could raise some US$2.6 million—more than four times the lease fees.<sup>23</sup> Extrapolating this to all urban residential properties in Kigali suggests that a move from the current lease fee, which has tax revenue potential of US$ 4.9 million but collects only about US$ 2 million, to a 1% value-based tax could increase revenue to between US$ 16 and US$ 19.3 million based on predictions from the spatial error (table 7) or the lag model (appendix table 5).

Rather than a 1% flat fee, a proposal being discussed in government circles is to levy separate fees on land and on buildings. One such proposal is to exempt the first RWF 30 million of a residential property’s market value from property tax and levy a 1% property tax on the remainder while also charging a land tax of RWF 70/m<sup>2</sup> (or more in premium locations) on properties below 300 m<sup>2</sup> plus a 50% surcharge on any area above 300 m<sup>2</sup> . Without land price data or structure replacement cost, this requires decomposing the observed market value of properties into the values of land and structure. Using simple hedonic methods (Diewert et al. 2015; Kuminoff and Pope 2013), the value of the property is defined as: where _V_ denotes the value of the property, _L_ the quantity of land, _S_ the quantity of structure, and _Pl_ and _Ps_ the prices of land and structure. As prices for land and structures are often correlated, restrictions on parameters are needed. Given it appears from our data that prices of land and structure vary by district, we also controlled for district fixed effects and, assuming that the fixed community characteristics affect only the value of the land (Eurostat 2013), attributed these to land values. We estimated a function of the form where _V_ id is the value of property _i_ located in district _d_ . The district fixed effects, ��, and ����� , measure the components of land value and ������ measures the structure value proxied by the volume of existing buildings in cubic meters of property _i_ in district _d_ ; and ��� is the error term at the property level. Results in appendix table 4 suggest that, at the mean of parcel area and building volume, the land share of property values is 39–40 percent in the city’s three main districts,<sup>24</sup> resulting in an average value per residential parcel of US$ 12,175, US$ 11,611 and US$ 7,977 (or a value of US$ 24.6, US$ 19.5, and US$ 19.0/m<sup>2</sup> , respectively) and an average building value of US$ 17,924, US$ 12,843 and US$ 12,881.

Using 40% as the average value of land, this suggests that, with the proposed exemption, only the top 5.1% of urban Kigali’s residential properties would pay building tax. This would reduce potential tax revenue to 48% of what could be obtained using a flat 1% property tax (with 85% of yield from the land tax). A failure to ground proposed exemptions in actual price distributions and a failure to assess the revenue implications

> 23 The difference in estimated property taxes using the actual sales price and predicted property values is about US$560,000.

> 24 Mean parcel areas and building volumes in Gasabo district are 497 m2 and 470 m3; in Kicukiro district are 605 m2 and 569 m3; and in Nayrugenge district are 423 m<sup>2</sup> and 353 m<sup>3</sup> .

13