Property taxes and Ghana’s development

Property taxes are a common method used by governments around the world to raise revenue. While the specifics vary by country and jurisdiction, property taxes generally involve an annual assessment of the value of a property, which is then taxed at a set rate.

At a time when the domestic revenue from the traditional tax sources is fast dwindling, governments in the last two decades have made some attempts to focus on what many have described as ‘low hanging fruit’, property taxes, to shore up domestic revenue.

There have been many projections made and experts believe that considering the number and nature of properties littered across the country, particularly those in prime areas such as East Legon, Cantonments, Ridge, Adentan, Airport residential, all in Accra, and other parts in the Ashanti, Western and Northern regions, there is the need for the government to seriously up its game to collect more property taxes, at least, from the affluent.

Some estimate that property tax collections can contribute between 10 and 15 per cent of the total domestic revenue raised per annum and this is enough to shore up overall domestic revenue.

In Ghana, property taxes are governed by the Local Government Act, of 1993 and collected by MMDAs. All property owners are required to pay property tax, with some exceptions.

While Ghana’s property tax system aims to be progressive, gaps in administration constrain full effectiveness. Meanwhile, there is a strong belief that by streamlining collection processes, revenue from that source will improve.

An opinion piece shared on the International Monetary Fund (IMF) blog, titled, ‘How property taxes can help low-income countries develop’, painted a picture of what countries such as Ghana, an emerging market, can do to turn around their financial fortunes.

The report said the world’s governments must raise an additional $3 trillion to achieve sustainable and inclusive economic growth goals this decade.

The cost in emerging markets equals four per cent of gross domestic product—and 16 per cent for low-income countries. 

As to how countries can finance such staggering price tags, it said large cities such as Delhi and Lagos had shown the way forward.

It was observed that taxing property more efficiently could play a meaningful role in raising revenue at the local level, allowing countries to invest more in their people, a new IMF analysis shows. 

Previous IMF research has shown that countries have ample potential to raise more domestic tax revenue if they need it—up to five percentage points of gross domestic product (GDP) over two decades. 

Of course, the political challenges of such reforms are far from trivial, as recent events in several countries suggest that raising taxes can create social unrest. 

It was clear from the report that, more efficient real estate taxes have an advantage in this regard: by being locally collected and spent, they may be politically less challenging than increases in broad-base national taxes.

Recurrent taxes on immovable property could help local governments capture the wealth generated through construction-intensive urbanisation. 

Generating such revenue fairly is especially important given the difficulty in developing countries of taxing income and wealth, which can be highly mobile.

The appeal of property taxes is clear when compared to revenue raised in advanced economies: more than one per cent of GDP on average in OECD countries, and nearly three per cent in some advanced economies. 

By contrast, they raise only around 0.1 per cent of GDP in emerging Asia and Africa. 

Achieving such a large growth requires improving property-tax coverage and addressing the capacity challenges in valuing real estate as ways to reverse the current revenue underperformance. 

New property identification technologies and simplified valuation methods have become widely available. 

With policy reforms and better technology, recurrent property tax revenues in developing countries should be at least 10 times higher than current levels.

Local revenue and spending

When well-designed, property taxes become a reliable and progressive form of municipal financing. 

They enhance the accountability of local governments since proceeds can be used to fund better local public services and tax the increase in wealth of those who own real estate that has been appreciated due to urbanisation and associated public infrastructure development. 

The tight link at the local level between revenue and spending shields property taxes from national politics and imposes higher accountability standards on local councils for the effective use of the resources.  

National legislation should regulate how much property taxes can differ across a country, limiting divergences in the level of local public services funded by this source. 

Municipalities should limit exemptions to a narrow range of public organisations, and forgone revenues should be regularly reported.

The impact on “asset-rich but cash-poor” households such as pensioners can be softened by deferring taxes until the property is sold, at which point full payment is due.

Satellites and drones

It’s best to take a gradual approach to property tax reforms, using modern technology to broaden the coverage of area-based taxes (expressed as a fixed rate per square metre). 

The goal should be to transition to full value-based property taxes in coming years as countries gain experience in implementation and market price information is meticulously recorded for periodic property valuation. 

Modern mapping technology, such as satellite imagery and aerial photography by drones, can be used to fast-track the expansion and coverage of property taxes to all parcels that ought to be included in the fiscal register.

Indian officials in Delhi and the greater Bangalore metropolitan area have started using satellite imagery to map properties in a geographic information system. In Africa, several municipalities have made impressive strides. Lagos increased tax collection fivefold to more than $1 billion in 2011 by broadening the base of its property tax, coupled with better enforcement.

The increased precision of satellite images enables the accurate measuring of surface areas and the development of fiscal register maps that depict buildings and their alterations. This allows the fast roll-out of an area-based property tax until valuation capacity has advanced to migrate toward a market value-based property-tax system that can raise more revenue.

Demand for capacity development from the IMF in this area indicates that many countries are seeing the benefits from this combination of the right policies and technology enablers. It makes property tax reform effective and politically appealing, especially when its objectives are communicated properly to the public.

Way forward

It is also imperative to note that, for the assemblies to collect property taxes more effectively, the appointment of a Chief Executive Officer must not just be based on political popularity and favours, but purely on grounds of competence in all aspects.

The MMDEC must be capable of bringing innovative ideas and must also be well-versed in financial management.
Governments must do away with nuisance taxes in the country’s tax structure to pave the way for residents and property owners to have the edge in paying property taxes.

Based on international practice, Ghana also needs to allow the monies collected by the assemblies to be used directly on development projects such as proper access roads, and security among other things within their respective metropolitan, municipality and districts. Only a small percentage should be allowed into the consolidated fund.

To say that satellites, drones, and the right policies can help countries increase revenue by up to 10 times at the local level, cannot be over-emphasised.

Property taxes can be a game changer. The potential is there but it will take more positive actions to make it work in the best interest of the country.