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 articles on Germany, Greece, Ireland, and the United Kingdom. There is a separate IPTI report on the United States, with a focus on New York.
Germany: Property Tax System Not Fit for Purpose
Germany’s Constitutional Court recently ruled that the country’s property tax system needs an overhaul. Replacing the existing system is going to be complicated – and expensive.
When the Federal Constitutional Court finally spoke, its verdict didn’t really surprise anyone. After all, it has been clear for years that Germany’s property tax system needs an overhaul. Almost as soon as the verdict was announced, market observers and experts quickly dusted off familiar proposals for a new property tax system. Unfortunately, none of their proposals has yet gained widespread support. This may, in part, be due to the fact that politicians can’t seem to agree on how the tax should actually work. Should it be based on the precise value of a property? Or is it enough to base property tax assessments on rough estimates, as long as everyone is treated consistently? And could the opportunity for reform also incentivise the development of new housing?
Let’s take a look at the four main alternatives to the current system:
Model 1 – Despite the court’s ruling, legislators are, in principle, free to stick to the existing model – provided they replace the standard values they use as the basis for calculating the property tax with current market values. Revaluing more than 35 million properties would be a truly herculean task and, according to Germany’s tax authorities, would take up to ten years. Some of Germany’s northern states have suggested that the process could be made easier if they were allowed to use more general figures, as is normally the case for such mass surveys. They would like to use the sales prices of comparable properties, combined with specific criteria such as year of construction, size and construction standard. Nevertheless, the effort would be considerable. A feasibility study arrived at costs of EUR 1.8 billion, plus EUR 220 million per year to update the figures.
Of course, things would be easier once the system is up and running and a suitable database is available. There are already more than 1,000 expert valuation committees around Germany determining standard land values, and many cities already have rent indexes. Data can also be harvested from local tax offices and land registry offices. Nevertheless, it would still be a huge undertaking to network all of these existing databases to allow property tax assessments to be produced at the push of a button.
Model 2 – A pure land tax would be a far simpler system to administer. A land tax would be based on the actual size of a parcel of land, which is fairly easy to determine. It could tax the value of the land and ignore the value of any buildings on the land. The system wouldn’t add much more red tape, because the existing standard land values are a good enough basis for land tax assessments. The only downsides are that the owners of detached houses, particularly in expensive locations, would probably end up with higher tax burdens as a result, as would the owners of undeveloped land. In contrast, apartment building owners would probably face lower tax burdens as their properties occupy relatively little land. A land tax would have the added benefit of encouraging developers to prioritise more compact buildings. This could be a positive political argument in times of ever scarcer housing, even if the property tax alone is not likely to be high enough to steer the real estate market in one direction or another.
Model 3 – The most politically advanced alternative is the fiscal cost approach (Kostenwert Modell). In fact, the Bundesrat (the Upper House of the German parliament) presented a bill to this effect at the end of 2016, although it was never implemented. The proposal envisioned a fairly minor change to the current system: Instead of basing tax assessments on the value of a property, they would be based on the standardized manufacturing cost of constructing a similar property. The key factor here is the year the property was built, which would form the basis for calculating how much a building type would cost. In principle, this sounds reasonably fair, because the owners of higher standard properties would pay more property tax.
Critics consider this model counterproductive, however, because new buildings would be taxed at a much higher rate, thus penalising investments in new housing. Modern buildings, for example, are subject to higher energy standards – a factor that would be included in the new tax assessment. Older buildings, on the other hand, not only benefit from lower assessed values, they are also allowed to reduce their assessments by up to 70 percent in the form of age-related depreciation. Compared to a mid-terrace house from 2018, a chic Wilhelminian style villa would be relatively cheap, which is not exactly a positive signal to send out the developers of new housing. In addition, this fiscal cost approach would be fairly complicated and expensive to introduce and administer.
In addition, this model has legal risks of its own: A number of tax law experts have already analysed the proposal and concluded that it would also be likely to be overturned by the constitutional court.
Model 4 – The “Southern Model”, named after the states of Bavaria, Baden-Württemberg and Hesse who first proposed it, would be something of a hybrid approach. It would also require no new evaluation of the country’s real estate, because only the areas of land and buildings would be fed into the tax system. Of course, this would not be completely straightforward. While the sizes of plots of land are readily available, it would not be quite so easy to calculate the entire area of each building. With this model, multi-family houses would be potentially worse off than single-family houses. Whether their owners would really end up paying more than today, however, is questionable.
Greece: Property tax hikes on the cards with the new objective values
The Greek real estate map will be undergoing some serious changes this month when the new objective values are to be published. The new rates used for tax purposes will have an effect on 21 taxes and levies imposed on properties, with many owners facing addition costs, not only for the Single Property Tax (ENFIA), but also for ownership transfers, inheritances and parental concessions.
It is also possible that the municipal levy will go up from 2019, though local authorities will likely postpone the decision until after the local elections of 2020. Since the introduction of the ENFIA tax in 2014, this will be the first time it will increase, as over 1 million owners will have to pay between 3 percent and 30 percent more.
According to sources the biggest hikes are expected in low-rate parts the capital, where the zone price will soar from 600 to 1,000 euros per square meter. The latest information (unless there is some form of political intervention) points to an annual ENFIA increase in the areas of Drapetsona, Keratsini, Renti, Perama and Elefsina – among the region’s poorest districts – that will be far above the expected figure of 20 euros at around 80-100 euros per property.
The hikes in these densely populated areas, revealed by Finance Minister Euclid Tsakalotos himself who told SYRIZA deputies that 15 percent of owners will see an increase, including those in low-rate areas, while the bill will be even heavier for tourism destinations such as Myconos, Santorini and parts of central Athens. There will be no change in the ENFIA that 67 percent of owners pay, while just 18 percent will see a decline in their dues thanks to a drop in their local zone rates.
Provisional ministry data also show that there may be some leeway for easing the burden on large property owners by raising the threshold for the supplementary property tax from 200,000 to 250,000 euros, as the country’s creditors have proposed. The latter have rejected the government’s intention for a gradual increase in the objective values across two or even three years.
Up until 2017 there were 500,000 property owners who paid the supplementary tax, which amounted to 630 million euros in total. Their total assets were valued at 607.61 billion euros, according to the old objective rates.
Ireland: Ibec calls for ‘site value’ tax to replace commercial rates
Ibec’s report on housing claimed a “dysfunctional” housing market is harming “quality of life of many people and undermining Ireland’s economic prospects”.
The Better Housing report, prepared jointly by Ibec and Property Industry Ireland, said that pent-up demand would lead to 50,000 households needed in the short-term alone, while more than 80,000 additional workers were needed in the construction sector because of “huge skills shortages”.
The organisation called for the introduction of government interventions to drive down the cost of development land, and a new site value tax to replace commercial rates and the vacant sites levy by “overhauling property-related incentives and taxes”.
Other measures called for include the easing of height and density restrictions, more social housing and a reduction in spending on housing assistance.
The report said: “Attraction and retention of talent is now the single biggest challenge facing Irish business. It is concerning business leaders in most regions and sectors of the economy and is particularly acute in our main cities.
“Inadequate supply of affordable and quality housing is one of the main factors impacting on talent availability. Ireland’s housing problems have now clearly moved beyond being the social issue of our time and have also become a major risk to our future economic prosperity.”
The planning system is not functioning effectively and is a major frustration to business, the report said.
“Unless urgent reform is delivered, we risk long-term damage to our hard-earned reputation as a great country in which to invest and do business.
“We need a radical rethink of our planning approach to height and density in order to bring our cities into line with international norms,” it said.
The report came as Ibec introduced its Better Lives, Better Business national campaign, which it said would concentrate on housing, infrastructure, planning and sustainability.
Chief executive Danny McCoy said: “Ireland’s ability to attract and retain talent as part of our inward investment strategy is being eroded by a range of problems that are damaging the quality of life of our people including housing shortages, access to essential services and traffic congestion.”
United Kingdom: 133,000 business rates appeals remain unsolved, says LGA
More than 133,000 businesses are still waiting for an appeal of their business rates valuation from 2010 to be resolved, council leaders have revealed.
More than a million businesses have challenged their business rates bill since 2010. The Local Government Association said figures published this month show 133,060 appeals have still yet to be ruled on.
Councils do not set business rates or rule on challenges by businesses making appeals. But the result of appeals is that councils must put money aside from delivering the services that local taxpayers pay for and expect until appeals are decided.
The LGA said councils have been forced to divert £2.5bn away from stretched local services over the past five years to cover the risk of business rates appeals, as they have to fund half the cost of any backdated refunds.
Ahead of a Westminster Hall Debate today (13 June) on business rates, the LGA is calling on the Government to take the financial risk from business rates appeals away from local government.
The LGA said government plans to allow councils to keep more of the business rates they collect, a move which has been long-called for by local government, makes it even more imperative for reform of the system to protect councils from the growing and costly risk of appeals. This is because they may become liable to pay back even more of the cost of any backdated refunds.
Council leaders are also recommending a time limit for appeals, except in exceptional circumstances. In Scotland, there is a six-month time limit for businesses to appeal their valuation.
Cllr John Fuller, vice chairman of the Local Government Association’s Resources Board, said: “Ongoing delays in tackling business rate appeals from 2010 are heaping further financial uncertainty and pressure on our local services at a time when every penny counts towards giving councils the best chance of protecting services over the next few years.
“It is right that a business is able to challenge their valuation if they genuinely believe it to be incorrect.
“Despite not setting business rates or ruling on appeals, councils are having to take billions of pounds away from already stretched local services, such as adult social care, protecting children and supporting businesses and boosting local growth, to cover the financial risk and uncertainty arising from this backlog of appeals. This is completely unfair.
“As we move towards a system where councils will keep more of the business rates they collect locally, communities need to be protected from the shifting of resources to address the risk of business rates appeals. With local government in England facing an overall funding gap that will exceed £5 billion by 2020, this money is needed to fund vital services and help plug growing funding gaps.”
United Kingdom: Scots firms pay £200m more in business rates than English counterparts
Scottish businesses are now paying almost £200m more in taxes than their counterparts in England according to figures released by the Scottish government.
Official figures, released following a parliamentary question from Conservative MSP Bill Bowman, reveal Scottish firms will have paid an additional £191.4m by the end of this financial year since the Scottish government increased the large business rates supplement in 2016.
The £191.4m figure represents a 5% increase on the amount the Scottish government said businesses would pay three months ago.
The SNP doubled the rate of the supplement that larger firms pay, from 1.3p in the pound to 2.6p, two years ago. It remains at 1.3p in England. The levy is in addition to the poundage for non-domestic rates for larger businesses.
The figures show high street retailers are the hardest hit by the levy and will have paid over £43m more than shops of a similar size elsewhere in the UK over the past three years.
Industrial premises will have paid an additional £32.3m to the Scottish government by the end of this financial year. Utility businesses will pay a further £33m, while offices face a £26.5m bill.
The additional cost for Scottish firms has caused fresh fears that the nation’s insipid growth will be weakened further.
Scotland’s high streets are struggling amid increasing household debt, less disposable consumer income, and a fall in footfall.
David Lonsdale, director of the Scottish Retail Consortium, said: “We’ve yet to hear a convincing explanation as to why firms here in Scotland are better placed to be stumping up more in business rates than competitors or counterparts in England. This has created a Scotland-only surcharge, which is costing firms £64.7m this year, of which retailers account for £14.1m.”
David Melhuish, director of the Scottish Property Federation, said: “Having a higher large rates supplement leaves Scotland at a real competitive disadvantage with the north of England for businesses that require offices and industrial premises. We need realignment with England to ensure we can compete.”
The Barclay review into Scottish business rates described the decision to double the rate as “damaging perceptions” of Scotland’s competitiveness.
A Scottish government spokesman said: “We accepted the vast majority of the recommendations of the Barclay review of non-domestic rates, with additional pro-growth measures. We will review the level of the large business supplement at each future budget.”