Taxing idle land could revitalise new cities

While searching for accommodation in Jinja City recently, I got first-hand insight of the housing and property landscape of the newly formed city. Many parts resemble a ghost town with abandoned houses conspicuously labelled "NOT FOR SALE". It’s perplexing to see prime property in a city strategically located at the source of the Nile decaying. 

This phenomenon is not unique to Jinja and the cause can be attributed to the fact that most Ugandans view land as a store of value rather than a factor of production. This has led to speculative investment in land creating pseudo scarcity, resulting in skyrocketing prices. Its important to note that local governments get more than 60 percent of their revenues from property rates, keeping land unproductive is denying these cities and local governments much-needed revenue. 

In economics 101, land is traditionally considered a factor of production because it is one of the essential inputs required for producing goods and services, along with labour, capital, and entrepreneurship, it provides the raw materials and space necessary for economic activities. 

Unlike other factors of production, land is perfectly inelastic and immovable. These characteristics underscore its importance as factor of production. To address inefficiencies in land use, governments could consider introducing a surcharge or tax on idle and underutilised land. Such taxes typically work by applying higher rates or additional charges to land that is not effectively used or underdeveloped. 

Implementing higher taxes on idle and underdeveloped land would deter speculative landholding, where individuals or entities buy land simply to hold it for future appreciation without any intention to develop or use it. This will in turn increase land utilisation by promoting optimal use of land for housing, commercial activities, or other productive purposes. This tax can also be used to tackle the issue of absentee landlords. 

In Jinja for example most of the decaying properties are owned by individuals who left Uganda during the Idi Amin era and never returned. By imposing a higher tax rate on land owned by absentee landlords, the government would create a financial incentive for them to either sell or lease the property, thus improving utilisation and development of the land. Additionally, taxing absentee landlords would promote a fairer tax system. 

It addresses the imbalance where residents bear the brunt of increased property value and associated costs, while absentee owners reap the benefit without contributing proportionately. Several countries have adopted similar measures, for example, in the United States, various states impose property taxes on land regardless of its use, and some municipalities have additional taxes or penalties for undeveloped land. Brazil has "Imposto Territorial Rural" (ITR) aimed at encouraging productive use of rural land while in France, the "taxe foncière" can be higher on undeveloped land, motivating landowners to develop or sell the property. 

For this tax to achieve its intended outcome, the policy would require a careful design and implementation that strikes a balance between the revenue and production needs with those of economic incentives and fairness otherwise such policies may exacerbate the income inequality gaps by reducing property values, discourage property investment and further increase the administrative complexities in an already complicated land tenure system. These factors could disproportionately impact low-income property owners. While the idea of more taxes may spark debate, the need for more effective land use is undeniable. 

Implementing such measures could mitigate the adverse effects of speculative investment and absentee ownership leading to more vibrant and productive urban environments. Addressing challenges of underutilised land is essential for revitalising cities like Jinja.

[email protected]