Member News

IPTI | Update on U.S. & European Property Tax Issues: March 2021

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).

UNITED STATES

Empty Office Buildings Squeeze City Budgets as Property Values Fall

At a meeting with Treasury Secretary Janet L. Yellen last month, Jeff Williams, the mayor of Arlington, Texas, laid out his grim economic predicament: Heavy spending on coronavirus testing and vaccine distribution had dwarfed dwindling tax revenue, forcing the city to consider painful cuts to services and jobs. While sluggish sales and tourism were partly to blame, the big worry, Mr. Williams said, is the empty buildings.

Those dormant offices, malls and restaurants that have turned cities around the country into ghost towns foreshadow a fiscal time bomb for municipal budgets, which are heavily reliant on property taxes and are facing real estate revenue losses of as much as 10 percent in 2021, according to government finance officials.

While many states had stronger-than-expected revenue in 2020, a sharp decline in the value of commercial properties is expected to take a big bite out of city budgets when those empty buildings are assessed in the coming months. For states, property taxes account for just about 1 percent of tax revenue, but they can make up 30 percent or more of the taxes that cities and towns take in and use to fund local schools, police and other public services.

The coming fiscal strain has local officials from both parties pleading with the Biden administration and members of Congress to quickly approve relief for local governments.

Lawmakers in Washington are negotiating over a stimulus package that could provide as much as $350 billion to states and cities. The aid would come after a year of clashes between Democrats and Republicans over whether assistance for local governments is warranted or if it’s simply a bailout for poorly managed states.

On Saturday, the House passed a $1.9 trillion bill that would provide aid to cities and states and garnered no Republican support. The Senate is expected to take up the bill this week with a vote that is likely to break down along similar party lines. Republicans have continued to object to significant aid for states, saying most are in decent financial shape and cherry-picking data to support their argument, such as revised budget estimates that show improvement because of previous rounds of federal stimulus, including generous unemployment benefits.

“On the whole, state and local governments aren’t in fiscal crisis,” Senator Patrick J. Toomey, Republican from Pennsylvania, said at a Senate Banking Committee hearing in February.

For local officials from both parties, however, the help cannot come soon enough and they have been making their concerns known to Treasury officials and members of Congress.

“The pandemic is raging on and the economic impacts are very real,” said Mr. Williams, a Republican.

The pandemic has upended America’s commercial property sector. In cities across the country, skyscrapers are dark, shopping centers are shuttered and restaurants have been relegated to takeout service. Social- distancing measures have redefined workplaces and accelerated the trend of telecommuting. The $16 trillion commercial property sector is being stressed in ways not seen since the Great Recession of 2008.

According to Moody’s, the credit rating firm, commercial real estate values are projected to decline by 7.2 percent nationally from their pre-pandemic levels, bottoming out by the end of this year. The hardest hit categories are the office and retail sectors, with values declining by 12.6 percent for offices and 16.5 percent for retailing.

American cities are facing red ink for a broad swath of reasons but the pain is unevenly distributed. In some cases, rising residential real estate values will make up for the commercial property downturn and some segments, such as warehouses, have been doing well as online shopping lifts demand for distribution centers. States that do not have income taxes, such as Florida and Texas, are more vulnerable to fluctuations in real estate values.

The overall picture is problematic, and the National League of Cities, an advocacy organization, estimates that cities could face a $90 billion shortfall this year.

Big cities are bearing the brunt of the office exodus. Figures provided by CoStar show that available office space in some of the largest markets has swelled from the end of 2019 to the end of 2020. Unused space in San Francisco increased by nearly 75 percent last year, while empty office space increased by more than 25 percent in Los Angeles, Seattle and New York City.

Mayor Bill de Blasio of New York warned in January that property tax revenues were forecast to fall by $2.5 billion next year as the value of hotel, retail and office properties has fallen by 15.8 percent. With real estate making up about half of New York’s annual tax revenue, the city is planning to cut thousands of jobs this year.

Victor Calanog, the head of commercial real estate economics at Moody’s, said that in some big urban markets, rent collection rates had fallen to about 75 percent, putting pressure on owners and landlords who need to repay their loans. Eviction moratoriums and uncertainty about what degree of normalcy will return to the office sector as vaccines are rolled out has made projecting the industry’s fortunes even more difficult.

“Companies were dragged kicking and screaming to the world of letting people work remotely,” said Mr. Calanog, who has been working from his home in New Jersey for the last year. “The genie is out of the proverbial bottle.”

The extent of the fiscal pain facing municipalities will be clearer in the coming months as commercial property assessments come in and owners, who view the values as inflated, contest their tax bills.

Jason M. Yarbrough, a real estate lawyer in Pittsburgh, said he had been fielding a growing number of calls from property owners seeking to file their 2021 appeals. With buildings and stores sitting vacant, some owners have seen their assessed values reduced by millions of dollars after challenging their assessments — lowering their tax bills by hundreds of thousands of dollars.

“We’re seeing a very large demand from commercial property owners, who are getting hit from all sides,” Mr. Yarbrough said, noting the squeeze this also puts on city budgets. “It’s a troubling issue for municipalities because they’re pegging their tax base on property values and you’re assuming there’s not going to be a Black Swan event.”

Lawmakers and Treasury officials have been aware of the strain on the sector. Last year, Representative Van Taylor, Republican of Texas, introduced legislation that would allow the federal government to take a small ownership stake in hotels and other companies and the industry lobbied hard for aid. But commercial real estate has been one of the few sectors not to receive direct government support in the relief packages that Congress passed in 2020.

The Treasury Department under Steven Mnuchin struggled to come up with a support program for the sector and rescuing rich property owners was politically untenable in Congress.

Despite the stress on the commercial real estate sector, it has proved to be relatively resilient so far. But policymakers are keeping a close eye on the potential for more problematic fallout as the pandemic persists.

Esther George, president and chief executive of the Federal Reserve Bank of Kansas City, said in a February speech that emergency lending and relief programs had largely kept rent payments flowing, preventing delinquency rates on bank loans secured by commercial properties from rising as high as some analysts had feared. However, she suggested that more might need to be done.

“A worrying scenario is that the economic impact of the pandemic outlasts the policy support programs currently in place,” Ms. George said. “Should that occur, many renters and businesses could find themselves unable to meet their obligations, forcing banks to realize losses on existing loans and weighing on credit growth and broader economic activity.”

Even some economists who have expressed skepticism about municipal aid have acknowledged that lost commercial property tax revenue is an area that could use some targeted shoring up. However, they remain concerned about Congress writing checks to cities that do not need the money with a blanket bailout.

“I’m actually quite worried about the commercial real estate sector,” said Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office who has advised Republicans. “I have no objection to there being some sort of support for that particular area.”

Many in the real estate industry have been frustrated by the restrictions that cities and states have imposed on businesses because of the pandemic, blaming them for bankruptcies and plummeting property values.

Jacob Wintersteen, a real estate developer in Texas and the finance chairman for the Houston area for the state’s Republican Party, said he feared local governments would continue with pandemic restrictions if they knew the federal government would prop them up.

“The only political solution I see is a political grand bargain of trying to bail everything out right now matched with immediately requiring every state to lift all restrictions and every municipality to lift all restrictions,” Mr. Wintersteen said.

Although the lobbying efforts of the commercial real estate industry were unsuccessful, groups that represent municipalities are using the plight of the sector to push Congress for their own relief. In a letter to members of the House and Senate in February, the Government Finance Officers Association warned that property tax revenue was facing a cliff.

“The lack of growth and loss in property and sales taxes nationally will continue to have a chilling effect on the economic recovery from the Covid-19-induced recession,” wrote Emily Swenson Brock, director of the Government Finance Officers Association’s Federal Liaison Center. “Early investment in additional financial resources directed at shoring up state and local revenue streams will protect critical safety net services across the United States.”

Ms. Brock said in an interview that Ms. Yellen had been receptive to her organization’s concerns.

In the meantime, property owners are grappling with what to do with their unused space and businesses are trying to decide what they will need in the future.

Drew Levine, a senior vice president at the commercial real estate brokerage Colliers in Atlanta, said that some tenants were looking to buy out their leases, others were trying to sublease vacant space and many were just waiting out the health crisis if they can afford it. Few companies are signing contracts to rent new space, however, and big corporate clients have indicated that plans for their office portfolios over the next few years remain in flux.

“Office occupiers are not ready to take the risk of going back to the office for the most part,” said Mr. Levine, who was working in a largely empty building in midtown Atlanta and has seen his commute across a city known for traffic congestion shrink to 10 minutes. “The streets are empty, I could park anywhere and jaywalk across Peachtree Street.”

New York: Unpaid Property Taxes Leap in New York City as Tenants and Landlords Struggle

Unpaid property taxes in New York City are soaring as homeowners struggle and the pandemic recession slashes the rents landlords are collecting from both commercial and residential tenants.

The arrears rose to $1.3 billion in February — 4.5% of the almost $30 billion due, according to figures released Monday by city Comptroller Scott Stringer.

By comparison, unpaid property bills for the fiscal year that ended in June 2020 equaled 1.8%. Even in the aftermath of the 2008 financial crisis, owed property taxes peaked at 2.17% or half February’s figure.

“We have been warning about the inevitability of this since the start of the cancel-rent movement,” said Jay Martin, executive director of the Community Housing Improvement Program, which primarily represents owners of rent-regulated buildings. “Something is giving way in the fabric of property ownership in the city.”

Commercial properties represent just over half the unpaid taxes. With tourism paralyzed, the delinquency rate for hotels citywide is 10%, with Brooklyn hotels double that at 20%.

Manhattan commercial properties have a lower default rate than those in the other four boroughs. While Manhattan properties have seen the biggest fall in occupancy, many tenants are still paying rent and large landlords have so far had the financial resources to weather the crisis.

City officials and some real estate experts are divided on whether unpaid property taxes will increase in the months to come amid an eviction moratorium that goes through at least May 1 and widespread economic suffering among New Yorkers.

Stringer expects the delinquency rate to finish the year at 3%, with late payments cutting the amount owed. The de Blasio administration’s budget is also based on 3% going unpaid.

Both expect higher unpaid bills and lower assessments for commercial buildings to reduce overall property tax revenues for the next fiscal year by 4.5%, to just over $29 billion, the first decline since 1996.

Meanwhile, the unpaid percentage for all residential properties — apartment buildings, coops, condos and one- to three-family homes — is 4.9%.

“We would expect delinquencies to only get worse,” Martin predicted. “Property taxes make up 50% of operating expenses for smaller landlords of rent-regulated buildings, and a large percentage of multi-family rent-regulated owners are operating at a loss.”

Martin called on the state to accelerate the distribution of rent subsidies. The federal aid bill passed in December would provide $1.3 billion to help residential tenants in the state.

A previous effort by the Cuomo administration was botched: By the end of December, only $40 million of the $100 million program administered by the state Division of Homes and Community Renewal, had been disbursed to 9,600 households. The program closed on Feb. 1 but no update has been released on the amount provided.

Stringer called on the state Tuesday to void rent for those affected by the pandemic, at a briefing on his analysis of the proposed city budget. He has previously called for spending $2.2 billion to help renters and said aid should be extended first to small mom-and-pop landlords.

“We must cancel rent for the hundreds of thousands of New Yorkers who have fallen behind through no fault of their own,” Stringer, who is running for mayor, said earlier this month.

He left unclear what would happen to rent owed to large property owners.

The Real Estate Board of New York is pushing for passage of a bill in the state legislature to reduce the 18% penalty on unpaid taxes to 3% given the impact of the pandemic. The Hotel Association of New York is asking for no penalties on taxes owed by its members.

“In normal circumstances you need a big enough stick to make sure people pay their bills,” said Paimaan Lodhi, senior vice-president of the Real Estate Board of New York. “But these are unprecedented times. The 18% interest rate is onerous and punitive.”

REBNY also supports direct aid to tenants. The group has opposed other measures that would change lease terms that would void personal responsibility clauses in leases or institute arbitration in rent increase disputes.

“The percentage increase in unpaid taxes is pretty astonishing and goes to show you that it’s not just residents and businesses that are in trouble,” Lodhi added. “We are all in this together and owners need some relief as well.”

The mayor’s office does not back the interest rate reduction.

“The city relies on property tax revenue to pay for essential services like education and public safety, and due to the pandemic, our overall revenue has declined by billions,” said Laura Feyer, a spokesperson for Mayor Bill de Blasio. “We are committed to exploring ways to help taxpayers and businesses recover to ensure New York City comes back stronger than ever before.”

Arkansas: Hospitality Owners Challenge Property Tax Valuations

The owners of a string of Little Rock-area hotels and motels have taken a shared property tax grievance to Pulaski County Circuit Court that could have implications across the state.

The basic bone of contention is whether the value of a hotel franchise, the banner or flag under which it does business, is a tangible or an intangible asset. Under Arkansas law, intangible property isn’t taxable for property tax purposes.

“They’re making an argument that we don’t agree with,” said Joe Thompson, chief administrator at the Pulaski County Assessor’s Office. “They’re saying the value of their franchise is intangible and that we shouldn’t be taxing that. If they set a precedent here, property owners in other counties will follow suit.”

The plaintiffs argue the taxable value of their 13 properties sprinkled across Jacksonville, North Little Rock, Maumelle and Little Rock should be lowered because the assessor is wrongly including the value of their franchise. The group represents about 10% of the estimated 125 motels-hotels in Pulaski County.

The group’s move to circuit court follows unsuccessful appeals to the Pulaski County Board of Equalization in August and County Judge Barry Hyde in December.

For now, the appeals are separated into 13 cases spread across the dockets of six judges: Herbert Wright, four; Mackie Pierce, three; Tim Fox and Alice Gray, two each; and Wendell Griffen and Patricia James, one each.

Pulaski County lawyers are attempting to get all the cases removed from court on constitutional grounds. They believe the appeals should be heard in another forum even though the Arkansas Constitution specifies circuit court as the next avenue for appealing property tax disputes.

“The new wrinkle is the county’s allegation that this is unconstitutional,” said Junius Cross Jr. of the Little Rock law firm of Newland & Associates, who is representing the 13 hotels.

The county’s argument: Assessment of property is an executive function. Because of the separation of powers doctrine, it is not within the province of state courts to assess property.

Under the separation of powers argument, the judiciary is the wrong branch of government to consider the appeal despite the provision in the state constitution.

“This provision requires a court to affirm or deny a petitioner’s alleged valuation,” according to the Pulaski County counterclaim. “To affirm a petitioner’s valuation requires the court to perform an executive function by assessing the value of real property.”

The county claims the proper venue for the appeal is the Arkansas Assessment Coordination Division, which is “granted the full power and authority in the administration of the tax laws of this state to have and exercise general and complete supervision  and control over  the valuation, assessment, and equalization of all property for ad valorem tax purposes, except common carrier property.”

In its response and counterclaim to the 13 cases, the county is asking for a ruling to declare the provision regarding circuit court’s involvement in the property tax appeals process unconstitutional.

“It will be interesting to see what happens in court,” said Junius Cross, attorney for the plaintiffs.

Texas: Samsung’s request to pay no property tax on $17 billion plant tests Austin’s incentive policy

Samsung Semiconductor is shopping around a $17 billion, 6.1 million-square-foot chip manufacturing plant, and if the tech giant chooses Austin, one of three U.S. locations under consideration, the project would be one of the largest single economic investments in Texas history. In return, Samsung has asked the city for a record tax incentive package for the plant—a 100% property tax rebate for 25 years, according to documents reviewed by Community Impact Newspaper.

According to the documents, the plant would come with $5.6 billion in construction costs and $11.4 billion worth of machinery and equipment. Samsung promises to create up to 1,993 jobs, of which 1,800 carry an average salary of about $100,000. The plant would be the largest single investment in the Austin region and easily surpass recent billion-dollar projects such as Tesla’s Gigafactory in 2020 and the Apple campus, announced in 2018.

A 100% property tax reimbursement over 25 years would mark the most aggressive corporate tax break in Austin history. What it equals in actual dollars is unclear. According to the documents, Samsung already rejected a 10-year agreement offered by the city that included nearly $650 million in property tax and other incentives. The offer by the city is nearly six times greater than all five of its active economic incentive packages combined.

A Dec. 9 analysis on the project from Impact Data Source estimated a 20-year, 100% Travis County property tax reimbursement would be worth about $718.3 million. The analysis used the existing Travis County property tax rate of $0.374 per $100 in valuation. Austin’s current property tax is $0.535 per $100 in valuation.

Spokespeople from the city and Samsung have declined to confirm any information regarding the deal as of press time. Community Impact Newspaper specifically asked Samsung whether the widespread failure of the state’s energy grid following winter storms Feb. 14 would affect the company’s decision, but Samsung did not comment.

Incentive deals such as this are often negotiated in secret to protect the sides’ negotiating positions. The public is only brought in after an agreement is reached and brought to City Council for approval. Some experts and members of the public have questioned offering a large tax break to a corporation bringing only 1,800 high-skilled jobs to an already humming economy. The project also runs counter to the city’s own commitment to focus its incentive program on assisting small businesses.

“Trying to get the big company to relocate in your community is actually kind of the opposite of what most of these programs should be,” said Nathan Jensen, a government professor at the University of Texas whose research focuses on economic incentive policy.

Chapter 380 of the Texas Local Government Code allows communities to offer public money grants “to promote local economic development and to stimulate business and commercial activity in the municipality.”

Five of Austin’s eight active Chapter 380 agreements are with corporations, such as Samsung, Apple, Visa and the property manager of The Domain development. The investment on behalf of the five corporations totals roughly $4.5 billion.

Although the region has recently attracted several major investments, from Tesla and Apple to the relocation of Oracle and the expansion of Google, the city of Austin has not struck a major economic incentive deal since 2017, when pharmaceutical giant Merck agreed bring a $28.7 million lab project in exchange for tax rebates estimated at $856,000. Merck later pulled out of the deal. Tesla’s Gigafactory deal in 2020 was outside city limits and included no city of Austin incentives. Apple’s 2018 deal to build a second campus was within city limits but only received property tax incentives from Williamson County.

Jensen said tax incentives for economic development should focus on correcting market failures. “What is [the market] not providing? There’s been some talk about food deserts. Maybe we should incentivize health care to come to our community or renewable energy,” Jensen said.

Austin political leaders have criticized the city’s deals as unnecessary. In 2016, the most recent data available, Austin paid $13.6 million in property tax rebates to seven companies, $9.9 million of which went to Samsung for its existing chip plant.

The latest Samsung deal represents the first test of the city’s new-look incentives policy. Rewritten in 2018, it sets a maximum incentive of 50% property tax reimbursement at five years for local expansion projects and 10 years for “external relocations.” However, the policy includes a crucial clause that allows consideration of “high-impact projects, unique developments and market competitive or other non- conforming projects” on a case-by-case basis.

Travis County is also revising its own incentives policy. In December 2019, the county adopted a strategy that recommends targeting small and medium-sized businesses. Earlier that year, county commissioners placed a moratorium on incentive deals after the Texas Legislature passed its 3.5% property tax revenue cap.

Sarah Eckhardt, county judge at the time, said the cap meant the county could not afford “preferential tax treatment” for wealthy corporate citizens.

However, the county has lifted the moratorium twice in the past year—to negotiate with Tesla, and, in January, to accept a tax rebate application from “Silicon Silver”, the name Samsung used in documents relating to the potential deal with the city.

Ellen Harpel, an economic consultant and founder of the Virginia-based firm Smart Incentives, said incentive deals allow communities to address specific economic development goals, such as creating more middle-skill jobs, revitalizing downtown or diversifying the economy. “Incentives should never just be about winning a deal or completing a transaction … It’s always connected to a larger economic development strategy; … it’s foundational,” Harpel said.

Aside from the failed Merck deal, Austin’s most recent corporate tax incentive deal was struck with Apple in 2012. Before Tesla in 2020, Travis County’s last deal was struck in 2014 with Charles Schwab. Most of Austin’s agreements, and half of Travis County’s, were reached between 2010 and 2012.

John Hockenyos, founder of economic firm TXP Inc., which consults the city on such deals, said during that time, governments were focused on recovery during the Great Recession. Hockenyos said the economy has since been “pretty darn good.”

Timothy Bartnik, a senior economist with the UpJohn Institute of Employment Research, said the influence of tax incentives in luring companies is “exaggerated quite a bit” and that governments should refrain from these deals unless they are in a distressed regional labor market. His analysis of tax incentive deals across the country showed companies that received government tax incentives were, in most cases, coming anyway— especially when the project was a local expansion.

Documents show Phoenix, Genesee County in upstate New York and South Korea are also contenders for the plant. Austin already hosts Samsung’s largest manufacturing plant in the U.S. In October 2020, the company bought more than 257 acres of land right next to the existing plant and rezoned most of it to allow for industrial use.

EUROPE

Ireland: Revaluation of Local Authorities deferred until 2022

Due to COVID-19, the Minister for Housing, Local Government and Heritage has today (24th February 2021) agreed with the Commissioner of Valuation that the Commissioner will defer the revaluation of rateable properties in the following local authority areas until 2022:

Clare County Council, Donegal County Council, Dún Laoghaire-Rathdown County Council, Galway City Council, Galway County Council, Kerry County Council and Mayo County Council.

New valuations arising from the revaluation of these local authorities will now be finalised in September 2022 and become effective for rates purposes from 2023 onwards.

The revaluations of these local authorities are part of an ongoing national programme to ensure that the rateable valuations of all commercial and industrial properties in Ireland are updated on a regular cycle so as to maintain relativity between individual ratepayers in the same local authority area. The purpose of revaluation is to bring increased transparency and equity to the local authority rating system.

Neither residential property nor agricultural  lands are rateable and  consequently are not affected  by revaluation.

Spain: What is IBI Property Tax?

IBI stands for Impuesto sobre Bienes Inmuebles: this translates to mean a ‘tax on property goods’ and you may also hear it referred to as SUMA tax. It is not a national tax, but rather one that is set and payable locally. All property owners in Spain have to pay their IBI property tax annually, and the rate that your IBI tax is set at will serve as a benchmark for all other property-related taxes in the country, which explains why it is so important to ensure your IBI value is correct.

The amount of IBI you will have to pay varies considerably between municipalities in Spain, as each individual townhall sets the amount. Malaga provides a great example of this, will homeowners in Torremolinos, Cártama and Rincón paying approximately 400 euros less in IBI tax than the owners of identical homes in Malaga city.

Nationwide, the amount of IBI property tax you will be is calculated as a percentage of the cadastral value of your property: this is the value of your property that is kept as a matter of public record. Whilst the word cadastral may be new to you, when you own property in Spain, they are words you will hear a lot! Cadastral is effectively the land registry and they will periodically revalue your property, changing that figure on official records. It is predicted that 90 percent of properties in Spain will be subject to this kind of revaluation in 2021.

The valor cadastral (land registry value) of a property is determined by its location, size, the value of the land, the land’s urban characteristics, the material cost of the building and its age, among other factors. This figure is hugely important because so much of your annual expenditure will depend on it: in terms of your IBI tax, the law dictates that municipalities can only charge between 0.4 percent and 1.1 percent of the value of the property as your IBI figure, although this can be increased to 1.3 percent in provincial capitals that offer a wider range of services and amenities. The amount of IBI property tax you will pay, then, will depend on both where you live and on the size and value of the property that you are living in.

Despite it being a fairly fixed figure, it is possible to pay less IBI Property tax. In order to achieve this, you should use your 20 digital cadastral reference number to check what value has been assigned to your property. If you feel that this value is too high, or notice any other discrepancies, then you can use this to have your property revalued, which will ultimately mean that you pay less IBI tax.

If your cadastral value is above your property value then that is not unusual, but if the difference is incredibly wide then the town hall may well allow you to invest in a reassessment. You will need to enlist the help of a legal professional in order to assess whether or not it’s possible to make this kind of claim: the paperwork will be extensive, as there is so often plenty of bureaucracy involved in this kind of process in Spain! Whilst it is technically possible to undertake this alone, it isn’t an easy process and therefore going solo isn’t recommended.

Think you are paying too much though? It’s definitely worth pursuing. The difference can be reimbursed retroactively for the excess that you have been paying over the years and having a lower cadastral value on your property will also impact the amount you will pay for other property-related taxes.

UK: Business rates holiday extended until end of June in England

The business rates holiday aimed at high street businesses forced to close during the pandemic has been extended for another three months, with big supermarkets heading off any criticism by promising to shun the new £3bn tax break.

The year-long business rates holiday, which was due to finish in England at the end of this month, has been extended by the government until 30 June. After that only businesses forced to shut this year would be eligible for a big reduction in their bills for the commercial equivalent of council tax. The relief is being capped at £2m, which will be a blow for non-essential retailers and pub companies with large property estates.

Last year Tesco, Sainsbury’s, Asda and Morrisons were among the big names who committed to repaying £2.2bn of the emergency taxpayer support. They were heavily criticised for accepting business rates relief while simultaneously paying big dividends to shareholders after their stores stayed open.

The rates relief was a blunt instrument deployed by the chancellor, Rishi Sunak, to prop up retailers barred from trading during the first lockdown. The rates holiday has already been extended for a full year in Scotland, with Wales yet to set out its plans. The government said businesses in England could “choose to opt out of the relief”.

The real estate adviser Altus Group put the cost of the three-month extension at £3bn. The lifeline would save hard-hit pubs, restaurants and hotels more than £600m but that would be less than the £760m of relief essential retailers such as supermarkets and DIY stores are entitled to.

Tesco, one of the biggest payers of business rates, said that when it returned £585m of rates relief for 2020 it had done so because it “was the right thing to do”. “Those same reasons still stand today and so we will not take advantage of the relief,” it added. Sainsbury’s, Asda and Morrisons said they would do the same.

UK: How can the outdated business rates system best be reformed?

Before the chancellor announced his new Budget, he warned he was kicking business rates reform yet again into the long grass, postponing his response to the consultation over reform until autumn – the fourth delay in a year.

We are in dire times; our economy has shrunk 10% from before the crisis and 700,000 jobs have been lost. Our borrowing is the highest ever outside wartime. Can we afford to wait?

The retail, hospitality and leisure sectors have been particularly hard hit. We hear of stores and pubs closing or companies facing administration. Of course, high business rates were an issue long before Covid reared its head; retail, hospitality and leisure businesses pay an unfair proportion of the tax – together around £12bn of the £26bn collected, a legacy of successive governments allowing the multiplier to rise to a 50% tax, the delayed seven-year revaluation and a total failure to introduce proper reform.

So, what is the chancellor doing about it? The extension of this year’s 100% business rates holiday for the retail, hospitality and leisure sectors for an extra three months and up to two-thirds business rates holiday for the following nine months is welcome. But is it enough?

We had called for at least a six-to-12-month full rates holiday, allocated on a needs basis, giving businesses proper time to recover from the impact of the pandemic. And the £2m cap per business will mean the relief after June will be very limited for many of the larger occupiers.

The chancellor also missed a trick in not extending reliefs to other hard-pressed companies that had not benefitted from business rates holidays. The government should accept that for many, Covid has been a material change of circumstance and agree to refund the 350,000-plus appeals now in the system – not brush them under the carpet.

And finally, the government must now gear up for proper business rates reform: to reduce the multiplier from outrageous levels of £0.51 to something manageable like £0.30, commit to frequent revaluations enabling rates to properly reflect rental levels and consider ways to plug the gap in local government finances. Considering a ring-fenced online sales tax or even council tax reform could be a good start.

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.