Member News

IPTI | Update on Property Tax Issues: September 2020

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep its members up to date with the latest developments in property taxes in the USA and Europe. IPTI has put together a selection of brief reports from articles contained in IPTI Xtracts which can be found on its website (www.ipti.org).

USA

New York: For those hurting before COVID, property tax relief can’t come soon enough

J. Crew, JC Penney, Pier 1 Imports, GNC, Brooks Brothers, Lord and Taylor, Gold’s Gym and 24 Hour Fitness are just some of the household names that have filed for bankruptcy since the start of Coronavirus. Some of these companies hope to re-emerge after financial restructuring, but rarely is a bankruptcy filing indicative of a thriving future. In fact, in many of the cases, COVID expedited the inevitable. Whether these companies occupy buildings as tenants or own properties themselves, their need for property tax relief predates COVID’s arrival in the United States. In order for these properties to survive, their property tax cuts need to be swift and substantial.

Bankruptcies do not happen overnight. To paraphrase Hemingway, companies go bankrupt two ways: gradually, then suddenly. Many companies, primarily those in the retail sector, could not withstand the effects of COVID because their decline began well in advance of the pandemic.

Landlords in different property sectors have been forced to agree to deferrals and rent reductions to different degrees. Owners of retail and hospitality properties are bracing for a market correction that will entirely redefine property values. Many of these properties are teetering on the brink of survival and to avoid closing its doors entirely it will be imperative that the assessor adjust values for property tax purposes.

The urgency with which retail and hospitality must receive property tax relief cannot be understated. If their tax burden is not adjusted, the domino effect of lost sales tax revenue, job losses, and missed tax payments will provide collateral damage to an already reeling economy.

COVID’s contribution to the decimation of certain market sectors is not just limited to those companies competing against Amazon. It includes restaurants that are spending thousands of dollars to reposition indoor seating. Top of the line venues purpose-built to encourage social interaction are now scrambling to reconfigure six-foot spacings. Retailers who pivoted and found a way to provide personal “experiential” settings are working to undo these efforts and limit customer interactions. And fitness concepts, once the antidote to failing centers, are now unsure if there is a place for them at all in a post-COVID world.

For those that survive, there are immediate and ongoing costs. These are not choices, but business necessities. The impact on this increase in the cost of doing business will have an astounding impact on values. If a restaurant spends more money, but does less business, they will be seeking to pay less rent in order to remain solvent. Similarly, if a retailer needs to space out their store, allow less shoppers, and generate lower sales, they must cut costs in their rent payments. Alternatively, some tenants are looking for landlords to pay the costs of adapting to the COVID environment. Whether it’s the landlord spending more money or the tenant paying less, the bottom line is diminished cash flow and lower property values.

In New York, the courts have explicitly stated their preference of valuing commercial properties by an income approach to value. This approach  has four major  components,  all of which  have been dramatically impacted by COVID: Income, vacancy rate, expenses, and capitalization rate.

Total income collected is down. Even if rental agreements were signed at high amounts, rent collection levels are down across all sectors. Vacancies were already increasing in many sectors and are now skyrocketing. Even in an optimistic scenario, we are likely to see vacancies at all-time highs.

Since March, appropriate budgeting for expenses has become an even more difficult task. Between PPE equipment, sanitizing products, plexiglass dividers, more frequent cleanings, and physical alterations to existing space, properties are faced with alarming expense inflation. The scary part is that with operations at a complete standstill from March to June (and some much longer), 2020 expenses will not show the true amount of costs for an entire year. The upkeep and adjustment required to these new standards stands to be even higher in 2021.

The last component is capitalization rate. While market cap rates can always vary, one thing is certain; there is more investment risk in a post-COVID world than before, and cap rates will adjust up to reflect that risk.

The law mirrors the marketplace in this instance and property assessments must be lowered. While it would be prudent for assessors to make these adjustments proactively and avoid additional economic damage, that is not always an easy task. Therefore, it becomes imperative that each owner present a complete picture of its business both before and after COVID, in order to show that not only has it been impacted, but that it is part of an overall market correction that was already occurring and will undoubtedly endure beyond COVID, and for that reason should have its tax burden reduced accordingly.

Pennsylvania: Philly postpones property reassessment and will leave values the same until 2023 due to coronavirus

Philadelphia will not reassess properties next year due to operational limitations amid the coronavirus pandemic, city officials recently announced. That means that most property owners will keep their current assessments and property tax bills, if the city’s tax rate remains the same. Citywide reassessments completed in 2018 and 2019 sparked complaints from residents and criticism from City Council after thousands of property owners received substantial tax hikes as a result.

The city did not complete a revaluation this year; officials said they were instead focused on implementing a long-awaited technology project known as Computer Assisted Mass Appraisal (CAMA). Training on that system has been delayed due to the pandemic, city officials said Wednesday. As employees of the Office of Property Assessment worked remotely, other work necessary for a revaluation was also delayed.

“I’m certain that opting to leave property values at current levels is the prudent action in light of a whole host of factors,” Mayor Jim Kenney said. “It will allow operations that are currently delayed to catch up, and will allow the OPA to ready the new CAMA system for a full reassessment next year, by which point I sincerely hope we will be past the effects of COVID-19.”

Properties that have new construction, expiring abatements, renovations, subdivisions, or consolidations – or errors in prior assessments – will still be reassessed. Those property owners will receive notice of their assessments by March 31, and their new values will take effect for taxes in 2022.

While the city’s property tax rate has not changed in the last few years, some property owners have had significant tax increases due to changing assessments. Kenney proposed a property tax hike in May to help fund schools. The proposal was met with resistance from City Council, and Kenney withdrew it after additional state funding was made available for the School District.

The median value of a single-family home in the city increased 10.5% in 2019, resulting in tax hikes for hundreds of thousands of homeowners. The median value climbed by an additional 3.1% under the 2020 assessments. An independent audit commissioned by City Council and released last year found flaws in the city’s assessing practices. The Kenney administration defended its practices but hired a consultant to recommend improvements.

Kenney said the next citywide reassessment will be completed in 2022 and will take effect for tax bills in 2023. “We owe it to taxpayers to ensure we are making property assessments as accurate as possible,” Kenney said, “and this decision will help OPA accomplish that.”

California: Landlords and Tenants – Be Ready for Prop 15

In 1978, California’s Prop 13, which limited the opportunities to increase the assessed value of property, started a tax revolution that traversed the globe. Many families and educators blame Prop 13 for a steep decline in California’s educational system by hamstringing the state’s revenue base.

As most will know, Prop 13 required nearly all California properties to be reassessed at the purchase price or fair market value only upon a change of ownership. The ad valorem property tax was limited to no more than 1 percent of assessed value, with an annual adjustment equal to the rate of inflation or 2 percent, whichever is lower. This resulted in wildly different assessed values for comparable properties.

For example, an office building which had not been traded for 20 years would have a dramatically lower tax bill than an identical building next door that just sold. This “unequal” treatment was challenged on a number of constitutional grounds, but the California Supreme Court held that the will of the voters should prevail.

The California Local Schools and Communities Funding Act of 2020 (Proposition 15 on the November 2020 ballot) would amend the State Constitution to undo Prop 13’s protections for commercial and industrial properties, with certain exceptions, including exemptions for agricultural properties and small business owners.

Prop 15 would create a split tax roll, one for residential and other exempt properties and the other for commercial and industrial properties, with the latter assessed at full market value phased in beginning in the 2022/2023 tax year. Properties would be reassessed every three years. Residential and other exempt property would retain the benefits of Prop 13. The Legislative Analysist’s Office estimates the additional tax revenue generated by Prop 15 between $6.5 billion and $11.5 billion per year.

If passed, the new measure would level the tax burden for most commercial and industrial properties by valuing them at fair market whether or not the properties were recently sold or transferred. For properties that have not been reassessed in a long time, this could mean a huge jump in property taxes but would remove the cost disadvantage suffered by recently transferred properties.

Most California leases are structured as a gross lease, with the tenant paying real estate taxes over a base year, or on a triple net (NNN) basis, with the tenant paying all of the real estate taxes (or a

proportionate share if occupying only a portion of a building). Property owners, who occupy their own properties, and tenants in California will see an increase in their occupancy costs if Prop 15 is passed.

Landlords often provide estimates of tax and expense pass-throughs based on the most recent year’s taxes. Landlords should now caveat any estimate of taxes based on whether Prop 15 passes. Current tenants may be facing a big tax bill, which could be as large, in some cases, as the base rent.

Tenants looking for space now may wish to defer leasing decisions until after the results of the November election are known. Alternatively, tenants could limit considerations to recently reassessed buildings to minimize the risk of unanticipated tax increases. It should be noted that Prop 15 also exempts  certain  small  businesses  from  personal  property  tax;  for other  businesses,  it  provides $500,000 exemption.

Texas: Property Tax Reform Didn’t Force Cities to Spend Less … Or Cut Texans’ Tax Bills

Even with reforms, city property tax bills remain high, and cities still have plenty of money to spend. As Texans continue looking for relief from high property tax burdens, city officials and their taxpayer- funded lobbyists who claimed property tax reform would force them to cut spending on core services like police and fire are being proven wrong.

Despite local officials’ objections to reform during the last legislative session, a number of North Texas cities are getting along fine without busting the new revenue caps set by lawmakers last year. State- wide property tax reforms in Senate Bill 2, passed in 2019, lowered the annual amount (some) cities can increase tax revenue without voter approval from 8 to 3.5 percent.

While SB 2 was designed to simply limit the growth of local spending and taxes and give citizens more control over their tax bills, some city officials made dire predictions that the bill’s property tax “cuts” would threaten everything from homestead exemptions to bond ratings to city services – often singling out public safety.

Now, cities like McKinney, Frisco, and Plano aren’t even approaching the new voter-approval tax rate their mayors complained would unduly restrict their access to taxpayers’ wallets. In fact, these cities and others are budgeting for FY 2021 based on the no-new-revenue rate or lower – and will still collect and spend more property tax money than last year.

Since the no-new-revenue rate calculation excludes taxes on new construction, even at the no-new- revenue rate, cities collect more money each year from new properties added to their tax rolls. That means bigger budgets and more spending, not cuts. Growth plus higher levies on existing taxpayers has fueled years of skyrocketing property tax collections and spending in many cities – with each annual revenue increase setting a higher baseline for the next year’s tax calculations.

In McKinney, for example, the average homeowner’s city property tax bill went up 48 percent from 2010 to 2020. Even when city officials lowered the tax rate, it wasn’t enough to offset rising property values. Over the same time, the city’s total tax base more than doubled. McKinney Mayor George Fuller was one of many local officials who testified last year against property tax reform measures. Fuller called letting voters decide on excessive tax hikes “a great soundbite” and said police and fire services would be “compromised and jeopardized” by lowering how much the city could raise taxes without voters’ approval.

Yet this year, McKinney is budgeting based on the no-new-revenue rate for the first time – and at the same time is increasing public safety budgets and adding new police and fire personnel.

Frisco Mayor Jeff Cheney called last year’s reform giving voters a say on excessive property tax hikes “political nonsense” and said he was counting on lawmakers to oppose the legislation, which he claimed would “shift the tax burden from corporations to residents as tools like the homestead exemption and senior exemption would have to be evaluated each year.” This year, however, Frisco is budgeting based on a tax rate below the no-new-revenue rate – and has maintained its homestead exemptions while also increasing public safety budgets and adding new police and fire positions.

Plano Mayor Harry LaRosiliere testified against the voter-approval limit in last year’s House version of property tax reform and claimed it could negatively impact the city’s bond rating. LaRosiliere signed a coalition letter with Fuller and mayors of 22 other cities aimed at weakening pro-taxpayer provisions in the bill. This year, Plano is budgeting based on the no-new-revenue rate for the second time in a row since citizens elected more taxpayer-friendly council members – and yet the city has maintained a AAA bond rating and is not cutting public safety personnel.

But Plano’s no-new-revenue rates were also calculated on an elevated baseline. The average Plano homeowner’s city taxes increased 40 percent over the prior five years, while the city’s total tax base grew almost 60 percent. “There is still plenty of room in the Plano budget to make cuts!” said local resident Debbie Bonenberger. “It is not good enough that we are down to the no-new-revenue rate. Keep going lower.”

Cities collect property taxes to spend on two things: funding the government’s daily operations to provide city services and repaying debt. That spending is what drives property taxes. Citizens’ property tax burdens are flattened as cities adopt the no-new-revenue rate, but are still at levels driven up by years of compounding increases. Even with reforms, residents’ city property tax bills remain high, and cities still have plenty of money to spend.

Much of city officials’ fear-mongering about reforms causing draconian cuts was coordinated by Texas Municipal League lobbyists, who are paid with taxpayer funds to promote city government priorities that are often anti-taxpayer. (TML’s legislative counsel presented a workshop last year on raising city revenues called “Shaking the Money Tree”). Ahead of the 2019 legislative session, TML committed to “vigorously oppose any legislation that would erode municipal authority in any way,” especially laws that would “impose a revenue and/or tax cap of any type, including a reduced rollback rate.”

Despite coordinated opposition, lawmakers succeeded in lowering the voter-approval rate, but some provisions pushed by city officials and lobbyists made their way into the law – including exempting cities with under 30,000 citizens (about 90 percent of Texas cities) and allowing “unused increments” of the 3.5 percent cap to carry over to future tax rates without voter approval.

So, while SB 2 put a check on some city tax burdens, it didn’t lower Texans’ property tax bills – only their local officials can do that. With or without property tax reforms, the size of Texans’ property tax bills depends largely on their local officials- who set the rates and spend the money. To reduce Texans’ property tax bills, local officials must lower tax rates to offset rising property values and control or reduce spending.

Cities will be finalizing their budgets and tax rates in the coming weeks, so citizens still have opportunities to weigh in on local spending plans and advocate for city officials to “keep going lower” with further tax reductions – providing real relief from years of ever-higher tax bills.

Note that cities adopt their budgets and tax rates in the same meeting as the final public hearing, meaning citizens need to contact their council members ahead of those meetings to have their input incorporated into the final proposals.

Illinois: An Unpopular Fix for Chicago’s COVID Budget Problem

In a moment when people are spending and earning less, we’re taxing all the wrong things. When Lori Lightfoot declared that Chicago will face a $1.2 billion budget deficit next year due to the “catastrophic collapse” of the economy, she wasn’t the only the mayor making that announcement. COVID-19 is wreaking havoc on municipal budgets all over the country. Chicago, though, is in worse shape than most cities, because of the sources from which we collect revenue.

A recent New York Times story ranked 41 cities based on how likely they are to suffer severe revenue shortfalls as a result of COVID-19. Using projections from National Tax Journal, Chicago ranked 11th, with an estimated decline of 11 percent. In last place (which is really first place) was Boston, with 4 percent. “What matters more in this pandemic moment is how a city generates money: Those highly dependent on tourism, on direct state aid or on volatile sales taxes will hurt the most,” the story read. “Cities like Boston, which rely heavily on the most stable revenue, property taxes, are in the strongest position – for now.”

The reason? Boston derives 71 percent of its revenue from property taxes. That’s a necessity in Massachusetts, which does not allow local governments to set sales tax rates, or levy income taxes. Everyone in Boston pays 6.25 percent sales tax, compared to 10.25 percent in Chicago. On the other hand, Boston’s residential property tax rate is 10.56 percent, and its commercial and industrial property tax rate is 24.92 percent. Compare that to 6.89 percent in Chicago. (Boston property is also worth more than Chicago property: according to Zillow, the average Boston home sells for $629,000, while the average Chicago home sells for $329,000.)

According to Chicago’s 2020 budget overview, the city took in $1.51 billion in property taxes while spending $11.65 billion, meaning property taxes funded 12.9 percent of the budget. A larger source of revenue was “Local Tax,” which included a public utility tax, sales tax, transaction taxes, and transportation taxes.

Massachusetts is sometimes derided as “Taxachusetts,” but Bostonians’ willingness to pay higher property taxes in exchange for lower sales taxes has turned out to be a smart move in the age of COVID. So far, property values have been stable, while sales and incomes are declining, due to business slowdowns during the pandemic. But property taxes have always been recognized as the most stable source of local revenue.

“Stability and reliability have long been thought of as requirements for creating a sound local tax system,” wrote the authors of “The Property Tax: Its Role and Significance in Funding State and Local Government Service,” a study by the George Washington Institute of Public Policy. “Local governments rely on the tax because, unlike all other local option taxes, the base of the tax cannot, for all intents and purposes, be moved. The revenue from such a ‘captive’ tax base can be relied upon to a greater extent than either wage or sales taxes – both of which have highly mobile tax bases.”

Despite its virtues, Lightfoot declared that a property tax increase “is at the very bottom of our list of options” for balancing the city’s budget. If the property tax is such an effective tool for municipal funding, why don’t municipalities use it more? Because voters hate property taxes. In 2005, Gallup conducted a poll on “The Least-Fair Tax.” The property tax was the landslide winner, at 42 percent, despite arguments that property taxes are less regressive than sales or income taxes. University of Chicago economist Milton Friedman, who hated property taxes less than most other taxes, theorized it was because “[i]t’s the only tax left on the books for which people have to write a big check.” Property taxes are paid in big chunks, twice a year, while income taxes are deducted a few dollars at a time from weekly paychecks, and sales taxes are paid a few pennies at a time, with every purchase.

Instead of a property tax increase, Lightfoot called for a new casino in Chicago. That’s not the most sensible solution: as the Times reported, “[i]n Detroit, one-fifth of the municipal budget typically comes from casino revenue. And casinos have just reopened, at reduced capacity.” Detroit ranks 4th among cities whose budgets are vulnerable to the COVID-19 recession. What’s most sensible, though, is not always what’s politically possible, as elected officials have learned over and over again when they’ve tried to raise property taxes.

EUROPE

Greece: Proposals to Lure Foreigners to Greece Highlight Need to Reform Property Taxes

High-net-worth individuals are being identified by tax policymakers these days in various ways. While Portugal recently approved a 10 percent tax on foreign pension income, putting an end to the tax-free regime for foreigners approved during the financial crisis, Greece is looking into attracting foreigners with tax reductions.

In order to transfer their tax residency to Greece, foreigners are required to make a minimum real estate investment of €500,000. To attract high-net-worth individuals, Greek policymakers are looking into reducing the unified property tax (ENFIA) by raising the threshold from €250,000 to €300,000 or €350,000.

Greece is one of the European countries that relies significantly on property taxes. In 2018, all property taxes (including both real property taxes and other property taxes) raised 7.9 percent of Greece’s total tax revenue. For European OECD countries, property tax revenue accounted for only 4.6 percent.

Property tax can be an efficient way of raising revenue, especially taxes on real property. This is because real property is not easily hidden from tax authorities and often has sufficient benchmarks for valuation purposes.

However, Greece’s real property tax system is extremely complex. The tax has two layers: a principal tax and a supplementary tax. The principal tax on buildings and land is determined by multiplying the square meters by the principal tax and certain coefficients affecting the value of the property.

On top of this principal tax, a supplementary tax applies. Companies will pay an additional 0.55 percent tax on the total value of the property. A reduced rate of 0.11 percent is applied if the property is used for the business’ activity.

For individuals, the supplementary tax is a progressive tax that applies on top of the €200,000 established threshold, with a progressive tax rate ranging from 0.1 percent to 1.15 percent.

Apart from the complexity of the multi-layered system, the tax creates a high burden on capital. Although the real property tax burden in countries like Austria, Czech Republic, Luxemburg, or Switzerland represents less than 0.1 percent of the private capital stock, the tax collection in Greece reaches 1.1 percent of the country’s private capital stock.

Greece also is among eight countries, from the 27 OECD European countries, that doesn’t allow businesses to deduct property tax from the corporate taxable income. All these measures increase the cost of capital and could drive businesses to invest in more business-friendly jurisdictions.

The high burden, the complexity, the fact that the property tax is levied not only on the value of the land itself but also on the buildings constructed on it, and being a non-deductible tax, put Greece at a

disadvantage when compared with other OECD countries. Greece ranks 33rd out of 36 countries in terms of the Real Property Taxes in our International Tax Competitiveness Index 2019. All this shows that property taxes in Greece should be a target for reform, even before considering the impact on foreigners, particularly in light of Greece’s standing relative to other European OECD countries.

Cutting the property tax is not the only measure that Greece has considered to entice foreigners to relocate. A 7 percent income tax for foreign pensioners who move their tax residence to Greece has also been proposed. The 7 percent flat rate would apply to all income including rent or dividends, instead of the local progressive tax rates that could reach up to 45 percent.

Additionally, a tax exemption was approved for property transferred to Greece when foreigners relocate to the country. The property is exempt from VAT and registration tax, as long as the person has been a non-resident for the two years prior to the transfer.

Policy changes to attract foreigners are not without benefits, but the Greek government should carefully weigh the costs of the tax incentives against opportunities to implement broader tax reforms in Greece. A policy to attract foreigners can be valuable, but if Greek citizens do not also reap the benefits of reforms, the government risks attracting foreigners while not making Greece an attractive place for Greeks to work, raise families, invest, and build their own businesses.

While reforming the property tax in Greece is a good way of attracting foreigners, Greece shouldn´t miss the opportunity for implementing a greater reform of the property tax that would spur investment and economic activity. In order to reshuffle this intricate property tax, a first step would be to reduce its complexity by eliminating the supplementary tax. Second, the tax paid should be deductible against corporate taxable income. Third, applying the property tax solely on the value of the land would favor renovations and any kind of property improvement, lure in capital investment, and eventually increase productivity and economic growth.

Although a property tax reform that follows these suggestions will impact revenues, policymakers can still focus on improving the structure of the property tax without undercutting the revenue potential of the tax. A more efficient property tax system in Greece is a better objective than just focusing on incentives for foreigners to change their tax residence.

Greece: New objective values for properties expected in 2021

The planned adjustment of the property rates used for tax purposes, known as “objective values,” will now be completed next year, along with the reduction of the Single Property Tax (ENFIA) originally scheduled for 2020.

The health crisis put the brakes on government planning, as surveyors were unable to complete their work. This should resume soon provided conditions allow for it.

Finance Minister Christos Staikouras told Mega TV on Thursday that the objective value adjustment had to stop due to the coronavirus pandemic measures. It will continue, though, so that the election program of the government that includes the ENFIA reduction be fully implemented.

Last year the government introduced a first cut to the ENFIA dues that averaged at 22%. It was supposed to be followed this year by another 8% reduction on average, but Covid-19 affected that too. The tax cuts are likely to resume next year.

The new parameter on the table regarding the curtailment of ENFIA is whether that will be realized on the main tax or the supplementary one, which is payable by owners of property topping 250,000 euros and concerns about 500,000 owners.

The reduction of the supplementary tax has also been among the recommendations of the committee led by Sir Christopher Pissarides.

The supplementary property tax adds up to €629 million and is paid by 450,000 individuals and 50,000 corporations. The total value of the assets they own exceeds €600 billion, while total property in Greece is worth slightly over €1 trillion in terms of objective values.

The ENFIA dues will increase for owners whose property has been undertaxed to date. This will be done through the inclusion in the objective assessment system of properties in 2,900 areas around the country, leading to additional state revenues of €400-500 million.

There will also be a significant adjustment to the objective values and ENFIA dues in areas that have benefited from short-term leasing online, such as the center of Athens.

UK: This practical fix shows why the chancellor should introduce a land value tax

Advocates have  started from the wrong  premise. Ahead  of the Budget, it’s time to  recast the proposition.

Ever since the 19th century, economists and social philosophers have advocated for a land value tax (LVT) as the fairest and most progressive form of taxation possible. With land  in  fixed  supply, monopolist owner-occupiers pay no tax on the imputed economic rents they enjoy, but benefit from the asset price growth brought about through improvements to local infrastructure and amenities, which are paid for by others.

Residential land accounts for over 75 per cent of the UK’s total land value and represents over 40 per cent of the UK’s total net worth. Volatility in the economy, as well as many of the problems within the housing sector, are partially attributable to unsustainable rises in land values. An LVT could remedy these problems, as well as lead to a more equitable society overall.

Yet repeated attempts to introduce LVT in the UK have failed, originally due to a combination of landowner resistance and insufficient data, and more recently because of the impossibility in practice of replacing Council Tax with the much fairer system that LVT represents.

Now, with the Budget approaching, economic effects of Covid-19 forcing the government to look for ways of increasing tax revenues, and calls from across society for the introduction of some form of wealth tax, this is an ideal time to look again at LVT.

So how could it be introduced in practice?

All recent proponents of a residential LVT have started from the premise that it would replace Council Tax. After all, we would surely just be replacing one form of property tax with another. This will never work, for the simple reason that the Council Tax Bands and rates are so out of date at the higher end of property values, they bear no relationship to the market value of today’s homes.

How can a Council Tax of £2,474 per annum on a £30m house in Kensington, compared to £2,398 per annum on, say, a £500,000 house in Solihull, be considered as a proportionate property tax? Council Tax has become a (very flawed) system of charging home occupiers for Local Authority services.

But to replace the overall £33bn of Council Tax due for England in 2020-21 would require an LVT rate of around 0.9 per cent. While land values vary widely as a percentage of property market values across the country, 66 per cent is a reasonable guide. At 0.9 per cent this would imply LVT on the Kensington house of around £180,000 a year (and approximately £3,000 a year on the house in Solihull).

And at Local Authority level, Kensington and Chelsea could expect their annual receipts to rise from £106m to £787m, whereas Birmingham’s would fall from £362m to £115m. Such dramatic shifts are clearly unacceptable.

A further problem is that Council Tax is payable by the occupiers of a property (who may be tenants), whereas LVT is charged only to the owners.

So, an obvious solution is not to replace Council Tax, leave it as it is, and introduce LVT as a new tax, starting at a very low rate. If LVT was introduced at, say, 0.05 per cent per annum, rising at this rate over four years to 0.2 per cent, the initial additional burden on the Kensington house would be £10,000 pa, rising to £40,000 pa; and for the Solihull house, initially £165 pa rising to £660 pa after four years.

These low rates would apply to owner-occupiers and “small scale” landlords. Other categories of owner such as: non-resident, corporate, large-scale landlords, owners of long-term empty dwellings, and holiday homes in certain designated areas, could expect to pay significantly higher rates of LVT, starting at say 0.5 per cent pa and rising to perhaps as much as 3-4 per cent in some cases.

Two accompanying tax reforms would make sense: reduce Stamp Duty Land Tax on purchases of principal primary residences (PPRs) to a flat 1 per cent, which studies have shown would significantly free up the housing market, at a cost to the Exchequer of around £320m pa. By comparison, LVT at a uniform rate of 0.05 per cent across England would raise approximately £1.6bn pa, and with the higher rates advocated above, total LVT receipts would be much greater. Secondly, introduce Capital Gains Tax at around 10 per cent on all PPR disposals.

This package of reforms would achieve multiple economic and social objectives: a gradual redistribution of locked in “land wealth” to the wider population; near eradication of the housing market as a form of speculation; and strong incentives to maximise efficient use of all the country’s housing stock.

All the necessary land and property ownership data exists today within one or another government agency. Market prices are readily available to complete the picture. Several (developed) economies have successfully operated LVT for a number of years.

There are of course various complications and issues that would need to be resolved (these are discussed in a fuller online version of this article), but the chancellor could do a lot worse than put LVT back onto the agenda in his autumn Budget.

Please note that there is currently a “fundamental review” of business rates in the UK; this would be the ideal time to introduce LVT and reduce the burden of business rates.

Authors:

  • Paul SandersonPresident | psanderson[at]ipti.org
  • Jerry GradChief Executive Officer | jgrad[at]ipti.org
  • Carlos ResendesDirector | cresendes[at]ipti.org

Compliments of the International Property Tax Institute – a member of the EACCNY.