Member News

Update on Property Tax Issues: March 2019

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).

The first article below covers both the USA and Europe.

 

If a Wealth Tax is Such a Good Idea, Why Did Europe Kill Theirs?

In late January, Senator Elizabeth Warren, who’s in the race to become president in 2020, added a new kind of tax to the American conversation, causing anxious pacing on superyachts in every port: a wealth tax. It’s a cousin of the property tax, but it encompasses all forms of wealth: cash, stocks, jewellery, thoroughbred horses, jets, everything. Warren calls the policy her “Ultra-Millionaire Tax.” It would impose a 2% federal tax on every dollar of a person’s net worth over $50 million and an additional 1% tax on every dollar in net worth over $1 billion. Economists estimate it would hit the 75,000 richest households and raise $2.75 trillion over ten years.

It’s a direct attack on wealth inequality, and it’s influenced by the work of French economist Thomas Piketty, whose book Capital in the Twenty-First Century put a spotlight on the increasing disparity of wealth in developed nations. Warren, who informally endorsed a wealth tax while at an event with Piketty in 2015, is the first U.S. presidential candidate to take up the cause.

The disparity in what Americans own is much greater than the disparity in what they earn. Jeff Bezos has a net worth of $135 billion, but his formal salary is less than $100,000 per year. Warren’s proposal aims to tap the fortunes of the ultra-rich and use the proceeds to fund social programs. But a wealth tax faces serious hurdles, including lessons from a failed experiment in Europe, the need for significant bureaucratic expansion, and serious questions over whether it’s even constitutional.

 

Euro Flop

Normally progressives like to point to Europe for policy success. Not this time. The experiment with the wealth tax in Europe was a failure in many countries. France’s wealth tax contributed to the exodus of an estimated 42,000 millionaires between 2000 and 2012, among other problems. Only last year, French president Emmanuel Macron killed it.

In 1990, twelve countries in Europe had a wealth tax. Today, there are only three: Norway, Spain, and Switzerland. According to reports by the OECD and others, there were some clear themes with the policy: it was expensive to administer, it was hard on people with lots of assets but little cash, it distorted saving and investment decisions, it pushed the rich and their money out of the taxing countries—and, perhaps worst of all, it didn’t raise much revenue.

UC Berkeley economist Gabriel Zucman, whose research helped put wealth inequality back on the American policy agenda, played a part in designing Warren’s wealth tax. He says it was designed explicitly with European failures in mind.

He argues the Warren plan is “very different than any wealth tax that has existed anywhere in the world.” Unlike in the European Union, it’s impossible to freely move to another country or state to escape national taxes. Existing U.S. law also taxes citizens wherever they are, so even if they do sail to a tax haven in the Caribbean, they’re still on the hook. On top of that, Warren’s plan includes an “exit tax,” which would confiscate 40 percent of all a person’s wealth over $50 million if they renounce their citizenship.

Warren’s tax is also only limited to the super rich, whereas in Europe the threshold was low enough to also hit the sort-of rich. This higher threshold helps it avoid problems like someone having a family business that makes them look rich on paper but, in fact, they’re short on the cash needed to pay the tax.

Also important, Zucman argues, the higher threshold means only a small group will be affected. And smaller groups have a harder time fighting for exemptions, which hurt European efforts. Some countries, for example, exempted artwork and antiques on the grounds they were hard to value. It’s true, but it creates a huge loophole: Buy lots of art! Economists hate incentives like these because they distort markets. Warren’s proposal calls for no exemptions.

 

Bureaucracy and the Constitution

But having no exemptions means the U.S. government will have to get very good at valuing art, diamonds, superyachts, and all the other fabulous things the super rich collect. Indeed, Warren’s plan includes a call for “a significant increase in the IRS enforcement budget.” It was the hefty cost of enforcement that played a big part in Austria killing their wealth tax back in 1993. It turns out it costs a lot to track and value rich people’s stuff every year.

And a wealth tax may not even be legal. The ability of the federal government to tax is tightly curtailed by the U.S. Constitution. Legally imposing the first income tax in 1913 required a constitutional amendment. Legal scholars are currently debating whether a wealth tax would need another amendment. The debate, Josh Barro writes, centers on whether a wealth tax would be a “direct tax,” which the Constitution makes really hard for the federal government to impose.

While the legality of a federal wealth tax is in question, the current politics of it are not. A new poll finds that even a majority of Republicans support Warren’s wealth tax. It turns out President Trump himself once advocated for one too.

 

A Local Problem with a Global Solution

It’s been roughly five years since Piketty published Capital in the Twenty-First Century. One of the book’s central arguments was that the rate of return on capital will be higher than the rate of economic growth (“r>g”) and, as a result, the wealthy will continue seeing their fortunes increase faster than everyone else’s.

His solution was a wealth tax, but he recognized that exemptions and freedom of travel had doomed the European experiments. So he suggested a global wealth tax: The whole world would decide to do one thing at one rate. That such a solution is highly unlikely is a perfect symbol for the difficulty of getting money from people with the best accountants, the best lobbyists, and the best boats.

 

USA

Pennsylvania: City property tax system – still broken

The city made two big commitments to gain support for a sweeping overhaul of its property tax system in 2013: the move to the so-called Actual Value Initiative would be revenue neutral and property assessments would be uniform. But promises made have not been promises kept.

The revenue-neutral claim went out the window before the ink was dry on AVI. And an independent audit commissioned by City Council last year found numerous errors in the way properties are assessed.

Six years after a major revamp of property taxes that resulted in a tax hike for most residents, one truth remains: Philadelphia’ property tax system is still broken.

While there have been improvements, property tax bills remain uneven from one home to the next. Tens of thousands of homeowners pay more in property taxes than they are supposed to, while others pay less. There appears to be no rhyme or reason as to how properties are assessed.

The City Council audit and a recent report by the City Controller found numerous problems including:

  • Assessments are not uniform and do not meet industry standards.
  • Assessments are off by an average of 15 percent.
  • The Office of Property Assessments lacks accurate data and does not document all of its procedures.
  • Assessment methods are not made public, making it difficult for property owners to determine how their values were calculated.

An analysis last year by The Inquirer found more than 35 percent of homes in the city are over assessed, resulting in tax bills above what property owners should be paying. .

Overall, 48 of the city’s 57 neighbourhoods saw jumps in their assessments, including some homeowners whose property taxes increased more than 100 percent. The spike prompted thousands of angry property owners to file appeals — the largest number since 2014 when the city implemented AVI.

City Council passed an ordinance earlier this year that allows property owners who are appealing their assessments to pay taxes based on their previous assessments until their cases are resolved. The city also is looking to hire a new chief assessment officer.

But bolder steps are needed. The city should implement a moratorium on increases in new assessments until properties are uniform, transparent, and meet the industry standards.

The city should also cap or phase in future increases to avoid sharp spikes in tax bills. This is something Mayor Kenney called for in 2012 when he was a City Councilman: “There’s got to be some limit to what we’re gonna whack people with, because they can move,” Kenney said then. “You can’t expect people to have their real estate taxes doubled and expect them to want to still be Philadelphia residents.”

Many states and some cities, including New York City, have limits on how much property taxes can increase in a given year. Philadelphia – which already has one of the largest tax burdens in the country- should do the same. As Kenney once said, jacking up property taxes is just one more reason why residents who can move to the suburbs.

 

New York: How a $238 Million Penthouse Turned a Long-Shot Tax on the Rich into Reality

The record-setting sale of a $238 million apartment on Central Park South in Manhattan has helped build support for a possible pied-à-terre tax.

The road to the nation’s first tax on superluxury second homes may well have begun at 220 Central Park South, where a four-story, 24,000 square-foot penthouse, unfinished and unfurnished, recently sold for $238 million.

That deal — the most expensive residential sale in United States history — seemingly set the stage for New York’s sudden embrace of a so-called pied-à-terre tax, a potential windfall for the city’s subway system and a small, subtle victory for those who believe Manhattan has become an unfettered playground for the rich.

If the measure is passed and signed into law, New York would join cosmopolitan hubs like Paris, Singapore and Vancouver, which already charge fees on secondary or part-time homes. It would also be a prime example of how headlines and hard times can sometimes intersect with a political moment, giving an outre idea a chance to become policy.

“When over six million New Yorkers are dealing with a crumbling and dysfunctional subway and the crisis in public housing, to see this opulence in the sky by someone who doesn’t even live here, struck a chord,” the City Council speaker, Corey Johnson, said.

The tax seems to be riding on a unique crest and confluence of several factors, including shaky tax revenue, uncertainty over the prospects for legal marijuana, and a general anti-rich, anti-corporate mood exemplified by the recent collapse of the Amazon deal in Queens.

The outlook for the tax is good: Both houses of the State Legislature and Gov. Andrew M. Cuomo support the proposal. Under the proposal, owners of second homes worth more than $5 million would be subject to a sliding tax surcharge and fees; homes that are valued more will incur higher fees and taxes.

The financial impact could be significant. New York City has about 75,000 pieds-à-terre, according to a city estimate in 2017. Of those, about 5,400 residences were sold for $5 million or more, the threshold where the proposed pied-à-terre tax would begin to kick in.

Mr. Cuomo estimated on Monday that the state could raise $9 billion in bonds off that revenue that would help fund repairs for the city’s troubled subway system. But the philosophical and psychological impact might be even more profound, offering a concrete, almost classist, rebuke to ultra-wealthy apartment buyers who sojourn in the city, enjoying its services and amenities, but often pay few taxes.

“There’s a growing realization with Billionaires’ Row, and the super-talls, that a lot of these homes are vacant and viewed as sky-high security deposit boxes for very wealthy foreigners,” said State Senator Brad Hoylman, the Manhattan Democrat who has sponsored the tax legislation for several years. And, he said, “because of our system of laws, because of our fire and police, because we are a secure financial investment, they should be charged for that.”

The speed with which the pied-à-terre tax has become politically popular is also remarkable: The idea was floated by a liberal think tank and lawmakers in New York in 2014, but had repeatedly been shunted to death in committee by Republicans leading Albany’s upper chamber, and quietly ignored by Democrats leading the Assembly.

The blue wave of November, however, changed the balance of power in Albany, with Democrats taking both houses of the Legislature, and unleashing a phalanx of progressives on the capital, part of a left-wing movement bent on correcting income inequality and pushing for higher taxes on the rich.

Liberal supporters of the tax had long pointed to a range of problems associated with pieds-à-terre, including encouraging real-estate speculation, inflating property values and associated taxes and speeding up gentrification in once-affordable neighborhoods.

Assemblywoman Deborah Glick, a Manhattan Democrat who carries the bill in that chamber, said longtime residents “are finding it hard to stay.” “They made districts and parts of New York very liveable and very attractive,” she said. “And they are driven out by people that don’t even want to live here.”

The bill’s sudden political momentum blindsided real estate executives, who fear the tax could irreparably damage the city’s high-end market, which is already experiencing a downturn.

Jonathan J. Miller, chief executive of the real estate appraisal firm Miller Samuel, said the market for high-end co-op and condo purchases has steadily declined since 2016, according to data provided by his firm. In 2016, 1,087 units sold for more than $5 million but less than $25 million. In 2017, the number dropped slightly to 1,075 units and decreased further to 849 units in 2018.

John H. Banks, president of the Real Estate Board of New York, the powerful trade group, said that “nobody has done any analytics as to the impact on the broader economy” as well as the local real- estate market.

“We are very concerned it’s going to have a huge chilling effect on high-end co-ops and condos,” Mr. Banks said in an interview on Tuesday, adding that he’d been taking calls from concerned members all week.

“Five million dollars sounds like a lot; you can buy the biggest house in Montana,” said Dolly Lenz, chief executive of Dolly Lenz Real Estate and former vice chairwoman of Douglas Elliman Real Estate. “In New York, $5 million buys a two bedroom in Hudson Yards.”

Ms. Lenz said she now spends more time in Florida looking at developments since many of her high- end clients are planning to move.

“So many people have told me they are planning to transition to Naples, Miami or Palm Beach,” she said. “It may not be today, but soon.”

Others, including Governor Cuomo, disagree that the tax would scare away potential homeowners. “If they have money to buy a $5 million apartment, which is not their prime residence, and it’s their little Manhattan getaway, they can afford the tax,” Mr. Cuomo said in a radio interview on Tuesday. “We need to fund the M.T.A.”

Indeed, with the state facing a shortfall in income-tax receipts, the pied-à-terre tax has become an attractive option, especially as other possibilities – marijuana legalization and congestion pricing – may stall.

The real issue is that New York City needs to fix its property tax system, said Martha E. Stark, a professor at New York University’s Robert F. Wagner Graduate School of Public Service, and the city’s former finance commissioner.

Under the city’s antiquated property tax system, co-ops and condos are not taxed at their true market value, but on the income generated by similar rental buildings.

The $238 million apartment, purchased by the Chicago-based hedge fund billionaire Kenneth C. Griffin, is currently valued at $9.4 million, according to the Department of Finance. That comes out to less than 4 percent of the sales price. A property valued at that amount would pay approximately $516,000 in taxes per year, Ms. Stark said.

If the property were taxed at the same rate as some single-family homes in Queens or Staten Island, the penthouse would produce around $2.4 million in property taxes.

A plan to revise the city’s property tax system is being studied by a tax reform commission. For early-adopters of such taxes, the increasing interest and new legislative traction has been satisfying. “It’s like a fine wine,” said Ron Deutsch, executive director of Fiscal Policy Institute, the left- leaning think tank which offered a white paper on the idea in 2014. “Sometimes it takes a little time.”

 

New York: Pied-à-terre tax ‘appealing but problematic,’ watchdog warns

Citizens Budget Commission calls for systemic, not “piecemeal” approach

A proposed pied-à-terre tax might be on solid footing politically, but its underlying logic is slipshod, a fiscally conservative advocacy group argued Wednesday.

The Citizens Budget Commission sought to slow the sudden political momentum behind a proposed excise on “foot on the ground” housing—residences belonging to foreigners and Americans who live (and pay taxes) elsewhere. Gov. Andrew Cuomo’s office suggested last week that such a levy might reap $9 billion for the moribund Metropolitan Transportation Authority over the next decade and Assembly Speaker Carl Heastie reiterated his chamber’s support proposal at a Crain’s breakfast forum days later. For what it’s worth, Mayor Bill de Blasio gave it his blessing as well.

Legislation in both chambers of the state Legislature calls for imposing an annual surcharge of 0.5% to 4% on the market value of residences worth $5 million or more. Hastily organized opposition including the Citizens Budget Commission and the Real Estate Board of New York has sprung up to head off passage of the tax, which is likely to be part of the state budget due April 1.

The budget watchdog, which has ties to New York business interests, called the notion “appealing but problematic,” and noted that rich out-of-towners make for an easy foil in part because they don’t vote. It even admitted that many second residences are “undertaxed” because of New York City’s complicated and much-maligned property tax system. But the group maintained that a pied-à-terre duty would not fix the overarching problems in that system and would create a new tax category on a questionable basis.

“The property tax should be levied based on the characteristics of the property, not its ownership,” the organization argued in a blog post. “A pied-à-terre tax is not a substitute for real property tax reform that increases equity.”

The group worried that the levy would further weaken the enervated luxury housing market and deter rich, part-time New Yorkers who contribute to the economy in other ways.

Also troubling to the commission was Cuomo’s suggestion that the state allocate the tax’s revenues to the MTA. First, the group asserted, this would do nothing to address the vast bureaucratic and labor inefficiencies that bloat the authority’s costs. Second, it would set a precedent for using “piecemeal” cash-gathering approaches to fund the system instead of receipts from sources directly connected to commuters and transit.

“In short, the state should not adopt a pied-à-terre tax without thoughtful deliberation about whether it is needed and without revision of the proposal to mitigate the negative impacts,” the blog post concluded.

 

EUROPE

France Unveils Plan to Tax Internet Giants

The French government unveils plan to implement a three percent tax on the French revenue of internet giants like Google, Amazon and Facebook.

The French government on Wednesday unveiled plans to slap a 3 percent tax on the French revenues of internet giants like Google, Amazon and Facebook.

The bill is an attempt to get around tax avoidance measures by multinationals, which pay most of their taxes in the EU country they are based in — often at very low rates. That effectively means the companies pay next to no tax in countries where they have large operations.

The tax will apply to digital companies that have global revenues of over 750 million euros ($848 million), and French revenue over 25 million euros. That will help protect startups, Finance Minister Bruno Le Maire said in a news conference.

About 30 companies, mostly based from the U.S, but also from China and Europe, will be affected. France is set to be the first European country to implement such a tax as the bill presented Wednesday in a cabinet meeting is likely to pass in the coming months in parliament, where French President Emmanuel Macron’s party has a majority.

Le Maire estimated the tax will raise about 500 million euros ($566 million) a year this year but that should increase “quickly.”

He said the tax will not affect companies directly selling their own products online. It will mostly affect companies that use consumers’ data to sell online advertising. It will also apply to online services companies like Airbnb and Uber.

“This is about justice,” Le Maire said. “These digital giants use our personal data, make huge profits out of these data … then transfer the money somewhere else without paying their fair amount of taxes.”

Le Maire quoted figures from the European Commission, the EU executive body, showing that the major digital tech companies pay on average 14 percentage points less tax than other European companies.

France decided to implement the digital tax after a similar proposal at the European Union level failed to get unanimous support from member states.

Le Maire said he would now push for an international deal by the end of the year among the countries of the Organization for Economic Cooperation and Development, a Paris-based forum made up mostly of developed nations.

The Computer and Communications Industry Association criticized the French measure, saying it would ultimately lead to higher costs for French firms and consumers.

“So-called digital companies are, contrary to claims, not under-taxed and they should not be arbitrarily targeted,” said CCIA Europe’s vice president, Christian Borggreen.

 

Greece: More hikes are expected in objective values

The Finance Ministry is expected within the month to invite chartered property surveyors to express their interest in the process of a new adjustment of property rates used for tax purposes, known as “objective values,” which will go into force at the end of June.

The government has agreed with its creditors to carry out a fresh revision of the objective values in 2019 as well as in 2020 so that they come closer to matching actual commercial prices. Last week’s European Commission report showed that the government could have used the zone rates surveyors had proposed in 2018, which were apparently modified by the ministry to avoid any major increases in the Single Property Tax (ENFIA).

However, the government decided to call on surveyors to produce new value proposals for the entire country. A surveyor who last year worked on the property rates of Fthiotida and Evrytania in central Greece, tells Kathimerini that the prices he recommended were ignored in their entirety by the ministry.

This new adjustment will, according to surveyors, lead to a fresh increase in objective values. They argue that the rejection of their proposals for many parts of the country meant that the differences between market rates and objective values remain. They anticipate large hikes in densely populated areas and a reduction by up to 30 percent in more upscale parts of Athens.

 

Slovenia: Real estate tax put off again

Contrary to previous announcements, the Finance Ministry has now said it will be impossible to introduce the new real estate tax in 2020 as planned because data on some types of property remain faulty.

“Even though much has been done in recent years, not all the registries have been put in order to such an extent as to remove obstacles to the introduction of the real estate tax,” the ministry told the STA.

The new tax, which is to replace the current levy for the use of building land, property tax and forest road fee, has been years in the making and put off several times because of its unpopularity.

An earlier attempt at introducing such a tax failed in 2014 after the Constitutional Court quashed the property appraisal act, which was to underpin the new system.

“The biggest obstacle to the real estate tax at the moment is that data on actual use of land for public roads and public railway infrastructure will probably not be available in time,” the ministry said.

It specified that the most problematic issue was data on municipal public roads. One problem could be if such plots were to be exempt from tax, considering that a large section of such infrastructure is still located on privately held land.

The Finance Ministry has been encouraging municipalities to do their part of the job in terms of these data, because receipts from the real estate tax would be their source of revenue.

“All obstacles to introducing the real estate tax will have been removed once these data have been put in order as well,” the ministry said, adding that this was the job of the ministries of environment and infrastructure.

Earlier this month, the newspaper Dnevnik reported that compiling a census of 1,200 kilometres of rail tracks and 39,000 kilometres of state and municipal roads did not begin until recently, mainly due to delays at the Infrastructure Ministry.

The legislation for the registering of the actual use of land for public roads and railway infrastructure was adopted in February 2018 and the appertaining rules only just before the end of 2018.

The census of plots of land with state roads is to be completed by June, but the problem is said to be the 32,000 kilometres of local roads which local officials do not think will be completed in less than two to three years.

 

United Kingdom: MPs urge reforms of business rates to revive UK high street

Measures needed to prevent shopping areas becoming ‘ghost towns’

The government should consider “wide reforms” to business rates and planning law to allow Britain’s town centres and high streets to flourish in future decades, a parliamentary committee has said.

The Housing, Communities and Local Government committee, headed by Labour MP Clive Betts, said that without reform formerly thriving shopping areas “are likely to become ghost towns and effectively close down altogether”.

Among the recommendations of its “High Streets and Town centres in 2030” report are further review of the “unfair” business rates system and other aspects of corporate taxation; an overhaul of planning law to make changes of use easier; and more local co-operation to speed up the evolution of high streets.

It also said that landlords should recognise that the retail property market has changed, and that the government should consult on whether to outlaw upward-only rent reviews.

Other suggested reforms included a levy on online retail sales, an increase in VAT and “green taxes” on deliveries and packaging. During the committee’s deliberations, Sports Direct chief executive Mike Ashley called for a 20 per cent tax on online sales, with the proceeds used to offer business rates relief.

Most retailers agree that business rates unfairly burden the operators of physical shops, but there is less consensus on how to reform them. Last week Mark Price, the former head of supermarket group

Waitrose, wrote in the FT that taxing sales instead of property “would not help the likes of Next and John Lewis, which are investing heavily to build their online capability.”

The Treasury reviewed business rates in 2015 and concluded there was no case for substantive reform, but the Treasury select committee recently launched a separate inquiry on the subject.

Revo, an organisation that represents landlords, retailers and local authorities, said it was encouraged by the proposal to reform the Landlord & Tenant Act, describing it as “long overdue”.

“The legislation as it stands encourages an adversarial relationship between property owners and occupiers,” said chief executive Ed Cooke.

The committee said local authorities’ ability to respond to the decline of high-street shopping was often constrained by outdated planning rules. It urged the government to make compulsory purchase orders easier to obtain and said it should consider whether usage classes needed to be made more flexible.

It added that “town centre first” policies, adopted in the 1980s to protect urban centres from the effects of out-of-town development, should be updated to reflect non-retail uses for centrally located buildings.

However, it said the government should suspend any extension of permitted development rights – which permit conversion of retail and office buildings to residential use without planning permission- because of their potential to undermine strategic decision-making.

Compliments of IPTI, a member of the EACCNY