Member News, New York Related News

Update on Property Tax Issues: IPTI June 2017

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep members up to date with the latest developments in property taxes both 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).

European View

As far as Europe is concerned, this month’s report includes articles on Greece, Ireland, Israel and the United Kingdom. There is a separate IPTI report on the United States, with a focus on New York.

Greece: Gov’t gives up on farms’ objective value

The government has practically admitted its inability to calculate the taxable value of farmland by extending its exemption from the supplementary property tax for another two years, according to a new tax bill tabled in Parliament on Friday. The draft law also provides for the lifting of professional data protection for the professional categories it applies to, upon the request of the head of the Independent Authority of Public Revenue.

The supplementary tax is the property tax on top of ENFIA paid by owners whose properties add up to more than 200,000 euros in objective value terms. In 2015 the government and the country’s creditors extended the supplementary tax to include farmland too. However, this was not implemented in practice last year so farmland had to be exempted, and it will apparently be the same for 2017 and 2018 too, as the state has yet to find a reliable method of assessing its taxable value.

Last year farmland was only exempted from the tax just before the issue of the pay notices, as the projections made by the IAPR showed huge tax amounts that would inflict a major blow on farmers.

According to the relevant report by the State General Accounting Office, the exemption of farmland is set to lead to a total loss of state revenues amounting to some 460 million euros – a burden lifted off taxpayers’ shoulders.

The Finance Ministry actually claimed that the exemption was deemed necessary in order for taxpayers to have ample time to search through forest maps and make any corrections required to the classification and registering of their farms. Yet is it more than obvious that the ministry cannot calculate the tax and is trying to avoid the ire of farmers.

Separately, the new bill allows the IAPR chief to demand information on the financial transactions of a taxpayer under certain conditions from third parties previously bound by professional data protection laws. This concern both transactions with those taxpayers and those made through the third parties.

This clause mainly concerns lawyers and their relationships with their clients, as their code dictates they should not reveal any personal details on their clientele.

Greece: Property market rates are up to 70 pct below ‘objective values’

The divergence between so-called “objective values,” or property rates used for tax purposes and actual market prices, is as high as 70 percent in some cases, according to recent transaction data. It is a difference that continues to burden owners, buyers and sellers alike, even though objective values were adjusted downward a year ago.

Commercial values remain significantly lower, whether this concerns houses or commercial properties, and the difference is even greater in areas with high objective values, which are completely obsolete.

In the northern Athenian suburb of Palaio Psychico, for instance, a 350-square-meter detached house was recently sold for 1 million euros, while its objective value (on which the Single Property Tax, or ENFIA, is calculated) is set at 3.2 million euros. Similarly, in nearby Halandri, a 40-year-old flat was sold at 20 percent below its objective value, and a 1982 apartment in Argyroupoli, eastern Athens, was sold 31.25 percent below its taxable price.

Lefteris Potamianos, vice-president of the Athens-Attica Estate Agents Association, explains to Kathimerini that the larger a property’s surface and the more exclusive its location, the bigger will be the difference between its market rate and objective value.

“This is due to the fact that objective values are calculated according to parameters such as the properties’ size and the qualitative features of each area. Therefore, while in the eyes of the taxman a property may appear expensive, in practical terms this is not reflected in the going rate, as the market remains at very low levels,” says Potamianos.

The situation exacerbates the injustice owners suffer as they continue to pay taxes based on high objective values, which they are unable to capitalize on as they are far from the market reality.

The gap between taxable and market rates remains wide despite a ruling last year by the Council of State that forced an adjustment. This is because the implementation of an automatic adjustment system that would match objective values to market prices has not gotten off the ground yet, even though it had been a prior action demanded in the government’s previous midterm fiscal plan. The latest deadline set for the system to start operating is January 1, 2018, but no one is certain it will be ready by then either.

Ireland: ‘Grossly unfair’: Farmers should have to pay more property tax says former minister

McDowell said the current system is ‘grossly unfair’ and described it at as a ‘ticking time bomb’

People with very large farms should have to pay more in their property taxes former Justice Minister and leader of the Progressive Democrats Michael McDowell has said.

Speaking in the Seanad, he said gave the example of two families, one of whom lives in a small red-brick terraced house Dublin, and who could have a 90% mortgage on a house which cost them between €450,000 and €500,000.

The other family, he said could live in a 6,000 sq. ft. restored Georgian or Victorian villa in the midlands and they would be liable for the same amount.

“The family in Dublin, might have a mortgage of 80pc or 90pc on their house whereas the family in the midlands might have none and might also have a farm of 300 acres but would contribute the same amount as the family in Dublin to their local authority.

“The unfairness of all of this is that the tax does not in any sense reflect the actual wealth of the owners, in particular if there is a 90pc mortgage,” he said.

McDowell said that there is a way to deal with this, that is, to provide for a different system of valuation and banding of houses in local authority areas so that, if one does live in a very substantial house outside Dublin, one should pay more to the local authority, and if one has a very large farm, one should pay more to the local authority than a family in Dublin in those circumstances.

McDowell said the current system is “grossly unfair” and described it at as a “ticking time bomb”.

“The time has come for us to address this unfairness. People in different parts of the country are being treated unequally and people who are of modest means and who struggle to make a living in this city are being treated unfairly compared with people elsewhere,” he said.

Ireland: ‘Aggressive’ site tax needed to force speculators to build

“Use-it or lose-it” taxes to force land hoarders to release sites needed for housing must be pitched “aggressively” to be effective, an expert has warned.

The head of Nama dramatically accused funds, which his agency sold billions of euro worth of property assets to, of now hoarding the lands to beef up their profits.

Just 6pc of land bought from Nama has been built on, according to CEO Brendan McDonagh, who was speaking at the launch of Nama’s annual report yesterday.

He said the agency had sold enough land to build 50,000 homes but so far only 3,000 had been delivered.

Property owners who sit on land as house prices go up will pocket fat profits, he said, because their other costs are not rising.

There may be other reasons housing construction is so slow, he said. But he said hoarding by landowners was a significant factor.

“That is a huge issue in my view,” he said.

The bulk of assets sold by Nama were bought by US investment funds, including so-called vulture funds, in huge tranches.

Finance Minister Michael Noonan, who also spoke at the Nama event, said the attorney general had raised constitutional concerns about previous attempts to tax development land into use, but said the way was now clear for action.

A vacant site levy was the best approach to punish land hoarding, he said.

“It can be brought in now,” he added.

He indicated that his successor would bring in a new levy in the Budget for next year.

Mr Noonan is due to stand down later this month, but he said he expected the Government would bring in the tax on empty development sites.

“People who are sitting on land as an asset will find themselves sitting on a tax liability,” he said.

He posed an annual charge of 1pc, 2pc or 3pc a year to incentivise land hoarders to sell.

Legally, any levy would have to be “proportionate”, including to social needs, he said.

Economist Kieran McQuinn of the ESRI said a more punishing levy was needed to force speculators to use zoned land for housing.

Landowners currently can hoard undeveloped land at little cost other than keeping planning permits up to date, and are rewarded as prices rise, Prof McQuinn said.

“I’d look to be more aggressive,” he said.

In Denmark, where a successful scheme is in place, the rate of the levy increases as property prices rise, Mr McQuinn said.

It means the levy varies from place to place and time to time, and is most penal for landowners where housing is most in demand.

Landowners who cannot afford to develop their sites are effectively forced to sell on the property to builders who can.

A vacant site levy is already due to come into force next year, but it’s targeted at derelict sites, rather than zoned land and sites with planning permission.

Meanwhile, Nama itself said it expected to make a surplus of €3bn once its last assets had been sold off. That is €700m more than previously expected.

The bulk of cash raised by Nama to date has gone to the banks – the final balance will be paid back to the Exchequer.

Nama reported a profit for 2016 of €1.5bn yesterday. It repaid €5.5bn of debt the last year.

Mr McDonagh dismissed speculation that the agency could be wound-up early. “Nama isn’t done, we still have three years of hard grind,” he said.

Israel: Double rates on unoccupied homes extended

Minister of Internal Affairs Aryeh Deri has decided to extend an administrative order imposing double municipal property tax on unoccupied housing units. The order authorizes municipalities to charge double property tax on housing that is unoccupied for a large part of the year. The order was originally issued in 2014, and Deri wants to extend it. The matter will now be sent to the Knesset Finance Committee for approval.

The Ministry of Internal Affairs today said that the decision to extend the administrative order was designed to continue the incentive for owners of unoccupied housing to let their housing units. “This measure will increase the supply of housing units for rent, and significantly lower high rents. Many unoccupied housing units are owned by foreign residents who use them as vacation homes, and are little used during the rest of the year. The majority of them are located in large cities. Subject to approval by the Knesset Finance Committee, local authorities will be able to charge double municipal tax rates on residential properties not being used.”

Commenting on the measure, Deri said, “Due to the housing crisis and high rents, we must employ various measures to help the public and restrain prices. High municipal property tax rates on empty housing units will constitute an incentive for owners of housing units, which are closed for most of the year, to open them to the rental market and increase the supply.”

One of the most prominent cities in which a large number of unoccupied housing units was found is Jerusalem. Jerusalem Deputy Mayor Ofer Berkovitch welcomed the decision to extend the administration order, saying, “The decision will enable the local authorities to continue to combat this unacceptable practice, which harms the economically disadvantaged and middle class people who are not homeowners. Continued activity and stepping up measures will put an end to the phenomenon and put many more housing units on the rental market. Over the past two years, we are seeing a significant slowdown in activity on the housing market by foreign residents as a result of these measures, and we must continue acting in full force and escalating the sanctions.”

The decision to extend the administrative order was taken by the National Housing Board last year, but has not been implemented up until now, because the minister of internal affairs did not sign it. Now that it has been signed, the local authorities will be able to continue imposing double property tax on housing that is not used more than nine months a year.

United Kingdom: British business demands concessions from May as economic confidence slumps

British business must be at the heart of the government’s decision-making after Theresa May’s disastrous snap election dented economic confidence, business leaders have said. Among the demands emerging are for the Government to scrap or reduce business rates and expand the annual investment allowance to ward off an expected slide in capital spending, and for an accelerated roll-out of ‘sector deals’ under the industrial strategy to offer incentives and for red tape to be cut in key sectors of the economy.

After an election campaign in which business issues were largely absent, professional groups and trade bodies are now champing at the bit to get their voices heard and to shift the minority government’s agenda towards more pro-business policies. Andy Silvester, deputy director of policy at the Institute of Directors (IoD), told The Telegraph: “Business was the dog that didn’t bark – now it has to be heard loudly. It must be front and centre of the Brexit negotiations.”

Mr Silvester said the Government should take action to encourage businesses not to postpone big spending decisions: “In normal times you’d look to a post-election Budget – an expansion of the annual investment allowance would be a real boon to small and medium-sized businesses.” He also called for an acceleration of the roll-out of so-called ‘sector deals’ under the industrial strategy for key industries including life sciences, saying it was “absolutely critical the Government’s domestic agenda continues”.

Business leaders said the Conservatives’ loss of an overall majority could conversely provide an opportunity for a more business-friendly policy platform and the ditching of unpopular interventionist proposals from May’s manifesto. One, who preferred not to be named, said: “If a lot of the Tory manifesto didn’t happen my members wouldn’t be upset”.

Commenting on the Queen’s Speech, Adam Marshall, director general of the British Chamber of Commerce (BCC), said: “The Queen’s Speech need to get the basics right and shore up the foundations of the economy. “They need to look at the measures and take forward those that make a positive impact, and pause those which may undermine business confidence. This is not the time to be proposing significant interventions.”

Both the BCC and the Federation of Small Businesses (FSB) called for the business rate system – which rakes in more than £30bn a year for the Treasury – to be scrapped or reformed.

Mike Cherry, national chairman of the FSB, called for the Government to “put small businesses at the heart of its thinking”, as well as for a pledge that there will be no tax raid on the self-employed, as proposed and then dropped in Chancellor Philip Hammond’s Spring Budget.

The comments came as sterling fell to a new seven-month low against the euro today, dropping as low as €1.1280, down almost one euro cent, as May’s Government postponed the Queen’s speech to hammer out a deal with the DUP.

Credit rating agencies Moody’s and S&P published warnings on the UK economy earlier today, coming hot on the heels of an IoD survey over the weekend showing plummeting business confidence, with 57pc of respondents either quite pessimistic or very pessimistic about UK economic prospects.

United States View

New York City and State – When The Largest Taxpayers Leave Town:

In previous issues we have highlighted the massive impact that the “dark store” concept has had on property taxes around the country. As is becoming more widely known each day, the exponential growth of online shopping has dealt what some say is a death blow to traditional brick-and-mortar retail, especially the “big-box” chain stores that sprouted virtually nonstop across the US from the 1980s though the present. High-end and boutique retail—meaning those that pay the highest per-square-foot rent and thus generate the highest taxes per-square foot—is being impacted as well. What this portends for the future of the property tax base as a deep and reliable source of government revenue remains to be seen, and we will revisit developments in this arena in future issues.

The “dark store” concept may not necessarily be limited to retail properties. Early in 2017, the Governor of the State of New York entered into an agreement with Entergy, the owner of the Indian Point Nuclear Power Plant, to cease operations in the year 2021.

For many years, people across a wide spectrum—environmentalists, safety advocates, economists, and politicians—had advocated strenuously for the closure of Indian Point, an aging nuclear plant located just one hour from the epicenter of New York City. The objections included, among other things, the possible widespread devastation from an accidental release of radiation which might not affect not only New York City, but a total estimated 20 million people within the densely populated “tristate” area, as well as heightened post-9/11 concerns about terrorism.

That said, the announced closure took many by surprise, including the localities that rely so heavily on the plant for tax revenue. By some estimates, the school district in which the plant is located obtains one-third of its revenue from the plant’s tax payments, and the village in which the plant is located receives almost one-half of its operating revenue through the plant’s tax payments. This has left local and state politicians and administrators, as well as economists and other interested parties, scrambling to come up with a workable replacement for so much lost tax revenue in a relatively short time.

There are many proposals floating right now. Crafting a solution to replacing major property tax revenue stream permanently, fairly, and before the loss of such revenue has a deep and lasting impact on the local economy, as well as property values and school quality (the two often go together), will prove to be a significant challenge. In subsequent issues we will update you on interesting developments in this area, including how other jurisdictions have addressed/are addressing the loss of property taxes as power plants are shuttered.

Around the U.S.-
Effective Tax Rates—An Important Piece Of The Property Tax Puzzle:

The effective tax rate measures the tax bill as a percentage of a property’s market value. A report just published by the Lincoln Institute for Land Policy and the Minnesota Center for Excellence presents research on the effective tax rate in over 100 U.S. cities. The report is available for download at: https://www.scribd.com/document/348864485/Lincoln-Institute-of-Land-Policy-s-comparison-of-2016-property-taxes#download.

This report is recommended reading and reference material for everyone in the property tax and property valuation fields, as well as urban planners, policymakers, economists, and those simply wishing to learn more about the relationships among property taxes, property values, and local economies.

As the report’s authors cogently point out, the effective tax rate alone cannot be used to measure the health or fairness of a given local property tax system, but it is nevertheless a key element to take into consideration, and can help one to understand more fully about topics such as the local government’s reliance on property tax for revenue, how it views and partakes of alternative revenue options, its decisions as to spending for public service. The report also discusses the impacts of reliance on property taxes, and the ramifications of favourable property tax treatment, whether in the form of exemptions or favoured classifications.

Texas:

The Governor of the State of Texas has recently signed into law four bills aimed at making property tax processes, such as error correction and appeals, more streamlined and efficient. These provisions are in keeping with a trend around the U.S. over many years aimed at increasing the ease, accountability and transparency of property tax systems.

On that last point, some local governments have learned that transparency does not necessarily equal fairness, and certainly does not translate to lower property taxes. A huge data dump onto the assessor’s website, for example, is not unwelcome but is not automatically a problem-solver. In fact, it may only serve to highlight and lay bare previously unrealized inequities. Such jurisdictions indulging in the more-is-better idea ought to consider studying their data alongside with their citizenry and fiscal watchdogs, to both identify problems in the making, and to hopefully become part of the dialogue over possible solutions.

Pennsylvania:

The Pennsylvania Coalition of Taxpayer Associations (“PCTA”), an alliance of eighty-seven nonpartisan grassroots Pennsylvania taxpayer advocacy groups throughout the state, is supporting proposed legislation aimed at eliminating property tax.

The legislation—House Bill 76 and Senate Bill 76, also known as the Property Tax Independence Act (“PTIA”)—is said by its proponents to enable the complete replacement of property taxes via increases in income taxes and sales taxes. Furthermore, they say that although school district debt service will continue to have to be dealt with even after elimination of property taxes, this will no longer be a problem once that debt is retired. This raises the question of how new capital projects for school districts will be funded.

Supporters of the PTIA say that the current property tax system in Pennsylvania penalizes senior citizens with limited incomes and no children in the local school district, the state’s agricultural sector, and young families.
On the other hand, they argue that the sales tax bases are stable and sustainable, and that it will in fact grow as more disposable income is freed up by the elimination of property taxes.