Update on Property Tax Issues: IPTI May 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). As far as Europe is concerned, this month’s report includes an article on Norway and a focus on the United Kingdom where a general election has been announced. In addition, there are articles concerning the United States, with a focus on New York.

Norway: Oslo municipality brought to court on property tax

If the municipality requires a property tax, it must apply to most homeowners, not just a few, according to the home owners’ association.

The association has filed a group complaint against the municipality of Oslo on behalf of more than 3,500 homeowners. The case is scheduled in the District Court from Monday to Wednesday next week.

– The property tax is construed such that between 70 to 80 percent of homes are exempt.

– We believe it is not legal to have a property tax that exempt such a large proportion of properties, says, head of the judicial department, Anders Leisner.

Oslo municipality introduced a property tax in 2016. The tax exemption limit was set at NOK 4 million, thereby targeting a mere 20 percent of the households.

Leisner says no other municipalities have such a high limit. The so-called ‘Red-Green’ city council in Oslo uses the property tax to carry out a redistribution policy, but it is only the Parliament that is allowed to do that, according to the lawyer.

A political question

It is the Assistant County Attorney, Trine Riiber, who will settle the case on behalf of the municipality.

– The municipality of Oslo believes that the property tax is legally enforced, as municipalities have a great deal of discretion in the design of property tax, and that the size of the tax exemption limit is a political issue where the courts cannot overrule the municipalities, Riiber told NTB.

United Kingdom: Conservative party promises a full review of business rates

The Conservative party has responded to concerns about business rates in its manifesto today, promising more frequent re-evaluations of the property tax and a full review of the system.

Business rates were revaluated for the first time in seven years in April, and rocketing tax rates in London caused outrage among many businesses.

Helen Dickinson, chief executive of the British Retail Consortium, said that while more frequent business rates re-evaluations were welcome, the system for valuing properties must be more robust and efficient.

Sir Peter Rogers, chairman of the New West End Company, said it was “reassuring” that Prime Minister Theresa May was announcing a review of the business rates system. However, the review must be “far-reaching”, he said.

“It is not fair, it is not progressive and it is clearly not based on ability to pay,” he said. “Moreover, it fails as an efficient way for businesses to contribute to the ever-rising financial requirements of local government services.”

However, not everyone was delighted with the idea of another consultation.

Jerry Schurder, head of business rates at Gerald Eve, said:

Firms will roll their eyes at the prospect of yet another structural review. They have given their views on business rates over and over again – at least five times since 2013 – and it’s high time this information was acted on.

Companies don’t need more consultation, they need genuine reform of the rating system and they need it now.

United Kingdom: Labour Manifesto 2017: What is a land value tax? How would it work?

For residential property, home owners would probably pay a tax based on the value of the house. Firms would pay a tax based on the value of the business premises, including the land

The Labour general election manifesto talks of a land value tax.

“We will initiate a review into reforming council tax and business rates and consider new options such as a land value tax, to ensure local government has sustainable funding for the long term.” (p86)
But what is a land value tax? How would it work? And who would pay it?

It would do what it says: impose an annual tax on land based on its market value.

So for residential property, home owners would pay a tax based on the market value of the house (since this would generally reflect the value of the underlying land). This would replace the council tax.

Meanwhile, firms would pay an annual tax based on the value of the business premises, including the land. This would replace business rates.

Wouldn’t it be a bureaucratic nightmare to value all the land in the country every year?

Not really. Business properties are already valued regularly (although not as frequently as they ought to be) by the Valuation Office Agency to determine business rate liabilities.

There is no reason why this could not be tweaked to cover business land values and also why the same could not be done by the VOA for residential properties. A wealth of online data from estate agents should make it easier for assessors to get it right.

How is this different from council tax?

Council tax is a regressive tax system which (for historic political reasons) means that those with lower value properties pay a larger share of the value of their property in tax each year than those in higher value properties.

Presuming a new tax were levied as a flat percentage of the value of the land, then those with property in the most expensive areas (or the largest amounts of land) would pay more because the market value of their asset would be higher.

Would this mean landlords would have to pay the tax, rather than residential renters?

It might if the levy was designed in that way. But one would expect landlords to fully factor the tax into rents, meaning that renters would not really be any better off in the end.

And business tenants?

As with a residential land tax, if the landlord was liable to pay it, business tenants could expect to see their rents rise commensurately.

There would also be an important difference from the existing business rates system: a land value tax would be based on the full value of the commercial land, not just the buildings.

What do economists say about the tax?

It has a lot of support. Taxing land is seen as practical and non-distortionary because land is an immobile asset. A wealthy person can’t move his or her land offshore to avoid the tax inspectors in the way that they can with stocks and shares.

It is also seen as efficient because it encourages landowners to use the land as productively as possible. The Institute for Fiscal Studies is pushing for business rates (on property) to be replaced with a full land value tax since this should encourage landowners to develop their land.

Land value taxes are also widely seen as fair, since urban land and residential property market values usually rise due to improvements in local infrastructure, which are paid for by all taxpayers. Under a land value tax, some of this uplift in wealth flows to the local community rather than accruing entirely to the lucky landlord.

Where does the idea come from?

It is commonly associated with the 19th century American economist Henry George, who recommended that taxes on land should replace all other taxes.

In Britain the Liberal government in the early 20th century came close to establishing a form of land value tax. Winston Churchill (who was then a Liberal) made a famous speech in Parliament in favour of a land value tax in 1909 in which he stressed the socially equitable nature of the levy:

“Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.”

United Kingdom: Branson & Paphitis urge new government to cut business rates

Business rates need to be tackled by the next government to boost small firms, according to two of Britain’s best-known entrepreneurs, Sir Richard Branson and Theo Paphitis.

Theo Paphitis and Sir Richard Branson said business rates need to be tackled by the next government

Hundreds of thousands of restaurants, shops and other businesses, large and small, across the country were left facing higher business rates bills last month, after the first revaluation of the tax for seven years.

A £300 million support fund was announced by Chancellor Philip Hammond in March and was supposed to be up and running by the end of April.

The General Election has delayed it as it will be up to the next government to respond to the consultation on the fund.

Billionaire Virgin Group founder Branson said that regardless of who is in office after the election, they need to provide help for smaller companies to deal with the increase in business rates.

“I am keen to see the next government giving small businesses as much support as possible”. He said, adding: “I don’t get involved in party politics, but I am keen to see the next government giving small businesses as much support as possible.

“This should include business rate relief and free trade access to Europe to help entrepreneurs in their early years.”

Paphitis went further and said that without cuts and reforms to business rates, the High Street will continue to die off: “Business rates need changing, they should be a priority.

On Tuesday new data from the Office for National Statistics is expected to say that consumer price index inflation climbed sharply in April, from 2.3 to 2.6 per cent, while on Wednesday it is tipped to say that the jobless rate in March held steady at 4.7 per cent.

United Kingdom – Scotland: Finance minister rejects SNP MSP’s call to extend business rates review

Scotland’s finance minister has insisted an ongoing business rates review must report back to him by July, snubbing a fellow SNP MSP’s call to extend the time frame.

Convenor of Holyrood’s local government committee Bob Doris wrote to Cabinet Secretary for Finance Derek McKay to ask him to reopen the Barclay Review’s consultation because it overlooked the thousands of non-commercial taxpayers who also pay non-domestic rates (NDR).

Rateable values are changing for the first time since 2010 after a national revaluation by The Scottish Assessors’ Association, which could see some firms face increases of up to 400 per cent.

Former RBS chair Ken Barclay, who is leading the review, recently admitted to Mr Doris’s committee he had not spoken to any public sector bodies in the course of his work, only businesses.

The public and third sector contributed more than £1bn of the £2.8bn raised in NDR for council services last year.

Bob Doris MSP said “there is merit in the consultation being extended, to allow for more robust and effective engagement”. Mr Barclay is due to report back to the finance minister in July.

In a letter to Mr Doris, which was copied to Mr Barclay, Mr Mackay said: “The Barclay review made an open call for submissions last year from July to October, which was open to all to respond to. I am aware that several public and third sector bodies responded along with a range of business groups and individuals, which was followed up with a range of face-to-face meetings around the country.

“Noting the review group is independent from the Scottish Government, I understand it is continuing to accept evidence and further engaging the public and third sectors via separate meetings to supplement the input received to date and inform its recommendations.

“In conclusion, the committee has my firm undertaking to engage fully on any wider scrutiny of non-domestic rates, and the strategic time to do that is once the Barclay review concludes, which is expected around July 2017.”

The decision was welcomed by the director of the Scottish Retail Consortium, David Lonsdale, who said: “It is fifteen months since the First Minister unveiled who would lead the Rates Review and her Finance Secretary’s refusal to countenance any delay is absolutely spot on.

“There is an urgent need to recast business rates for the decade ahead, in order to deliver a reformed system which is modern, sustainable and competitive.

“A fundamentally reformed rates system and substantially lower tax burden would increase retailers’ confidence about investing in new and refurbished shop premises, create jobs and help revive high streets and town centres.”