Property Tax Seen From Three Arenas Of Policy
The Ministry of Planning and Investment recently made a striking move when turning down the HCMC government’s proposal to impose the secondhome tax on a trial basis, saying such a plan would not ensure fairness and feasibility. There is a good reason behind this argument.
Seen from three policy arenas, there are interesting issues for debate. The locality proposes a redistributive policy which often negatively affects the local economic development, while central authorities reject a policy that should fall within their jurisdiction. Experiences from local governments elsewhere in the world show that the second-home tax should not be a priority for HCMC, which should consider other more effective tools to tap land value.
Three arenas of policy
Public policies are made into three policy arenas, comprising redistributive, allocational and developmental.
Developmental policies help consolidate the economic standing of a locality in the competition with other localities, enhancing the locality’s economic capacity, expanding the tax base and job creation. Developing industrial zones or trade centers are examples of such policies. These policies often win support and are the core for any locality.
Redistributive policies benefit the disadvantaged, but often have negative impact on a locality’s economic growth. For example, policies to use the State budget to provide subsidy for the poor can discourage such people to strive harder as they rely more on support, thus making the burden increasingly heavier. Redistributive
policies are necessary, but localities should take prudence when employing such policies.
Allocational policies are neither developmental nor redistributive, but are in-betweens. Security and sanitation services are typical of such policies. Basically, such policies benefit all residents and are deemed necessary, but they do not necessarily create net benefits for the economy.
All the three arenas of policy are necessary, but the priority of each arena varies from one locality to another. For most localities, developmental and allocational policies are more preferred and prioritized, while redistributive policies are mandatory. Therefore, redistributive policies are often the arena assumed by higher authorities, especially the central government.
Property tax viewpoint
Given the three above arenas of policy, we can see two conflicting viewpoints on taxation in general and the property tax in particular. Tapping the haves to support the have-nots is the popular viewpoint on taxation. This approach by nature is redistributive, which prompts a dislike of taxation among the general public. Taxing the second home clearly manifests this viewpoint, on the grounds that well-to-do people with more than one home should be slapped higher tax to have revenues for other tasks. Further, it is argued that taxing the second home will discourage speculation, thus lowering the house price to a level more affordable to lower-income earners.
It seems logical at first glance, but for localities, taxing the second home will adversely affect economic growth. Money flows, and richer people can move to other localities to acquire a second home. Localities need to comprehend that a wider tax base and jobs are created by businesses, high-income families and capable people. Taxing the second home under the redistributive mindset will have adverse impact on the local economy.
Conversely, the property tax under the developmental arena will do. Take the case of HCMC for example. Urban services in general have not met the requirements for a higher-quality living environment to woo high-skill workers and well-to-do families. The property tax will be an efficient tool to address this issue.
It would be difficult to collect taxes for the budget and then tap the budget to improve services for the entire city. The more viable method is to allow grassroots administrations to collect taxes to finance essential services. For example, the city government can allow authorities of wards in Phu My Hung Urban Area where residents are used to service fees (which are by nature similar to the property tax) to collect the property tax to finance necessary services there.
Reality in some developed countries shows that the property tax, economic development and local services are all correlated in an upward spiral. Higher housing prices lead to higher tax revenues, while service improvement leads to higher living quality and consequently higher housing prices, resulting in higher tax revenues. This is the developmental impact of the property tax, which should be the approach for HCMC to replace the traditional method being employed now.
Recommendations for HCMC
For HCMC, which is seeking to improve the business environment, attract investment and encourage entrepreneurs, taxing the second home will most likely backfire. Experiences
from other cities in the world with a similar standing like HCMC’s unveil two issues. First, the redistribution of a sizeable amount of budget revenues from HCMC to other localities or for national expenditures is necessary. Therefore, it is unlikely the State budget will be restructured to increase allocation for the city’s development goals. The city should not seek a larger share in the budgetary cake.
Second, tapping land value should create the most important resource for the city’s infrastructure development and provision of urban services. As the central government has plans to draft the Property Tax Law to replace the Law on Non-Agricultural Land Use Tax, the city should refrain from applying this tax law on a trial basis, especially the plan to tax the second home as analyzed above. Instead, the city should trial measures to make the most of land so as to create new sources of revenue and to aid development.
These measures include:
Betterment levies, which are a form of tax or fee levied on land that has gained in value because of public infrastructure investments or public services. For example, when Cach
Mang Thang Tam Street is widened, properties along the street, especially those becoming streetfront properties due to the street widening, will gain steeply in value. The landowners will have to contribute a certain percentage of that gain as value capture to cover the cost of street widening. Sale or transfer of development
rights. Property developers can buy the right over higher-density constructions, including underground constructions, or the right to convert land use purposes, from low-density to high-density development. Such demands are high, and the city can collect sizeable amounts of money for the budget.
Impact fee. This is the charge imposed by authorities on new development projects that exert pressure on public infrastructure facilities. Higher-density constructions will lead to heavier impacts on traffic infrastructure and other facilities, and project owners have to cover the additional investment in infrastructure. The impact fee can be compared to the purchase of development rights mentioned above.
Land readjustment. Under this measure, land lots of odd shapes will be merged together, on which public facilities are developed, and then the whole area is divided into urban sections. The merged land area will be divided into three sections, one for infrastructure development, one to be sold for funds to cover development costs, and one to be handed over to landowners. This measure will be appealing to landowners, as their lands will gain values, and appealing to authorities as well, as public facilities can be developed without exerting pressure on the State budget.
In short, measures to tap land value stated above under the developmental policies will be feasible and efficient in addressing the shortage of funds for infrastructure development for HCMC in particular and other cities in the country in general. Taxing the second home, from the developmental perspective, should not be a priority for HCMC. Therefore, it is a good viewpoint when the Ministry of Planning and Investment declined to include the second-home tax measure in the draft resolution to replace Resolution 54/2017 of the National Assembly on trial implementation of special mechanism to create new growth momentum for HCMC.