jurisprudence that statutory tax rates must only differentiate between vacant and improved land (STF 1997). Therefore, those municipalities with progressive systems had to return the extra tax collected and reform their local legislation because they were facing several judicial claims. This decision had a negative impact on municipal revenues, and the National Congress had to enact Constitutional Amendment No. 29 of 2000, which allowed the application of progressive or selective statutory tax rates and resolved the legal issues about property tax progressiveness. Another important decision, set forth by the Superior Court of Justice(STJ 1996), established that the valuation roll, that is, the official assessed values of land and buildings, must be prepared in accordance with a specific municipal law named Planta Genérica de Valores (PGV). Since then, it has been considered illegal for municipalities to set new assessments through an executive order (municipal decree). This fact has led to meaningful political negotiations between city councils and local executives to enact new PGVs. Fortunately, an executive order can adjust the valuation roll by the official inflation index. The inflation adjustment for assessments can be a convenient tool for maintaining the level of current revenues during periods of significant inflation, which are common in developing countries. However, in developing countries, there also may be higher levels of urban infrastructure investment and real estate booms, greatly increasing land values. Therefore, inflation-rate indexes should be applied to valuation rolls for only short periods. The International Association of Assessing Officers (IAAO 2013, 12) recommends an annual frequency of reappraisals and a period of four to six years for physical reviews and property re-inspection. As examples of legal assessment cycles in developing countries, DeCesare (2012) reports that in some Latin American countries (Costa Rica, Chile, Colombia, and Guatemala), the legislation specifies a revaluation cycle of four to five years (but usually to no effect). In South Africa, the federal legislation (Municipal Property Rates Act, No.6 of 2004) establishes a four-year interval for revaluation. In Brazil, despite the valuation roll being a strictly municipal responsibility, DeCesare (2012) notes that the federal government has recommended guidelines of a five-year revaluation cycle for large municipalities and an eight-year cycle for smaller municipalities. Indeed, in Brazil, political and administrative requirements to annually undertake a valuation roll update may be costly and, depending on the municipality s size and the real estate market conditions, this period could be reasonable. In reality, the valuation rolls are often very outdated in Brazil. Frequently, the valuation rolls are over a decade old and have simply been adjusted by the rate of monetary inflation. Many reasons are given for this fact. As cited in DeCesare (1999) and Domingos (2011), attempts at property tax reforms by city councils often have resulted in heated debates with political fallout. The city council also can amend or overturn a PGV bill submitted for its consideration, and it is common that relief instruments, such as a ceiling on a tax increase, are applied to cushion a tax shock. Indeed, all the components of the assessment system must be specified within the PGV. In a PGV, each district, neighbourhood, street, or other geographical unit usually has its land value assessed in reals (R$) per square metre; the building value usually varies based on Journal of Property Tax Assessment & Administration Volume 10, Issue 4 21

4 the construction type and age. However, there are some exceptions to this model because each municipality is responsible for establishing its own assessment system. For instance, the valuation roll of Rio de Janeiro sets the square-metre assessment of land and buildings combined. For property tax reform, Bird (2006) recommends a phase-in mechanism that would smooth the tax levied over several years to cushion the effects of an increase. The Municipal Property Rates Act, No. 6 of 2004 of the Republic of South Africa is an example of addressing concerns about the impact of updating the valuation roll. Articles 20 and 21 of this act provides for a mandatory phase-in mechanism by which the tax increase must be divided across four fiscal years. The last property tax reform package in Rio de Janeiro dates to the period: the current valuation roll was enacted in 1997 (Municipal Law No. 2,585/1997), and the flat rate system was enacted in 1999 (Municipal Law No. 2,955/1999). When the new law switched the selective rates to a flat-rate system, the municipal executive and the city council agreed to a comprehensive tax relief programme to cushion the increase in tax burden for properties that had been in a lower tax-rate value bracket under the previous system. This step gave rise to much controversy because prior to 1999, the tax rates varied in relation to a property s location and size. However, selective and progressive rates had been declared unconstitutional by the Brazilian Federal Constitutional Court in 1997 and it was before this rate system was reinstated by Constitutional Amendment No. 29 in Thus, the executive local government had to design a bill within the premise that the tax burden would not be increased, especially for those taxpayers in the lower-value bracket. In the previous system, the rates ranged from 0.1% to 1.3% for residences, 0.6% to 2.5% for nonresidential properties, and 0.15% to 6.0% for vacant land. Each of these categories was changed to 1.2%, 2.8%, and 3.5%, respectively. To cushion the increase of the tax levy, Municipal Law No. 2,955/1999 granted an inflationlinked monetary rebate. For 2011, the rebate for each group of property was R$295, R$1,135, and R$4,086, respectively. In addition, Municipal Decree No. 18,305/1999 established a tax reduction of 40% if the residential value was lower than R$45,000 (for 2011). As a result of the combined effect of the monetary rebate and the tax reduction, 65% of the residences and 90% of the vacant land were exempted from property tax. An Overview of Public Finances in Rio de Janeiro Sources of Municipal Revenues in Brazil The 1988 Brazilian Constitution established three municipal taxes: Tax on Services (ISS), which is levied on the services listed in federal law and imposed on the gross values of services rendered; Tax on Urban Properties (IPTU); and Tax on Property Transfers (ITBI). Municipalities also can impose a garbage collection fee (TCL) and a street lighting fee (COSIP). Betterment levies (CM) also are permitted under the Constitution but are rarely applied. In addition, municipalities share in one federal and two state taxes, which are transferred based on the municipal location of the tax event one-half of the Federal Tax on Rural Properties (ITR), one-half of the State Automotive Tax (IPVA), and one-quarter of the State Value Added Tax (ICMS). Among the many governmental transfers assigned by the Constitution and federal laws, three are of particular importance. First, at the federal level, 21.5% of the revenues from the Personal Income Tax (IRPF), the Corporate Income Tax (IRPJ), the Tax on Industrialised Products (IPI), and the Import Tax (II) are directed to the Municipalities Fund (FPM). These monies are then transferred to municipalities based on population size and level of income. 22 Journal of Property Tax Assessment & Administration Volume 10, Issue 4

5 Second, the federal government makes a significant contribution to the Unified Health Fund (SUS) as part of its policy of decentralisation for the universal health care system in Brazil. Finally, the municipal expenses for elementary education also are linked to two funds the Fund for Maintenance and Development of Basic Education (Fundeb) and the National Education Development Fund (FNDE). Fundeb combines federal, state, and municipal resources to ensure a minimum expenditure per student while FNDE is a federal government programme that provides student meals. In the nomenclature of Brazil s public finance, capital revenues include borrowing, bond sales, sales of properties, repayment of lending, and capital transfers. Before 2000, the capital revenues obtained through municipal borrowing and bond sales were a significant source of municipal revenues. However, their importance was drastically reduced due to the enactment of the Supplementary Federal Law No. 101 of 2000, called the Fiscal Responsibility Law (LRF), which imposes a public debt limit of 120% of a municipality s current revenues. Development of Revenues Primarily due to the tax relief provisions of the municipal tax reform laws of 1999 and the lack of an update to the valuation roll, the growth of property tax revenues in Rio de Janeiro has been lower than in some other municipalities. Tables 1 and 2 show the development of IPTU revenues through per capita indexes and by their participation in current revenues, respectively, in 14 large Brazilian municipalities for the years, 1996, 2000, 2004, 2008, and According to table 1, the property tax per capita has increased in all of the selected municipalities. However, there is great heterogeneity among these municipalities, with indexes ranging from R$42 in Manaus to R$464 in São Paulo in Despite an index approximately equal to those of Campo Grande, Belo Horizonte, Table 1. Property taxes per capita amongst 14 large Brazilian municipalities IPTU revenues per capita (in R$ as of October 1, 2013) Municipality Growth São Paulo % Rio de Janeiro % Salvador % Brasília n.a % Fortaleza % Belo % Horizonte Manaus % Curitiba % Recife % Porto Alegre % Belém % Goiânia % Campinas % Campo Grande % Data Source: Brazilian National Treasury (various years) *Real$1 = US$0.446 as of October 1, 2013 Table 2. Property taxes per municipal current revenues amongst 14 large Brazilian municipalities IPTU per current revenues (%) Municipality São Paulo Rio de Janeiro Salvador Brasília n.a Fortaleza Belo Horizonte Manaus Curitiba Recife Porto Alegre Belém Goiânia Campinas Campo Grande Data Source: Brazilian National Treasury (various years) Journal of Property Tax Assessment & Administration Volume 10, Issue 4 23

6 and Porto Alegre, Rio de Janeiro has much higher property market values than those areas, indicating different levels of performance. In addition, Rio de Janeiro had the lowest percentage of revenue increase between 2000 and As shown by table 2, the modal property tax participation in municipal current revenues amongst the selected municipalities has decreased from approximately 13% to 16% in 1996 to 7% to 10% in This decrease contrasts with the international experience, where property taxes have been a reliable source of local own tax revenues in many countries. Table 3 presents the composition and development of public finance in Rio de Janeiro for the period, The participation of property tax in current revenues was reduced from 14.7% to 9.6% during this period. However, the actual property tax level increased 82%, from R$938 million to R$1.71 billion. The participation of the Tax on Services (which has been the most important municipal tax in terms of revenues) has remained at approximately 25% in spite of growth of 161% in actual level, from R$1.72 billion in 1996 to R$4.50 billion in The participation of the governmental transfers has grown significantly, from only 4.8% of the current revenues in 1996 to 23% in This increase can be explained by the introduction and strengthening during the 2000s of the governmental transfers Table 3. Rio de Janeiro s municipal revenue sources as a percentage of current revenues Own Taxes Revenues Property Tax (IPTU) Tax on Property Transfers (ITBI) Tax on Services (ISS) Service fees on garbage collection and street lighting Income tax and social security contribution on n.a municipal salaries Other Share of State Taxes Share of State VAT (Cota ICMS) Share of Automotive Tax (Cota IPVA) Governmental Transfers Municipalities Fund (FPM) Unified Health Fund (SUS) Education Funds (Fundeb and FNDE) Other Revenues from Municipal Assets (Leases, interest, among others) Tax Arrears Revenues n.a Other Revenues Total Current Revenues (Billion R$ as of October 2013*) Capital Revenues (Billion R$ as of October 2013*) Data Source: Brazilian National Treasury (various years) All terms stated in English are free translations of their official names in Portuguese. * Real$1 = US$0.446 as of October 1, Journal of Property Tax Assessment & Administration Volume 10, Issue 4

7 linked to municipal expenses for health and education. Finally, capital revenues have significantly decreased amongst Brazilian municipalities since the Fiscal Responsibility Law of However, due to the international events scheduled to take place in Rio de Janeiro and some relaxation of the municipal borrowing rules, a substantial amount of external funding has been obtained from international financing institutions since Thus capital revenues abruptly grew from only R$318 million in 2008 to R$1.8 billion in Property Tax Administration in Rio de Janeiro According to Bahl and Wallace (2008), tax administration is the key factor in property tax performance. To provide a comprehensive overview of the tax administration in Rio de Janeiro, table 4 displays the tax roll situation in December of 2000 and The data present the number of recorded properties, the estimated tax roll coverage, the full and taxable assessed values, the amount levied and collected as well as some relevant indices. Results from the Brazilian Demographic Census (Censo Demográfico) for 2000 and 2010 and the Central Register of Enterprises (Cadastro Central de Empresas) for 2000 and 2010 are provided to show the tax roll coverage among residential and nonresidential properties. The data comparison between Rio de Janeiro and other large Brazilian municipalities illustrates the current situation in Brazil and provides a possible national benchmark. The analysis in this section has been organised around six themes: the recorded properties, the relief policies, the billing and collection, the assessment system, the taxation on assessed values, and the calculation process. The Recorded Properties Table 5 shows the estimated tax roll coverage of built properties amongst 10 large Brazilian municipalities. The tax roll coverage of built properties ranged Table 4. Tax roll of Rio de Janeiro in 2000 and Number of Recorded Properties (units) Residential 1,268,792 1,422,381 Nonresidential 190, ,293 Vacant land 170, ,144 Total 1,630,225 1,805,818 Properties on Census (2000 and 2010) Households 1 2,127,853 2,406,815 in sewerage network 1,405,606 1,949,962 Business 2 165, ,852 Tax Roll Coverage Residences 60% 59% Residences with sanitation 90% 73% Business 100% 100% Total Assessed Values 3 (million of R$ as of October 2013) Residential 86,162 89,092 Nonresidential 48,849 64,716 Vacant land 10,014 8,863 Total 145, ,673 Taxable Assessed Values (% of Total Values) Residential 69% 69% Nonresidential 65% 65% Vacant land 54% 51% Total 67% 67% Tax Levied (million of R$ as of October 2013) Residential Nonresidential 890 1,178 Vacant land Total 1,800 2,080 Taxation on Assessed Values Residential 0.83% 0.83% Nonresidential 1.82% 1.82% Vacant land 1.91% 1.80% Total 1.24% 1.28% Collection Rate Residential 87% n.a. Nonresidential 75% n.a. Vacant land 43% n.a. Total 77% 82% Property Tax Revenues (R$ as of October 2013) Per capita Per municipal GDP 0.78% 0.73% General Data Population 5,851,914 6,323,037 Municipal GDP (million of R$ as of October 2013) 172, ,397 Data Source: Municipal Tax Department of Rio de Janeiro 1 IBGE (2000a, 2010a) 2 IBGE (2000b, 2010b) 3 Estimated values for 2011 * Real$1 = US$0.446 as of October 1, 2013 Journal of Property Tax Assessment & Administration Volume 10, Issue 4 25

8 from 48% to 80% among the selected municipalities. However, these figures include the informal settlements, which it can be argued should not be considered as taxable property. Thus, if only residential properties provided with sewerage network access are considered (which is a good proxy for formal settlements), this index would range from 71% to 119%. The tax department of Rio de Janeiro annually re-inspects a small portion of the tax roll, partially updating the cadastre at a slow pace. The number of recorded properties increased 9.7%, from 1,630,225 in 2000 to 1,805,818 in 2011 (table 4). The ratio between the number of assessed residential properties and the number of surveyed households was approximately 60% according to both the 2000 and the 2010 Demographic Census data. However, just considering the properties with sewerage service, this ratio would decrease from 90% in 2000 to 73% in This fact shows that the investment in urban infrastructure in Rio de Janeiro throughout the 2000s has not been accompanied by greater effort in property registration and therefore higher property tax billings. In relation to the nonresidential property coverage, the ratio between those on the tax roll and those surveyed by the Central Register of Enterprises was almost 100% for both 2000 and Indeed, Brazil appears to be in a better position than some developing countries in relation to its tax roll coverage. A paper by Bahl et al. (2009, 25 26) estimated that the effective tax roll coverage amongst the 36 largest cities in India was below 40%. Lewis (2003, 235) estimated that the tax roll coverage has been approximately 80% in Indonesia since Nevertheless, improving the registration by updating and broadening cadastre information is recommended to enhance property tax performance in Brazil. In 2005, the Federal Cities Ministry published a guideline, which highlights the advantages of a multipurpose technical cadastre through the use of a geographic information system (GIS) (Erba, Oliveira, and Lima Jr. 2005). Although such systems can provide important tools for urban planning, their implementation is an ambitious goal which may prove very costly for local governments. Furthermore, if there is no political will to enhance property taxation, the georeferencing may have the opposite effect. According to Galvao and Gaia (2005), the georeferencing was the tool that resulted in an increase in the roll of exempted properties from 7% to 49% in the Municipality of Belem in Individual property re-inspection Table 5. Recorded and surveyed properties amongst 10 large Brazilian municipalities in 2010 Municipality Registered Built Properties Surveyed Households Households in sewerage network (SN) Surveyed Business General Coverage Coverage (properties in SN) São Paulo 2,830,000 3,898,745 3,283, ,190 63% 73% Rio de Janeiro 1,635,674 2,406,815 1,949, ,852 63% 76% Salvador 600, , ,870 63,319 59% 71% Belo Horizonte 575, , , ,866 60% 68% Brasilia 736, , ,150 88,994 80% 103% Fortaleza 564, , ,936 68,170 67% 114% Curitiba 515, , , ,855 70% 81% Porto Alegre 507, , ,548 94,827 76% 87% Campinas 256, , ,140 49,521 59% 73% Manaus 255, , ,550 25,170 48% 119% Data Source: Municipal tax departments (2011); IBGE (2010a) 26 Journal of Property Tax Assessment & Administration Volume 10, Issue 4

9 may be considered an economical alternative, providing better landowner identification and updates to property information. Cooperation agreements with notaries offices could provide updated landowner identification as well as updated information on a property s size and type. Electricity and/or water service customer records could provide updated landowner, tenant, or possessor information as a feasible alternative for updating taxpayer information. The Relief Policies Property tax relief measures are very common in Brazil. According to data from the Family Budget Survey (POF), only 33% of Brazilian households reported paying property tax (Carvalho Jr. 2012). This index represents the aggregate effect of exemption policies, payment delinquency (collection rate), and tax roll coverage. Overall, the index was very heterogeneous, ranging from 15% of households in Manaus to 70% in Belo Horizonte (Rio de Janeiro was at 32%). Carvalho Jr. (2012) also analysed the relief policies of 12 large Brazilian municipalities and noted that granting exemptions based on assessed value up to a certain limit was often the rule (p. 35). Such a policy can be a serious problem if the assessment ratio is low because properties with medium or high market values can be exempted. In Rio de Janeiro, the loss of revenues due to tax reliefs represented approximately R$1 billion or 33% in As a comparison, the current exemption percentage among residences in Rio de Janeiro is 65%, which is significantly higher than the residential exemption levels of São Paulo (38%), Fortaleza (30%), Porto Alegre (29%), Manaus (25%), Curitiba (15%), and Belo Horizonte (14%). The Collection Brazilian legislation provides several instruments for tax enforcement and compliance, such as a prohibition on property transfer, judicial proceedings for recovering tax arrears including the imposition of interest and penalties, registration of both the property and the taxpayer on a national or governmental blacklist which can result in credit restrictions, and as a last resort, the public auction of the property in arrears. Adding delinquent taxpayers to the two national blacklists which the private sector utilises in decisions to fund personal purchases (Credit Protection Service Register[SPC]) or grant loans (Centralised Banking Services Register[Serasa]) could induce a very high political cost to municipalities and therefore this provision is not applied. Alternatively, some municipalities, such as São Paulo, have created their own blacklist. This action, however, is not providing a significant level of enforcement because the restrictions have been applied only to the execution of agreements and the grant of tax incentives by the municipal government. In 2006, the National Congress enacted legislation that permits the outsourcing of the delinquent tax collection to private financial institutions. Unfortunately, this recent instrument has not been implemented as yet by the municipalities. For Rio de Janeiro, according to the Municipal Tax Department, public auctions of properties with past due tax bills have been conducted since 2009 with a relative level of success. Most of the time, taxpayers have quickly headed toward the Municipal Tax Department to renegotiate or pay their arrears after their property has been listed in the public auction. The collection rate also is very heterogeneous throughout the country, as shown in table 6 for the 10 largest Brazilian municipalities in 2000 and Strong collection performance is found in Belo Horizonte, Porto Alegre, São Paulo, Campo Grande, and Rio de Janeiro (between 80% and 88%) and poor performance is found in Fortaleza and Journal of Property Tax Assessment & Administration Volume 10, Issue 4 27

10 Manaus (60%). An improvement in the collection rate in Campo Grande, Belo Horizonte, and Manaus was observed during this period. However, even in 2011, the collection rate was often below 40% in some small- and medium-sized Brazilian municipalities (those under 200,000 inhabitants). The collection rate is probably an important element in explaining the high property tax revenue heterogeneity in Brazil because the collection rate often increases with the municipal population and the level of income due to better administrative capacity. Even without taking into account the political issues, the administrative costs and economies of scale and scope might be a significant factor in the collection rate performance. Table 6. Property tax collection rate amongst 10 large Brazilian municipalities in 2000 and 2011 (%) Municipality Municipality São Paulo Curitiba Rio de Janeiro Porto Alegre Salvador Manaus Belo Horizonte Brasilia Fortaleza Campo Grande Data Source: Municipal tax departments Furthermore, a very low collection rate among vacant-land properties was noted even in large municipalities. A questionnaire was ed to municipal tax departments in three large municipalities to further investigate this result. The tax departments indicated the reasons were the higher statutory tax rate applied to land, the legal confusion between the urban and rural property tax, and the alleged speculative behaviour of landowners. Another point raised was the urban informality issue. Although Brazilian legislation allows property taxation on either the legal landowner or the possessor, local governments usually bill the outdated landowners of large parcels of land that have been informally subdivided and urbanised. Nevertheless, all the respondents overlooked the role of administration and enforcement. Concerning the utilisation of the enforcement instruments, with the exception of the costly judicial proceedings, the others were not applied. The Assessment System The valuation roll of Rio de Janeiro has not been updated since The gap between assessed and market values has been increasing, particularly after 2009, due to the real estate boom which started mainly after a new federal policy of housing credit. Notwithstanding, the increased expectations for real estate appreciation caused by urban infrastructure investment plans, transportation projects, and facilities needed for the upcoming international sports events were also important in the case of Rio de Janeiro. Carvalho Jr. (2012) found that the widening gap between assessed and market values has expanded both vertical and horizontal inequity. The research compared the assessed and market values for 2,511 residential properties and found that the average assessment ratio in 2009 was 35% (the ratios, in general, ranged from 25% to 40%). For nonresidential properties, the estimate was approximately 50%. The nonresidential assessment ratios were higher for two reasons: nonresidential values on the valuation roll are at least 20% higher than residential values in the same location and nonresidential depreciation is lower. Furthermore, considering the higher statutory tax rates and the lower tax relief applied, the effective taxation on nonresidential properties can be significantly higher. Estimating assessment ratios is difficult because there is no good source of market data available for all municipalities. In 2011, an average assessment ratio of 35 45% in Sao Paulo and 20 30% in Rio de Janeiro was the common estimation 28 Journal of Property Tax Assessment & Administration Volume 10, Issue 4

11 within the real estate sector. However, it is possible to establish a proxy for the assessment ratio by comparing total assessed values to municipal GDP. Bahl and Wallace (2008) in their study used a factor of 3 times GDP as a proxy for the total market values of all properties in developing countries. Carvalho Jr. (2009) estimated total market values as approximately 2.5 times municipal GDP among the large Brazilian municipalities in 2003; however, an index of 3 times municipal GDP can be considered reasonable for Table 7 presents the estimated assessment ratio of eight large Brazilian municipalities as well as the years of the roll s latest update. As the table shows, the assessment ratios varied widely among the cities: Belo Horizonte (60%); São Paulo and Campinas (35%); Porto Alegre (30%); Rio de Janeiro, Fortaleza, and Brasilia (25%); and Manaus (5%). The last three municipalities had the lowest index amongst the selected cities and also had low revenue performance in terms of per capita and per GDP, which suggests that the assessment ratio and revenue performance are strongly correlated in Brazil. Another issue raised by table 7 is the update cycle. The average period between valuation roll updates, as shown by the table, is one decade. In Rio de Janeiro, the valuation roll has not been updated during the last 15 years, while in other cities, there has been similarly long intervals without a reappraisal: São Paulo and Belo Horizonte (8 years), Porto Alegre (11 years), Fortaleza (12 years), and Manaus (27 years). The Taxation on Assessed Values The term, taxation on assessed values, is defined in this article as the ratio of the total tax levied to the total assessed property values. This ratio is often very different from the statutory tax rates and from the effective rate which is usually defined as the amount of tax levied on the market value. Table 8 shows the participation of the total assessed values in the municipal GDP as well as the taxation on assessed values in Rio de Janeiro, São Paulo, Belo Horizonte, Brasilia, Campinas, Porto Alegre, Fortaleza, and Manaus. Table 9 displays the statutory tax rates in these municipalities enabling a comparison between the statutory rates and the rate of taxation actually applied to the assessed values. According to table 8, in Rio de Janeiro, the assessed values were taxed at approximately 1.3% as a result of 0.8% on residential properties and 1.8% on other properties. The difference between the statutory tax rates (table 9) and these actual rates indicates that the impact of the tax relief system is extensive. Furthermore, despite Rio de Janeiro having the highest rate of taxation, assessed values represented only 70% of the municipal GDP, the second lowest index among the selected municipalities, which indicates a low assessment ratio. São Paulo and Belo Horizonte had the best indexes among the selected municipalities. In São Paulo, the tax burden was about 1% and property tax revenues accounted for 0.9% of its GDP. The valuation roll update in 2010 increased the total assessed values from 79% to 107% Table 7. Estimated assessment ratio in 2011 and valuation roll update cycle amongst 8 large Brazilian municipalities Municipality Estimated Assessment Ratio Last Updates Municipality Estimated Assessment Ratio Last Updates São Paulo 35% 2002, 2010 Campinas 35% 2006 Rio de Janeiro 25% 1994, 1998 Brasilia 25% 2009 Porto Alegre 35% 1991, 2002 Fortaleza 25% 1998, 2010 Belo Horizonte 65% 2002, 2010 Manaus 5% 1984, 2011 Data Source: Municipal tax departments; IBGE (various years) Journal of Property Tax Assessment & Administration Volume 10, Issue 4 29

12 Table 8. Total assessed values per municipal GDP and their taxation amongst 8 large Brazilian municipalities in 2010 (%) Property Tax Assessed Values Taxation on Assessed Values Municipality per GDP per GDP Residential Nonresidential Vacant Land Total São Paulo Rio de Janeiro Belo Horizonte Campinas Porto Alegre Brasília Fortaleza Manaus n.a. n.a. n.a Data Source: IBGE (various years); local tax departments of selected cities Table 9. Statutory property tax rates in 8 large Brazilian municipalities in 2010 (%) Statutory Tax Rates Municipality System Residential Nonesidential Vacant Land São Paulo Progressive Rio de Janeiro Flat Rate Belo Horizonte Progressive for Residences or 3.0 Campinas Progressive Porto Alegre Progressive for Vacant Land Brasília Flat Rate Fortaleza Progressive for Built Properties Manaus Progressive Data Source: IBGE (various years); municipal tax codes of São Paulo s GDP. Belo Horizonte might be considered a good example of performance in Brazil because the property tax revenues accounted for 1.0% of its GDP. After updating its valuation roll in 2010, Belo Horizonte had 182% of its municipal GDP in property values assessed, which were taxed at 0.8%. On the other hand, Brasilia, Fortaleza, and Manaus had the worst performance among the selected municipalities. Fortaleza and Brasilia had 70% of municipal GDP in property values assessed, while Manaus had just 15%. The tax burden was just 0.3% in Brasilia and 1.1% in Fortaleza and Manaus. Revenues per GDP were between 0.1% and 0.4%. Collection practices also bear some responsibility for this performance because less than 60% of the tax levied has been collected in these cities. Table 9 indicates that progressive systems are the most commonly used. However, their design is very important because there is a potential risk of a significant portion of the tax roll burden falling on the lowest value bracket when the assessment ratio is low. The table also shows that higher tax rates are usually applied to vacant land and nonresidential properties. This also was the practice in other Latin American cities according to Schechinger (2004) and DeCesare (2012). In Brazil, the higher tax rates on vacant-land properties are likely explained as a possible incentive for land development which is consistent with article 156 of the 1988 Brazilian Constitution which states that the social function of the land must be encouraged by local governments through property taxation. Other possible reasons for the higher tax 30 Journal of Property Tax Assessment & Administration Volume 10, Issue 4

13 rates on nonresidential properties are the lower political and administrative costs of taxing this sector and their perhaps greater demand for public services. In addition, property taxes on nonresidential properties can be transferred to the consumers, working as an indirect tax and therefore giving these taxpayers a higher ability to pay. Indeed, in Brazil, changing a property tax system has not been an easy task because municipal legislation is necessary to alter any of the three main mechanisms that can increase taxes: tax rates, reliefs, and assessments. Certainly, with the exception of Brasilia, the selected municipalities already have reasonable statutory tax rates; therefore, policies to increase taxation should focus mostly on relief reduction and revaluations. Calculation Process Under the valuation roll of Rio de Janeiro, three categories of values residential, nonresidential and vacant land are assessed in reals per square metre. In 1998, 1,422,381 residences, 213,293 nonresidential properties, and 170,144 parcels of vacant land were reassessed throughout 24,699 different geographical units (streets or block of streets). In general, the nonresidential values are greater than the residential values, which are greater than the vacant land values. The assessed values in the valuation roll are established for new properties, with a depreciation system applied to the old properties. Residential properties are automatically depreciated at 1% per year for up to 50% in 50 years while nonresidential properties can be depreciated up to 35% over 60 years. Because the valuation roll establishes the land and the building values combined, the depreciation adjustment also may fall on the land value portion; therefore, its impact on assessments might be higher than the usual application to the building value alone. Carvalho Jr. (2012) noted that the depreciation system reduced the values in a sample of residential properties by 20% in To illustrate the impact of the depreciation and tax relief systems, table 10 provides a hypothetical example of a property tax calculation for an apartment located in São Clemente Street (an area in the city with high market values). Under the assessment system, the residential values are adjusted by size, age, and position. In 2010, the assessed value in São Clemente Street is R$1,380 per square metre for new residences, which is then depreciated by 50% (a 0.5 depreciation coefficient is applied because the building was built in 1958). The apartment s size (60 square metres) and position (facing away from the street) qualifies for a 0.9 adjustment by both the size and position coefficient. Thus, its capital value is assessed at R$33,257, which represents just 12.4% of its market value in Furthermore, because its assessed value is lower than R$45,000, a tax reduction of 40% also is granted, providing a taxable value of R$20,112. To calculate the tax liability, the residential tax rate of 1.2% is applied to the taxable value, which results in a calculated tax of R$241. However, tax legislation provides a monetary rebate of R$260 for all residential properties. Because this monetary rebate is higher than the calculated levy, the apartment would be property tax exempt. Estimating Property Tax Performance in Rio de Janeiro There are a number of possible ways to evaluate property tax performance at the local level. The usual way has been analysis of certain indexes, such as revenues per capita, share on local revenues, or the revenue growth and/ or development. The revenue-per-gdp analysis has mostly been used for crosscountry comparisons because GDP data are often not available at the local level. Nevertheless, the Brazilian Institute of Geography and Statistics (IBGE) annually estimates the GDPs for Brazil s Journal of Property Tax Assessment & Administration Volume 10, Issue 4 31

14 Table 10. Example of property tax calculation process in Rio de Janeiro (2010) Assessment Factors Building Type Residential Apartment 1.0 Building Age/Depreciation 52 years 0.5 Location São Clemente Street (2nd block) R$657 per sq. metre Inflation Index Inflation since % Adjustment per Position Facing away from street 0.9 Size 60 sq. metres 60 sq. metres Adjustment per Class Size Less than 100 sq. metres 0.9 Assessment Calculation Assessed Value (AV) 1.0 x sq. metres R$657 per sq. metre R$33,527 Rebate on Assessment Residential AV > (R$19, ) 0.6 Taxable Value (TAV) R$33, R$20,112 Tax Rate Residential 1.2% Tax Liability before Rebate R$20, % R$241 Rebate on Tax Liability Residential Monetary Rebate (R$260) Tax Levied R$241 R$260 Exempted Assessment Indexes Market Value (MV) 60 sq. metres x R$4,500 per sq. metre R$270,000 Assessment Ratio AV/MV 12.4% Effective Tax Rate TAV/MV 0 Data Source: Municipal tax code and valuation roll of Rio de Janeiro municipalities, enabling their use in this analysis. However, this approach has some limitations because the municipal GDP may not properly approximate the tax base, which is the gross property market value in a municipality. For instance, in a metropolitan area, the bulk of production (the GDP) may be located in some municipalities and the residences (the housing stock) in others. Fortunately, this is not the case in the Municipality of Rio de Janeiro, where most of the production and the housing are located within its large territory. Bahl and Martinez-Vasquez (2007) and Bahl and Wallace (2008) established a method for estimating the property tax performance in a country using a model of ratios. These authors considered the property tax revenues per GDP as the variable to be predicted. To do so, they used five variables: 1) the collection rate; 2) the rate on the total assessed value; 3) the assessment ratio; 4) the tax roll coverage values; and 5) the ratio of property market values to GDP. These authors draw an identity, which is the decomposition of the ratio of property taxes revenues to GDP. However, Bahl and Wallace (2008) cited three main obstacles with this approach. The first is stipulating an optimum level of property tax burden for developing countries. The second is the lack of estimation of properties market values. The third is that any additional administrative cost necessary to obtain the recommended level of revenues should be taken into account in the analysis. The authors suggest that the revenue yields have to be high enough to compensate the costs of property tax administration. This model has been adopted to estimate property tax performance in Rio de Janeiro, with one important change: the addition of a term representing the ratio of the taxable assessed values to the total assessed values. This ratio, which produces the total amount of tax levied on taxable assessed values, reveals the 32 Journal of Property Tax Assessment & Administration Volume 10, Issue 4

15 impact of tax relief measures on the tax base. Hence, the impact of any change in the tax relief policy can be estimated by this model. The equation for the model is expressed as follows: Property Tax Identity: T' = T' T TAV AV TMV MV Y T TAV AV TMV MV Y where Y = municipal GDP T' = property tax collection T = property tax liability TAV = taxable assessed values AV = total assessed values TMV = taxable market values MV = total market values. The first term (T'/Y) is the property tax revenues per GDP, which was 0.75% in Rio de Janeiro for The second term (T'/T) is the ratio between property tax collection and liability. The collection level was 82%. The third term (T/TAV) is the ratio between the property tax liability and the taxable assessed values. This ratio was 1.9% and represents the levy on the taxable assessed values. The fourth term (TAV/AV ) is the ratio between the taxable assessed values and the total assessed values, which produces the taxable portion on the total assessed values and indicates the impact of tax relief provisions. As shown in table 4, just 67% of the total assessed values were permitted to be taxed in The fifth term (AV/TMV) is the ratio between the total assessed values and the taxable market values, which indicates the assessment ratio, which was approximately 30% in The sixth term (TMV/MV) is the ratio between the taxable market value and the total market values, which shows the loss of revenues due to the incomplete information and coverage of the tax roll: in other words, the coverage values. Table 4 displays tax roll coverage of 60% among residential properties and 100% among nonresidential properties in Rio de Janeiro. In general, nonrecorded properties are those with low values (mostly in informal settlements). Thus, the coverage values must be very limited. These are stipulated at 15% in this calculation. The last term (MV/Y) is the ratio between the total market values and the municipal GDP. As previously stated by Bahl and Wallace (2008) and Carvalho Jr. (2009), an index around 3 times GDP is expected. In addition, as noted by Bahl and Martinez-Vasquez (2007), this ratio is determined to be a residual to complete the identity. Four assumptions were established for all studied scenarios. First, the collection rate would slightly increase from 82% to 85% because the administrative costs of enforcement are progressive. Such an increase would occur mainly under a reform that narrowed the roll of exempted properties (more taxable properties means higher compliance cost). Second, the tax roll coverage would be broadened from 60% to 90% among residences (in number of properties). The impact of this greater coverage was assumed to be an increase from 85% to 95% on the coverage values. Third, the taxable amount on the total assessed values would increase from 67% to 92% due to the review of the tax relief policy. Less relief also would make the tax burden on the taxable assessed values increase slightly from 1.9% to 2.0%. Fourth, the relationship between the full market values and the municipal GDP would be equal to 2.8 to complete the identity with the baseline data. Thus, only the variations in taxation applied to the taxable assessed values and in the assessment ratio will be analysed. Table 11 shows the components of the property tax identity in the baseline simulation for Rio de Janeiro and the four scenarios containing improvements in the five ratios for Journal of Property Tax Assessment & Administration Volume 10, Issue 4 33