Alexander Causwell | Falling in love with property tax

The most primitive state consists of a tax administration and an armed group of men to enforce collection. Taxes are thus as old as government, and people have almost certainly dreaded them for just as long.

Yet, among that loathsome class of obligations, property taxes deserve more appreciation by policymakers and citizens alike, especially since Jamaica belongs to a select group of jurisdictions that levy a Land Value Tax (LVT). An LVT, unlike most property taxes, is based on the unimproved value of the land, and therein lies an untapped advantage.

The LVT is preferred among economists going back to Adam Smith, as it is the only tax that garners no ‘deadweight loss ‘— economist speak for the economic inefficiency created when taxes distort behaviour to the detriment of overall welfare. Taxing physical structures — as in a more typical property tax — disincentivises investment in buildings. GCT raises the prices of goods and services, encouraging consumers to purchase fewer of them — just as taxing sugary drinks might discourage their consumption. Income taxes discourage working by eating away at the potential gains that greater production would yield, hence why higher income taxes predict lower GDP growth. The amount of land available is fixed, regardless of the LVT rate, and so cannot be disincentivised.

For Jamaica, the LVT is especially attractive as a more efficient alternate tax base to income taxes. CAPRI’s 2018 report, In Search of the Most Efficient Tax for Jamaica, found that administering property tax costs the government just 0.3 per cent of revenue, compared to 3.4 per cent for income tax. For businesses, the administrative hassle in complying with the property tax costs of 16 per cent of the tax revenue given over, versus 20 per cent for income tax.

IMPOSSIBLE TO EVADE

Property taxes are also virtually impossible to evade since the state has a database of all property, whereas income tax evasion is estimated at 50 per cent of potential revenue because the tax administration can have no comparable database of all income. Only formal PAYE workers reliably pay income tax, while own-account workers, professionals, and many self-employed individuals easily skirt their obligations.

Yet, the government does not lean on the property tax base nearly as much as it could. In 2023, revenue from property taxes amounted to 0.7 per cent of GDP, while income taxes generated 9.2 per cent. Our property tax share is also low by international standard: for OECD countries, the average property tax share is 2 per cent of GDP.

Property tax revenue has lagged because the government has neglected to update valuations at regular, frequent intervals — a failure which has compounding political and economic implications. The first nationwide valuation was completed in 1974, followed by 1983, 1992, 2002, and then 2013 — an average lag of almost 10 years. The 2013 valuations did not even factor into property tax calculations until 2017 — already four years out of date then, and 13 years out of date as of 2026. This inconsistency then translates into sticker shock upon each update: as real land values rise considerably between valuations, augmented by inflation, each revaluation strikes landowners as inordinately high. Public outcry has repeatedly pressured governments to back down and settle for lower and varied rates, thereby neutering the LVT’s efficiency gains and rendering it negligible as a share of overall government revenue.

It also may be that central government pays little attention to the LVT because property taxes are earmarked for local government, even though several erstwhile responsibilities of municipal corporations — water supply, fire protection, waste management, disaster preparedness and management — have been gradually centralised since Independence, with responsibility for parochial roads soon to follow.

GOOD OPPORTUNITY

Given this historically unrealised potential, the current administration’s announcement to update valuations and increase the property tax rate above the current maximum of 1.3 per cent is a good opportunity to move toward a more favourable tax base. But this requires commitment to regular, more frequent valuations, such as every one to three years. This is also easier to do with technology now available through the government’s existing digital register of parcels and the advent of automated valuation models. Amended legislation could also restructure where the revenue goes: a commensurate portion to the Consolidated Fund; the remainder to municipal corporations based on a transparent, formula-based shares tied to service needs and performance.

Housing development would also benefit from Jamaica following through with better use of LVT. A low LVT makes it cheap for landowners to hold on to idle property — whether vacant lots or empty units — for speculative gain. Increasing the tax makes land speculation more costly, encouraging more real estate to come on to the market and providing more sites on which developers can build; hence, municipalities in Pennsylvania that levy an LVT produce over 50 per cent more housing units than comparable towns tied to a standard property tax. Increasing the housing supply will place downward pressure on costs, benefiting buyers and renters alike. The speculative appetites that once coveted land may then shift toward the capital markets, growing investment in Jamaican businesses.

A complete transition to a single tax on land value may never be politically feasible, however desirable, but inching toward it would convert more deadweight loss into palpable gains to Jamaica’s overall prosperity. And so, if the taxwoman must cometh, bid her cometh for the land rather than the fruits of our labour upon it.

Alexander Causwell is a research fellow at CAPRI. Send feedback to communications@capricaribbean.org