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The major sources of revenues for local governments are taxes, user fees and intergovernmental transfers. Taxes such as income taxes, property taxes, land transfer (stamp duty) taxes, general sales taxes and sales taxes on special commodities (licences, permits, hotel occupancy, vehicle registration etc.) along with user fees form the current operating revenues (COR) of the cities. Once the operating expenditures are met, the COR is often used for short life expectancy assets or recurrent expenditures (Serageldin et al., 2008). Reserves or borrowing are more appropriate for long life expectancy assets or non-recurrent expenditures. Reserves are created by accumulating a portion of the COR with interest in a special account which can be used for capital investments. 


One of the main benefits of raising capital through taxes is that it provides interest free capital. Moreover, the future beneficiaries share the burden of the project. 



Disadvantages of using taxes can be the inherent risk that the projected tax revenues are not met and that citizens show resistance to the higher taxes. 


Tax increment financing (TIF) 

TIF is a financing mechanism used to revitalise dilapidated, abandoned or brown field urban neighbourhoods within a city. Revitalisation improves the quality of urban life and increases future tax revenues. The city demarcates such areas as TIF zones for capital improvements and freezes the property tax revenues for an assigned period. The city can capitalise on funding from national and state governments or the EU for the revitalisation of the TIF Zone. The consequent future increase in property tax revenues is further invested in the economic and infrastructure development of the TIF zone. On completion of the allocated TIF period, the tax revenues flow back through the taxing authorities. Inability to achieve the projected future property tax revenues can however risk the revitalisation of the demarcated area (UN Habitat, 2009).


Land value Capture (LVC) 

New investments in public infrastructure can trigger an increase in land values in the neighbourhood. Land value capture taxes are levied to capture the increment in land value as a consequence of public investment.  LVC taxes move the burden of such huge investments from the present taxpayers to the future beneficiaries of the proposed investment (Slack, 2005b).

First steps: 

  1. Review the existing taxes and conduct a study on the paying capacity of the target population 

  1. Review the possibility of tax increment and options available for tax increment based on the paying capacity and willingness of the target community 

  1. Financial analysis of the capital that could be raised through increased taxation as well as the period of time required to raise the capital. 


Case studies:  


Further reading: 



Serageldin, M., Jones, D., Vigier, F., and Solloso, E. (2008) Municipal Financing and Urban Development, Human Settlements Global Dialogue Series, No. 3, United Nations Human Settlements Program (UN- HABITAT).

UN-Habitat (2009) Guide to Municipal Finance. (2009). UN-HABITAT.

Slack, E. (2005b). “Land Value Capture Taxes.” In Cordes, J.J., R.D. Ebel and J.G. Gravelle (Eds.) The Encyclopedia of Taxation and Tax Policy, Second Edition. Washington, D.C.: The Urban Institute Press, pp. 237-9. 


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