President’s Message – March 2021
The Tax Foundation published an interesting report last month in which it analysed some of the latest data on taxation published by the Organisation for Economic Co-operation and Development (OECD). As it includes property tax, I thought it may be useful to share a few of the main points in their report.
The report starts by outlining that developed countries raise tax revenue through a mix of individual income taxes, corporate income taxes, social insurance taxes, taxes on goods and services, and property taxes. The mix of tax policies can influence how distortionary or neutral a tax system is. Taxes on income can create more economic harm than taxes on consumption and property. However, the extent to which an individual country relies on any of these taxes can differ substantially.
A country may decide to have a lower corporate income tax to attract investment which may reduce its reliance on corporate income tax revenue and increase its reliance on other taxes, such as social insurance taxes or consumption taxes. For example, in 2019, Lithuania raised only 5.2 percent of total revenue from corporate income taxes, but a combined 70.4 percent of total revenue came from social insurance taxes and consumption taxes.
Countries may also be situated near natural resources that allow them to rely heavily on taxes on related economic activity. Norway, for example, has a substantial oil production industry on which it levies a high (78 percent) income tax and thus raises a significant amount of corporate income tax revenue. These policy and economic differences among OECD countries have created differences in how they raise tax revenue.
The report goes on to point out that, having regard to the most recent data from the OECD (which is 2019), consumption taxes were the largest source of tax revenue for OECD countries. On average, countries raised 32.3 percent of their tax revenue from consumption taxes. This is unsurprising given that all OECD countries (except the United States) levy Value Added Taxes (VAT) at relatively high rates.
The next significant source of tax revenue is social insurance taxes, which raise 25.7 percent of revenue on average. Individual income taxes accounted for 24 percent of total revenue across the OECD. The smallest shares of revenue were from corporate income taxes (9.6 percent) and property taxes (5.6 percent). From an IPTI perspective, property taxes have much to offer, but we know they are unpopular!
The report continues by comparing average 2019 and 1990 OECD tax revenue sources and it states that the most notable change is a decrease in individual income taxes versus increases in social insurance and consumption taxes.
The share of revenues from corporate income taxes has also increased compared to 1990 (despite declining corporate income tax rates). The relative importance of property taxes as a source of revenue has stayed roughly constant. The report goes on to look at the various taxes as follows.
Consumption Taxes: Consumption taxes are taxes on goods and services. These are in the form of excise taxes, VAT, or retail sales taxes. Most OECD countries levy consumption taxes through VAT and excise taxes. The United States is the only country in the OECD with no VAT. Instead, most U.S. state governments and many local governments apply a retail sales tax on the final sale of products and excise taxes on the production of goods such as cigarettes and alcohol.
In 2019, Chile relied the most on taxes on goods and services, raising approximately 53.1 percent of its total tax revenue from these taxes. Chile was followed by Hungary (45.3 percent) and Latvia (45.1 percent). The United States raised the least amount of tax revenue in the OECD from consumption taxes at 17.6 percent in 2019. Japan raised slightly more, at 19.5 percent, followed by Switzerland, at 21 percent.
Social Insurance Taxes: Social insurance taxes are typically levied in order to fund specific programs such as unemployment insurance, health insurance, and old-age insurance. In most countries, these taxes are applied to both an individual’s wage and an employer’s payroll.
In 2019, the Czech Republic relied the most on social insurance taxes at 44.3 percent, followed by the Slovak Republic (at 43.1 percent), Slovenia (42 percent), and Japan (40.2 percent).
Denmark raised the least, at 0.1 percent, because social programs in Denmark are mostly funded from taxes other than dedicated social insurance taxes. Australia and New Zealand are the only countries that do not levy specific social insurance taxes on workers to fund government programs.
Individual Income Taxes: Income taxes are levied directly on an individual’s income, beginning with wage income. Many nations also levy their individual income tax on investment income such as capital gains, dividends, interest, and business income. These taxes are typically levied in a progressive manner, meaning that an individual’s average tax rate increases as income increases.
The country with the highest reliance on individual income taxes in 2019 was Denmark (52.4 percent), followed by the United States (41.5 percent) and Australia (41.1 percent).
Colombia (6.2 percent), Chile (7.2 percent), the Slovak Republic (10.9 percent), and the Czech Republic (12.6 percent) relied the least on individual income taxes.
Corporate Income Taxes: The corporate income tax is a direct tax on corporate profits. All OECD countries levy a tax on corporate profits. However, countries differ substantially in how they define taxable income and the rate at which they apply the tax. Generally, the corporate income tax raises little revenue compared to other sources.
Colombia relied the most on its corporate income tax, at 24.5 percent of total tax revenue. Chile (23.4 percent), Mexico (21.3 percent) and Australia (19.1 percent) also relied heavily on their corporate income tax compared to the OECD average of 9.6 percent. In 2019, Latvia (0.5 percent), Hungary (2 percent), United States (3.9 percent) and Italy (4.6 percent) relied the least on the corporate income tax.
Property Taxes: A much smaller source of tax revenue for most OECD countries is the property tax. The property tax is levied on the value of an individual’s or business’ property. Other types of property taxes include estate, gift, and inheritance taxes, and net wealth taxes.
The United Kingdom relied the most on property taxes in the OECD (12.4 percent), followed by the United States (12.1 percent) and Canada (11.6 percent). Estonia relied the least on property taxes, raising only 0.6 percent of total revenue. Lithuania (1 percent), the Czech Republic and Slovak Republic (both at 1.2 percent), and Austria (1.3 percent) also relied very little on property taxes.
Although there is perhaps nothing particularly new or startling in any of these figures, it is useful to see the latest OECD data and the Tax Foundation’s commentary.
Moving on to IPTI business, we continue to be busy with both interesting projects and a variety of online events. Our projects include looking at how advances in valuation technology – in particular, the use of artificial intelligence and machine-learning – are viewed by those within the valuation profession and, in relation to property tax systems, by stakeholders. Another project is looking at what type of computer support – including automated valuation functionality – is now relevant to a modern valuation agency. And, still in the field of technology, how the property tax management function within large corporations is organised and the extent to which computer support facilitates its effectiveness.
In terms of online events, a recent webinar we delivered in partnership with the Institute of Municipal Assessors (IMA) was titled “Valuation of Multi-Residential Properties”. The valuation techniques employed to value multi-residential properties vary across property groupings such as high-rise, medium-rise and walk-up apartments. Direct capitalization of net operating income into present worth is one of the methods used to value these properties. The general uniformity of units within each of these groupings also allows for the utilization of gross income multipliers which is another method of converting rental income into current value. As with all income producing properties, analysis of the income and expense statement is a critical part of the valuation process as it will allow for consistent comparison of rents per unit type and identify what utilities are either included or additional to base rent. This webinar explored both methods and our two experienced presenters provided plenty of practical examples of their development and application. I am pleased to say that the webinar was well attended and the audience greatly appreciated the knowledge shared by our presenters.
Looking ahead, we have a number of interesting events coming up details of which are, as usual, available on our website: www.ipti.org.
Before leaving IPTI matters, I am pleased to welcome a new Member of our Board of Advisors. In February, Kevin Siu was appointed as the Commissioner of the Rating and Valuation Department in Hong Kong following the retirement of LY Choi. Kevin has joined our Board and we are pleased to welcome him.
I should also add that the latest edition (Volume 17 Issue 2) of our joint publication with the IAAO – the “Journal of Property Tax Assessment & Administration” – is now available. Among the interesting papers it contains is one entitled “Nationwide Mass Appraisal Modeling in China: Feasibility Analysis for Scalability Given Ad Valorem Property Tax”. The abstract for this paper reads: “The Chinese government has stated its intention of introducing an annual property tax since 2003, but, while selecting six pilot cities for experimenting with the viability of a mass appraisal system rollout, has not yet adopted this policy. The Shenzhen Center for Assessment and Development of Real Estate was founded to facilitate the process of piloting the viability of property taxes – an initiative that coincided with the Lincoln Institute of Land Policy’s initial involvement in China in 2003 (with the International Property Tax Institute [IPTI], ESRI Canada, and others) – and to provide expertise in topics ranging from property tax and municipal finance to public land management and land expropriation. The long-standing intention to roll out property tax, allied with significant capacity building, begs the questions, why has there not been more progress to date, and are there any fundamental barriers to policy adoption? This paper seeks to contribute to understanding this issue by assessing the feasibility of creating computer assisted mass appraisal (CAMA) and automated valuation models (AVMs) in China and their respective capability to conform to IAAO valuation standards, with implications for scalability across national and regional markets.”
Although not linked with the above paper, readers will see an article later on this page with some recent information about the introduction of property taxes in China.
Now it’s time for a quick look at what is making headlines concerning property taxes in selected jurisdictions and countries around the world.
As mentioned above, we will start with China where a recent Xinhua report discussed home prices and the property tax, sparking speculation that a new tax may be imposed to rein in any runaway trend in home prices in some cities. In late December, a report from the Chinese Academy of Social Sciences (CASS) suggested new charges may be part of the 14th Five-Year Plan (2021-25). For more than a decade, property tax has been the equivalent of crying wolf in China. But now, after a year of pandemic-related ups and downs in the housing industry, the issue of whether or not there would be a new property tax has gathered tremendous staying power in public chatter. The Xinhua dispatch mentioned possible tough measures to cool the overheated home market. It also discussed a slew of suggestions to uphold the principle that “housing is for living in, not for speculation”. A view expressed was that a levy of property tax in a reasonable and scientific manner could help. The CASS report suggested cities where home prices tended to overheat may want to test a new solution in the form of a property tax during the 14th Five-Year Plan period. In line with the Central Economic Work Conference’s emphasis on solving housing problems in major cities, the report said systematic strategies should be adopted, including charging property tax. The president of the China Real Estate Data Academy, said, “It’s highly likely for property tax to enter the legislation procedure during the 14th Five-Year Plan period, and it will likely become part of day-to-day life in a couple of years.” In 2011, Shanghai and Chongqing became the only two cities to levy property tax. In Shanghai, the tax is collected only from families having housing area of more than 60 square meters per person, and it is taxed at a rate of 0.4 percent or 0.6 percent of the total property price annually, depending on the apartment’s price per square meter. In Chongqing, the tax, which is levied on a trial basis, is focused more on taming investment speculation in high-end properties, with the rate set between 0.5 percent and 1.2 percent of the property price annually. However, the real estate tax in other cities will likely be completely different from what is being levied in Chongqing and Shanghai, in terms of tax base and collection as that involves all related government divisions, from legislation to implementation, experts said.
A new “Valuable House Tax” (VHT) recently came into effect in Turkey after being incorporated into the Turkish tax system in 2019 as part of the “Law on Digital Services Tax and Amendments to Several Laws and Legislative Decree No. 375” No. 7194. This law was enacted on 7 December 2019 and the VHT, part of the real estate portion of the legislation (Real Estate Tax Law No. 1319), was supposed to be introduced in 2020; however, it was postponed to 2021 due to objections and great debate. According to the related provisions of the Real Estate Tax Law, the VHT will apply to houses worth at least TRY 5,227,000 (about $700,000 USD); houses worth less will not be taxed. The VHT is based on the taxable value of a house, which is determined according to the Real Estate Tax Law. Overall, the VHT tax rate is 0.3 percent for houses with a value between TRY 5,227,000 and TRY 7,841,000 (about $1 million USD), 0.6 percent for houses with a value between TRY 7,841,001 and TRY 10,455,000 (about $1.4 million USD) and 1% for houses with a value of more than TRY 10,455,001. Taxpayers who own only one residential property within the borders of Turkey do not have to pay any VHT, no matter how high the value of this property is. Those who have more than one house within the scope of the tax do not have to pay VHT on the house with the lowest value. Since the liability of VHT starts in the year following the year in which the established thresholds are reached, houses that reach the above thresholds will be subject to VHT in 2022. The threshold for the year 2020, which determined the houses subject to VHT, was TRY 5 million.
In India, the Government of the Union Territory of Jammu and Kashmir has started an exercise for the imposition of Property Tax through Urban Local Bodies (Municipal Corporations, Municipal Councils and Municipal Committees). A statement reads: “In exercise of the powers conferred by the Jammu and Kashmir Property Tax Board Act, 2013, the Jammu and Kashmir Municipal Act, 2000 and the Jammu and Kashmir Municipal Corporation Act, 2000, the Government hereby directs that for the levy of Property Tax on any land or building, the value of land as notified in terms of Jammu and Kashmir Preparation and Revision of Market Value Guideline Rules, 2011 (circle rate) shall be a key determinant of the value of the property apart from the nature of construction, the kind of use, the age of the property or any other relevant consideration”, read the notification. To add a bit of force, it goes on to state: “Imposition of Property Tax is one of the pre-conditions fixed by the Government of India for availing 2% additional borrowings … with the imposition of Property Tax, the J&K Government would be able to get Rs 503 crore from the Government of India”. That should provide an incentive! The J&K Municipal Act states: “Unless exempted under this Act or any other law for the time being in force, Property Tax shall be levied on all lands and buildings or vacant lands or both situated within the Municipal area. The Property Tax shall be levied at such percentage not exceeding 15 per cent of the taxable annual value of land and building or vacant land or both as the Government may, by notification, from time to time specify”. The Act also provides, “The taxable annual value of land and building or vacant land assessable to taxes under this Act shall be calculated by multiplying the corresponding unit area value with the total build-up area of a building or the total area of land, as the case may be, minus depreciation, at such rates as may be prescribed, depending on the age of the building”.
Moving on to Australia, the debate over replacing stamp duty on residential properties with an annual land tax continues to rumble on. Another recent report says that it is commonly agreed that property transaction taxes are highly inefficient. Property transaction taxes, incurred when a house is sold, are an important source of state government revenue. The authors of this report say that their research examines the cost and benefit of replacing stamp duty with either a recurrent property tax based on the value of the home or with an increase in consumption tax. They refer to stamp duty reducing transactions in the housing market and presenting a barrier for homeowners wanting to move when a residence no longer suits their needs. They also refer to mobility and indicate that reduced mobility can have ramifications beyond the housing market, e.g. it may be difficult for people to accept better jobs that are located too far from their current residence. Stamp duty, they say, also increases the down payment required to purchase a home, making it more difficult for young households to enter the property market. Over time, as house prices have increased the burden of stamp duty has become larger, and these problems have become more severe. And finally, stamp duty is one of the most volatile taxes, as the revenue raised varies based on movements in the property market. But, they acknowledge, the challenge for governments is that replacing stamp duty with an alternative tax will always be controversial as it will raise the tax burden on some people and lower it for others. In the long run, they say, their research shows that a land or property tax is preferential to the current situation. But it will be difficult to get broad-based support for the removal of stamp duty and its replacement with a property tax from current voters. Some state and territory governments have already taken steps to eliminate stamp duty. In the Australian Capital Territory, there’s a 20-year plan for the transition from stamp duty to land taxes. The New South Wales’ government has an alternative proposal. Households purchasing property in the future may be allowed to select either a recurring land tax or a one-off stamp duty levy. The gradual transition – either by increasing the length of the policy change or by allowing households to select into different tax payment systems – helps make these policies more palatable to the voting public and also provides a pathway for other state governments to follow.
And finally, in the wild and wacky world of property tax, appeals can sometimes produce unusual if not downright absurd grounds for reducing valuations. One of my favourites from the non-residential sector related to a monolithic bullion store which was a massively reinforced structure; the agent representing the taxpayer sought a reduction on the grounds that it had “no natural light inside the building”. I think he may have misunderstood the use and purpose of the property! However, it is usually the unrepresented taxpayers in the residential sector who put forward some of the most amusing grounds. One, which was apparently not a joke, stated as the reason for a reduced valuation of his house as: “My neighbour smells; he smells so bad he has been refused entry onto public transport.” I am not sure how serious the next one was, but I liked his style. The taxpayer said: “I read on your website that a reduction might be available if I incurred high maintenance costs. My wife is high maintenance; can I get a reduction?” It would be interesting to know what his wife thought about that one!
If anyone has examples of similar nonsense, please send them to me at: firstname.lastname@example.org
Paul Sanderson JP LLB (Hons) FRICS FIRRV
President, International Property Tax Institute
President’s Message 2021
President’s Message 2020
President’s Message 2019