IPTI | Update on U.S. & EU Property Tax Issues: January 2022

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 below a selection of articles from IPTI Xtracts; more articles can be found on its website (www.ipti.org).

UNITED STATES

New York: NYC Advisory Commission on Property Tax Reform Releases Final Report

Report recommends the most significant changes to New York City’s property tax system in 40 years

The New York City Advisory Commission on Property Tax Reform released its final report with recommendations to create a simpler, clearer and fairer property tax system. The final report, entitled “The Road to Reform: A Blueprint for Modernizing and Simplifying New York City’s Property Tax System,” recommends sweeping changes to the current system, with a particular emphasis on smaller residential properties which the public and subject matter experts most often cite as having the greatest inequalities.

The final report expands on the initial recommendations released on January 31, 2020 and details targeted owner relief programs that will help low- and moderate-income homeowners better afford their tax bills. The report marks the first top-down review of the property tax system by a government-appointed commission since 1993.

“I am pleased to present the final report of the Advisory Commission tasked with reforming the City’s property tax system. I would like to thank the members of the commission who spent the last three years diligently working through the myriad issues involved. Hopefully, this report will serve as a blueprint for the state and city legislative bodies to take this long-needed reform to enactment,” said Commission Chair Marc Shaw.

The Commission’s work was temporarily disrupted by the pandemic, but it resumed in 2021 with an additional five public hearings to solicit input on the 10 recommendations in the preliminary report. The public’s feedback was instructive for the Commission in developing its final recommendations, which involved stripping the system of the features that lead to inequities and reconstructing it to align with a set of basic principles that prioritize targeted relief for primary resident owners.

The Commission’s strategic approach centered on first establishing the right mix of structural changes to achieve horizontal equity, the principle that similar properties should be taxed similarly, and then layering on owner relief programs consistent with the longstanding ability-to-pay principle. The result is a system design that will help ensure low- and moderate-income owners have affordable tax bills and primary residents are not displaced from neighborhoods that they have called home.

The Final Report includes structural changes that would make the system more equitable and understandable by:

• Creating a new tax class for small residential property owners: 1-3 family homes, condos, coops, and 4-10 unit rental buildings, ensuring that rules are applied uniformly regardless of property type;
• Valuing property in this new residential class based on sales-based market value, thereby ending the statutory requirement to value coops and condos based on comparable rental buildings;
• Ending fractional assessments which differ by property class and confuse property owners;
• Removing assessed value (AV) growth caps, widely recognized as one of the primary drivers of inequity, and phasing in market value changes over five years instead;
• Replacing the complicated class shares system with a simple, more transparent system where individual tax class rates are fixed for five-year periods, unless deliberately changed by the City Council and the Mayor.

Recommendations also include targeted relief for primary resident owners to help them better afford their tax bills, including:

Homestead Exemption: A flat rate or graduated rate partial exemption is recommended.

• Flat Rate Exemption: Primary residents with incomes below $375,000 would receive a 20% property tax exemption based on sales-based market value. Those with incomes between $375,000 and $500,000 would receive exemptions between 4% and 16%.
• Graduated Marginal Rate Exemption: Primary residents with incomes below $375,000 would receive an exemption of up to 30% based on their home’s sales-based market value. The exemption would decrease for higher-valued homes and, for those with incomes between $375,000 and $500,000, the exemption would be further reduced.

Circuit Breaker: In addition to the homestead exemption, a tax abatement for those who are tax-burdened, with incomes below $90,550, is recommended.

• Primary residents with incomes below $90,550 who pay more than 10% of their income in property taxes would receive a tax abatement for the amount in excess of 10% of their income, up to a limit of $10,000; for those with incomes between $58,000 and $90,550, the benefit would be gradually reduced as income rises.

“While New York City’s property tax system has resisted reform for forty years, this comprehensive package of proposals offers a realistic path forward that addresses deep inequities and responds to the realities of vast differences in ability to pay. I urge the City’s State legislators to champion these reforms in Albany and show all taxpayers that government works in their interests,” said Commission Member James Parrott.

“The work of this temporary commission draws a roadmap toward real estate tax equity in New York’s property tax system, which has treated too many New Yorkers unfairly for decades.  What frightens me the most, is that if government doesn’t take the steps towards fairness and transparency now, the inequity between homeowners is going to grow more and more disparate each and every year to come,” said Commission Member Allen Cappelli.

“Over the past three years, the Commission has worked diligently to find solutions and/or recommendations to make our current property tax system more efficient, understandable and transparent. I believe the recommendations in our final report make real and substantial progress towards realizing those goals.  Accordingly, I want to thank my Commission colleagues, as well as the invaluable support staff from the New York City Council, the Mayor’s Office, the Department of Finance, and the Office of Management and Budget for their hard work and dedication to our mission,” said Commission Member Kenneth J. Knuckles.

“New Yorkers deserve a fairer property tax system than what we have, which is getting more unfair with each year.  The Commission presents a road map for a fairer and simpler system.  Our elected officials need to follow that road soon,” said Commission Member Carol O’Cleireacain.

“The Commission was asked to develop recommendations to make the property tax system fairer, simpler and more transparent.  The recommendations in this report will do just that and, if enacted, benefit residents who have been taxed unfairly for far too long,” said Commission Member Elizabeth Velez.

About the Commission

Mayor Bill de Blasio and Speaker Corey Johnson announced the Commission in May of 2018.  It was charged with developing recommendations to reform the existing property tax system to make it simpler, clearer, and fairer, while ensuring that there is no reduction in revenue to fund essential City services.

Beginning in 2018, the Commission conducted a first round of hearings where members of public provided feedback on the property tax system and the Commission received advice from experts.  Following a series of Commission meetings in executive session, a Preliminary Report was released in January 2020.  The Commission’s work was delayed by the COVID-19 pandemic, but resumed in the spring on 2021.  Five additional virtual hearings were held this year to solicit feedback on the preliminary recommendations.  In total, the Commission has sponsored 15 public events and has read hundreds of public comments.

Commission members include Marc V. Shaw, Chair, Allen P. Cappelli, Carol O’Cleireacain, Kenneth J. Knuckles, James A. Parrott, and Elizabeth Velez.  The Commission also included non-voting ex-officio members including the Commissioner of Finance Sherif Soliman, Budget Director Jacques Jiha, City Council Finance Division Director Latonia McKinney, and the Deputy Director and Chief Economist of the City Council Finance Division Raymond Majewski.

New York: NY state must act to restore fairness with smart property-tax reform

The New York City Advisory Commission on Property Tax Reform released its final report last week, just before the de Blasio administration headed out the door. While we’ve been critical of this process for the more than five years we’ve pushed reforms, we have to admit: we are impressed.

The panel, jointly created by the mayor and City Council, has proposed some smart, substantive measures to make the system more equitable and transparent, along with safeguards and financial relief to ensure the changes do not cause undue harm.

The hard part is over. Now comes the really hard part: making it happen. We are ready to do what it takes. But almost all these crucial changes must be made by the governor and Legislature.

Gov. Hochul’s just-proposed $1 billion statewide property-tax rebate, mostly for low-income families and seniors, might be at least an implicit acknowledgment that the problem must be addressed. But those rebate checks won’t unravel the convoluted mess that is our property-tax system. Albany must make real reform a priority in 2022.

This is the fifth op-ed we’ve penned on this in three years, and the case for comprehensive reform has only gotten stronger. New York is reeling from a pandemic that’s wreaked havoc on our economy and our lives. Yet as most tax revenue dropped precipitously during the recent recession, property-tax bills continued to climb. In 2008, when income and property-transfer taxes hit a peak in Gotham, property taxes were 35 percent of city tax revenues. Now they account for close to half.

The problem is our city’s property-tax system is fundamentally unfair and purposefully opaque. To determine the levy, the Department of Finance calculates the market value of all city real estate, takes a fraction of that number to establish the assessed value, then multiplies that by an average tax rate. A state law capping the yearly increase at 2% does not apply to New York City, which is why, in part, our levy has increased about 75% in a decade — more than four times the rate of inflation.

Another law requires that levy be divided proportionally among the four property-tax classes, which are each assessed and taxed at different rates, with various exemptions. And the proportion — or “class share” — changes with each year’s budget, making next year’s taxes impossible to predict.

Common sense dictates that homes with the same market value in the same property class should have the same property-tax bill. That’s far from the case. One big reason is another state law capping the amount single property assessments can increase at 6% each year, or 20% over five years.

In theory, this should protect homeowners from rapidly rising taxes. In practice, it has artificially reduced the tax bills of high-priced homes in hot real estate markets, while the tax bills for moderately priced homes continue to increase steadily. That is why our ex-mayor pays about $4,000 in property taxes on his Park Slope home valued at close to $1.6 million while a home on Staten Island’s North Shore valued at $700,000 gets hit with $6,500 in property taxes.

Another cause of inequity is yet another state law requiring condos and co-ops to be assessed as income-producing properties, rather than based on comparable sales. This is particularly problematic in Manhattan, where the values of luxury condos are often determined by comps to rent-stabilized apartments nearby. This illogical methodology leads to many homes being extremely undervalued and explains why the median effective tax rate — taxes paid per $100 of market value — in Manhattan is only $0.45, less than half the ETR in Staten Island ($0.97) and The Bronx ($0.91).

And because the city levy is based on the total market value of real estate, homeowners in these working- and middle-class outer-borough neighborhoods are subsidizing the property taxes of wealthier ones.

Some of the commission’s recommendations could help. Eliminating the assessment cap would redistribute property-tax liability among the posh Upper West Side brownstones and modest homes in Tottenville and Bensonhurst. The commission also urges expanding Class 1 properties into a new “residential class” that would include one- to three-family homes, co-ops, condos and four- to 10-unit rental buildings and using a sales-based methodology — not rental income — to value them.

The commission also suggests ending “fractional assessments” and instead calculating property taxes by multiplying a new lower tax rate by full market value and fixing class shares rather than changing them every year. This would make tax bills easy to understand and more predictable.

And to help ease the transition, the commission proposes financial safeguards like five-year phase-in of market-value changes, a homestead exemption for owner-occupied homes and “circuit breakers” to help ease the burden of tax increases for lower-income families and seniors.

None of these solutions is perfect, but let’s not let the perfect be the enemy of the good. The New York City Advisory Commission on Property Tax Reform has done its job. Now it’s time for the Legislature and governor to do theirs.

New York: Making the case for property tax reductions in office space in 2022

Among the various types of properties that are the subject of tax certiorari proceedings, office buildings today present some of the greatest challenges. For hotels, the impact of COVID was one of the most immediately recognizable: As the pandemic quickly spread, vacations were immediately terminated and all but the most urgent non-leisure travel occurred; and the hotels that were not fully shuttered were often used as temporary housing and care facilities. In the retail sector, where bricks and mortar was already an endangered species by 2019, many shopping malls simply went dark; vacant stores were obvious to the observer. And at the other end of the spectrum, industrial, distribution and warehouse space largely skyrocketed to values that eviscerated the merits of many tax appeals, so not much to talk about there except in unusual circumstances.

That left office space, somewhere perhaps in the middle. While everyone is familiar with the apparent devastation to the very concept of working in an office, the floor plate reality has not yet aligned with office pro formas to support what we all intuitively know has occurred.

In other words, in contrast to hotels and retail, the fallout is occurring far more gradually, often almost invisibly, so that for many properties it’s just too early to say with great clarity how bad things really are. Office leases are often five years or more, and most credit tenants will keep paying the rent even if hardly anyone is occupying the space. Tenants of office space differ widely in how they are using space, but the overwhelming majority have substantially decreased their utilization.

The real question is, how will investors view that space when those leases are up for renewal? And what about the added costs to maintain office space that are associated with COVID and its progeny?

The result is that many assessors today have not seen fit to give office owners the tax break they deserve. Though it may be more difficult to prove a case for a property tax reduction for office space than for a hammered hotel in which the damage is obvious, the evidence is out there and building to show that property tax assessments remain excessive. Office vacancy rates in New York City are now at a 30-year high of over 18%, according to a recent report from New York State comptroller Thomas DiNapoli. By January, only 13% of Manhattan office workers are expected to be in the workplace five days per week, according to a recent survey. A third will be in three days per week, and some 21% will remain fully remote.

Average expected daily office attendance among financial services firms will be 47%, accounting firms will be 36%, and consulting firms 30%. According to the Partnership for New York City, in addition to these vacancies, high-earning business owners and financial partners are leaving New York and taking their workforces with them. The Partnership projected that 22% of financial firms plan to reduce their New York City-based workforce in the next five years. This is of course consistent with allowing many lease terms to run their course. “Post-pandemic, remote work is here to stay,” said Kathryn Wylde, president and CEO of the Partnership for New York City, the city’s leading business group. “There is going to be a permanent relook at keeping offices and jobs in New York City.”

Heading into 2022, and with New York City’s upcoming assessment roll around the corner, followed by rolls throughout New York’s suburbs, assessors must ask themselves, what possible justification exists to assume that rents will not take a nosedive while expenses remain constant or surge? More important, given the present uncertainty and the above statistics, who wouldn’t expect a massive discount when pricing office space?

Illinois: Kaegi puts spotlight on commercial property assessment appeals

Cook County assessor works to rebalance tax burden between commercial and residential properties

The McDonald’s Fulton Market District headquarters building, which sold for $412.5 million, was appraised at a much lower value of $148.7 million. Nearby, the building that houses Google’s Midwest headquarters sold for $355 million, but is valued at only $135 million.

The appraisals, which were filed by attorneys hired to appeal the properties’ assessments, illustrate the odd way property tax assessments are handled in Cook County, Crain’s reported.

Commercial landlords with deep pockets have made a habit of paying appeals attorneys and appraisers to argue why a commercial property is worth much less than the assessed value, in an effort to lower the property tax bill.

Some of the techniques used to get a lower appraisal include increasing the building’s expenses and reducing a building’s estimated rents — a strategy used by appraisers for the McDonald’s and Google buildings, which were valued with below-market rents.

“There is a subset of the appraisal community that is all about arguing that a bacon double cheeseburger is really a side salad,” Cook County Assessor Fritz Kaegi told Crain’s.

Kaegi, who is finishing his third year as assessor, earned the position after his 2018 campaign against his predecessor Joseph Berrios. Berrios was criticized for his tendency to undervalue commercial properties, shifting more of the county’s property tax burden onto less wealthy homeowners.

While the assessments are only one variable used to calculate property taxes, they do lay the groundwork for what has become a zero-sum game. When one group of property owners is underassessed, another group has to pay more in taxes than they should, meaning if all of the owners of the city’s most expensive properties successfully appealed their appraised values, millions of dollars of taxes would be shifted onto other property owners.

Berrios was called out for accepting campaign donations from property tax appeals attorneys and getting too “chummy” with them. Kaegi, who doesn’t accept donations from appeals attorneys, is now facing criticism from commercial landlords arguing that his “overvalued” commercial property assessments are scaring off investors.

In West Chicago Township, an area that includes the Fulton Market District, Kaegi’s office increased residential assessments by 24 percent this year from 2018. The non-residential assessments rose by 115 percent, making those properties account for 60 percent of the township’s tax base, compared to 46 percent in 2018.

While Kaegi hasn’t accused the appraisers, like those of the McDonald’s and Google buildings, of wrongdoing, he did say he noticed “some systematic behaviors that are concerning” to the Cook County Assessor’s office. He has asked the Illinois Department of Financial & Professional Regulation to investigate some appraisers who he believes may have violated professional standards.

“We are on the lookout for patterns of abusive behavior,” he said. “And we won’t hesitate to bring it to the attention of regulators when we see it.”

New Jersey: Atlantic City Casino Property Tax Break Ordered to Mediation

The Atlantic City casino payment-in-lieu-of-tax (PILOT) amendment signed by New Jersey Gov. Phil Murphy (D) last week is headed towards mediation.

Soon after the state passed S4007/A5587 to greatly reduce the amount of collective property tax the nine Atlantic City casinos will pay next year and through 2026, Atlantic County filed a lawsuit against New Jersey. The county, which is expected to lose $4 million in 2022 due to the PILOT calculation change, contends that the new agreement unlawfully violates the terms the casinos and state agreed to in 2016.

Atlantic County’s own fiscal analysts project that $5 million to $7 million is a more probable 2022 tax loss that the county will miss out on under the PILOT revision.

New Jersey Superior Court Judge Joseph Marczyk, after reviewing the estimated fiscal projections and PILOT legislation, said he believes mediation is the best solution. Marczyk informed the state and county before Christmas to ready their arguments.

An initial conference is set for January 4, with mediation scheduled to begin soon after both sides agree to an intermediary.

Marczyk did not go so far as to issue a temporary injunction or restraining order against S4007/A5587 to prevent the legislation from being enrolled and enacted. Instead, he believes a mediator can find common ground that will appease the county and allow the new PILOT calculation to move forward.

S4007/A5587 removes gross gaming revenue (GGR) from iGaming and mobile sports betting from being factored into the casinos’ PILOT calculation. The casinos’ property taxes are determined by using total GGR from the preceding year.

The casinos successfully argued that since much of the online GGR is shared with third-party operators like DraftKings and FanDuel that are not invested physically in Atlantic City, that income shouldn’t be included in the property tax. State fiscal projections expect the revision to save the casinos $55 million next year, and between $30 million to $65 million each year through the 2026 expiration of the PILOT arrangement.

Atlantic County receives 13.5 percent of the total PILOT money.

Atlantic County Executive Dennis Levinson wrote Murphy earlier this month, expressing his concerns that the PILOT savings afforded to casinos will come at the expense of county taxpayers.

[Atlantic City] Mayor Marty Small Sr. and his advisor, retired Judge Steven Perskie, contend that these bills are good for Atlantic City, but no one has confirmed they are equally beneficial for Atlantic County taxpayers nor have there been any financial statistics or budget calculations provided at this time on which to base these evaluations,” Levinson argued.

Small has supported the PILOT change since it could better ensure the longevity of the nine casinos and the thousands of workers that they employ. The city will continue to collect its local 2.5 percent tax levied on iGaming and online sports betting revenue.

EUROPE

France: Increase in property tax: the executive denies any responsibility

According to Housing Minister Emmanuelle Wargon, it is the communities that are responsible for this increase.

In recent years, the French have faced a steady increase in property tax. The year 2022 should be no exception. Indeed, the Ministry of the Economy is already anticipating a strong revaluation of cadastral rental values ​​over the coming year. However, these values ​​serve as the tax base, and in particular determine the revaluation of the property tax. According to initial estimates from INSEE, this increase should be at least 3% next year.

But if it is indeed inflation which has the upper hand over the evolution – upward – of the property tax, the gradual abolition of the housing tax by the government is also singled out. This very popular measure at the time of its introduction, and which will affect all households from 2023, has it in fact been “cushioned” by raising other taxes? Asked about this at the microphone of Europe 1, the Minister of Housing Emmanuelle Wargon denies any causal link.

“We are committed to fully compensating for the gradual abolition of the housing tax“, indicated Emmanuelle Wargon. “This government kept local government allocations close to the euro throughout the five-year period, while these allocations fell below the five-year period.” The Minister of Housing drives the point home: “If communities decide to raise taxes, it is their responsibility. We cannot put it on trial against the government.”

In accordance with a promise from Jean Castex, who wanted to relaunch the construction of social housing, the government has also undertaken to cover the cost of the exemption from property tax for social housing, currently the responsibility of the municipalities, and this “for the first ten years of service“. The measure will apply to dwellings authorized during the current municipal mandate. Its cost is estimated at 70 million euros per year by Matignon.

The state and communities are passing the buck on this tax hike. But it is ultimately the taxpayer who will have to pay an ever higher bill. Especially since the property tax is not the only one which will have to be paid in October 2022. During the same period, the French will have to pay their tax or fee for the removal of household refuse (TEOM / REOM), as well as the tax for the management of aquatic environments and flood prevention (Gemapi). Calculated on the same tax base, these taxes should also increase by more than 3%.

Greece: Radical overhaul of property taxation

Clearer picture of changes in store expected in January with submission of relevant bill

A new landscape is expected to emerge in the real estate market as of January 1, with an easing of taxes as well as additional obligations for property owners.

These changes foresee the abolition of the additional tax on real estate, which paves the way for the accumulation of property, a new scale for the Single Property Tax (ENFIA) rates, and the introduction of a permanent mechanism for updating property rates (“objective values”) used for tax purposes,​​ so that they remain close to the commercial value.

The intention of the Finance Ministry is to also adjust commercial tax rates and age coefficients, which have remained at the same level for many years. This has resulted in unfair taxation, as a 26-year-old property has the same taxable value as a 50-year-old property.

Although the new value-added tax directive will be effectively activated in 2025, it paves the way for the extension of the exemption of newly built properties from the 24% VAT rate.

The exemption was voted in 2019 as a temporary measure with an expiration date of 2022 and was one of the main reasons behind the sharp increase in the issuance of new building permits, as the construction industry accumulated real estate to be sold without the 24% tax. However, the construction industry also argues that the coronavirus pandemic and its lockdowns led to building delays in 2020 and 2021.

At the same time, the freezing of the capital gains tax is expected to move ahead as it is seen slowing down investments in the real estate market, without even yielding much revenue.

The government’s financial staff will have to show its cards soon regarding the additional corporate tax and whether there will be some kind of “luxury tax” for high-value real estate.

Other changes include the exemption of real estate transfers from VAT after the end of 2022, as well as the simplification of the property transfer process.

From 2022, however, liabilities with costs for the owners will also be finalized. No transfer will take place without the issuance of the electronic building ID while the gradual abolition of heating oil burners will begin, in favor of more environmentally friendly heating systems.

On the agenda are financial incentives for real estate energy upgrades.

United Kingdom: Business rates system still needs fundamental reform

The government’s review was an opportunity lost and radical intervention is needed to sustain viable businesses, writes the former chief executive of Birmingham City Council and non-executive director of the Valuation Office Agency, 2017-21.

Imagine a system of income tax where the amount you paid went up every year, even in years when your income fell. Or where the amount you paid was determined by the income of other people. Or that you are still liable for the full amount even if you had no income. And if you believed you had overpaid tax, it could take several years to get it back. And the effective rate of tax could easily be over 40% of turnover before other costs.

I’m not sure it would survive long. Public opinion would tear it apart and one political party or another would change it fast. Nevertheless, that is more or less how the rates system works.

Ratepayers applauded loudly when the  government announced its fundamental review of business rates in March 2020, but the outcome, published alongside the October 2021 spending review, seems bound to disappoint.

The reduction in burden, for example to hospitality and retail, is not part of the fundamental review but an extension of the temporary administrative relief brought in to mitigate the impact of Covid. None of the flaws have been addressed. The principal changes are to move to three yearly revaluations and some changes to the collection of data and the processing of appeals which, while worthwhile, don’t deliver fundamental change.

Theory versus reality

In theory, rates is a tax on economic rent: the premium income commanded by preferable land locations. In a perfect market, rational economic players are prepared to pay just that much extra for a prime location as to erode the economic advantage of it over a secondary one. For example, in an agricultural world, the less fertile land is left fallow until grain prices rise sufficiently to enable the farmer to make just enough money on the least productive land to pay their costs and make a ‘normal rate of return’ on capital employed. The ‘super profits’ they make on their more productive land can be taxed as a windfall gain and it will not reduce their resolve to employ it.

Those super profits are economic rent and can be taxed without distorting activity. So ‘rates’ are intended as a tax on an income source rather than a wealth tax. In classical economic theory, a tax on (economic) rent is considered very efficient and it should not distort the market. It’s all based on “location, location, location”.

Of course, that isn’t what we actually tax. We have established a complex valuation system that attempts to measure economic rent, forged over time by the valuation profession and tempered by tribunals and courts to the point that a lay person has little hope of understanding what is being measured. But it is clear that if the multiplier can exceed one (which in the 1970s and 1980s it did) so more than 100% of ‘economic rent’ is collected, and there are no properties with zero rateable value (which economic theory predicts there should be), the actual tax is a levy on the yield from property in current use. Effectively it is a tax on capital employed.

Distorted economic choices

As a tax on a means of production it will distort economic choices. It makes online business more profitable than ones based on using bricks and mortar and less capital-intensive businesses more attractive to entrepreneurs than more capital-intensive ones (remember plant and machinery is ‘rated’ as well as just land and property).

The amount of tax paid is in effect determined by what was paid in the past by all business plus inflation. That has been moderated this year, because of the dramatic impact of Covid. But prior to that business rates went up by CPI regardless of underlying economic conditions. The government capped council tax, reducing the ‘real’ level of domestic property taxes during austerity but not business rates.

Each revaluation of rates redraws the distribution of the burden. Frequently in the past, the state of the property market in the City of London would determine whether your bill went up or down. If the City was doing badly and their property rents had risen slowly, your bill was likely to increase!

Even then the relative burden any business paid was based on what the level of rents were at least two years prior to the introduction.

Clogged up with appeals

You could appeal, but not against that valuation date no matter what has happened in the economy since. In any case it would take years to resolve the appeal. The introduction of Check, Challenge, Appeal has helped remove some frivolous appeals, and some of the current changes to data collection are designed to improve the efficiency of the process. But statutory deadlines are still measured in months and years.

Part of the problem with the system is that it is frequently clogged up with thousands of appeals, many of which have little or no chance of success. There are a large number of surveying firms whose existence is predicated on pursuing appeals for ratepayers and whose USP is that they understand the byzantine valuation process. In previous conversations with representatives of these firms they had expressed an interest in moving from five- to three-yearly revaluations as the best way for them to maximise their income and equalise their workload over the cycle!

Four options for reform

A fundamental review would have tried to address some of these weaknesses. For example, if you moved to annual revaluations, you could have a system where the multiplier (the tax rate) was fixed (unless explicitly raised in a transparent way as all other major taxes are). This means changes in rateable value – up and down – are the cause of the change in the burden of the tax. Annual revaluations are possible – other countries do it, although admittedly with a much smaller overall tax burden.

What Covid demonstrated was the need for radical intervention in the business rates system to sustain viable businesses, and the scale of the change needed in those circumstances.

Second, you could have significantly simplified the valuation process, using an explicit formula basis which everyone could understand and apply without use of difficult and esoteric concepts like the ‘tone of the list’, so ordinary taxpayers can work out if they are paying the right amount.

Third, there would be analysis of the economic distortions created by such a heavy tax on the use of some types of productive assets. That might conclude that the overall burden was too high, and a rebalancing of business taxes overall was desirable.

Fourth, perhaps some of the anomalies of the system could be rooted out. Independent schools can claim charitable tax relief, while local authority schools cannot. Similarly, privately owned and publicly owned hospitals. There is small business rates relief, but perhaps the burden could be modified further by considering the economic capability of the underlying taxpayer.

What Covid demonstrated was the need for radical intervention in the business rates system to sustain viable businesses, and the scale of the change needed in those circumstances. The fundamental review was a chance to resolve deep-seated flaws in the rates system. The fact that it was an opportunity lost doesn’t mean the issues go away, nor the pressure from taxpayers for change.

Stephen Hughes, former chief executive, Birmingham City Council; non-executive director, Valuation Office Agency, 2017-21

Authors:

• Paul Sanderson, President | psanderson[at]ipti.org
• Jerry Grad, Chief Executive Officer | jgrad[at]ipti.org
• Carlos Resendes, Director | cresendes[at]ipti.org

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