The removal of rent control and consumers' willingness to pay can help |
The Supreme Court's recent decision to reserve its verdict regarding allowing additional floor area ratio for residential houses in the capital and its concern for civic facilities comes at a very opportune time. We expect reforms to percolate to the common man. |
For, if the reforms were to be working at the local level, it would be reflected in the quality of day-to-day living, that is, civic or public services that we all are entitled to. |
Most of us agree that good quality of public services (water/sewerage services, good roads, lighting, solid/waste management and other civic amenities) not only increases our efficiency, but also raises the general quality of living. |
According to the Union urban development ministry, 20 per cent of the country's urban households are denied access to safe drinking water, 58 per cent do not have safe sanitation and more than 40 per cent of garbage generated is left uncollected for want of proper waste management. |
It is possible that analogous, if not worse, problems exist in rural areas, regarding which reliable data is not available. However, if urbanisation is an inevitable occurrence, it is important to address these infrastructure problems in urban areas. If such problems cannot be addressed in urban areas, it would be much more difficult to address them in rural areas. |
For understanding local finances that underlie the provision of the various civic amenities, we have to ask why reform has not percolated to local government. One of the various constraints that have become the bane of local government finances, is rent control. |
Standard theory teaches us that the price of a good or service is determined by the forces of demand for and supply of the good or service. As we have always been socialistic in our policies, since Nehruvian times, the price of housing has not been determined by the demand for and supply of housing. |
Rent control (that entails a ceiling on rent) was rather perceived to be important in protecting the urban poor "" quite reasonable as far as the ethos of the post-independence era are concerned. |
But now, the constant pressure of population and rural-urban migration in urban areas of the country has coupled with rent control to create severe housing shortages and hampered local government's ability to finance public services. With rent control, landlords have little interest in maintaining property, and as a result the supply of good quality housing at a given price is limited and has curbed the growth of real estate. |
Why is the issue of rent control important for quality of public services? Various local governments in the country depend heavily on property tax revenue for financing their local public services. |
And, many states and several local governments continue to use the annual rental value (ARV)-based system for determining the base of the property tax, which, however, is not a buoyant base because of rent control. |
Rent control freezes property taxes payable on the property and affects the many public services local governments are obligated to offer. It also restricts the ability of local governments to compete with each other to offer these public services. |
The removal of rent control is likely to free good quality housing at market prices and prevent tenants from going to the informal land-lease market where there is little or no protection for them. What is the alternative? |
Various local governments in the country have started switching over to an area-based determination of property value for purposes of taxation. Here, the property value is assessed not on the basis of ARV, but on the property's location, carpet area and its use. This entails the idea of zoning. |
To motivate the need for zoning, imagine that we have combined heterogenous property values together in an area, but that the owners all pay the same property tax rate. |
Note that while the smaller house owners pay the same tax rate, they pay a lower amount of tax in absolute terms, when compared to owners of higher property values. This is a situation in which owners of higher property values subsidise public services for owners of lower property values, who receive identical public services. |
Zoning is one way of ensuring to relate tax rates to the public services rendered. Under this system, uniform property tax rates apply within specified boundaries, so that properties of a certain value all pay the same property tax rate and are eligible for identical public services. Thus, area-based determination of property value along with zoning is one panacea for the problems caused by rent control. |
There is another solution for the problem of poor quality of local public services. Relate the user charge to the service. However, casual observation suggests that "privatisation" and "reform" are viewed as a general rise in prices. |
Understand that consumer willingness to pay is the most important impediment to reform! Thus, for reform to affect local finances and public services, we need to bring about a change in the thinking of consumers, so that they appreciate the benefits of the charge-service relationship. |
Of course, there are several different ways of financing local government services, such as the floating of general obligation bonds, as is done by local governments in the US. However, reform of consumer sentiment and willingness to pay, at least by those that can afford to do so, for a good quality service, is the first step to local government reform. |
(The writer is with the National Institute of Public Finance and Policy) |
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