Urban Economics and Planning

Urban Economics and Planning

Analyzing the Economic Impacts of Increasing Urban Renewal Charges on Essential Household Expenditures in Iran: A System GMM Approach

Document Type : Original Article

Authors
Morteza Mishkar Motlagh 1
Mohammadreza ArabMoghadam 2
1 Ph.D. Candidate in Finance, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran
2 M.A. in Economics, Faculty of Economics, Kharazmi University, Tehran, Iran
10.22034/uep.2025.528659.1655
Abstract
Introduction 
One of the structural challenges of urban fiscal governance in Iran is the heavy reliance of municipalities on unstable and unpredictable revenue sources, such as the sale of building density rights. This reliance threatens municipalities’ financial sustainability, leading to unregulated urban development, increased spatial inequality, and intensified negative environmental impacts. In such a context, attention to sustainable and efficient revenue sources, including local taxes such as urban renovation levies, is an inevitable necessity for achieving sustainable urban development aligned with the principles of tax justice. As a form of property taxation, urban renovation levies play a significant role in municipal finance in many countries. However, in Iran, the share of this revenue source in total municipal income has been negligible and declining, particularly in the metropolis of Tehran, where in 2020, the share of these levies was estimated at 2.1 percent of the municipality’s total revenue. In contrast, the average share of property taxes in OECD countries has been reported to exceed 40 percent. In response to this situation, the “Law on Sustainable Revenue for Municipalities and Rural Administrations” was enacted in 2022, one of whose objectives was to increase the rate of urban renovation levies from 1.5 to 2.5 percent of property value.
However, any increase in the rate of urban renovation levies may have welfare and distributional effects on urban households, especially tenants, through higher housing rents. Theoretical literature suggests that property taxes may be fully or partially passed on to tenants in unregulated rental markets with inelastic supply. From this perspective, an increase in renovation levies could, by raising rental costs, impose additional pressure on household consumption expenditure. Despite the importance of this issue, limited attention has been paid in the Iranian literature to the economic and social implications of renovation levies on household budgets. Accordingly, this study aims to fill this knowledge gap by analyzing the impact of increased urban renovation levies on the expenditure basket of urban households in Iran.
Materials and Methods
A balanced panel dataset comprising 341 provincial-level observations covering the period 2011–2021 is employed to analyze the economic impact of urban renovation levies. Due to the unavailability of disaggregated data on actual household-level payments of renovation levies, the variable “household rental and housing expenditure” is used as a proxy for renovation levies in the model. This selection is grounded in the economic rationale of tax incidence passed from landlords to tenants in rental markets. It is consistent with the global literature’s established theoretical frameworks and empirical evidence.
The analysis focuses on four main dependent variables, representing key household expenditure categories: food, clothing, transportation, and healthcare. Each category was estimated separately within its model specification. Control variables include per capita household income, housing prices, and human capital (measured as the average years of schooling among the employed population). A dynamic panel data model was used for the empirical estimation, utilizing the System Generalized Method of Moments (System GMM) approach. This method addresses endogeneity, lagged effects, heteroskedasticity, and serial correlation. All estimations were conducted using Stata software and validated through standard diagnostic tests, including the Arellano–Bond, Hansen, difference-in-Hansen, and Wald tests.
In the policy analysis section, two internationally comparable indicators were used to assess the fiscal burden of renovation levies: (1) the ratio of per capita property tax to per capita household income, and (2) the share of renovation levies in the municipal budget. Based on these indicators, two policy scenarios for increasing renovation levies were formulated, and their effects on household expenditures were simulated using the estimated coefficients from the System GMM models.
Findings
The findings of this study are based on the estimation of four separate models corresponding to the main components of urban household expenditure: food, clothing, transportation, and healthcare. The results indicate that the response of these categories to increases in rental expenditure, which serves as a proxy for urban renovation levies in this study, is not uniform across categories.
In the food expenditure model, rental costs exhibit a statistically significant negative association with food spending. More specifically, the estimated coefficient for rent is –0.166, which is significant at the 5% level. This suggests that as housing rents increase, households reduce their food expenditure—albeit modestly in absolute terms. Among the control variables, both per capita income and housing prices show positive and significant effects on food expenditure, while human capital is not statistically significant.
In the clothing expenditure model, the effect of rent is again negative and statistically significant, with a coefficient of –0.357 at the 1% significance level. This finding suggests that, similar to food, clothing is a flexible expenditure item that tends to decline when housing costs rise. Income and housing prices remain significant and positively correlated with clothing expenditure, while human capital remains statistically insignificant.
The rent variable in the transportation expenditure model does not show a statistically significant effect. This lack of association can be attributed to the relatively inelastic nature of transportation needs in urban life, such as commuting for work, education, or accessing services, which are less likely to be adjusted in response to rising rents. Notably, per capita income demonstrates a substantial and significant positive effect, indicating that higher income directly contributes to increased transportation spending.
In the healthcare expenditure model, rental costs again show no significant effect. The only statistically significant predictor in this model is per capita income, with a coefficient of 1.04, which is important at the 1% level. This underscores the idea that healthcare expenditures are primarily driven by income levels rather than rent-induced financial stress. Other control variables, including housing prices and human capital, are not statistically significant in this model. The validity of the econometric framework was confirmed through diagnostic tests. None of the models exhibited second-order autocorrelation; the Hansen and difference-in-Hansen tests confirmed the validity of the instruments; and the Wald test verified the overall significance of the models. These diagnostic results reinforce the robustness of the System GMM estimation strategy adopted in this study.
Two scenarios for increasing urban renovation levies were developed to assess policy implications. Scenario 1 reflects a 66% increase in levies, aligning with the legal adjustment from 1.5% to 2.5% as legislated in the 2022 Law on Sustainable Revenue for Municipalities. Scenario 2 assumes a 566% increase, aimed at aligning current levy levels with the average benchmarks observed in developed countries. Applying the estimated coefficients to these two scenarios reveals that, under Scenario 1, household food expenditure would decrease by approximately 0.16% and clothing by 0.12%. Under Scenario 2, these reductions would reach 0.47% and 1.01%, respectively. These results suggest that, even with substantial increases in urban renovation levies, the resulting welfare impact on urban household budgets remains marginal and does not constitute a significant economic threat.
Conclusion
This study, using empirical data and estimated via the System Generalized Method of Moments (System GMM), finds that increasing urban renovation levies in Iran has a statistically significant but economically modest impact on two key components of household expenditure, namely, food and clothing, while no significant effects are observed on transportation or healthcare spending. These findings suggest that policy discourse may have overstated concerns about severe economic pressure on urban households resulting from such tax increases.
From a policy perspective, the results indicate a viable opportunity to reform the municipal revenue structure by increasing the share of urban renovation levies without causing substantial disruption to household budgets. If implemented gradually, accompanied by transparent public communication and adherence to principles of social equity, such reforms could serve as a meaningful step toward achieving sustainable urban finance. Furthermore, the findings underscore the importance of improving the quality of public services and enhancing municipal accountability to citizens. Any increase in renovation levies will only gain social legitimacy if tangible improvements in urban service delivery accompany it.
Finally, this study recommends that urban policymakers move away from reliance on unsustainable revenue sources such as the sale of development rights and instead work toward developing an institutionalized, transparent, and equity-oriented local tax system. Future research should examine the distributional impacts of these policies across income deciles and assess spatial inequality in the burden of renovation levies, thereby providing valuable insights for designing equitable urban tax policy.
Keywords
Fiscal Equity
Household Expenditures
Sustainable Urban Economics
System GMM Model
Urban Renewal Charges
Welfare Distribution

Subjects

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Urban Economics and Planning
Volume 6, Issue 3
Summer 2025
Pages 100-117

  • Receive Date 08 June 2025
  • Revise Date 17 July 2025
  • Accept Date 19 July 2025