Progressive Taxation of Vacant Land

One of the tools that can be used to discourage speculation and encourage development is taxation of vacant land parcels. Many governments around the world have used this tool to motivate the private sector to develop vacant land. However, governments should not use this tool solely to address budget issues. Rather, they should use this tool to change the behavior of the private sector and block speculation.

A World Bank review of the nine cases of vacant land taxation around the world shows that various governments have different ways of defining, identifying, and prioritizing vacant land; of structuring vacant land fees; of choosing an implementation mechanism; and of deciding who benefits from the fee and how, as well as the various penalties to be imposed in the absence of required payment. There are also differences in prioritizing how to apply the taxation—whether by location, time left vacant, or degree of development. One common denominator among the case studies is the capacity of the local government in implementing the taxation, which proves to be an important factor in the success of this tool. Some observations from the review of case studies are listed below.

Motivations for implementing a fee. Two different traits were observed in this context. In developed countries, the main motivation seems to be addressing disinvestment and blight in cities. However, in developing countries, the focus of this tool is on fighting speculation. This is demonstrated by the examples of Brazil, China, Colombia, Korea, the Philippines, and Taiwan, China.
Rate setting (capacity challenges for cadaster and valuation). Having a property tax system in place is a prerequisite for implementing the vacant land tax. In the cases reviewed, the tax rate structure is based on either the assessed or market value of the property. Without having a tax collection system in place, governments cannot move to impose a vacant land fee.
Implementing agency, fee collection, and revenue uses. The implementing agency for imposing and collecting the tax is usually the local government. The tax revenues collected are deposited into the city’s general fund and are used for public purposes. The Philippines presents a unique case. If a city implementing a tax on idle land is located within Metropolitan Manila, then the tax revenues get split between the city and the Metropolitan Manila Authority.
Recourse for nonpayment of vacant land tax. The nine case studies present a similar course of action in case of delinquency of payment of the vacant land tax. This course usually involves an eventual confiscation of the vacant land by the government after applying an initial interest charge on delinquent landowners and exhausting all other channels of action to receive the vacant land tax (World Bank 2015).

Taxing vacant land parcels has its challenges and problems. Most importantly, it is a costly exercise because it requires a two-rate or split-rate property tax system to assess both improvements to the building site (if any) and the land value. As noted, assessments are expensive and many developing countries lack experienced assessors to perform a sound assessment of land value, regardless of improvements in or around it. Another issue concerns the definition of vacant land, which has to be carefully formulated to ensure an equitable taxation system while also discouraging speculation and blight. For example, comparing a 1-hectare land parcel with a single-family house to a 100-square meter land parcel with no structure on it, which one would be considered vacant and how much tax should be imposed to ensure fairness?

International experience on vacant land taxation

Some developing countries have experimented with vacant land taxation. In each case, a specific issue motivated the government to implement a vacant land tax. For example, the postindustrial city of Harrisburg, Pennsylvania, in the United States has been experiencing economic decline for the past several decades. The city started a vacant land tax program hoping that lowering the tax rate on building values and raising it on land values would stimulate new development and conservation of older buildings. In effect, the land value taxation was used as a local policy tool to help reverse economic decline and encourage urban revitalization. In this context, the city of Harrisburg implemented a “two-rate” or “split-rate” property tax system in 1975, imposing a land tax rate that is six times higher than the improvements on the property. The city believes that this tax system has been successful, resulting in the desired reduction in vacant land parcels.

Another example is Seoul, in the Republic of Korea, which experienced a 136 percent increase in land prices in 1978 mainly due to massive speculation. This in turn increased demand for land and decreased market supply, thereby widening the gap between landowners and nonlandowners. This motivated the government to impose a vacant land tax to discourage speculation and promote development. Any land parcel left vacant for two years was considered idle land and was subject to a 5 percent property tax, instead of the normal 2 percent. Similarly, a 7 percent and 8 percent tax would apply for land left vacant for three and five years, respectively. The government would confiscate the land if the taxes were not received. Some other cities in developing countries have also experimented with this tool. Table below summarizes the experience of Bogotá, Colombia; Harrisburg, Pennsylvania, United States; Marikina City, Philippines; and Seoul, Korea, in defining vacant land and structuring tax amounts.

Table: International experience in taxing vacant land

	Government’s definition of land subject to fees	Fee structure
Harrisburg, Pennsylvania, United States	A tax on land applied to all properties	Foreclosure on land = 3% of assessed land value Improvements = 0.5% of assessed value of improvements
Seoul, Korea, Rep.	Land left vacant for a minimum of two years	5% instead of 2% on improved lots 7% if left vacant for more than 3 years 8% if left vacant for more than 5 years 9% if left vacant for more than 7 years 10% if left vacant for more than 10 years
Marikina City, Philippines	Land area greater than 1,000 square meters, one-half of which remains unimproved Residential lots, regardless of land area, one-half of which remains unutilized or unimproved	Additional levy at the rate of 2.5% per year on the assessed value of the property
Bogotá, Colombia	Land that is subject to urbanization but has not yet been developed, and land that has already been urbanized but has had no construction yet	In 2004: Vacant properties = 1.2–3.3 percent of the assessed value For improved properties in urban areas, rates from 0.4% (residential use) to 1.5% (financial institutions) Today: vacant urban land rate has increased to 30%

Source: World Bank 2015.