Taxes and land in Eastern Europe
Largely under the radar, great strides are underway in land valuation and property tax systems in Eastern Europe -- as well as in Western Europe hotspots such as Ireland. In March, senior fellow Joan Youngman traveled to Ljubljana, Slovenia, with a delegation from the Lincoln Institute for a workshop on market value-based taxation of real property at the Center of Excellence in Finance, a leading training institution for public officials. The work was with participants from six Eastern European nations to compare international experiences and draw lessons for the successful implementation of value-based property taxes. The group analyzed property tax bases and valuation systems from the perspective of revenue capacity, fiscal policy, property rights, administrative efficiency, and land use incentives.
Major property tax changes in Serbia, Latvia, Slovenia, and Croatia were discussed in the context of similar efforts in Estonia, South Africa, Northern Ireland, and the Republic of Ireland. For example, the Republic of Ireland has instituted a new property tax this year, after more than three decades without a residential property tax. At the same time, Croatia is scheduled to introduce a new residential property tax this year to replace existing community charges, income tax surcharges, and taxes limited to second homes. Kosovo increased property tax collections by one-third between 2012 and 2013, while in Serbia a change from central to local tax administration led to more than an 80 percent increase in Belgrade property tax revenue between 2006 and 2011. Slovenia and Northern Ireland both undertook a consolidation of property records and tax billing, while in Estonia these separate departments were functionally coordinated through use of compatible software.
Throughout all regions the economic downturn has had a serious impact on property markets. Residential values doubled in Northern Ireland and in Latvia between 2005 and 2007, then fell sharply and only now are approaching their pre-recession levels. Estonian land prices and rents fell by half in 2009, while Slovenia experienced a 50 percent drop in the number of property sales. These market fluctuations posed serious political and assessment challenges to value-based taxes. The failure of a hastily designed 2011 property tax introduced in Greece in response to its fiscal crisis offered many potential lessons for legislative drafting, tax administration, taxpayer communications, and public relations.
The week’s discussion stressed the importance of separating the valuation and rate-setting processes, avoiding the political temptation to overtax business property, and setting specific cycles for revaluation. The danger of excessive transaction taxes, which can easily undermine valuation data by encouraging misrepresentation of sales prices, was demonstrated by the revenue improvements that followed reform of high tax rates, which reach 18 percent in Russia but have been reduced to less than 1 percent in Estonia. All countries had confronted the challenge of minimizing exemptions and deductions, but none more so than the United Kingdom, where the London Eye Ferris wheel, the Houses of Parliament, and even Buckingham Palace and Stonehenge are subject to tax and all exempt property is valued in order to calculate the revenue forgone by the exemption.
That approach is the subject of an article in the April issue of Land Lines, by William McCluskey and David Tretton: Valuing and Taxing Iconic Properties: A Perspective from the United Kingdom.