Challenges to Equitable and Effective Land Value Capture
Lessons from Mexico City
Aurora Echavarria Canales (UCLA), Paavo Monkkonen (UCLA)
Scholars and practitioners argue that local governments should capture rising land values to fund services and infrastructure, especially when the value results from public and collective action (Bird and Slack 2007; Smolka, 2013). Yet land value capture mechanisms are technically and politically challenging to implement. In this paper, we examine the four most prevalent land value capture mechanisms: (i) property and land taxes, (ii) real estate transfer taxes, (iii) betterment levies, and (iv) development charges. We propose a conceptual framework with seven design features to describe and compare the mechanisms, both across mechanisms within the same city and for a single mechanism across different contexts. Our analysis shows the superiority of property taxes as a tool for land value capture, and how contemporary scholarship advocating for development charges fails to recognize their drawbacks.
We use the case of Mexico City as an example and evaluate how the city uses the four different land value capture mechanisms, and the challenges it faces in doing so.
Applying our conceptual framework to property taxes in Mexico City shows that the larger implementation challenges stem from political, rather than technical factors. The use of progressive rates and the redistribution of tax revenue across all boroughs make property taxes a relatively progressive and equitable tax in Mexico City. However, the political challenges that the city faces in updating cadaster assessments undermines the equity and efficiency of this tax. Additionally, the city’s use of discounts and subsidies to encourage payment diminishes the tax’s efficiency.
Real estate transfer taxes offer Mexico City a way to tap into property wealth at the moment of property transfer, when property owners have increased liquidity. However, this tax has the weakest justification and overreliance on it exposes local revenues to market fluctuations.
Betterment levies are a useful way for local governments to fund public works. Mexico City has used them in the past and most recently employed them to fund a renovation project for Avenida Masaryk, a high-end street in the neighborhood of Polanco. Residential property owners were included in the initial funding plan but were omitted after significant push-back. Lack of adequate citizen involvement in the planning stages as well as the technical challenges of measuring value uplift resulting from the project ultimately reduced the legitimacy of the charge.
Development charges, cash, or in kind payments by developers for planning permissions are the least effective land value capture mechanism. In the case of Mexico City, these strategies have also compromised comprehensive planning principles. Mechanisms like the SAC (Sistema de Actuacion por Cooperacion) have also received significant pushback from neighboring communities due to the lack of transparency in the management of funds, as well as poor citizen participation channels.
In sum, we find that Mexico City, like many cities around the world, can and should take more advantage of the broad-based land value capture mechanism already at its disposal, the property tax. Local efforts to raise revenue should focus on overcoming its political unpopularity instead of devising new more complicated programs.
References
Bird, Richard, and Enid Slack. 2007. Taxing Land and Property in Emerging Economies: Raising Revenue…and More. Cambridge, MA: Lincoln Institute of Land Policy.
Smolka, Martin. 2013. Implementing Value Capture in Latin America: Policies and Tools for Urban Development. Cambridge, MA: Lincoln Institute of Land Policy
Aurora Echavarria is a PhD candidate in urban planning at the UCLA Luskin School of Public Affairs. Her research explores the intersection of inequality, urban governance, and the politics of local public finances in Latin American cities. Her dissertation research focuses on the governance of property taxes in Mexico.
Paavo Monkkonen is professor of urban planning and public policy at the UCLA Luskin School of Public Affairs. He researches and writes on the ways policy–ranging from national housing finance systems to local land use regulation–shapes urban development, housing affordability, and social segregation in cities around the world. He has held visiting positions at Hong Kong University, the National Autonomous University of Mexico, Sciences Po Paris, and the Paris Institute of Advanced Studies.