Member News

Update on Property Tax Issues: October 2017

By Paul Sanderson | IPTI

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.

EUROPE:

Germany: Municipalities Are Playing Politics With Property Tax

The authors of the study looked at data on buildings and housing from the 2011 census as well as analysing the tax policy behaviour of 8,036 West German municipalities. The local fiscal situation, as well as socio-economic factors and political preferences were also factored into the analysis. 

In order to determine whether and to what extent the share of home-owners living in a municipality has an effect on the property tax multiplier in that municipality, historical data on damage done to housing during the Second World War was also used. This war damage led to property ownership being greatly suppressed in favour of the construction of rental properties in the hardest hit municipalities in the years following 1945.

‘When it comes to setting the property tax multiplier, local politicians tend to be guided not only by the state of the municipality’s own fiscal situation but also by what neighbouring municipalities are doing,’ summarises Dr. Oliver Lerbs, acting head of ZEW’s Research Department ‘International Finance and Financial Management’ and coordinator of the research area ‘Household Finance and Real Estate’. 

Another factor is the share of property ownership versus renting in the municipality’s housing stock. ‘Regardless of a municipality’s size and structure, a higher percentage of rental properties often results in higher property tax. If the share of home-owners in Germany was ten percentage points higher, this would cost the municipalities somewhere in the region of 120 to 140 million euros in property tax revenue,’ says Oliver Lerbs.

‘The reason for this, based on our estimates, is that property tax is far more noticeable to home-owners. As a result, the political desire for high property tax rates is lower than in municipalities in which more of the residents rent,’ explains Professor Roland Füss, professor of real estate finance at the University of St. Gallen and co-author of the study.

 

Greece: Large Property Tax being mulled

The government is considering getting rid of the Single Property Tax (ENFIA) and bringing back the Large Property Tax (FMAP) next year, provided that Finance Ministry committees manage to harmonize property prices used for tax purposes (known as “objective values”) with actual market rates.

According to a government official, if that difficult process is completed successfully, a bill will be tabled in Parliament for the adjustment of objective values and the replacement of ENFIA with FMAP.

The official added that the state will still expect to collect 3.2 billion euros from property taxation because that is the sum the agreement with the country’s creditors provides for. As it is the government’s responsibility to determine how the tax burden is distributed, Athens intends to slash the dues of small owners and shift the burden to big properties.

However, the same official conceded that the completion of the committees’ task by the end of the year – as is necessary for the timely change in the property taxation – appears particularly difficult.

Deputy Finance Minister Katerina Papanatsiou told a conference on Wednesday that “our aim is for ENFIA to be replaced by a tax on large properties that will be progressive.”

On the matter of bringing objective values down to market prices, the minister said the creation of second-level committees is being promoted, adding that they will be tasked with checking the findings of 75 local (or first-level) committees.

The second-level committees will aim to factor in any local distortions that have been observed in the past.

Papanatsiou argued that there are many areas where objective values are below the going rates. She also reiterated the ministry’s decision not to revise any other parameters (such as how popular an area is) for determining zone values, and the plan for the incorporation of rental rates in the online system that will provide values for every zone, especially those with little or no buying activity.

 

Ireland: How a land value tax could solve many economic headaches 

“LVT would have no impact on most people, but would ensure land is employed for its best use”

Opinion: the introduction of a Land Value Tax would force people to be efficient with their use and ownership of land and help alleviate many of the Irish economy’s current woes

How do we solve the housing crisis? Ask the average person and they’ll say ‘build, build, build’. Urban planners are saying we need higher density and they argue this can be achieved without towers in the sky. 

They detest urban sprawl, describing it as a cancer on communities, identities, and the liveability of urban areas. They point to the plentiful areas of unused and vacant brownfield sites and are protesting to government to sort out land hoarders.

The Minister for Housing says we need to build upwards and remove height restrictions in Dublin. The millennial generation are looking for assistance on rent and housing affordability associated with the rise of expensive cities. The suburbanites suffering from the leapfrogging planning policies between cities and counties of the Celtic Tiger era are shouting for transport improvements and greater connectivity. And, with the rise of urbanisation, rural areas are saying do not let rural Ireland die.

It really is a problematic time and a period of roundabout policy-making. With population increases forecast for the next 30 years and the overwhelming importance of cities in driving future growth, these problems will get bigger. But no one person is responsible and the underlying incentive model is broken.

The problems being created in our modern economy due to the misalignment in our underlying tax system need not continue

Taxes act as disincentives to productive activities. Income tax is a disincentive to be productive, VAT is a disincentive to sell and buy and stamp duty is a disincentive to buy assets. Capital gains tax is a disincentive to sell assets, while property tax is a disincentive to make home improvements.

But a tax which has been introduced in a small number of countries which does not tax productive acts fails to get a look in. Milton Friedman referred to land value tax (LVT) as the least bad tax and the tax is one which most economists favour in sorting many of our problems.

The benefits from rising land values are currently being captured by land monopolists that arise primarily from the community development around them. For instance, there are stark differences between location costs for individuals and firms in Dublin, Waterford, and Kerry. The most expensive house last year sold for €8.4 million on Shrewsbury Road in Dublin 4. Purchased in 1987, it was reported that this eight-bedroom property with an outdoor swimming pool required a lot of investment to bring it up to the standards of other properties in the area.

The bricks and mortar of that house would not have changed considerably in that period. It does not cost millions to maintain a house like this over a thirty-year period so most of the cost to the new owners is the land value of its location (in 2007, Shrewsbury Road was the sixth most expensive street in the world).

Most of this is down to speculation, the investment by taxpayers in local transport and amenities, the general community development in Ballsbridge and the agglomeration effects of firms and populations to Dublin, which makes the central location of Ballsbridge highly sought after. Hence, everyone should benefit from this value capture and not just the owners. This is the principle of land value tax.

Consider the 0.9 acre plot on on Shrewsbury Road that went on sale this year for reportedly €10 million, with planning for seven houses. To date, this would have escaped property tax.

But LVT would cover every piece of land that has productive potential on the island of Ireland (including agriculture) and would replace the present property tax. It would have no impact on most people, but would bring unused and under-utilised land, such as the Shrewsbury Road plot and other inefficient land uses, into the net and ensure land is employed for its best use.

LVT’s introduction and application to all activities on land would shift the underlying incentives of the system and help solve many of our present problems. Each site would be taxed on a proportion of the current annual rental value of the land. Obviously, this would be low for agriculture and higher for businesses and residents. With an effective rate, less tax would need to be collected on the productive improvements made upon sites in terms of labour, VAT, corporation tax, and so on. This shifts resources from unproductive to productive activities.

People will be forced to be efficient with their use and ownership of land. Marginalised, more rural areas would benefit as the value of land in rural areas is much lower and residents here would benefit by reductions in other taxes. In effect, it would stimulate economic activity away from the centre and provide natural subsidies to those in rural areas and where it is needed most – farmers and people dependent on rural communities should certainly not fear the LVT.

The Land Value Tax is one which most economists favour in sorting many of our problems.

Over time, a gradually increased LVT rate would replace the need for stamp duty, capital gains taxes, property taxes and business rates. This would reduce the bureaucracy associated with tax collection, with the added bonus of less evasion in our tax system. Remember that it is not possible to hide land.

There are also many other benefits. Urban planners will not be able to point to vacant brownfield sites as they should disappear so urban sprawl will be reduced.

Most importantly, it is also fairer. Our current system enables land monopolists the opportunity to capture enormous rental value from the productive activities of others, particularly in cities with the competing demands of land for living, working and leisure. The problems being created in our modern economy due to the misalignment in our underlying tax system need not continue. Time for change?

 

United Kingdom: London seeks £240m boost from higher business rates                                                                                                                               

Mayor and councils want greater control over taxes raised in the capital                           

London could receive a public spending boost of £240m next year after the capital’s mayor Sadiq Khan and its councils agreed a plan to retain more of the money the city collects in business rates.

The deal, announced by Mr Khan on Wednesday, would allow London to keep funds raised from increases to the rates. The government must approve the plan, however, which is meant to be part of a devolution deal struck between the mayor and ministers in March.

Business rates are a tax on companies’ premises. The levy is collected by local councils but is set by the government. In 2016 ministers outlined the first rates revaluation in seven years, provoking protests from businesses because some faced steep increases.

Councils in London collect more than £8bn of the £25bn raised each year in England through the levy.

The capital retains £6bn and hands £2bn to the government to fund services elsewhere in England.

Under the deal between Mr Khan and the councils that is supposed to take effect next April, London would retain any future increases in business rates, rather than pass the money to the government.

This means that the additional £240m secured from London’s companies through the rates revaluation proposed last year — and implemented in April — would be kept by the capital. The deal would also enable London to retain all of the money raised through rates paid by any new companies in the capital. Mr Khan said: “This is an important step in devolving more control over the use of the capital’s tax revenues to London government.

“But it is only a first step as the government will still retain control of business rates tax policy, revaluations and the business rates appeals system.”

The mayor called for London to retain all the money it raised through business rates.

Claire Kober, chair of London Councils, the umbrella body for the capital’s local authorities, said: “This is a key moment on our journey towards 100 per cent business rates retention in the capital, one which will bring the boroughs and the mayor closer to matching the financial independence of other major global cities such as New York.” 

Under a pilot scheme overseen by the government, councils in Greater Manchester, Cambridge and east Cheshire last year secured the arrangements on business rates that have just been agreed by Mr Khan and London’s local authorities.

London controls just 7 per cent of the taxes paid by individuals and businesses based in the capital, and the city has long argued it needs to retain more money to tackle problems such as housing.

However, some other English regions fear that would cost them because London — by far the wealthiest part of the country — in effect transfers taxes to them.

Chancellor Philip Hammond in March outlined £435m of relief for companies affected by the revaluation of business rates, but the London Chamber of Commerce said his package did not go far enough.

 

United Kingdom: Will setting tax rates locally help to drive economic growth?

Giving places control of tax rates can have positive economic impacts, but will not be a panacea for sluggish local economies  

In its ongoing discussions about business rates devolution, the Government is exploring the possibility of allowing local authorities to set their own rates. This would probably be a popular move among local leaders – the latest DCLG consultation on the subject reported that a significant number of local authorities were in favour of being granted powers to reduce the business rates in their areas, in order to gain more flexibility and encourage growth locally. But what impact might this have for local economic growth – and what issues might it raise?

While the What Works Centre for Local Economic Growth has not looked at the economic impact of setting taxation at the local level, it has looked at the impact of policies that offer local tax breaks, such as enterprise zones. Lessons can be drawn from these findings to help guide the localisation of the business rates multiplier.

The evidence found by the What Works Centre shows that enterprise zones can have a positive impact on both boosting employment and addressing unemployment inside the area they cover: out of 27 studies looking at the impact of enterprise zones on employment, 15 found a positive impact of enterprise zones, while seven out of nine studies looking at unemployment also found a positive impact. However, evidence of their impact on poverty and wages was mixed, with half the studies investigating this issue finding a positive impact.

What’s missing from the existing studies is an assessment of the impact of the specific characteristics of different types of enterprise zones. For instance, some enterprise zones in the US and France only offer tax rebates on the basis that businesses hire a certain proportion of staff locally; but as there is no counterfactual (i.e. another similar area where firms would not have specific hiring requirements), there is no way to assess the influence of this precise characteristic on the overall success of the programme.

There are also potential risks associated with place-based tax rebates, although they are not fully understood. One major concern is displacement. Are enterprise zones successful at creating new activity, or do they simply attract nearby companies, at the expense of those surrounding areas that do not benefit from the programme? Research seems to suggest that displacement effects are indeed common, meaning that the headline impacts of enterprise zones must be treated with caution.

Overall this suggests that local tax rebates can have a positive impact locally, but their precise factors of success and wider impact are not entirely clear. 

Coming back to the current debate on business rates, this suggests that allowing local authorities to reduce the business rates multiplier could be investigated and implemented as a way to foster economic growth, but this would need to take into account a number of potential issues:

  • There is a risk of job displacement between local authorities, with potential effects on neighbouring areas. Making sure there are specific safeguards to ensure good policy coordination (for instance, a limit on the multiplier reduction, a cross-authority pooling of revenues, etc.) will be critical.
  • Rates reduction should be implemented under a strict assessment process, laying out clear objectives and risks. Local authorities are unlikely to provide the level of tax reduction that enterprise zones do, and in some areas a business rates rebate might be too modest to have a substantial impact of the economy, but large enough to significantly erode local revenues.

Ultimately, the effect of any fiscal incentive is unlikely to be significant, especially if applied in sluggish economies. The reason why some areas are less attractive to firms relates to their local characteristics, such as the level of skills of their population and the quality of their infrastructure. Although fiscal incentives can act as an “extra push”, they do not tackle the core issues that must be addressed to make places more prosperous, and should not be considered as the Alpha and Omega for local economic growth.

Compliments of IPTI, a member of the EACCNY