Betterment Levies – Development Brief

Over the past few years, the government began implementing a rarely used 1950s law that taxes properties adjacent to newly implemented public urban development projects to partially fund projects’ costs. The Betterment Levy Law 222/1955 (qanun muqabil al-tahsin) assumes that the projects would raise the real estate value of properties within 150 meters of them and therefore the government is owed half the resulting appreciation.[1]

At the end of 2020, a blanket city-wide enforcement of the betterment levy was issued in Cairo,[2] which will in all probability mean that owners of properties adjacent to the controversial Heliopolis and Madinat Nasr bridges and street widening projects will be ordered to pay a tax soon.

A Wealth Tax

An earlier Betterment Levy decree issued in December 2019, for owners of properties on Giza’s Tersa Axis is a good example of what this tax means. According to the decree, owners of properties in a 6km long stretch of the Tersa road, and within 150 metres on either side, were ordered to pay between LE1500 and LE2750 per square metre because they would benefit from the widening (Table 1).[3] The decree assumed that property prices would have almost doubled, which is a vast overestimation. Here, a typical 100 m² home would pay an average of LE 212,000, or about two fifths of what the property was assumed to be valued before the project was implemented.

By comparison, the real estate transfer tax (capital gains) is 2.5% on the sale price, where it is captured from an actual transaction that netted income for the owner. The Betterment Levy, on the other hand, is demanded immediately, regardless of whether a transaction did happen or not, or if it happened at the value that was estimated. Therefore, in all likelihood owners would have to pay it from savings, if they existed.

Table 1: A table of the betterment levies demanded from properties on the Tersa Axis in Giza (Giza Governor’s Decree 7909/2019)

According to some legal scholars, taxes must be levied on generated income as it represents the natural source of taxation, as well as the basis of its justice.[4] While there is already a wealth tax in the form of the Real Estate Tax,[5] which carries exceptions for family homes (one unit per household), while it is calculated at 10% of the rental value of the property (after deducting 30% for maintenance) when levied, which translates to approximately 0.4% of its total value.[6] The assumed values are also quite old (and hence low), as they date back to the last assessment of 2013. Even at the next revaluation, which is due this December 2021,[7] assessment values will only be allowed to rise by a maximum of 30%,1[8] which will be much lower than the market value accrued over the last eight years.

Tax or Levy?

The imposition of three different types of taxes on real estate, with contrasting values, has created an air of injustice between owners. And in a country where 85% of households are owner-occupiers, these taxes also affect low-income households and the poor. In addition, poorer households would be the most affected by the three taxations as urban development projects extending basic infrastructure and improving transport should be implemented in places that already need them: working-class neighborhoods, raising the quality of life from below par to acceptable, and thus is not a luxury that should be taxed.

This feeling of injustice may explain the already abysmal collection rates of the Betterment Levy. One researcher that interviewed municipal employees has shown how they have been largely powerless to collect it,[9] acting more as gatekeepers in capturing the taxation, waiting until owners applied for building permits, to collect it in exchange for them, or, deduct them from compensation if an expropriation decree was lodged – though this latter form of the collection was abolished in 2018.

Recommendation to Abolish

The Betterment Levy Law has had hardly been revisited since it was passed more than sixty years ago, while some of its articles have proven unconstitutional. Originally, the law only allowed for valuations to be appealed in front of government appointed committees, whose decisions were final. This stipulation was taken to the Supreme Constitutional Court which ruled it unconstitutional in 2002,[10] ordering that appeals are seen in the district courts. Moreover, the Betterment Levy Law only allowed for fees to be appealed in front of special government-appointed committees, where their decision was final. This was challenged at the Supreme Constitutional Court in the early 2000s, and the stipulation was overturned, allowing for appeal in front of local courts.[11]

As both the Real Estate Tax and the Real Estate Transfer Tax laws have been greatly expanded over the last two decades, the existence of the Betterment Levy has been called into question. The Real Estate Transfer Tax already captures any rise in value that property would experience if a project were implemented. While the Real Estate Tax, if more regularly reassessed, would also capture any rise in value. Therefore, having a third tax that performs the same function as the other two, and with significantly higher values, only serves to stoke unrest and disenchantment, while at the same time not realistically benefiting public finances.

In this light, the only recommendation regarding the Betterment Levy Law would be to abolish it on the grounds of tax injustice, while reforming the Real Estate Transfer Tax law that is based on collecting revenue from actual transactions, and at the same time improving administrative efficiency by streamlining government functions.