Funding education through better real property valuation

Have you ever scrutinized the receipt that your local government issues whenever you pay your annual real property tax (RPT)? On top of the basic tax on your real property, you will find another item called “Special Education Fund” (SEF). It is an additional one percent tax on the assessed value of your real property collected by the local government that goes to fund the needs of public schools within your city or municipality.

The list of how it will be spent has been expanding. Before, its spending was limited to the operation and maintenance of public schools like construction and repair, research, and sports activities. New things have been added that are charged to the fund like acquisition and titling of school lands, laboratory and information technology equipment (as a result of the K-12,) and salaries of teachers and day-care workers for early childhood care and development (ECCD).

That additional one percent on your ameliar thus supports many claims. Yet, revenues derived from RPT as a percentage of the total economic output have declined since 2002.

Part of the reason for this decline is that property revaluation which should happen every three years hasn’t been diligently done. The Department of Finance-Bureau of Local Government Finance (DoF-BLGF) reports that as of March 2019, less than half (45%) of LGUs have updated Schedule of Market Values (SMV). Specifically, we are looking at 98 non-compliant cities and 46 provinces.

Another reason, as explained by former DoF Undersecretary Milwida Guevarra, is that the mean or average value of properties in a locality is used in preparing the schedule. But property owners have a strong incentive to undervalue the property so that attendant taxes that go with its sale — capital gains, documentary stamp tax, transfer tax, etc. — won’t be as high as it should be.

This becomes apparent when we see the divergence between the SMV and the private valuation on the same property. Looking at some 19 cities, the DoF discovered disparities ranging from 187% to 7,474%!

Finally, majority of provinces and municipalities, especially those outside the “NCR plus” area, lack technically qualified personnel to do tax mapping and computerize databases. Usually, the local government units (LGUs) that are able to build capacities are those that have received foreign grants for the purpose.

In this light, property revaluation creates a lot of room to increase local government revenue collections.

Pending before the Senate is House Bill 4664, otherwise known as the Real Property Valuation and Assessment Reform Act. It aims to address the decline in RPT collections despite economic growth by adopting internationally accepted standards on property valuation, rationalizing the process, establishing valuation benchmarks, and putting together a comprehensive database to support the valuation tasks and cross reference values between LGUs and the Bureau of Internal Revenue. But for me, the most important contribution of this proposed measure is the de-politicization of the valuation process. This will be done by recentralizing the technical aspect of valuing properties and determining the SMV using rationally determined benchmarks. Local legislative bodies still retain their power to set tax rates and assessment levels.

The proposed law has a “stick.” Local governments that fail to conduct a general revision of assessment and property classification and use the approved SMV will be ineligible for any performance-based grant or any form of credit financing.

One cannot overemphasize the importance of this measure especially as we try to beef up the education sector badly battered by the pandemic. Its passage will result in increased SEF per capita LGU allocation per student in public schools from the current P760 to P1,040, based on DoF estimates.

It will be unwise to rely on the supposed additional resources going to local governments resulting from the Mandanas-Garcia ruling. True, LGUs will receive a nominal addition of around 27% in 2022. But 2023 is a different matter altogether. The National Tax Allotment (NTA), formerly called Internal Revenue Allotment (IRA), is based on revenue collections three years back. That means the 2022 NTA share will be based on 2019 collections, a year prior to the pandemic. But since the pandemic in 2020, our economic output and national tax collections have plunged. Hence, the LGUs’ NTA in 2023 (and in the short term) will also decline in absolute amount.

Overall, poverty revaluation lessens LGUs’ dependence on  the National Government for resources to fund local development. And since property valuation is connected to the SEF, the passage of the bill on poverty revaluation enables a great investment for our children’s future.

The clock is rapidly ticking. Elections are just around the corner. When politicians, particularly incumbents, file their candidacies in October, Congress will have little appetite to do serious legislative work. The Senate must act quickly. Otherwise, the senators might be seen as the ones “dropping the ball” on this important measure.

Jessica Reyes-Cantos is President of Action for Economic Reforms (AER) and Co-convenor of Social Watch Philippines (SWP).