Resource and Land Taxation

1
Resource and Land Taxation

• Indira Rajaraman
• Tax Aspects of Domestic Resource Mobilisation A
  Discussion of Enduring and Emerging Issues
• Rome
• 4-5 September 2007

2
Resource Taxation

• Non-renewable Mining, Petroleum, Timber
• Renewable (within sustainability limits) Water,
  Fishing

3
Fiscal Resources from Natural Resources

• With natural resources, it is non-tax revenue in
  the form of royalty and other compensation,
  rather than taxation, which poses issues to be
  resolved.
• Taxation of resources, whether within a VAT
  framework or not, is on par with indirect taxes
  on other inputs (conceptual parity, if not rate
  parity) exports are usually exempted, with or
  without a VAT.
• Non-tax royalties do not figure in
  double-taxation agreements and are therefore not
  compensated in any way.

4
Are Resource Royalties an Emerging Issue?

• Resources are not uniformly distributed
  spatially, so there is the issue of whether
  non-tax revenue should accrue to producer
  jurisdictions, and why.
• In the future, with buoyant commodity demand from
  China and India, mineral prices are projected to
  be buoyant, therefore this is a very live issue.
• Demand-side players will lobby for royalty design
  that will keep mineral prices less buoyant, and
  producer jurisdictions will lobby for royalty
  design that will keep up fiscal buoyancy.

5
Rationale for Non-tax Compensation

• Economic
• Land pre-empted from other use during extraction
• Depletion (inter-temporal fairness)
• Externalities (market failure to factor in
  concurrent and inter-generational costs)
• Costs of restoration of land for other uses
• Permanent loss of livelihoods (river storage for
  hydro power)
• Legal Local jurisdictional rights in terms of
• Ownership
• Control

6
Compensation Design

• Royalty rates
• Specific rates ( per unit quantum) low on
  buoyancy but stable
• Ad valorem ( value) high on buoyancy, but can be
  volatile
• Mixed systems are sometimes prescribed (Specific
  plus value) that strive for the virtues of
  both.
• Where resource prices on a steady upward trend,
  producer jurisdictions benefit from fully ad
  valorem design
• Hydro power not formula driven, designed case by
  case, which introduces scope for corruption.

7
New Approaches

• New approaches profit/income-based royalty
• Competitive bidding processes to determine
  royalty rather than pre-determined formula
• suits the variability of mineral deposits
• but can be defeated by collusive bidding
• Competitive bidding for each component of royalty
  makes collusion difficult across all elements of
  a vector of bids
• Environmental
• Design (fully ad valorem or hybrid with specific
  component)
• Depletion (separate for current local and
  inter-generational)

8
Land Taxation

• In situ
• Transfer of property

9
Which Level of Government?

• Immoveable property (housing and land) is the
  universally assigned tax base for local
  government.
• Immoveable property as a tax base is
  administratively suitable for local government
• relatively easy to observe and assess,
• and relatively difficult to conceal.
• Thus, effective land taxation holds the key to
  provision of the local public goods which are
  critically underprovided in the developing world
• Water, sanitation, law and order, primary
  education

10
Effective Land Taxation in Developing Countries

• Requires three operational properties
• parsimonious information requirements for
  assessment
• assessee acceptance.
• The critical need is for an incentive structure
  for local revenue collection.

11
Problems in Developing Countries

• Valuation distortions Land markets are
  frequently distorted as a result of taxation of
  transfer of ownership (called stamp duty in
  India), and taxation of capital gains, both of
  which encourage under-reporting of the true
  market value of land and property.
• Valuation basis Not enough transfer transactions
  for a robust estimate of capital value.

12
Common Solutions to the Valuation Problem

• Urban property taxation is typically based on
  rental value rather than capital value, since the
  market for rental might be deeper than the market
  for transfer of ownership.
• However, even rental value can be distorted by
  rent control legislation.
• Being sought to be overcome by presumptive
  zone-specific area-based taxation.

13
Presumptive Parameters

• Parameters going into determination of the
  presumptive rental value
• Type of usage (commercial/residential/other)
• Type of construction
• Zone (the zones need not be contiguous)
• Age of building
• Resident type

14
Revenue Yield of Presumptive Levies

• Buoyant only if rates periodically revised.
• This calls for recalibration of the various
  parameters underlying the determination of the
  area-based rental value.
• Thus, area-based assessment will lead to
  sustained revenue improvement only if it is not a
  once-over change.

15
Local Government Collection Incentives

• Require three properties to work in practice
• Minimal costs of assessment and enforcement (of
  the incentive).
• Cross-sectional fairness in assessment of revenue
  potential across local jurisdictions.
• Distinction between revenue effort and underlying
  revenue potential (matching grants do not do
  this).

16
Cost-effective Incentives

• The most cost-effective design for own resource
  collection incentives
• Norm-based closed-ended grants from higher
  governments, where allocations are made after
  deducting baseline calculations of local revenue
  potential.
• Thus, the revenue potential is deemed to have
  been collected (upto some stipulated percentage
  less than hundred if need be), at specified floor
  rates.
• This calls for a minimal-cost method of
  estimating jurisdiction-specific revenue
  potential.

17
Other Incentives Commonly Found

• Grants from higher-level governments must not be
  so structured as to carry adverse policy
  incentives.
• Example A grant system inversely calibrated to
  local facilities will generate adverse incentives
  for keeping these under-supplied.
• Other types of direct incentives commonly
  recommended (based on performance indicators like
  primary enrolments, small family norms) call for
  monitoring and verification by State governments
  and are liable to lapse over time.

18
Compliance

• Compliance can be encouraged by linking property
  tax payment to ownership rights
• Urban property taxation is a benefit tax and
  there is non-compliance when no commensurate
  services are delivered by urban authorities

19
Rural Land

• In rural areas
• selective, not universal, coverage confined to
  crops yielding returns above a specified floor
• systematic, as distinct from discretionary,
  catastrophe exemption provision for rural land,
  given the absence of perfect risk markets
• New issues arising with the conversion of rural
  land into Special Economic Zones explosion in
  land value with no commensurate gain for original
  owners of the land.

20
References

• The Energy and Resources Institute, 2007, Study
  on Compensation to Resource Bearing States
  (Interstate Council, mimeo)
• June 2007 conference of Lincoln Institute
• Rao, U.A. Vasanth, 2006 Is Area-Based Assessment
  an Alternative, an Intermediate Step, or an
  Impediment to Value-Based Taxation in India,
  Georgia State University
• Rajaraman, Indira, 2003, A Fiscal Domain for
  Panchayats (Oxford University Press).