IPTI | Update on U.S. & EU Property Tax Issues: March 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).

USA

New York: New York City Tax Assessments Disregard Reality

New York City has published three tax-year assessments since COVID-19 swept into our world. The New York City Tax Commission and New York City Law Department have had ample opportunity to reflect and refine their thinking on those assessments. The disease broke out in Wuhan, China, in the fall of 2019 and soon spread around the world. Most of New York City noticed its impact in February and March of 2020 as businesses shut down at an accelerating rate, warranting government mandates and additional closures.

So, what did New York City do for the 2020/2021 tax year? It significantly raised tax assessments. The Tax Commission and other review bodies refused to base their valuations upon the devastating catastrophic effects of COVID-19 that had ravished the city. Why do this, you ask? The answer is technical. New York City values real estate on a taxable status date, which is Jan. 5 each year. On Jan. 5, 2020, COVID-19 did not exist in assessors’ evaluation process. Nor did it exist in the review of assessments later in the year.

Employment restrictions, masks and lockdown requirements made it impossible to operate theaters, hotels, restaurants and many other business enterprises. These restrictions took effect long before the first installment of property tax payments for the 2020/2021 year had to be paid. Yet hotels found that their tax bills exceeded their total revenue. Other businesses had similar experiences.

The city’s next assessment, for the 2021/2022 tax year, reduced assessments by 10 to 15 percent in some sectors, and by as much as 20 percent for hotels. It was too little, too late, and many businesses were failing. The assessment review process was slow and unsympathetic to the plight of businesses devastated by COVID-19.

The Jan. 5, 2022 assessment roll attempted to recoup a modest amount of the value trimmed from taxpayers’ properties the previous year. This in spite of the destructive effects of the Omicron variant that were at their height on the Jan. 5 valuation date. That is the truth: New York City’s newly released fiscal 2022/23 property tax assessment roll presents a market value of almost $1.4 trillion, an 8 percent increase in taxes and estimated taxable assessments of $277.4 billion. That sounds like too much!

Real estate tax increases have come at a time when most property owners and businesses have not even begun to recover from the pandemic’s economic impact. Foreign and business travel have disappeared, street traffic is down, and empty storefronts abound.

Commercial rents in Herald Square are down 27 percent from pre-pandemic levels. However, high bills due to ever-increasing inflation remain to be paid. Mortgages, payrolls and maintenance costs add to the burden of businesses in New York City. Most properties are still struggling, and many are falling behind.

Hospitality has been hit especially hard. Hotel revenues and prices have dropped to unsustainable levels. COVID rules and fears have evaporated any growth in tourism. One example of the pandemic hotel market value decline is the recent sale price of the DoubleTree Metropolitan at 569 Lexington Ave., which was 50 percent less than the price it sold for in 2011.

While a few market values have increased, tax increases should have been delayed. For Class 1 real estate, which includes residential properties of up to three units, total citywide market value rose 6.7 percent to $706.8 billion from the previous year’s tax roll. For Class 2 properties (cooperatives, condominiums and rental apartment buildings), the total market value registered $346.9 billion, an increase of $27.8 billion, or 8.7 percent, from the 2022 fiscal year. For Class 3 properties, which include properties with equipment owned by a gas, telephone or electric company, market value is tentatively set by the New York State Office of Real Property Tax Services at $43.6 billion.

Last, but definitely not least, total market value for commercial properties (Class 4) increased by 11.7 percent citywide to $300.8 billion. Manhattan had the smallest percent increase in market value at 10.3 percent. Class 4 market value is down $25.2 billion, or 7.7 percent, below its level for the 2021 fiscal year. Hotels registered a market value increase of only 5.3 percent.

These slight increases in market value do not warrant this year’s increase in taxes. Businesses are still affected by the economic impact of the pandemic and need time to recuperate. The city’s Department of Finance admits that although values increased for the 2023 fiscal year, they remain below the 2021 fiscal year values for many properties due to the impact of the pandemic.

The Department of Finance also acknowledges in its announcement of the tentative tax roll that commercial property values remain largely below pre-pandemic levels. This underscores why the increase in taxes should have been delayed, at least until properties and businesses attain pre-pandemic values.

In appealing assessments, property owners can improve their chances for obtaining relief by quantifying property value losses. For hotel owners and operators, this means gathering documentation showing closure dates, occupancy rates and any special COVID-19 costs incurred. Most industry forecasts anticipate at least a four-year recovery period for hotels to reach pre-pandemic revenues.

Retail and office property owners should be prepared to show any declines in gross income and rents received or paid on their financial reports filed with the city. Residential landlords should list tenants that vacated and those that are not paying rent.

In conclusion, tax assessments must reflect the entirety of what this pandemic has done to the real estate industry over the past 22 months. New York City authorities must provide tax relief for property owners, and taxpayers and their advisors will need to take an active part in obtaining reduced assessments.

Texas: Texans are ready to end corporate property tax breaks

Following his recent speech to the Texas Oil and Gas Association, Rep. Dade Phelan, speaker of the Texas House of Representatives, tweeted that the Texas Legislature is “developing a program to replace Chapter 313,” the soon-to-be defunct provision in the Texas Tax Code that allows school districts to give property tax breaks to businesses.

Members of the Legislature are doing this because last year Texans all across the political spectrum sent them a clear message that it is wrong for Texas school districts to give multi-million property tax breaks to big business while average Texans’ property tax bills are skyrocketing.

For instance, the progressive group Every Texan partnered with the conservative Texas Public Policy Foundation in expressing grassroots’ opposition to “unjustified business tax breaks.” Their joint statement said, “It’s time to call these tax breaks what they are: handouts to favored industries and to the few school districts that use them to incentivize companies to locate there. Texans shouldn’t be on the hook for these sweetheart arrangements, and we certainly shouldn’t maintain them at the expense of our schools. Texas ought not to extend Chapter 313.”

The Houston Chronicle investigated Chapter 313, reporting, “the biggest corporate tax giveaway in Texas has helped businesses cut more than $10 billion from their property taxes — and there are no limits on the program’s exponential growth.” Because of the outpouring of opposition, the Texas Legislature last year failed to pass any of a number of bills extending Chapter 313 past its scheduled expiration date of December 31, 2022.

Now it appears that Phelan and other legislative leaders are listening to representatives of big business rather than voters. However, they should not ignore the constituents who put them in office because opposition to Chapter 313 tax breaks is alive and well across Texas.

In January, the Stephenville ISD School Board voted to discontinue negotiations on 313 abatements for a proposed solar farm in Erath County. The 5-1 vote came after county residents had expressed their opposition to the abatements through public meetings, communications with school board trustees, and an active social media campaign.

One Erath County resident who fought against the abatements, Joanna Friebele, said, “I want everyone to remember this is America and we are all entitled to our opinions, we are entitled to work at it and if we do, sometime we get to reap the rewards.” She also reminded fellow activists of the ongoing efforts of businesses to get tax breaks, “This is also a multimillion-dollar corporation and they will work at it too.”

Robert Fleming led a number of Bell County residents in another effort successfully opposing abatements in Troy ISD. The school board voted down (6-1) the abatements for a proposed solar farm last June. He talked about how difficult the fight is because of the resources the businesses bring to the fight.

“These companies are very organized, they’re very professional,” Fleming said in a Texas Farm Bureau report. “They come into our communities, they separate family, they separate friends, they separate neighbors with a dollar bill, and that is what really bothers me the most.” This same battle has been fought — and often won — across the state, including in Montague, Brown, Wharton, Matagorda, Clay, Val Verde, Concho, Van Zandt and Coleman counties.

One country where the battle is ongoing is Comanche County. Residents were caught off guard a number of years ago when a wind farm successfully campaigned for abatements. However, they were better prepared when a solar farm recently approached Comanche ISD seeking a 313 property tax abatement.

Over 60 residents showed up for a February community meeting. Topics discussed include the 313 approval process, environmental concerns related to solar farms and the proposed boundaries of the “reinvestment zone,” which has to be adopted before the tax breaks can be offered. The meeting also included property owners who had signed leases with the solar farm.

Comanche ISD will take the first step in the process at its February 28 school board meeting. Many county residents hope the board trustees will follow the lead of the trustees in Bandera ISD, who unanimously rejected Montague Solar’s 313 application on February 14.

Bandera and Comanche are not that far from Austin. Yet the message of residents in these and other parts of Texas does not seem to be reaching the Texas Capitol. If members of the Texas Legislature listened to their constituents back home, they’d understand that Texans are tired of paying higher property taxes so that big businesses can get big tax breaks.

Maine: ‘Dark store theory’ leaves local residents paying more than their fair share in taxes

Even if you have never heard of the “dark store theory,” odds are you’re paying the price for it.

While everyday Mainers and small business owners pay property taxes in order to support their municipalities’ schools, parks and emergency services, many large corporations are using the dark store theory to avoid paying their fair share.

Across the state, municipal assessors are tasked with determining the value of properties on which to base property taxes. Property owners have the right to appeal the value that assessors determine. Unfortunately, large corporations have started to use this appeal process to push for property values that are a fraction of what towns determined their value to be.

When a municipal assessor establishes the value of a piece of property, whether it’s land or property with buildings and fixtures, there are a set of factors used to determine its value. One factor is comparable sales — looking at what similar properties in similar areas have sold for. Many times, the comparable property is a good fit for the comparison. But when the similar property has been unused for several years, or there are deed restrictions that limit the size of a store’s footprint or the nature of the business that occupies the space, two properties that may have been built for a similar purpose no longer have a similar value.

In Maine and across the country, there is a trend where owners of large commercial properties, like big box stores, question the assessed value of their property based on comparisons with “dark stores” or “failed stores,” that is stores that have been closed and sold for much less than their former value. They take a newly built property and compare its value to a decrepit, long-abandoned one. Or they impose deed restrictions on the store they just moved out of for the “supercenter” they built nearby, then use the restricted property as comparable to the unrestricted new store.

Local assessors are at a disadvantage when national corporations use the dark store theory and appeal the value of their property. Many towns are intimidated by the big dollar abatement requests made on behalf of big box stores by a team of lawyers, some of whom are paid a percentage of whatever concessions are made.

It is expensive for municipalities to litigate these types of appeals and they can take years to resolve. Many municipalities settle these appeals for a reduced value rather than spend tens of thousands of dollars or more in legal fees, while appeals are just a cost of doing business for these large corporations. In the end, the average taxpayer is the one who gets the bill, whether the municipality agrees to pay for the litigation or agrees to a settlement.

Hundreds of thousands of property tax dollars are at stake. When big box stores succeed with their abatement requests, those taxes have to be paid by everyone else in the community. While big box stores benefit from municipal services such as police and fire protection, it’s the municipality’s residents who are paying for those services.

In states where assessors have successfully fought off these spurious abatement claims, there are laws that address and combat these tactics. In the Maine Legislature, we have a bill, LD 1129, written in consultation with Maine assessors, that would give Maine municipalities the ability to clarify what makes a similar property comparable. Every property owner would continue to have the right to appeal; this bill would simply ensure everyone is playing by the same rule book.

Property owners in Maine pay their fair share in taxes. But shifting the tax liability from a successful, profitable, ongoing business to local taxpayers needs to be stopped before it even gets started. LD 1129 will clarify the law for assessors and property owners alike and improve the fairness of valuations across the state.

Virginia: Land value tax helps realize the Richmond 300 vision

Since the 1990s, Richmond’s story largely has been one of success. Spurred and supported by the expansion of the Mid-Atlantic Interstate 95 corridor, the city saw employment increase, population loss reverse and median incomes increase from $24,000 in 1990 to $54,000 in 2020.

Yet, as often is the case, Richmond’s rising tide failed to lift all ships. Today, the city’s poverty rate remains at roughly 25%, with areas in decline standing in noticeable contrast to their more affluent counterparts.

Add to this the prevalence of undesirable land uses — including vacant and blighted parcels, and surface parking lots; and very real concerns about continued sprawl development — and it is clear that, despite its progress, Richmond’s efforts to become an equitable, vibrant, sustainable urban center have yet to come to full fruition.

Of course, many people remain committed to bettering the city, as evidenced by the local adoption of the “Richmond 300: A Guide for Growth” plan in 2020, and the General Assembly’s passage of Chapter 790 in the same year, which enables the city to adopt a land value tax (LVT) in place of its current property tax system. Why mention a single tax policy alongside an ambitious strategic plan meant to direct the city’s development, growth and change through 2037? The simple act of adopting the LVT will prove a fundamental step toward realizing the 17 goals, 73 objectives and 415 strategies contained in the Richmond 300 plan. Here’s how:

In academic studies of U.S. cities and towns that use it, the LVT has been shown to yield a variety of desirable outcomes, including increased home values, reductions in tax delinquency, enhanced tax equity, and increases in infill development paired with reductions in sprawl. The key to all of this is the LVT’s practice of untaxing improvements — the homes and businesses people work and borrow to create — while more heavily taxing land, an inelastic good whose value derives mostly from the community in which its located.

Confused? Think about what the old real estate adage “location, location, location” really means. It turns out that untaxing private buildings encourages investment in improvements, and upping taxes on land returns more of the value created by public investments, in things like parks, schools and roads, to the public coffers.

This all probably sounds good, so what’s the catch? If there is one, adopting the LVT would change the tax bills of virtually every property owner in Richmond. The policy can (and should) be implemented in a revenue-neutral fashion, and it will rely on current property assessment data, so neither of those factors explains the anticipated changes. The changes will result from the fact that the LVT relies on new tax rates to generate property owners’ tax bills: It’s simply a matter of different math producing different numbers.

Change can be scary, and any change that affects people’s pocketbooks can be especially so. But an analysis of what the LVT would mean for Richmond is far from scary. In fact, it’s downright exciting. Our New Jersey-based non-profit has been working with City Councilman Andreas Addison, 1st, on research and analysis of a land value tax in Richmond. Using the city’s 2022 assessment data, we ran some analyses based on a conservative version of the LVT — one in which 50% of the total tax revenue comes from the value of land.

Here’s what we found: Richmond is home to about 6,000 vacant lots. With no improvements to speak of, the associated tax bills for these parcels currently are quite low, making them easy to hold onto until “the market is right.”

Under the LVT, owners of vacant land will see their bills go up by an average of $387 annually. This shifts roughly $6 million of tax burden away from productive land uses and incentivizing redevelopment, which in turn can reduce development pressure at the city’s periphery.

Like vacant lots, surface parking — of which Richmond has about 1,000 lots — also will pay more under the LVT. An inefficient use of urban space, these lots will collectively pay about $3 million more each year, further reducing tax pressures on owners of improved properties and (likely) spurring better land use decisions.

Finally, let’s consider the effects of the LVT on Richmond’s lifeblood: homeowners and business owners. Most residential property owners will see reductions in their tax bills of about 2%, on average. Commercial land does even better. Downtown’s flagship spaces, Class A and B office buildings, would see their current tax bills reduced by an average of almost 50%.

More in-depth analysis, and a lot of public outreach and education, are needed before the city of Richmond can implement the land value tax it authorized in 2020. As experience and the city’s actual tax data make clear, however, adopting this policy will be an important step toward realizing the vision encapsulated in the Richmond 300 plan.

Texas: How Texas Uses Commercial Property Tax Code to Fast Track Growth

Everything’s bigger in Texas, including the tax code. Unique provisions in a state funded primarily by property taxes give commercial owners more control over how and where local government dollars are spent. The Lone Star state is using more than 200 Tax Income Reinvestment Zones (TIRZ, pronounced like turs) to keep up with the growing appetite for new development and better public spaces.

A TIRZ is a political subdivision of a city most commonly initiated by property owners that allow the TIRZ itself to collect a portion of incremental tax increases funded through the appreciation of the appraised property within the zone. In layman’s terms, a TIRZ functions like an HOA, diverting a portion of tax revenue from its municipality to fund improvements with the zone’s boundaries. The funding comes from taxes attributed to new improvements, so the process fuels itself. The more tax revenue generated, the more money for the area, the more it can invest locally to generate more tax revenue. Because taxes are levied on the value of the properties, the system works by garnering a portion of appreciation of the commercial value of the buildings. In effect, a TIRZ gives owners a greater say on how to spend tax revenue being generated by their properties to benefit their properties. Similar to a Public Improvement District but with more funding and power akin to a redevelopment authority.

Tax Income Reinvestment Zones of Texas have been a hot-button issue within the state since they were first established in the early 1990s. Developer Robert Silvers wanted to transform the rundown Lamar Terrace neighborhood in Houston but the city’s notorious lack of zoning left him with few options to create a planned community. After acquiring more than 100 plots, he began working with the city of Houston to establish the states’ first Tax Income Reinvestment Zones: TIRZ Number One. The city agreed to levy the same tax receipts on the zone for the next 40 years. Receipts above that level would go towards funding water, electricity, transportation, drainage, and sewer upgrades within the area. Silvers’ plan worked and shortly the TIRZ was raking in millions, expanding to include all of Lamar Terrace Neighborhood, rapidly changing it to the upscale St. George Place neighborhood that exists today. In its first 10 years, the TIRZ generated $40 million in incremental taxes, most of which went directly towards improving the TIRZ.

Combined with a lack of zoning laws, reinvestment zones give commercial owners outsized power in how local dollars are spent. Originally pitched as a way to transform downtrodden areas in desperate need of redevelopment, many of today’s TIRZ have established themselves as stewards of some of the state’s most valuable real estate. This led to allegations that a TIRZ is just a cash grab from commercial owners tired of forking over taxes that improve areas their assets aren’t in. But in a state defined by property tax collection, a collective organization designed to reinvest in an area is actually a way to expand municipal funding. That’s exactly what Houston is doing.

Houston has made more use of TIRZ than any other city, now 27 different of them exist in the city covering 90 squares miles. Those TIRZ generate an additional $200 million in tax revenue annually, outside the city’s budget. That’s the key here. Houston’s finances have been hobbled by a state-imposed property tax revenue cap. No matter what the cities’ finances are like or how fast property values are appreciating in Houston, the city can only raise property taxes by a maximum amount every year. That’s left the city scrambling for funding as the area’s population explodes but its budget stays stagnate. The last few Houston mayors have struggled with high-profile disputes between the firefighter union, police, and other municipal employees over who gets a larger share of a pie piece that isn’t getting bigger. TIRZ funds are exempt from the revenue cap, allowing rapidly appreciating property values to generate additional tax revenue. In Houston, the TIRZ isn’t subverting funds, without it more than $200 million in annual tax revenue would not even exist.

“The City Council has been trying to minimize the impact of the revenue cap by the utilization of the TIRZs, that just points to the structural inequity that exists. But you can only do that for so long without hurting the city as a whole,” Houston Mayor Sylvester Turner told the Houston Chronicle. “So, I do think once the revenue cap is removed, then the necessity for the TIRZs is not nearly as great.”

It isn’t just Houston, across the state cities are working with property owners to establish TIRZ to manage the state’s robust growth. Texas’ population has grown by more than 4 million people over the last 10 years. Twenty-three U.S. states don’t even have a total population of 4 million. Frisco, Texas, is the poster child of explosive growth in the state. The most recent U.S. Census found Frisco is the nation’s fastest-growing city with a 71.1 percent population growth rate over the past decade. Frisco formed its first TIRZ in 1997, 713 acres of an undeveloped area bounded by some of the area’s most trafficked highways. That Tax Income Reinvestment Zones is now home to the third-largest mall in Texas, Dr. Pepper Ballpark, Dr. Pepper Arena, and many other commercial properties. The zone has generated tens of millions in additional tax revenue that the city has used to keep property taxes for families low and invest back into the community. The TIRZ also has an added benefit for the school district. Money generated by the TIRZ is not counted in the state’s Robin Hood formula that redistributes funds from richer school districts to poorer ones. That allows Frisco to keep an outsized portion of tax revenue to fuel further growth. Earlier this year Frisco moved to expanded TIRZ by 583 acres to include 3 golf courses nearby.

In Texas, a TIRZ is akin to a public-private partnership. Private property owners can establish greater local control over an area, freeing some of the financial burdens of the city at large. More and more property owners and commercial developers are establishing TIRZ to help seal in some of an area’s prosperity. As Tax Income Reinvestment Zones proliferate, their purpose and mission have been clouded. Like any tool, a TIRZ can be used for good or evil. By and large, most throughout the state have improved and maintained their areas but they are not without drama. Tax Income Reinvestment Zones have faced accusations of improper development, favoring their own developments and projects at the expense of surrounding areas that have greater need. In heavily developed areas, a TIRZ is a way for the rich to get richer but that’s not always a bad thing if the TIRZ is reinvesting to facilitate growth.

In a state defined by property taxes that are growing faster than any other, TIRZ has proven to be a useful tool for Texas to manage its growth. By working with commercial property owners and cutting them in on the success of the neighborhood through incremental tax revenue, municipalities are giving property owners additional equity in the prosperity and growth of urban areas.

Connecticut: Money for property tax reform is there for the asking

Where is the money going to come from to pay for the changes that need to be made to fundamentally reform Connecticut’s unfair, inefficient and onerous property tax system?

That question has been asked repeatedly in the wake of a report – issued in December by The Property Tax Working Group of 1000 Friends of Connecticut – that called for an overhaul of the state’s tax structure, beginning with three steps that should be taken immediately by Gov. Ned Lamont and the General Assembly: fully funding the Payments in Lieu of Taxes (PILOT) program; having the state kick in more money for local special education; and providing low-income households with a refundable property tax credit.

As it turns out, there could be more than enough money to implement those changes, even without dipping into the whopping $1.48 billion surplus that the state is projected to amass this fiscal year. In Connecticut’s roughly $23 billion operating budget, less than $18 billion is collected from residents and businesses. Tucked inside the voluminous budget document are $8.84 billion in tax breaks and credits – known as “tax expenditures” in legislative parlance – that are doled out annually to certain taxpayers and special interests.

Amazingly, while the many billions of dollars in state spending are scrutinized each year, there is no requirement that the tax breaks and credits be similarly evaluated. Thus, they simply roll over from year to year, without regard as to whether they are constructive or productive.

They ought to be re-examined with an eye toward eliminating or modifying those that are not beneficial to the state’s fiscal health. Of course, deciding which tax breaks to get rid of is a balancing act between sound policy and political judgments. But making those decisions is what lawmakers are elected to do.

Additionally, there are hundreds of millions of dollars to be garnered using a variety of strategies. The problem is: The state doesn’t act, ask or take. Policymakers need to be creative, collect what is rightly owed and shed tax breaks and credits that are counterproductive.

The following are some ideas worthy of consideration:

• Over the past decade, the Department of Revenue Services (DRS) has slashed its audit staff by 10 percent and its collection and enforcement staff by 25 percent. A 2021 study by The Boston Consulting Group, commissioned by the Lamont administration to address the expected wave of state employee retirements by June 30, estimated Connecticut fails to collect hundreds of millions of dollars annually. It’s estimated that each dollar spent to hire more auditors would bring in $8. Restoring auditors to 2013 levels could bring in $200 million.
• The consultant’s report also cited dozens of new initiatives and efficiencies that could produce more than a half-million dollars annually. Included are such items as digitizing services; pooling resources; consolidating the state’s real estate holdings; and blocking payments to vendors who owe the state money. Many of the consultant’s recommendations could be carried out without trimming the state workforce, which is already undermanned.
• The wealthy now pay a top income tax rate of 6.99 percent. Boosting it to 7.99 percent for wealthy filers and to 8.49 percent for the uber-wealthy — rates that would still be among the lowest in the Northeast — could generate an estimated $504 million a year.
• The one-week tax holiday on the sales tax, which typically occurs in August, could be eliminated for a savings of $5 million.
• Credit card processing companies could remit the sales tax collected by merchants directly to DRS rather than sending the taxes back to the merchant, who then has the responsibility to pay the state. Changing the procedure could reduce paperwork for the merchants and simplify the audits of sales tax receipts.
• A portion of the state surplus that is not designated for debt reduction could be targeted to cities and towns to help defray their borrowing costs.
• State police overtime costs have risen to about $30 million a year. Hiring 100 to 200 troopers would result in $5 to $10 million in net savings.
• Connecticut receives far less of its revenue from the federal government than most other states. Creating a federal funding liaison, both in Hartford and Washington D.C., could produce additional aid.
• Tax amnesty programs that allow scofflaws to escape paying interest and penalties on delinquent taxes, could be eliminated. Such programs, which have proliferated in recent years, essentially provide “get out of jail free” cards.
• The state has roughly $700 million in outstanding revenue that’s deemed “uncollectable” by DRS. Those funds could be securitized and sold for a significant one-time infusion of cash.

In sum, deep in the budget and the bureaucracy are the answers to the dilemma of how to rebalance the state’s inequitable property tax, which accounts for a disproportionate 42 percent share of all state and local taxes. The property tax stifles business expansion and job growth; destroys open space by encouraging unwise land use; impoverishes cities; creates unequal educational opportunities; and has led to an outmigration of residents to no- or low-tax states.

Like buried treasure, the money to reform the state’s property tax system is there for the asking. All it will take is some fortitude and digging.

EUROPE

Greece: Handing out cash

There are two dangers lurking in the global trend of rising interest rates: One is that it will halt the post-Covid economic recovery (this worries European Central Bank head Christine Lagarde, as recovery in the eurozone is still weak), and another that it will cause great damage to heavily indebted countries, companies and individuals. Greece could be affected by both.

There is also a third, more specific risk, for our country: its creditworthiness which, after three bailouts, remains in the “junk” category. If this does not change, if the rating does not rise by two notches to investment level, the cost of servicing our debt will increase many times over. This is a great danger – which many have been aware of over the previous 10 years – that could cast a heavy shadow on Greece. These are not just theories and not just distant scenarios. One of the first to feel the risk of an uncontrollable rise in borrowing costs is a strategic link in the economy – the banks.

In the next four years, by 2026, it is estimated that banks will have to raise 14 billion euros from the markets to continue meeting their minimum requirements for own funds and eligible liabilities (MRELs). In the face of rising interest rates, this alone would be enough to challenge some imaginative profitability scenarios that are circulating.

The situation seems more complicated if some invisible consequences of the Hercules bad loan reduction scheme are taken into account. In order to meet the plan’s requirements, the banks “burned” capital. Thus, their capital adequacy fell significantly compared to the European average and, at the end of 2022, when the period of supervision ends, we will see whether or not new capital increases are required.

Neither the banks, nor the big companies, the state, nor employees will be unaffected by the increase in the cost of borrowing. Reaching investment grade is urgent. The alarm should have been sounded. Yet the opposite is happening.

Fiscal policy seems to be moving in line with the extended pre-election phase. So, instead of exercising fair fiscal management, the ENFIA property tax (in a sense, one of the fairest taxes) has been drastically reduced for everyone – both for those who own small properties and for those who own a lot of real estate – at a cost of 350 million euros for the state coffers, instead of the 70 million euros written in the 2022 budget.

And instead of exercising prudent fiscal management, the government has decided to give away 6 of the 8.3 billion euros that was initially distributed as repayable advances during the pandemic to support businesses, while the possibility of even greater generosity is being considered – cutting or writing off the remaining 3 billion euros altogether.

In short, government decisions that serve political patronage send messages to foreign and domestic observers that undermine the key national goal. To the outside world, they tell them to be skeptical when looking at Greece’s creditworthiness, because it is a country that, despite owing 200% of its GDP – over 350 billion euros – doesn’t hesitate to take advantage of relaxing European rules to borrow even more for pre-election handouts.

In Greece, the message is that they can relax, because there is money, and above all, there is a government that is manages the crisis by handing out cash – not like the others, in the past, who imposed taxes. And if today there is a strong belief that, supposedly, if it wants, the government could handle the tsunami of price hikes at no cost to us, it would be unfair not to recognize the government’s contribution to this belief.

United Kingdom: Government To Assess Whether Online Sales Tax Could Address Tax Imbalance Reported By Retail Sector

The UK government has published an early-stage consultation, exploring the arguments for and against an Online Sales Tax (OST). Whilst no decisions have been made on whether to go ahead with an Online Sales Tax, consultation will look at potential designs and impacts on consumers and businesses of implementing such a tax.

The consultation was committed to at Autumn Budget as part of the government’s conclusion to its review of business rates (annual property tax), where stakeholders, including some of the UK’s most well-known high street businesses, called for an Online Sales Tax to help rebalance the tax system through funding a reduction in business rates for the retail sector. Given the significant changes in the retail market and shift online, it is right that the government reassesses the taxation of this sector, although no decision has been made yet as whether to implement such a tax.

Lucy Frazer, Financial Secretary to the Treasury said: “We want to see thriving high streets and a fair economy as we move forward from the pandemic, which is why our business rates review cut the burden by £7 billion for businesses, and committed to look at an Online Sales Tax – given the imbalance identified by some between online and in-store retailers. Whilst we’ve made no decision on whether to introduce such a tax, it’s right that, given the growing consumer trend to shop online, we work with stakeholders to assess the appropriate taxation of the retail sector.”

As part of the three-month consultation stakeholders will be asked for their views on the challenges on the design of an Online Sales Tax, including which products and services would be in scope and whether it would be a flat-fee tax based on the number of transactions or deliveries, or a revenue-based tax. The consultation delves into what effect an Online Sales Tax would have on consumers and businesses alike, which will also be a key determining factor in policy decisions.

The UK government has supported retailers over the entirety of the pandemic through our economic support plan worth around £400 billion, including through tax cuts such as business rates and VAT relief, funding via business grants and loans, and wage support through our world-leading furlough scheme.

The Autumn Business Rates Review further supported the high street, reducing the rates burden by over £7 billion, and making the system fairer, including through more frequent revaluations, freezing the multiplier and cutting business rates in half for the retail, hospitality and leisure sector for 2022-23.

The consultation will run from 25 February to 20 May 2022.

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 (IPTI) – a member of the EACCNY.