Thursday, September 01, 2011

How to Increase Revenues Without Imposing New Taxes: A Proposal to Reform the Real Property Valuation System of the Philippines

Below is a term paper I wrote for our course in "Public Policy Analysis and Development" at the Ateneo School of Government:



“How to Increase Revenues Without Imposing New Taxes: A Proposal to Reform the Real Property Valuation System of the Philippines”


Introduction

During the last 2010 elections President Benigno “Noynoy” Aquino III promised “no new taxes,” a promise that most Filipinos voters expect him to keep until the end of his term. At the same time, Filipinos have very high expectations of the Aquino government, not only in terms of stamping out graft and corruption but also in the provision of basic social services. Given these political preconditions, the present government must therefore find novel ways to increase its revenues in order to fund its ambitious programs without necessarily imposing new taxes.

So far, the Aquino administration’s efforts in this this area has only generated controversy. For instance, during the early months of the Aquino administration Finance Secretary Cesar Purisima led a highly-publicized “name-and-shame” campaign against big-time tax cheats and luxury car importers. More recently, Commissioner Kim Henares of the Bureau of Internal Revenue (BIR) attempted to introduce a new policy requiring individuals earning more than P500,000 per annum to file an Annual Information Return (AIR). Both tax policy initiatives seem to have fizzled out.

The Chairman Mao’s Group would like to propose an alternative tax reform initiative that will potentially raise revenues without exactly raising current or imposing new taxes. Our reform proposal focuses on improving the collection of the Real Property Tax (RPT) by local government units (LGUs) through the periodic updating of zonal values contained in the Schedule of Market Values (SMV). To maximize the collection of property taxes, we also believe that government needs to establish a common Property Valuation Standard for the entire country. Real properties must first reflect their true “fair market values” in order for LGUs to collect the right RPT. We also believe that the national government should help capacitate LGUs towards proper SMV preparation, valuation techniques and efficient collection of the RPT.

Presently, our country’s real property valuation system is chaotic, ineffective and inequitable. The system makes it easy for individuals and corporations to undervalue and overvalue their real estate property. Thus, when government is the purchaser, as in right-of-way and expropriation cases for example, property owners usually provide the true market value (while some even resort to over-valuation) of their real estate property. But for tax assessment purposes, owners commonly tend to undervalue their property. This system results to huge financial losses to government, both in terms of foregone revenues (due to undervaluation) and public expenditures (due to over-valuation).

We believe that real property could be, and should be, the Philippines’s greatest financial asset. It is estimated that about 50% to 75% of our nation’s wealth is contained in real estate, thus making it the single biggest potential source of revenues for the national government. But its contribution to GNP has remained at a meagre 6.3% for the last ten years. Indeed, the Philippine government collects more money taxing “income” and “consumption” than “property.” In 2009 for example, government collected P520 billion in income taxes and P354 billion in consumption taxes (e.g. VAT, excise tax, etc.) but only P21 billion in property taxes (e.g. RPT, capital gains tax). In other words, the burden of financing public expenditure programs is inordinately being borne by the salaried worker and the ordinary consumer, not the property owner, of this country. Clearly, the administration of taxation in the Philippines is inequitable and unjust and skewed towards making the rich richer and the poor poorer.

Be that as it may, we are not about to propose a radical overhauling of the Philippine taxation structure but will just limit ourselves to finding out why the RPT collection of LGUs and the capital gains tax collection of the BIR is so paltry compared to the income tax and consumption tax collection of government. The policy reforms in real property valuation that we are proposing, if implemented correctly, will potentially bring in up to P25 billion in additional, sustainable and progressive income to the government every year.

Problem Presentation:

A Skewed Tax Administration Structure

The National Revenue Structure. The Philippine government relies on a handful of national agencies to generate revenues, namely; the Bureau of Internal Revenue (BIR), Bureau of Customs (BOC) and other agencies such as the LTO, BFP, Bureau of Immigration, etc., with the rest of its public expenditures it finances either through gross borrowings (both foreign and domestic), GOCC remittances, foreign-assisted grants and the sale of government assets.

On the average, the BIR collects about 74% of total government revenues, with the Bureau of Customs accounting for approximately 25% and other collecting agencies such as the Bureau of Immigration (e.g. immigration tax), the Land Transportation Office (e.g. motor vehicles’ tax), Bureau of Fire Protection (e.g. Fire Code tax), etc. comprising the remaining 1% of the total national internal revenue.

Table 1: National Government Revenues

By Collecting Agency, 2008-2010 (in million pesos) Source: DOF

Agency

2008

2009

2010

% Average

Bureau of Internal Revenue

778,571

798,456

875,080

74%

Bureau of Customs

260,248

273,291

309,526

25%

Other Collecting Agencies (e.g. LTO, BI, BFP, etc.)

10,213 (1%)

10,724

10,955

1%

TOTAL

1,049,179

1,082,621

1,195,716

100%

For 2008 the total BIR revenue collection amounted to P779 billion, increasing to P798 billion in 2009 and further to P875 billion in 2010. For 2011, the BIR is targeting to collect P940 billion in total tax revenues. The “Property Transfer Tax” (or more commonly known as the “capital gains tax”) typically comprises just 1.5% of the total revenue collection. It should be noted that while the Bureau’s revenue collection has been growing progressively at an average 9% annually, its collection of the capital gains tax has somewhat remained stagnant between the years 2008-2010. In 2008 for example, the agency collected P1.279 Billion in capital gains taxes, slightly decreasing to P1.165 Billion in 2009 while in 2010 it again stood at P1.262 Billion (see table below).

Table 2: Bureau of Internal Revenue: Tax Revenue Collection

(in million pesos) Source: DOF

Particulars

2008

2009

2010

A. Taxes on Net Income&Profits

482,239

470,336

519,372

1. Individual

144,364

139,075

156,961

2. Corporate

285,260

272,735

309,639

3. Others

52,615

58,526

52,772

B. Taxes on Property

1. Property Transfer Tax

1,279

1,165

1,262

C. Taxes on Domestic Goods and Services

294,383

326,241

353,668

1. General Sales, Turnover or VAT

140,318

168,679

185,668

2. Selective Excises on Goods

60,750

58,038

60,160

2.1. Alcohol Products

19,839

20,052

21,287

2.2. Tobacco Products

27,555

25,303

26,511

2.3. Fuel and Oils

11,380

10,623

10,157

2.4. Others

1,976

2,059

2,204

3. Selective Taxes on Services

40,115

42,506

46,312

3.1. Other Percentage Taxes

18,889

19,979

21,879

3.2. Banks/Financial Insts.

19,266

20,466

22,200

3.3. Insurance Premiums

1,819

1,913

2,072

3.4. Amusements

141

148

161

4. Taxes on the Use of Goods/Property or Permission to Perform Activities

4.1. Franchise Taxes

697

1,641

1,949

5. Other Taxes

52,503

55,377

59,579

5.1. Documentary Stamps

40,054

42,338

45,580

5.2. Mining

660

745

849

5.3. Tobacco Inspection Fee

6

6

7

5.4. Others

11,783

12,288

13,143

D. Taxes on International Trade & Transactions

1. Travel Tax

670

714

778

TOTAL

778,571

798,456

875,080

The Local Revenue Structure. The Local Government Code of 1991 (RA 7160) mandates that 40% of the total national internal revenue should be allotted to LGUs in the form of Internal Revenue Allotment (IRA) while the remaining 60% is retained by the national government. This 40% in turn is shared among the LGUs in the form of the IRA, with provinces getting 23%, cities also 23%, municipalities 34% and barangays 20% share.

Aside from the IRA, the Local Government Code grants LGUs broad powers to generate their own local sources of income some of which are the floating of bonds, imposition of various licensing fees and collection of the Real Property Tax. But twenty years after the passage of the Code, majority of LGUs still have been unable to capitalize on their vast income-generating powers and many continue to rely on the national government for funding. In fact, for the period of 2001-2006, LGU dependence on the IRA has increased with 82% of provinces, 76% of municipalities and 45% of cities relying on the IRA for their basic operating expenses.[i]

The ad valorem Real Property Tax (or more colloquially known as the “amellar”) provides LGUs the means towards a stable, sustainable and progressive source of local income from their land and land-related resources. Sadly, most LGUs have failed to maximize the income-generating potential of their RPTs. Over the last decade the RPT contributed to only 12% of total LGU income.[ii] Table 3 (see below) shows that for Fiscal Year 2009, LGUs generated a mere P20.582 billion in real property taxes, representing just 16% of revenues locally-generated by municipalities, 26% by cities and 31% by provinces.

Table 3: Locally-Sourced Revenues for FY 2009

(in million pesos)

Particulars

Municipalities

Cities

Provinces

TOTAL

1. Tax Revenue

8,591

39,028

3,880

51,500

1.1. Real Property Tax

2,872 (16%)

15,142 (26%)

2,567 (31%)

20,582

1.2. Special Education Tax

25

292

118

435

1.3. Other Local Taxes

5,695

23,594

1,195

30,484

2. Non-Tax Revenue

8,797

17,106

4,300

30.202

3. Regulatory Fees

1,247

3,332

450

5,029

3.1. License Fees

558

1,786

86

2,430

3.2. Permit Fees

159

955

10

1,123

3.3. Other Fees

531

591

354

1,476

4. Business and Service Income

4,611

10,141

2,722

17,474

5. Other Income/Receipts

2,938

3,633

1,128

7,699

TOTAL (Local Revenues)

17,388

56,134

8,180

81,703

Source: Budget of Expenditures and Sources of Financing (Tables) Fiscal Year 2010

A Skewed Tax Collection Effort. As mentioned earlier, the Philippine government derives its revenues mainly from the income tax and consumption taxes, with property taxes comprising a miniscule part of its total tax revenues. A cursory review of the government’s tax collection effort in 2009 for example would reveal that BIR collected close to P520 billion in income tax (individual and corporate) and P354 billion in consumption taxes (e.g. VAT, excise tax on goods and services, etc.) but only P1.165 billion in property transfer tax (see Table 1) while the LGUs generated a mere P20.582 billion in real property taxes (see Table 2). Thus, the burden of funding government’s various expenditure programs is being borne by the salaried worker and the ordinary consumer, and not by the property owner, of this country. Clearly, the skewed tax collection effort of the government has resulted in an unjust and inequitable situation which makes the rich richer and the poor poorer.

A Chaotic Real Property Valuation System. At present, there are at least 23 national government agencies (NGAs) and 1,712 LGUs which undertake real property valuation. The DENR, for instance, performs land valuation for the acquisition, disposition and rental of public lands while the DPWH and NAPOCOR conducts its own valuation for expropriation of private property and acquisition of land for right-of-way. GSIS, SSS, Land Bank and other GFIs also have their own real property evaluators for their mortgage lending operations while the Land Registration Authority under DOJ also conducts land valuation assessments for litigation and garnishment proceedings. The BIR too regularly conducts assessment of real property-related national taxes (i.e. capital gains tax, documentary stamp tax, estate tax, etc.), the DAR for compensation of land covered by CARP, and the COA for government real property transactions. To complicate things further, each local government unit has its own respective land valuation assessments for the collection of the Real Property Tax.

Aside from the government sector, there are also a number of private corporate entities operating in the country who provide real property appraisal services mainly for real estate planning and development purposes, mortgage foreclosures, financial reporting and accounting, investment purposes and the like.

Understandably, the multiplicity of valuation systems and standards has resulted to chaos. In fact, it is not uncommon for one property to be assigned several, widely disparate assessment values in the Philippines today. A DOF study for instance shows that LGU zonal values are 13% to 94% lower than the zonal values used by the BIR. The zonal values of the BIR are in turn 5% to 930% lower than the valuation of the private sector appraisers. In some highly-urbanized areas, the DOF estimates that LGU zonal values are 187% to 7,474% lower than the market value established by these private sector appraisers.[iii]

The chaotic condition of our property valuation system is conducive to graft and corruption. Since property owners do not know for sure the true value of their real properties, they have no way of knowing whether they are paying the correct taxes. The current system also makes it very easy for property owners to undervalue and over-value their properties, depending on the exigency. Undervaluation is quite rampant and seems to be the standard practice, but only when government is the receiver of payment. When government is the purchaser, as in right-of-way and expropriation cases, property owners usually provide the true market value of their lots and some even resort to over-valuation of their property, thus increasing public expenditures.

LGU Non-Compliance of the Schedule-of-Market-Values (SMV). The Local Government Code stipulates that LGUs (thru the respective Sanggunians) should upgrade zonal values and revise their Schedule of Market Values (SMVs) to reflect changes in the market every three years. As the basis for assessing the RPT, the regular revision of the SMV is a vital element in the establishment and maintenance of an equitable property taxation structure. On the other hand, an outdated SMV results in an inequitable sharing of the tax burden.

Compliance to this provision of the Code was quite impressive when the very first SMV revision was released by the DOF in 1994. Around 95% of the cities and 83% of the provinces duly complied and upgraded their SMVs. Since then, there have been four (4) mandated general revisions of the SMV between the years 1994 to 2003. However, the Bureau of Local Government Finance (BLGF), an attached agency of the Department of Finance, notes that LGU compliance has steadily declined so much so that by 2003, only 17% of the cities and 21% of the provinces managed to upgrade their SMVs. In other words, real estate in 83% of cities and 79% of provinces do not reflect their true current market values today. This probably explains why collection of the RPT by LGUs, and concomitantly of the capital gains tax by BIR, have not significantly increased in recent years. As Table 1 has shown, BIR collection of the Property Transfer Tax for the 2008-2010 period has remained stagnant at 1.279 billion in 2008, 1.165 billion in 2009 and P1.262 billion in 2010. Likewise, RPT revenue collection by LGUs have remained somewhat constant at P17 billion in 2008, P20.58 billion in 2009 and P20.93 billion in 2010.

Lack of political will, inadequate training, equipment and resources for ground personnel, graft and corruption, etc. are the reasons often cited for the government’s skewed tax collection effort. Elected local officials, for instance, are generally adamant about taxing their propertied constituents mainly because they are their traditional sources of campaign funds and political support. Also, many politicians fear that constituents will become more “demanding” if the levy the correct taxes. While many of these oft-cited reasons are true, requiring equal attention from government, we would like to limit ourselves only towards examining and proposing reform solutions to just a particularly narrow component of taxation reform which is real estate property valuation reform.

Policy Reform Proposals:

Institutionalizing Valuation Reform

The Aquino government could adopt a number of imaginative steps to realize the potential gains accruing from property valuation reform, the easiest of which is for President Aquino to simply include in his next State of the Nation Address (SONA) an urgent appeal to all mayors and governors to update their SMVs and maximize their RPTs. The Finance Department may likewise wish to grant incentives and/or provide sanctions to errant LGUs, or perhaps treble up its supervision and capacitation efforts towards providing LGUs with the requisite technical expertise to update their SMVs and the necessary logistical support to increase their RPT collection rates. President Aquino could even go further by issuing a general appeal to all patriotic property-owning Filipinos to pay their amellars religiously.

There are, however, limits to what the Executive Department can do, and reforms in the real property valuation system must necessarily involve legislative fiat for it to become institutionalized. Below are three (3) specific recommendations to bring about the desired changes in the real property valuation structure of the Philippines:

1. De-politicize Property Valuation. Valuation is a highly-technical function requiring the application of knowledge in various disciplines – law, economics, marketing, engineering, environment, etc. It should be performed objectively by highly-trained professionals and not by politically-appointed individuals, as in the case of most municipal, city and provincial assessors. Valuation is also separate and distinct from assessment and tax administration – two functions which belong more to the political realm since it is the elected politicians and policy makers who decide on these matters.

It has become increasingly clear that many LGUs are ill-equipped to undertake property valuation, a function devolved to them in 1991 by the Local Government Code. For one, most LGUs (especially 3rd to 6th class municipalities) lack access to competent, qualified appraisers and assessors. But a more disturbing development is in the “politization” of the property valuation process at the local level by assessors who are beholden to political masters and by vote-seeking politicians who are hesitant to revise their SMVs for fear of incurring the ire of their landed and propertied (and therefore influential) constituents.

To reverse the current trend of SMV non-compliance by LGUs, Congress may need to consider amending the Local Government Code to “re-nationalize” the highly-technical function of valuation temporarily. Or it could also adopt a policy of “partial” or “selective” re-nationalization wherein certain LGUs (notably 1st class cities and provinces) would be exempted from re-nationalization after demonstrating due competence in the performance of their real property valuation functions.

Incidentally, Congress already made the correct step in this area by enacting the Real Estate Service Act (RA 9646) last June 29, 2009. The RESA law aims to professionalize both the private and public property sectors by, among others, requiring real estate brokers, LGU assessors and other practitioners to take a licensure exam administered by the Philippine Regulation Commission (PRC). Future applicants to the municipal, city and provincial assessment offices will now be required to present a PRC “real estate broker” license as a prerequisite in their appointment as local assessors.

2. Establish a Uniform National Property Valuation System. Market information on real property transactions (i.e. sales and rentals) is vital in the appraisal of the market value and in the formulation of the SMV. At present, there is no complete, up-to-date and accurate collection and recording of real property transactions in the country. Real property sales transaction data are dispersed among various entities, namely the LGU assessors, the Registry of Deeds, the BIR, the banks, notaries public, developers, brokers, agents, etc. It is estimated that 60% of all transactions in the Philippine land market is “informal.”[iv]

Last October 13, 2009 former President Gloria Macapagal Arroyo signed Executive Order No. 833 creating the Property Valuation Office (PVO) under the Department of Finance with the mandate of “sustaining and instituting real property valuation reforms.” The Property Valuation Office is tasked with establishing a uniform national property valuation system for the entire country. Among its other duties are the following:

  • develop a Valuation Database and Information System,
  • develop a common Valuation Standard based on the latest international valuation guidelines, to serve as a guide for both public and private sector appraisers,
  • conduct regular Valuation Education and Training seminars for local assessors,
  • plan, monitor, evaluate and develop policies pertaining to real property valuation reforms.

Unfortunately, the incumbent Finance Secretary has yet to fully implement the said E.O. At present, the task of advocating valuation reform is being performed by a small, ad hoc unit within the Bureau of Local Government Finance.

Our group recommends that the Finance Secretary immediately implement E.O. 833 establishing the Property Valuation Office. The proposed PVO requires only a measly P4.53 million budget (although this amount represents only the Personal Services (PS) component and does not factor in the office’s MOOE and Capital Outlay requirements of the said office). Considering the financial windfall that could potentially result from reforming the real property valuation system, the amount seems paltry by comparison.

3. Enact the Valuation Reform Act (VRA) bill. The Property Valuation Office created by E.O. 833 is only an ad hoc office, and one indication of its ad hoc nature is the fact that any incumbent Finance chief can just opt to ignore it. Institutionalizing reforms in the real property valuation sector necessitates passage of a law, specifically the Valuation Reform Act (VRA) bill.

The Valuation Reform Act bill has been pending for eight (8) Congresses already. During the previous 14th Congress, the bill was passed on second reading in both the Upper and Lower House. Senate Bill No. 3519, under Committee Report No. 740, was sponsored by Senator Panfilo M. Lacson on November 17, 2009 while House Bill No. 7094, under Committee Report No. 2571, was sponsored by Camarines Norte Congresswoman Liwayway Vinzons-Chato on January 19, 2010. Again, under the current 15th Congress, several versions of the VRA have been filed. To date, both the Upper and Lower Houses of Congress have yet to take up the VRA bill at committee level.

We propose that Malacañang, thru the Presidential Legislative Liaison Office (PLLO), certify the VRA Bill as an urgent priority measure.

The Valuation Reform Act addresses most of the structural problems in the property valuation sector. For instance, instead of an ad hoc Property Valuation Office, the Act creates a National Valuation Authority (NVA) that will be comprised of highly-trained specialists with core competence in real property valuation. The NVA will also function as a market regulator and will be responsible for policy planning and the setting up of valuation standards, compliance monitoring, training and development. Specifically, the NVA will have the following functions:

    • Develop, adopt and maintain valuation standards, policies and guidelines based on internationally-accepted standards and practices for real property appraisal to be used for tax and other government purposes. It will also ensure compliance by national government agencies, local governments and other concerned agencies;

    • Review and approve the SMVs prepared by provincial and city assessors, including municipal assessors of Metro Manila, for tax and other purposes;

    • Provide technical assistance on real property valuation, and coordinate and conduct when required appraisal of special purpose properties for real property tax purposes;

    • Provide leadership and policy directions to LGUs, NGAs and private sector institutions and individuals on matters pertaining to valuation, development and maintenance of standards, regulation of valuation activities, promotion of valuation education, etc.;

    • Recommend to the approving authority the appointment of qualified persons and maintain a roster of LGU assessors;

    • Develop and maintain a comprehensive, up-to-date database of real property sales transactions, prices of materials for buildings, machinery, equipment and other structures; and,
    • Conduct continuing research and study on valuation system and maintain an information base on current country and global trends and development on real property valuation.

Discussion

Incremental vs. Rational Approach? As we have seen, there are three key ingredients in property valuation reform, namely; 1.) professionalization of local assessors and “de-politization” of the property valuation process, 2.) establishment of a uniform National Property Valuation Standard to serve as a common guide to the real property valuation industry, and 3.) creation of a separate agency dedicated towards capacitating LGUs in proper SMV preparation and correct RPT valuation. All three reform components have one end-goal: the efficient collection of the Real Property Tax and consequently, the Property Transfer Tax.

In the context of the “incrementalist vs. rationalist” debate on policy reform, we would like to point out that Recommendations 1 and 2 (“de-politization” and imposition of a common valuation standard) would fall more under the incrementalist approach while Recommendation 3 (passage of the VRA law) adheres more to the rationalist school of thought. The question of what approach to adopt – incremental or rational - is a tough one since it involves analysing so many variables. But by answering the nine guide questions provided under the “Navigating Policy Reform” lecture of our professor, Dean Edna Co of UP-NCPAG, we hope to provide a satisfactory answer to the question of what approach policy-makers should take in reforming the Philippines’ property valuation sector.

Stakeholder Analysis

Real and Potential Opponents of Valuation Reform. Opposition to the real property valuation comes in two forms: passive and active. Presently, “passive resistance” to the VRA bill seems to be the norm as policy makers simply choose ignore the problem because it is not part of the public consciousness anyway. The fact that the VRA bill has failed to muster enough votes in Congress for the last 24 years is a testament to this passive form of resistance and proof positive that our legislators as a whole are not sympathetic to valuation reform. This may be because almost all the members of the Senate and the House of Representatives are property owners, with a number having interests in the property development sector or owning vast tracks of land. Likewise, most of the senior decision-makers in the Executive Department own real estate. For these reasons, the VRA bill enjoys a very low level of support in the highest echelons of government. It is therefore not surprising to learn that the Valuation Reform Act was not included in the list of priority measures of this 15th Congress.

Another stumbling block to the passage of the VRA bill is the strong lobby presented by the Philippine real estate industry, whose profit margins and tax expenditures will be drastically affected by valuation reform. The real estate industry – comprised of developers, brokers, contractors and financiers – is one of the most organized and “cash-rich” sectors in the Philippines. In the past, industry players did not actively lobby against the VRA bill, but this may partly be because the bill was not in “danger” of being passed in Congress. But should the VRA bill reach the plenary voting stage, it is reasonable to expect that real estate moguls would mobilize and apply unremitting pressure on legislators to kill the said measure. Individual home owners, farmland owners, building and apartment operators, etc. are also expected to resist the VRA.

The Valuation Reform Act is also expected to encounter resistance from the LGUs, who instinctively would object to any diminution in their devolved functions. Re-nationalizing the function of real property valuation (i.e. taking it away from LGUs and giving it back to DOF) must be considered very carefully. Our group is partial towards “selective re-nationalization” (i.e. allowing LGUs with a demonstrated adequate capacity for property valuation and RPT collection to retain its discretionary powers over valuation).

Prime Movers of Valuation Reform. At present, advocacy for valuation reform is spearheaded by two minor functionaries in the Bureau of Local Government Finance, Miss Ching Agcaoili and Mrs. Perla Segovia, who have been working for the passage of the bill for the last two decades or so. A handful of legislators, like Senator Panfilo Lacson and Congresswoman Liwayway Vinzons-Chato, took up the cudgels for the VRA bill during the previous 14th Congress. But Congresswoman Chato lost her reelection bid and Senator Lacson is currently distracted by the Dacer-Corbito case. And sadly, Mrs. Segovia passed away this month.

There are also a number of progressive LGU officials who are supportive of valuation reform, obviously because it promises to increase local revenues, most notably Mayor Jesse Robredo of Naga City (now DILG secretary) and Mayor Jerry Treñas of Iloilo City (now congressman). The cities of Naga and Iloilo became pilot-testing areas for the BLGF’s SMV reform study in 2006 and both officials reaped the actual benefits accruing from valuation reform. As such, they could also be tapped to talk about the positive outcomes of valuation reform and influence other policy leaders to the cause. The other stakeholders in property valuation reform are the following:

    • Registry of Deeds
    • Provincial/City Prosecutors
    • Provincial/City Engineers
    • District Engineers
    • Local Board of Tax Assessment Appeals
    • Central Board of Tax Assessment Appeals (DOF)

Lastly, valuation reform has the support of multi-lateral funding agencies like Australian Aid Agency (AusAid) and World Bank. In fact, it was AusAid who funded the initial policy research and advocacy component of valuation reform under the Land Administration and Management Programs 1 and 2 (LAMP I and II). The three main components of the LAMP grant are 1.) reforms in the real estate property industry thru passage of the Real Estate Act (RESA) law, 2.) reforms in the property valuation structure thru the Valuation Reform Act (VRA), and 3.) reforms in land administration thru the Land Administration Reform Act (LARA). The LAMP program expired in 2006 and funding assistance has not been renewed to date.

Cost Benefit Analysis

The Projected Benefits of Valuation Reform. The potential benefits of property valuation reform come in two forms. One is in terms of “savings” (i.e. government money which would otherwise be lost to undervaluation or over-valuation of property) and the other is in terms of “revenues” (i.e. government income derived from the collection of “correct” taxes). While it is virtually impossible to quantify the total amount of money lost to under- and over-valuation of real property, the BLGF was able to compute exactly how much the government stands to earn by reforming its property valuation structure based on the SMV reform study it conducted in the cities of Naga and Iloilo in 2006.

One major component of the BLGF study entailed the periodic revision of the Schedule of Market Value (SMV) by the respective Sangguniang Panglungsods of Iloilo City and Naga City to reflect current market rates. From there the BLGF, with assistance from the National Tax Research Center (NTRC), was able to extrapolate and compute the potential benefits and aggregate impact of the revised SMV on RPT collection across the country. According to the BLGF-NTRC study released in 2007, the estimated potential increase in revenue to be generated by revising the SMVs using the correct method of property valuation, at 100% compliance of all LGUs in just one general revision period is between a minimum of P6.854 Billion (66%) to a maximum of P18.562 Billion (180%). This estimate was made by comparing the potential RPT collectibles and actual RPT collectibles in 2006 using both the existing SMV and the revised SMV. Translating this to the actual 2007 RPT date of the BLGF, the minimum and maximum actual increases would be P9.469 Billion and P25.826 Billion, respectively, for the year 2007 alone.

A 2004 paper entitled “Comparative Study of Land Values in Selected 19 Cities and Municipalities” reveals that the zonal values of the BIR are anywhere from 5% to 930% lower than private appraisers’s valuation, indicating a significant loss for the national government. Thus, adopting the local SMV as the single valuation base will likewise have a positive effect on the collection of national taxes on real property transactions (i.e. capital gains tax) due to the expanded tax base. The said study, however, stopped short of providing an exact peso estimate of the RPT revenue lost annually due to outdated zonal values. In another study, BLGF notes that in 2003 only 17% of the cities and 21% of the provinces upgraded their SMVs. In other words, real estate properties located in the remaining 83% of cities and 79% provinces of the country do not reflect their current fair market values.

The potential increase in local incomes, which the BLGF projects to be between P9 billion to P25 billion a year, will certainly provide a big boost to our perpetually cash-strapped LGUs which are the government’s frontliners in the delivery of basic services. Since RPT income is not remitted to the National Treasury but goes directly to the LGUs (as stipulated in the Local Government Code), the impact of this projected increase in revenues will immediately be felt on the ground in the form of improved basic services and local infrastructure projects. The increase in RPT revenues will likewise result to an automatic increase in the Special Education Fund (SEF), which mandatorily receives 1% of the total RPT revenues. All in all, the monetary windfall ensuing from valuation reform would certainly allow LGUs to be more autonomous and less dependent on the national government.

Lastly, by adopting international valuation standards our country’s standing in the international community will be enhanced and help to attract more foreign investors. Valuation reform will address the common (mis)impression that everything is “negotiable” and not everything is “what it seems to be” in this country. A less “opaque” property valuation sector would discourage over-valuation and under-valuation practices in the corporate sector.

The Estimated Costs of Valuation Reform. The estimated costs of valuation reform pales in comparison to the projected financial windfall accruing from the proposed reform. For example, the cost of setting up the Property Valuation Office (as proposed in E.O. 833) or creating the National Valuation Authority (as proposed in the VRA bill) could easily be justified based on its promised benefits. The Property Valuation Office created by E.O. 833 requires a mere P4.53 million initial operating budget, although admittedly the said amount represents only the Personal Services component (salaries for its personnel) and not its Maintenance and Other Operating Expenses (MOOE) and Capital Outlay requirements. But even if Congress decides to establish a full-blown bureaucracy as in the National Valuation Authority (as proposed in the VRA bill) and allots it P250 million budget, this amount would still be miniscule compared to the additional revenues to be derived from valuation reform. Spending P250 million to be able to collect P25 billion makes perfect sense.

Reforming the property valuation system also entails other costs, in the form of:

  • capacitation programs for LGUs in the form of training seminars on

proper SMV preparation and property appraisal techniques,

  • regular monitoring and supervision activities to ensure LGU SMV compliance,
  • technical assistance on IT systems and equipment,
  • dissemination/duplication of “best-practices,”
  • developing and maintaining a comprehensive database of all real

property sales transactions in the Philippines,

  • research studies on latest country and global trends on real property valuation

Conclusion

Is the Timing Right for Valuation Reform? At the end of the day, all public policies are decided based on an ethereal concept called “the right timing.” Even the best plans are put on hold when policy makers feel the timing is not right. However, “now is not the right time” is also a convenient excuse given by groups whose interests might be adversely affected by the reform measure.

Reforming the country’s problematic real property valuation structure is certainly a formidable task. Practically all the “powers that be” – the moneyed, the landed and the powerful – in Philippine society are potentially against it since they are the ones who will be most affected by the reform. If the BLGF estimate is to be believed, property owners will be paying anywhere from P9 billion to P25 billion in additional amellar annually. Depriving one group of citizens (and an influential group at that) of their money has never been easy in this country, and with such an impressive (or more aptly, intimidating) array of oppositors to valuation reform, it is easy to imagine that the VRA bill will once again suffer its usual fate consigned in legislative limbo.

In trying to answer the question “is the timing right for valuation reform,” we would like to borrow some concepts espoused by John Kingdon under his “Policy Streams” theory of public policy. Kingdon posited that there are three “streams” constituting the policy-making process, namely: the “Problem” stream, the “Political” stream and the “Policy” stream. Kingdon claimed that when these three streams – problem, political and policy – meet, a “window” opens which usually results in a new public policy. A “window” usually opens when there is a change of administration, a movement in Congress, a shift in the national mood, or when a pressing problem attracts widespread attention. In this case, the role of the “policy entrepreneur,” whom Kingdon defined as “someone who holds a deep and long-abiding commitment to a particular policy change,” is vital in the enactment of a new policy. Kingdon adds that the policy entrepreneur “must have legitimacy, connections and persistence to be successful.”

We believe that a “policy window” opened with the election of Noynoy Aquino to the presidency. He brought back the people’s trust in government and a certain expectation that things will be better from now on. Aside from his campaign promise of “no new taxes,” President Aquino also made a solemn oath to “do the right thing” (“gawin ang tama”). We would like to point out that valuation reform adheres to both promises: it will increase revenues without imposing new taxes while at the same time reduce corruption through the reduction of official discretion in property valuation. By reforming the valuation system, real property owners will be paying the taxes reflective of their property’s current market values (“ang tamang buwis”).

The Arroyo administration was “sympathetic” to the cause of valuation reform. In fact, the previous administration already made initial (though incremental) steps towards valuation reform through Executive Order 833, Department Order 37-09 and the like. President Arroyo even certified the VRA bill as an urgent priority measure during the waning days of the 14th Congress. Unfortunately, the new Aquino administration has chosen to ignore the strides made in valuation reform by the previous dispensation, with the present leadership at the Department of Finance focused on “plugging the leaks” in the income tax system. But now that both the DOF’s highly-publicized campaign against big-time tax evaders and the BIR’s widely-controversial “AIR” proposal seem to have fizzled out, we believe that it is about time for the DOF leadership to realize “the error of their ways” and try out other strategies to improve revenue collection. After experiencing only resistance and apathy to their income tax initiatives so far, it is about time for Secretary Purisima to re-visit the reforms in the real property valuation sector. Instead of thinking up ways to “plug the leaks” in the income tax system, the Finance Department should instead shift its focus on “plugging the leaks” in the amellar system of LGUs and the capital gains tax structure of the BIR.

Since salary increases are not forthcoming, any attempt by government to further pare down their take-home pay will certainly be resented and resisted by the Filipino working class. And because of the escalating fuel prices and rising cost of living, more and more people are cutting down on consumption. Thus, the Finance Department is facing a difficult uphill battle in their present drive to milk more revenues out of the income tax and consumption tax. Moreover, the BIR’s increased efforts to tax professionals (if it becomes successful) would result to further increasing the fees in the service sector since lawyers, doctors, accountants, etc. would most likely pass-on any increase in their operating costs to the end-consumer.

We believe that the prevailing political and economic conditions have made the climate conducive to property valuation reform. Because of the uncertain times, the Filipino working class (which comprise the greater majority of the population) would certainly be agreeable to increasing the tax burden in favor of rich property owners, especially if this will mean diverting the DOF’s attention away from the income tax and the VAT. Given the right media mileage and spokesperson, the issue of valuation reform can become a widely-popular and convenient “tax the rich, give to the poor” policy solution to our fiscal problems.

Enter the Champion: The “Policy Entrepreneur” Imperative. Valuation reform is a cause in search of a champion or, to borrow Kingdon’s less dramatic term, a “policy entrepreneur.” What the Valuation Reform Act needs is a widely-popular and highly-credible, politically-astute and media-savvy individual to champion it not only in the halls of Congress and corridors of Malacañang but to carry its message to the public. Until and unless a policy entrepreneur arrives on the scene to take up the cudgels for valuation reform, the VRA bill will certainly remain in legislative limbo.

Valuation reform will only happen when the people themselves clamor for it. “Public clamor” could be achieved through the networking, organizing and advocacy efforts of the policy entrepreneur. As Kingdon wrote, “agenda-setting” – or the ability to elevate a problem to the forefront of the national agenda - is one of the more important skills of the policy entrepreneur. The policy entrepreneur can adopt various strategies to bring the issue of property valuation reform to the public consciousness. For example, most people presently are unaware of the iniquitous system wherein the national tax burden is inordinately shouldered by income earners and consumers, less so by property holders. The policy entrepreneur could speak against this inequitable sharing of the national tax burden, and rally public support towards a more equitable sharing of the tax burden. Once the ordinary Filipino realizes that he is unjustly bearing the brunt of financing government expenditures, he will clamor for government to shift its tax policies and demand for increased collections in the property sector.

Another agenda-setting tack is for the policy entrepreneur to bring up the spectre of increases in the VAT and the income tax. Government has to get its budget from somewhere. With deficit-spending no longer a viable option and foreign borrowing no longer popular, government is limited to only two options: 1.) “plug the leaks” in the income tax and VAT system or 2.) “plug the leaks” in the RPT and PTT system. In more simple terms, policy makers are faced with two choices: 1.) tax further the wage earner and the consumer, or 2.) tax the property owner. The policy entrepreneur, through the mass media and other fora, could argue that government has already milked the working man and the poor consumer dry, and it is about time for the rich property owners to step up and “up their ante” in the national tax burden.

Lastly, the policy entrepreneur could highlight the potential cash windfall to be gained from valuation reform, which the BLGF estimated to be somewhere between P9 billion up to P25 billion annually. And this figure still does not include foregone revenues due to the inefficient collection of the capital gains tax by the BIR.

Due to the resulting public clamor and increased consciousness of the issue among our leaders, Congress will have no choice but to enact the Valuation Reform Act. Likewise, mayors will be told to pay particular attention towards collecting the amellar or otherwise face the ire of their un-propertied constituents (which incidentally, comprise the greater bulk of voters).

In conclusion, we believe that valuation reform is an idea whose time has come. The change in administration, the harsh economic times and the shift in the national mood have all served to open a “policy window” for valuation reform. The only element missing is for a policy entrepreneur to come along and champion it to fruition. We believe that the only feasible, not to mention popular, way for this government to increase its revenues without imposing new taxes is by taxing the (few) property owners. It is about time government realizes that there is nothing more to squeeze out of the poor wage earner and the ordinary consumer. It is about time government looks to other, more affluent sectors of society to source its revenues.

End Notes:



[i] Bureau of Local Government Finance (BLGF), Department of Finance.

[ii] Ibid

[iii] Ibid

[iv] National Tax Research Center

Primary Sources

1. Local Government Code of 1991 (RA 7160)

2. Philippine Valuation Standards: Adoption of the IVSC Valuation Standards Under Philippine Setting. Bureau of Local Government Finance, Department of Finance, 1st edition, 2009.

3. Budget of Expenditures and Sources of Financing (Tables) Fiscal Year 2010, General Appropriations Act (GAA) of 2010.

4. Valuation Reform Act (VRA) bill

5. Executive Order 833, Office of the President, 13 October 2009.

6. Department Order No. 37-09, Department of Finance, 19 October 2009.

7. Real Estate Service Act (RA 9646), 29 June 2009.

8. Inputs from Key Informants/ Interview of Resource Persons:

a. Ching Agcaoili, Bureau of Local Government Finance

b. Perla Segovia, LAMP-BLGF Project Consultant

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