News Column

Property tax requires thorough assessment

February 13, 2014

On the face of it, a proposal by government to start taxing landlords for rise in property values resulting from investment in public infrastructure sounds noble.

Known as 'betterment tax', the proposed levy falls perfectly in the State's search for innovative ways to raise extra funds to implement its devolution.

Under the proposals contained in a draft Sessional Paper on Devolved Government, the rating and valuation laws will be amended to make way for the new tax.

For starters, betterment taxes in rates as high as 50 per cent have been tried in developed nations such as UK, US and Germany. The idea has been to net part of unrealised gain in property value deemed to have been created by actions other than those of the land owner.

In a speculative market such as Kenya's real estate, such a levy will, in theory, check the irrational rise in property prices whenever public construction is announced.

This has been vindicated by a number of analyses conducted after global real estate bubbles of late 2000s which show that European countries that charged betterment taxes were least affected.

For practical purposes, however, the government needs to tread carefully in introducing a levy that remains a matter of emotive political debate even in countries that have tried it.

The tax is fraught with difficulties and numerous risks. To apply it, the State will have to craft objective ways of calculating the portion of value arising from its investment in public infrastructure.

Secondly, the tax risks opening a can of worms, especially in cases where government policies negatively impact value of land.

If the government insists on being paid for the extra value created by its actions, the principle of equity is such that it must also be ready to compensate for related losses.

From time-to-time, the government may want to create new public graves, relocate dumpsites or even restrict development on lands adjoining new sites acquired for its key strategic assets. All these actions are likely to have negative impacts on land values.

We take this early opportunity to ask the State to think of implementing the capital gain tax instead of fantasising over concepts that it is ill-prepared to manage.

Unlike betterment taxes, capital gains levy collected upon sale of a property is not only more objective but also has a wider base.

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Source: Business Daily (Kenya)

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