Update on Property Tax Issues: October 2018

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).

As far as Europe is concerned, this month’s report includes articles on France, Greece, Luxembourg, Slovenia and the United Kingdom. In the USA, articles include California and New York.

 

France: Roman Abramovich fights French property tax bill of €1.2m

Shortly after Roman Abramovich bought the Château de la Croë property about a decade ago on the exclusive Cap d’Antibes peninsula in the south of France, the taxman came knocking.

The Russian billionaire, French authorities said, had undervalued the holiday home and hadn’t paid enough wealth tax in 2006 and 2007. The tax agency valued the property at about €41,000 per square metre by comparing it to asset sales of similar calibre in the vicinity around that time. Since then, Mr Abramovich has been trying various ways to get out of paying the €1.2 million bill presented by authorities. His latest endeavour, which included a complaint that the new tax paperwork wasn’t delivered to him personally, was rejected last month by France’s top court.

Built in the late 1920s for a newspaper magnate on a thin stretch of land now identified as Billionaire’s Bay, the chateau is known for having been the residence of several crowned heads. King Edward VIII moved in just after he controversially abdicated in 1937 to marry American socialite Wallis Simpson. King Leopold III of Belgium, the last Queen of Italy, and Farouk I of Egypt, also lived there. The mansion was then owned in the 1950s by billionaire Greek shipping tycoon Aristotle Onassis and later by his lifelong rival Stavros Niarchos. A fire destroyed part of the property in the 1970s and it remained abandoned for decades until Abramovich’s acquisition. Mr Abramovich spokesman John Mann declined to comment on the issue.

In his lawsuits, the Russian argued that the French tax administration largely overvalued the property’s price by comparing it to luxury houses in much more expensive locations. The judges at the Cour de Cassation were unfazed. They ruled that the tax agency was correct in comparing the Château de la Croë to other properties sold around the time in the areas of Saint-Jean-Cap-Ferrat, Cap d’Ail, and Antibes. Those similar estates included Villa Fiorentina, once occupied over the years by the Kennedys, Elizabeth Taylor, and Greta Garbo. In late 2004, it sold for over €73m — inclusive of Vat.

Mr Abramovich’s holiday home sits isolated at the tip of the Cap d’Antibe with a panoramic sea view. The property spans more than 75,000 sq m (807,000 sq ft) with a living area of more than 2,400 sq m in the chateau and a guest pavilion. A year earlier, the Paris court of appeal had already dismissed similar arguments put forward by Mr Abramovich by citing an architect expertise report from 2005 that highlighted the extraordinary nature of his chateau.

 

Greece: Opposing views on easing of ENFIA tax

Ruling SYRIZA and opposition New Democracy may agree – broadly at least – on the reduction of the Single Property Tax (ENFIA) over the next couple of years, but the specifics of each proposal reveal that the rival parties are thinking along completely different lines.

The leftist party, for its part, is seeking to reach out to the bulk of owners, who have small properties, promising major discounts that will reach up to 50 percent by 2020, while the conservatives want to spread the same percentage across the board.

In practical terms, Prime Minister Alexis Tsipras’s announcement to this end last week means that owner of medium-sized and large properties will see small to negligible benefits in 2019 and 2020. With New Democracy’s proposal, however, there would be benefits for all owners, though the biggest discount in euro terms would be seen by those with properties of a higher value.

The government is considering the introduction of an amendment by the end of the year that will change how the ENFIA tax is calculated. This method will provide for reduction scales on the main tax– owners also paying supplementary tax are not entitled to any reductions – while owners will be categorized according to their personal assets.

This means that for 2019 there will be a 30 percent discount for owners with assets of up to 60,000 euros, while the discount rate will drop further the more the property sum grows.

There is no discount being planned for the following year for owners of assets totalling more than

150,000 or 200,00 euros. That means that if the limit of property meriting a discount is set at 200,000 euros, some 470,000 owners will be excluded from the ENFIA easing, and if the limit is set at 150,000 euros the discount will not concern 750,000 owners.

The SYRIZA proposal will cost some 320 million euros in lost taxes for 2019, distributed as follows: Owners of assets adding up to 60,000 euros will gain a total of 190 million euros, or 55 euros each on average, as there is a great number of owners in this category (some 3.49 million people). This also

includes 1.35 million low-income taxpayers who have a 50 percent discount anyway, therefore the 30 percent discount after the deduction of the 50 percent would be just a handful of euros in real terms. This means that an owner with a low income who would be due to pay 150 euros per year for ENFIA, is anyway paying 75 euros thanks to the 50 percent discount. Consequently, the 30 percent reduction promised will just mean this owner will be better off by no more than 22.5 euros.

Owners of properties worth between 60,000 and 100,000 euros will be spared a total of 92 million euros. There are 1 million such owners, who will save between 80 and 90 euros each.

As for those owning real estate assets between 100,000 and 200,000 euros, they will see minimal discounts that will not exceed 40 million euros in total next year, while their real benefit will be between zero and 20 euros per year.

The New Democracy proposal, in contrast, is more front-loaded than SYRIZA’s in that it provides for a 20 percent reduction to the ENFIA tax for 2019. The fiscal cost for the first year amounts to 600 million euros, as the discount will concern both the main and the supplementary property tax, which means all owners will enjoy some relief.

In euro terms the biggest savings will be for those with the biggest property, as each owner’s total assets will still be the main criterion. Therefore, small-scale owners with a property up to 60,000 euros will save an average of 37 euros each in 2019 (or 130 million euros in total), taxpayers with properties of 60,000-100,000 euros will be spared 83 euros each on average, assets of 100,000-150,000 euros will see their owners save 120 euros each and those with real estate worth 150,000-210,000 euros will see a mean reduction of 160 euros. The benefit in euro terms will be even greater for properties topping 250,000 euros, as they will also enjoy a discount in their supplementary tax too.

For 2020 SYRIZA proposes a further reduction worth 300-400 million euros and an expansion of the beneficiary base to include owner with assets of 200,000-500,000 euros too. ND, on the other hand, eyes increasing the reduction rate from 20 to 30 percent in 2020.

The precise amount of ENFIA each property owner will have to pay in 2019 and 2020 will also be determined by the new adjustment of taxable property rates, so-called objective values, which will be charged in two instalments regardless of which party is in power, SYRIZA or New Democracy.

This is because the adjustment of the objective values in two parts, to fully match the market prices, is one of the country’s post-bailout commitments and was clearly spelled out in the June 2018 Eurogroup decision.

The process will definitely affect the ENFIA dues, as both parties intend to peg the reductions they will push to the total value of each owner’s properties. However, it remains unclear whether the 2019

ENFIA will be calculated on the basis of current objective values – which as of January 1 will be activated for property transfers too – or with the new ones to be introduced next year. For the latter to happen, it will take a legislative amendment, as the law in place provides for the ownership tax to be calculated according to the values in place on the 1st of January each year. Barring the introduction of such an amendment, the objective values to be calculated next year will only affect ENFIA in 2020.

 

Luxembourg: Property tax reform ‘should be tackled by next government’

Interior minister Dan Kersch says ‘sensitive’ reform is one of the ‘major issues’ that must be dealt with

Property tax is a “major issue” the next government should deal with, according to interior minister Dan Kersch.

“The next government will have to deal with two major topics – property tax reform, consistent with a comprehensive reform of taxes, and the unification of text on communes and communes’ unions,” he said.

Property tax – due to its being a “sensitive” reform that will “not satisfy everyone” – is an issue the current government has failed to tackle, according to Kersch.

The tax is implemented by communes, and all homeowners receive a property-tax assessment indicating an amount to be paid. The tax is levied on all properties, and multiple owners are jointly liable to pay. The tax generates €40 million for the State.

The Luxembourgish Socialist Workers’ Party (LSAP) has suggested linking property-tax reform with a reform on income tax.

Kersch said the two were “inseparably linked” and that bringing them together would ease the burden on households. A reform can only be possible once all communes have adapted their general urbanisation plans (plan d’aménagement général, PAG).

To date, more than 60 communes have yet to adapt their plans or have not completed the process.

 

Slovenia: Real estate tax scheduled for 2020

The Finance Ministry has announced that the launch of a real estate tax, which has been in the making in Slovenia for years, is scheduled for 2020. It suggested on Friday that the tax would not exceed the levy imposed on real estate owners so far.

The ministry said it continued working on the tax during the change of government and that the tax could be adopted in parliament in 2019, while next year could also bring a repeat of the mass real estate appraisal.

A draft version of the tax bill could be submitted for public debate at the end of November, while the act could be adopted before next year’s summer recess. The launch of the tax is scheduled for 2020.

Serving as the basis for the tax will be the value of the real estate, determined via a mass appraisal system based on the real estate valuation bill passed last December.

The current plan is to let municipalities keep the entire revenue from the tax. The levy is not expected to be higher than is presently the case with what is already a real estate of sorts, called compensation for the use of building land.

Still, total revenue, estimated at EUR 230m for this year, is expected to increase by 20%-30%, since additional real estate will be subjected to the tax, possible also property owned by the Church and the state.

While it is too early to discuss rates, the ministry said municipalities could get the power to adjust the rates by 50% in either direction.

A 2013 attempt to introduce the tax collapsed as the Constitutional Court ruled the act on the valuation of real estate unconstitutional.

The Mapping and Surveying Authority (GURS) says that data on real estate has been improved substantially in the last four years and that appraisal models have already been drawn up on the basis of the new appraisal act.

GURS indicated owners could expect the evaluation for their property in their mailboxes as early as in August next year.

Options for owners to contest the value determined by GURS, a key concern for the Constitutional Court, have been beefed up, the ministry said, arguing all the issues raised by the top court had been addressed.

Meanwhile, the ministry did not wish comment specifically on the coalition agreement-stated plan for “a tax on real estate that will place a higher burden on owners of larger and multiple pieces of real estate”. It expects a solution as part of coalition talks.

In its 2014 ruling the Constitutional Court rejected the possibility of having different rates in place for comparable pieces of real estate.

 

UK: Business rates: one John Lewis store will pay four times the tax of Amazon

The £4.5m tax Amazon pays in Britain will be dwarfed by the rates for a single department store after huge hikes in April

John Lewis, the embattled retailer whose profits collapsed by 99% in the six months to July, will be charged £10.5m in business rates for its flagship Oxford Street shop from April, according to new figures — a 60% rise in three years.

A short walk away, Selfridges’ flagship shop also faces a 60% hike: its business rates bill will climb to £17.5m. That figure is almost four times the total UK corporation tax paid last year by the online retail giant Amazon: just £4.5m.

The looming threat to the high street will put pressure on the chancellor, Philip Hammond, to throw businesses a lifeline when he delivers his budget on October 29.

This weekend, Helen Dickinson, the chief executive of the British Retail Consortium (BRC), said: “These figures lay bare the shocking burden the business rates regime places on British retailers, who make up 5% of the economy and pay 25% of business rates — £7bn a year. The rates bill is leading to store closures, preventing the reinvention of our high streets, and is damaging communities the length and breadth of the UK.”

The BRC is lobbying for a two-year freeze in business rates until a revaluation in 2021, while the New West End Company, which represents businesses in London’s West End, is lobbying for a rates reduction of £5bn. This would be financed by a 1% tax on online businesses but would not apply to traditional retailers’ internet sales.

High street trading has been squeezed by online shopping, which now accounts for 18.2% of the market, with fewer stores surviving to shoulder the rates burden.

A phased four-year settlement in 2017 will bite hardest from April, with some stores facing huge increases. Burberry, which this month unveiled a new collection, faces a hike for its London headquarters of 186% compared with its rates in 2016-17. In Manchester, Zara must pay £1.26m and Manchester City football club £2.4m, up from £1.7m in 2016-17.

Altus Group, the property adviser that researched the figures, found NHS hospitals will have to pay £386m and council-controlled state schools £957m.

Nickie Aiken, the Conservative leader of Westminster council, said: “Our taxes should reflect our way of life. I would ask the Treasury: do we want to continue the decline so that the only things left on the high street are charity shops and betting shops?”

 

USA – California: Proposition 5: California’s property tax measure, explained

Who’s behind it, who’s against it, and what it will mean for Los Angeles

Proposition 5 would make a small but significant tweak to Proposition 13, a 1978 ballot measure that slashed property taxes state-wide. If passed, it would allow homeowners who are over the age of 55 or are severely disabled to continue paying property taxes based on the assessed value of their current homes when they sell and then purchase a new residence. The same goes for residents in areas affected by natural disasters.

That could translate into big savings for older homebuyers, given that under Proposition 13, Californians who have owned property for longer periods of time often pay far lower taxes than their neighbours.

Under current law, when people who have owned their homes for decades decide to sell and rebuy somewhere else, it often means taking on a much higher property tax burden.

Residents to whom the ballot measure applies can already take property tax savings with them if they buy a home of equal or lesser value in the same county. But they can only do this once. Proposition 5 would eliminate the one-time requirement and allow home buyers to shop around in counties across California.

Who’s behind it?

The measure was drafted by the California Association of Realtors. The real estate trade group has spent more than $4 million qualifying the initiative for the ballot and promoting it to voters.

What impact would it have on Los Angeles?

In LA, older homeowners will be able to take low property tax payments with them when they move. That could make homeowners who are fearful of higher taxes more likely to sell their homes, meaning buyers might have more options to choose from.

The measure would have financial consequences though; a report from the state Legislative Analyst’s Office suggests that new demand from seniors could drive California home prices even higher than they already are.

The report also notes that local governments would lose out on more than $100 million per year in property tax funding, as would California schools. Eventually, rising real estate values could grow that amount to $1 billion annually for both governments and schools.

Arguments for

Supporters of Proposition 5 say it would allow older residents living on fixed incomes to downsize without worrying about enormous property tax increases, which they liken to a “moving penalty.” It would also allow residents whose homes have been damaged or destroyed in natural disasters to move on without getting hit with a big tax hike.

Arguments against

The main argument against Proposition 5 is that it will almost certainly cost schools and local governments a lot of taxpayer revenue. Its potential effects on California’s housing market are less clear, but few predict it will bring down sky-high real estate prices.

To take advantage of Proposition 5’s benefits, residents also have to be homeowners. For this reason, critics say, it’s likely to disproportionately benefit the wealthy, while siphoning away tax dollars from services used by everyone.

Who supports it?

On top  of  the  California  Association of  Realtors,  supporters  include  the  California  Chamber  of Commerce and the Howard Jarvis Taxpayers Association, which was founded in support of Proposition 13.

Who opposes it?

The measure is opposed by the California Democratic Party, the California Teachers Associati on, the Southern California Association of Nonprofit Housing, and other housing and labor advocacy groups.

 

USA – California: Proposition 13 has strictly limited property tax increases since 1978. Voters could get a chance to change that

For four decades, the most potent brand in California politics has been Proposition 13, the 1978 ballot measure that limited property tax increases and prompted a nationwide revolt against taxation.

Now, the legacy of Proposition 13 stands on the verge of one of its stiffest tests. On Monday, an initiative qualified for the November 2020 ballot that could lead to a $145-million campaign and dismantle Proposition 13’s protections for businesses.

The initiative would end the state’s restrictions on taxing commercial and industrial properties and increase tax receipts for cities, counties and school districts by an estimated $6 billion to $10 billion a year.

Veronica Carrizales, policy and campaign development director for initiative proponent California Calls, cast the measure as part of a generational struggle to support public services she said have been starved of resources since Proposition 13’s passage in 1978.

“We think California is ready and now is the time to tackle this longstanding and nonsensical inequity in our property tax system so we can put communities and schools first and not corporate greed,” Carrizales said.

By contrast, business groups and taxpayer advocates are already digging in to defend their interests from a tax increase they contend would worsen a business climate consistently ranked among the worst of any state in the country because of California’s high corporate, income and sales taxes.

“We have a clear, united state-wide business and taxpayer coalition that is only going to grow in opposition to this measure for 2020,” said Rob Lapsley, president of the California Business Roundtable. “We are organized. We are ready to start building a campaign and we’re starting today.”

Proposition 13 limits property taxes for both homes and businesses to 1% of a property’s taxable value. The initiative also restricts a property’s taxable value from increasing more than 2% each year, no matter how much its value rises on the market. The longer a person or a company owns a property, the less they pay in taxes compared to its market value.

Under the proposed initiative, protections for residential properties would not change, but local governments would be able to levy taxes on commercial and industrial land based on a property’s market value, a process known as “split roll.”

As it stands, the disparities in what businesses pay in taxes are wide, depending on when they first purchased their properties. Computing giant Intel acquired its Santa Clara headquarters in the 1970s and pays taxes on its land assessed at $225,000 an acre, according to the Santa Clara County Assessor’s Office. By contrast, tech company Adobe Systems paid a reported $27 million an acre for land to expand its headquarters in nearby San Jose this year.

Activist groups have talked about charging businesses higher property taxes for years. But they’ve been cowed by intense opposition from the business community and voters’ allegiance to Proposition

13. 13. In 2014, Gov. Jerry Brown called Proposition 13 “a sacred doctrine that should never be questioned.” Before now, no split-roll initiative had qualified for the ballot.

Jon Coupal, the head of the Howard Jarvis Taxpayers’ Assn., the anti-tax organization whose namesake founder was the author of Proposition 13, said it might seem like California’s changing demographics and political attitudes would weaken Proposition 13’s hold on the electorate.

“This is not the California of 1978,” Coupal said. “It has become more progressive.”

But Coupal and Lapsley pointed to June polling from the nonpartisan Public Policy Institute of California, which showed that 65% of likely voters believed Proposition 13 turned out to be a good thing for the state — roughly the same margin by which the initiative passed 40 years ago.

“It’s withstanding the test of time, no matter what anyone says,” Lapsley said.

Early surveys show voters might be more open to the idea of taxing businesses more on their properties.

A new USC Dornsife/Los Angeles Times poll of 980 registered voters found 46% in support of split roll, with 22% opposed and 31% undecided. The poll, conducted between Sept. 17 and Oct. 14, has a margin of error of 4 percentage points in either direction and larger for subcategories of voters based on voting behaviour, age, ethnicity, party affiliation and other demographic indicators.

The survey found especially strong backing among college-educated voters — 58% of whom were in support of the proposal — and those in the Bay Area, with 64% behind the measure.

With the measure potentially going before voters in two years, those numbers should put opponents on the defensive, said Bob Shrum, a long-time Democratic strategist who is director of the Jesse M. Unruh Institute of politics at USC.

“I think they will have to spend a very large amount of money to defeat this,” Shrum said.

Business groups plan to do just that. Lapsley said the opposition campaign is prepared to raise “at least $100 million.”

Supporters of the initiative hope to collect $45 million, Carrizales said. They are also pursuing a separate campaign to convince 1 million new or infrequent voters to go to the polls in 2020 during the next presidential campaign.

Expanding the pool of voters is a smart strategy, Shrum said.

“I think it’s one of the only ways to answer or compete with $100 million,” he said.

Both gubernatorial candidates, Democrat Gavin Newsom and Republican John Cox, have said they would like to make big changes to the state’s tax system, which relies on income taxes paid by the wealthiest Californians and yields volatile tax receipts. Newsom has tiptoed toward embracing changes to Proposition 13, including proposals to levy higher property tax bills on businesses.

Other major changes to rules inaugurated by Proposition 13 also are on the table for 2020. Assemblyman David Chiu (D-San Francisco) wants to end the ability of heirs to inherit their parents’ low property tax bills when they inherit their homes. The California Assn. of Realtors, a powerful interest group, wants the state to place limits on — but not eliminate — that property inheritance tax break and clamp down on businesses that avoid higher property taxes when they buy commercial real estate. They would do so as part of a broader initiative that would extend other tax advantages under Proposition 13 for homeowners 55 or older.

State law allows backers of qualified initiatives to withdraw their measures in advance of a vote, something that multiple interest groups did this year after working out alternatives with the Legislature.

Sen. Bob Hertzberg (D-Van Nuys), who has been pushing for changes to California’s tax system for years, said two years gives the Legislature plenty of time to make a deal.

“This is extraordinary in the sense they’ve qualified it two years in advance,” Hertzberg said. “It gives us plenty of time to have this debate.”

For now, though, backers of the measure aren’t interested in conversations with lawmakers about pulling their initiative back.

“Now is the time for bold structural solutions, and we won’t settle for incremental or piecemeal change,” Carrizales said.

 

USA – New York: NYC’s property taxes are going to remain a total mess

Everyone  knows  New  York  City  taxes  are  high,  but  that’s  not  the  only  problem:  they’re  also complicated, confusing and unfair — especially property taxes.

Which is why Assemblywoman Nicole Malliotakis (R-SI) just rolled out a plan to overhaul Gotham’s property-tax system. And why a newly formed panel is holding hearings to come up with fixes.

It’s also why a tax-reform group is suing the state and city (a judge just gave the suit the go-ahead). And why the Citizens Budget Commission — which has documented property-tax inequities for years — put out another report on them just last month.

How complex is it? The city divides property into four tax “classes”: small homes, apartments, utilities and commercial and industrial real estate. Each class is taxed based on different rules, rates and possible exemptions. Thus, each class winds up with a different average “effective tax rate” (i.e., a property’s tax bill as a percentage of its market value).

A 2016 CBC report notes that small homes are hit with the lowest ETRs, 0.74 percent. Small rental buildings average more than twice that, and larger ones five times the rate.

Tenants feel the pain when landlords fold their tax bills into the monthly rent: If the rent is too damn high, it’s in large part because the tax is too damn high.

Meanwhile, commercial property-tax rates are even higher, hurting job providers.

Single-family homes do OK compared to elsewhere in the region and even the nation. But as a Lincoln Institute study found some years back, the effective rate for a 20-unit rental building here is twice the national average for a big city. And ETRs on commercial property run 76 percent above the US big-city average.

Equally troubling: Within classes, rates vary widely. ETRs for small homes run from nearly zero to as much as 1.2 percent, the CBC report said. “A single-family home worth $500,000, for example, could see a tax bill anywhere from less than $100 to $6,000,” it observed.

One key factor: Hikes in assessments are capped, so they phase in slowly. Yet caps help those who least need it: homeowners whose property values are rising fast, such as those in gentrifying neighbourhoods.

Point is, it’s all a big mess. And property taxes only add to the crunch of all the other taxes: on businesses, incomes, sales, etc.

Clearly, reforms are in order — not just to lower taxes but to simplify them and make them fairer. Yet, for all the renewed interest in doing that, don’t expect much to change.

For one thing, the city’s spending growth means City Hall can’t afford to cut tax rates. And any attempt to level the playing field will create armies of winners and losers; what New York pol is willing to risk the political consequences?

No, sad to say, New Yorkers will be stuck with crazy property taxes until their leaders find the courage to upset the apple cart by finally taming the city budget.

Compliments of  International Property Tax Institute (IPTI), a member of the EACCNY