The study of property taxation in Europe offers special challenges because each country has a different definition of land and property, and a different approach to local property taxation. The term property often includes both land and buildings, but may also include plants and machinery as well as certain possessions, such as automobiles. In Denmark, for example, separate taxes may be levied on the land and property elements of a single holding.

Among the 41 counties in our study, we identified 61 different forms of local taxation. Most are based on annual value, usually assessed on a capital or rental basis, and are payable annually. While most countries tax the sale of property at the state level, the Czech Republic, Italy, Portugal, Slovakia and Spain levy such taxes locally. Yet, amid such diversity, a basic central pattern emerges. Each county, except Malta, operates some form of annual property tax on the use or occupation of land and/or property, usually levied at the local level, and the revenues contribute to the provision of local services.

Tax Reform and the European Union

Over the last 10 years France, Denmark, Germany, the Netherlands, Belgium, the United Kingdom and the Republic of Ireland have either completed or are in the process of completing substantial reforms to their taxation systems. Other countries have undertaken more minor reforms. Even some emerging democracies are reviewing and reforming their relatively new taxation systems in light of changes elsewhere. No individual tax exists in isolation, and all are affected by larger fiscal, economic and political developments. The reform of one tax will often have consequential effects on others, and property taxation in all its forms is no exception.

One impetus to tax reform in Europe is the European Union (EU). Fifteen of the countries in our study are members, and many other countries are in various stages of being considered for membership. Many countries are taking this opportunity to reform and improve their tax administration systems and to make their taxation rates competitive with those of other member states. Tax harmonization is not one of the declared aims of the EU, although it may be a natural consequence of many EU polices.

The main incentive for tax reform in Europe is coming from the states themselves. In one of the first signs of the problems caused by traditional national taxation systems, the Ministry of Finance in the Netherlands noted in the early 1990s that not only were businesses locating in the most tax-favorable areas but they also were buying goods and services from other countries where tax rates and other costs were lower. The close proximity of the Netherlands to Germany, France, Belgium and Luxembourg, as well as the good transport links between the countries, exacerbated the situation.

The introduction of the Single European Market has opened internal markets to foreign competition with the removal of trade barriers and the abolition of customs duties between member states. Business competitiveness now depends primarily on efficiency and the amount of taxation imposed by the national government, rather than on state aid and trade policies.

Approaches to Local Taxation

The Taxpayer

The majority of property taxes are payable by the owner. Of the 51 taxes we studied, 29 identified the owner as the taxpayer and 12 are paid by the occupier; the remaining 10 are sales-based taxes. The occupier figure was distorted because the United Kingdom accounted for 50 percent of this figure, due to differences in the implementation of its local taxes. In the Netherlands both parties can be taxed at different amounts. For sales-related taxes the results were less clear, with the taxpayer being the seller in half the cases and the purchaser in the other half.

Sources of Valuation Information

Many countries have some form of computerized cadastral system to record property-related information, and as part of the assessment process different levels of government usually exchange information. The nature and implementation of such systems vary considerably, from a series of different registers administered at various levels of government to a single register administered nationally.

The rights of the taxpayer to centrally held information also differ among countries. Some provide no rights to any information, while others provide notice whenever a new valuation or alteration is made. In some cases, valuation and comparable evidence may be made available at the request of the taxpayer.

Bases of Valuation

Three alternative approaches for the valuation bases are used most frequently. The Capital Value Approach is normally based on the open market value of the property at a specified baseline date, which may be a current date such as the start of the tax year. Sweden designates a date two years before the tax year. This approach has the advantage of giving valuation authorities more time to consider all the evidence available before arriving at their final valuations. The open market value is usually defined on the basis of a property’s best and/or highest value.

The Rental Value Approach is based on the open market rental value at a specified date. England, Wales, Scotland and the Republic of Ireland specify a baseline date some time before the new values come into effect, as in Sweden. The open market rental value may be restricted by assumptions as to changes of use and alterations. The rationale is that the tax is levied on the occupier and the amount of tax is based on the current use of the property, not its potential value.

Properties not normally bought and sold in the market require alternative approaches to valuation. For example, the use of a revenue (or accounts) approach has been adopted in England and Wales for many types of leisure-related property, and its use is expected to increase. The cost approach, related to the cost of construction, also is widely accepted in England and Wales and in other European countries.

The Overall or Unit Approach relates to a property’s size. The tax is levied at a prescribed rate per square meters or per unit, which may vary depending on the predominant use of the property. These rates may be loosely based on rental or capital values, but are more often an arbitrary rate fixed by the appropriate taxation authority. In 1997 the Netherlands moved away from such a system in favor of a market-related capital value approach. Many new democracies have adopted the unit approach due to a lack of property information, a limited and restricted property market, and insufficient resources to enable the development of alternative systems. It is anticipated that many of these countries will move to a value-based system when resources and circumstances permit.

A number of other approaches are used under special circumstances. One is the capital value banding approach adopted for the valuation of residential property for the Council Tax in England, Wales and Scotland. In this approach property is ascribed to various value bands rather than valuing each individual property precisely. Another example is the local business tax, which includes the value of the property plus in the case of France a percentage of salaries and in the case of Spain and Switzerland the business profits.

Revaluation of the Tax Base

One of the key factors in examining European property tax systems is whether the valuations on which the tax is charged are up-to-date. Our research identified a very mixed picture: some countries have not revalued their tax bases for many years and others undertake revaluations regularly, every four or five years (see Table 1). Many countries have either no provision for regular revaluations or have postponed revaluations so often that their tax base bears little resemblance to current market values.

Indexation

Many countries have attempted to overcome the problems associated with infrequent revaluations by some form of indexation. Those countries performing annual revaluations may implement them through actual annual revaluations, indexation of an earlier revaluation or self-assessment declarations by the taxpayer. While annual indexation between regular revaluations every few years may ensure a relatively accurate tax base, its use becomes more questionable when the base has not been updated for 10 or 20 years. The position is made far worse in countries where the property market is changing rapidly, especially in major cities and towns. Any adopted index needs to be closely related to the property market in that location and to the specific property type. In most cases, however, the index is a single figure applied across the entire country and for all types of property.

Exemptions and Reliefs

Exemptions can be considered from two viewpoints: the nature of the property or the nature of the taxpayer. In addition, some countries have introduced arrangements that place a ceiling on the amount of tax payable. Some common features relating to the types of properties for which some form of relief may be granted are:

• land owned by the state and used for the provision of public services, such as schools, hospitals, cemeteries etc., if usually exempt or excluded from the tax legislation;
• land and property used for religious purposes;
• historic land and buildings;
• agricultural land.

Relief to taxpayers takes many forms and can include:

• relief to persons of retirement age;
• relief to disabled persons;
• relief of a percentage of the tax for certain owner-occupiers or remittance of an initial amount of the tax.

Calculating the Amount of Tax

The simplest systems for calculating tax payments adopt a given tax per square meter occupied. Once the area of the property is agreed, it is a relatively simple matter to apply a given tax rate to that area. In some countries, the assessed value must be multiplied by an index or co-efficient and then by a locally determined rate that can vary depending on the size of the authority levying the charge. In France, the situation is even worse for the business tax, where a series of limitations have to be calculated to ascertain whether a ceiling or cap applies to the taxable amount.

Appeal Systems

Most countries have a system by which the taxpayer may challenge the tax assessment or valuation, although that action generally does not postpone the payment of the tax. In some cases the first step is an informal approach to the authority, which may be able to resolve the dispute without the need for more formal action. Where a formal approach is adopted, the appeal may be dealt with as part of the general tax appeal process through the normal tax tribunals and courts, or it may be handled outside the normal tax system, often in courts and tribunals established for the purpose.

Tax Collection and Payment

In many countries taxes are collected by the national tax authority, often as part of the income tax process. This method has the advantage of being linked with national exemptions and benefits; the resulting tax is usually payable over the whole tax year. Under the second common method, the tax is paid directly to the relevant taxing authority, sometimes in installments.

Conclusion

European countries are constantly reviewing their tax systems and adopting the best features of other systems. This presents special challenges to a survey such as ours, but also enhances its potential impact by allowing comparative analysis to influence new legislation. One very important conclusion at this early stage of the research project is the importance of keeping the tax base up-to-date. This not only simplifies the entire valuation and collection process but also ensures a tax base that is more acceptable and understandable to taxpayers. During this year we propose to widen our research and complete data collection on other European countries. In addition, we will attempt to compare the amounts of revenue raised by each type of taxation and analyze them within the context of each country’s local government and finance system.

Peter K. Brown is professor of property taxation at Liverpool John Moores University, a frequent author and a regular speaker on valuation, rating and taxation matters. Moira Hepworth is head of research at the Institute of Revenues, Rating and Valuation (IRRV), based in London. The authors are joint recipients of a David C. Lincoln Fellowship in Land Value Taxation. This article is based on their first year of research and their recent working paper.

Related Publication

Peter K. Brown and Moira Hepworth. 2000. “A Study of European Land Tax Systems.” Lincoln Institute Working Paper. 156 pages.

Public investment in urban areas often results in increased land value that benefits only a small group of private owners. In a pioneering initiative, the city of Porto Alegre, Brazil, is using the property tax as an instrument for capturing land value increments, deterring land speculation and promoting rational urban development.

Economic and Social Context

Porto Alegre is the capital and largest city of Brazil’s southernmost state, Rio Grande do Sul. With a population of 1.5 million inhabitants and approximately 450,000 real estate units in 1994, city officials estimated a shortfall of more than 50,000 residential properties. However, major economic and social problems limited the city’s ability to provide housing for low- and middle-income families.

As in many developing countries with unstable economic cycles, land is a major means of concentrating wealth in Brazilian cities. In Porto Alegre, the existence of large undeveloped sites near the city center contributes to urban sprawl on the periphery. The major factor responsible for this situation is land speculation by wealthy landowners who hold large vacant sites and wait for a favorable moment to undertake investments or to sell their sites at huge profits.

As low-income families are pushed to the periphery, their segregation leads to increased social exclusion and demands for public services. However, the provision of basic infrastructure, such as public transport services on the long routes between the periphery and the commercial, industrial and entertainment centers, requires large investments from the government.

City officals in Porto Alegre had set a primary goal to provide high quality urban services for the outlying community, including basic infrastructure, education, public transport, street cleaning and security services. However, a financial diagnosis of the city’s revenue alerted authorities to the scarcity of resources for such investment. In contrast, many districts in more central areas were well supplied with infrastructure, equipment and services, and they had lower population densities than were called for in the city’s urban development plan.

Speculation was clearly impeding land development, but officials believed the political atmosphere seemed favorable for change. After a period in which government authorities faced chronic inflation in Brazil, an economic stabilization program was introduced in July 1994. Before the economic plan, inflation was running at astonishing annual rates of 7,000 percent. Since the introduction of the plan, average rates of inflation ranged between 0.7 and 1.7 percent a month. When the economy was measured in terms of Gross Domestic Product (GDP), it showed annual positive growth rates since 1993. Local government was confident that the moment was ideal for recovering the investment and productive activities that had been paralyzed during the previous high-inflation period.

In summary, the following factors encouraged Porto Alegre’s initiative to use the property tax as an instrument for simultaneously capturing increased land value, deterring land speculation, and promoting social fairness and economic growth:

• Stimulation of urban land occupation and development, since the private market was not responding positively to the demand from low- and middle-income residents.
• Reduction of the housing shortfall.
• Provision of assistance to low-income families, guaranteeing better living and working opportunities.
• Recovery of land value generated by public investment, by encouraging individuals who had been favored by public investment to return those benefits to the community.
• Avoidance of large additional investments in public infrastructure and services by applying financial resources rationally.

Government Actions

The Brazilian Constitution (1988) defines the property tax as a tax on urban land and buildings and specifies that it can be used as an instrument of urban policy to promote the rational use of land to generate social benefits to the community at large. This provision allowed Porto Alegre to undertake the following actions:

• Define priority urban zones for development and occupation. The process involved the selection of five distinct areas characterized by high-quality urban infrastructure, equipment and services. These areas would support a larger population density without any additional public investment.
• Identify 120 vacant sites ranging from 3,000 to 360,000 square metres (m2) in the priority zones.
• Introduce local legislation requiring the development of the selected properties within given time periods. The law established that if the periods specified for developing the sites were not met the property tax on those sites would be made progressive. The tax rate would be raised by 20 percent increments on an annual basis up to a maximum rate of 30 percent. The basic rates for vacant land vary from 5 to 6 percent of the property market value.
• Grant priority to construction projects on the designated sites. The City Council institutions responsible for planning permits would facilitate construction and occupation.

Effectiveness of the Initiative

The legislation was promulgated at the end of 1993 and the government started to implement it in 1994. The proposal was supported by both ruling and opposition party members of the City Council, which is responsible for approving decisions on matters of municipal legislation.

As of October 1997, the initiative has not yet achieved its desired results. Only five of the 120 vacant sites are being developed. The landowners of 50 properties are paying the property tax at the progressive rate. Three of the properties were removed from the list because they had been incorrectly included in the first place due to inaccurate records about their physical characteristics.

The development status of the remaining 62 properties has not been defined. Some are owned by wealthy and politically powerful landowners who appealed to the Supreme Court against the constitutionality of the measures undertaken by the city government. Indeed, two landowners (A and B) who hold nearly 44 percent of the vacant land are appealing, and other landowners seem to be waiting for the judiciary outcome to make their own decisions. (See chart.)

Evaluating the effectiveness of Porto Alegre’s property tax initiative will be possible only after the judiciary decisions on the matter are pronounced, but other crucial gains derived from the experience have already guaranteed its success. The legislation has generated intense debate at the national and local level regarding political and private rights, property rights and public interest. The experience has also been used as an example to make other government authorities aware of their responsibilities to promote the rational use of urban land.

In Brazil, cultural and economic factors still seem to encourage land speculation rather than productive activities, and the difficulty in establishing boundaries between public interest and private rights is, indeed, complex. However, the pioneering actions undertaken in Porto Alegre represent an important step towards controlling private speculation and promoting responsible urban development. Similar initiatives elsewhere now have a greater potential for becoming effective alternatives to achieve fairness in the distribution of public resources with favorable social benefits to the community.

Claudia M. De Cesare works for the Porto Alegre City Council and is a Ph.D. candidate at the Centre for the Built and Human Environment, University of Salford, England.

Thomas A. Jaconetty is the chief deputy commissioner of the Board of Review (formerly the Board of Appeals) of Cook County, Illinois. During the past 24 years he has been involved in the disposition or review of taxes on more than 600,000 parcels of real estate. He is a member of the International Association of Assessing Officers (IAAO); the Chicago, Illinois State (ISBA) and American Bar Associations; the Justinian Society of Lawyers; and many other professional associations. He has served as a member and chair of the ISBA State and Local Taxation Section Council and contributed to the Illinois Department of Revenue’s Recodification Project.

A certified review appraiser and formerly an arbitrator for the Circuit Court of Cook County, Jaconetty has authored numerous articles and chapters for legal and taxation publications, edited three books and is working on a fourth. He has lectured at or moderated many educational programs on property taxation and assessment administration, and has published over a dozen articles on those topics. In 1998 he was appointed to the Planning Committee of the National Conference of State Tax Judges, and he served as conference chairman for the past two years.

Land Lines: How did you first become involved with the Lincoln Institute?

Thomas Jaconetty: I was familiar with the Institute’s work through its presentations at the annual conferences of the International Association of Assessing Officers (IAAO) and various other educational seminars. In 1994 the chairman of the National Conference of State Tax Judges, Ignatius MacLellan of the New Hampshire Board of Tax and Land Appeals, invited me to attend the conference after reviewing articles I had written on “Highest and Best Use” and “Valuation of Federally Subsidized Housing.” I found the experience invigorating, challenging and intellectually stimulating. The conference was and continues to be the best seminar in which I am involved each year, and I attend quite a few.

LL: As the past chairman, how do you see the role of the National Conference?

TJ: For 25 years the conference has functioned as a clearinghouse of ideas for officials exercising judicial or quasi-judicial powers over tax cases for statewide or regional jurisdictions. Noted authorities in the field, state tax court judges and officials of established tax courts are drawn together in an informal, collegial environment. The conference encourages improved decision making, the exchange of data and resources, the analysis of complex legal issues, and an avenue for a free-flowing interchange of ideas. The personal and professional relationships are open, friendly and dynamic, and there is plenty of room for divergent opinion, eclectic thought and agreement to disagree.

The Planning Committee of about 15 regular participants develops annual programs, and the rest of the members are actively involved with making presentations, offering suggestions, working on committees, attending the sessions and contributing to the overall educational experience. The annual fall conference is the most significant opportunity for formal interaction, but ongoing discussions are supported by the use of e-mail, the Lincoln Web site and the members’ professional involvement in other organizations.

LL: Why is it important for tax adjudicators to have this forum?

TJ: We are surrounded by ever-changing ideas and theories that we must balance against time-honored principles of taxation, complex economic relationships and the expectations of government. Each state has individual statutes and case law, but there is a high level of commonality among basic tax principles and a finite number of responses to factual situations. In spite of the many recurring and vexing issues that confront us, regular communication offers an opportunity to encourage consistency and consensus on the one hand and divergent opinion and reasoned dissent on the other. Members actively seek suggestions, advice and even help from their colleagues, who eagerly and generously respond.

LL: How have you seen the National Conference evolve during the years of your involvement?

TJ: Actually, there has been a remarkable level of consistency. There has been a core group of representatives from about 15 states and another dozen or so that change over time. Many members predate my involvement and others are very new. The most significant changes have been the enhanced communication offered by e-mail and the willingness of the group to probe into ethical, theoretical, decision-making and policy-based questions. There also has been a noticeable increase in volunteerism and in the number of women who are active participants.

I think there is a growing awareness that the deference given to any fact-finding agency (such as the state tax courts from whence our members come) creates a complementary responsibility to evaluate tax controversies within a framework that addresses all of the pertinent legal, valuation, philosophical and public policy issues. From all of that we hope to attain “justice,” which James Madison argued “is the end of government.”

LL: What do you see as the greatest challenges to the conference?

TJ: Remaining timely and relevant, and maintaining a cutting-edge outlook. Not every ascendant theory is always supportable or reasonable, but we seek to remain receptive, open and flexible while respecting the basic principles of state and local taxation that have stood the test of time. As issues become more complex and multi-jurisdictional, there is always a tug-of-war between local control and innovation versus national consistency and uniformity. This era of enormous budgetary constraints on state and local agencies places a premium on knowing where to go for expertise.

We face new challenges and are learning every day, and the conference presents the opportunity to encourage that growth. As John Quincy Adams said, “To furnish the means of acquiring knowledge is . . . the greatest benefit that can be conferred upon mankind.” We are also working to increase our membership and recruit more participation from states not currently represented. The optimum goal is to have around 55 to 60 active participants at any one time.

LL: What role does the Lincoln Institute play?

TJ: It is the heart and the soul of the conference. Especially in these trying economic times, without the Institute’s support many of our members would not have the local funding and financial wherewithal to attend the conference. And, without the organizing ability of the Institute staff, there would be no conference. The Lincoln Institute is uniquely qualified to create the healthy intellectual environment that brings the tax policy, legislative, academic, practitioner and administrative points of view before those very persons who decide the cases and, in so doing, “make the law.”

LL: You alluded to policy. Should judges and tax adjudicators be involved in considering public policy?

TJ: I can only suggest my own view. How judges and adjudicative bodies rule is almost inevitably a reflection of what they learn, know, believe, have proven before them, sense and comprehend, as well as what appears to be just. Everything must be taken against the backdrop of the purposes of the law and the ends that the law seeks to achieve. The more informed, eclectic, analytical and open the decision maker, the better the outcome.

The valuation of contaminated property (brownfields) and subsidized housing are two real property tax areas that immediately come to mind. These are technical issues, but they require an appreciation of the larger context and policy implications, as well as the proper balance between legislation and its interpretation.

The Lincoln Institute has had a significant and salutary impact on the development of sound tax policy. Henry George, whose writings inspire the Institute’s work, addressed these issues in The Land Question “[Taxation] must not take from individuals what rightfully belongs to individuals.” In Progress and Poverty he stated, “It is the taking by the community, for the use of the community, of that value which is the creation of the community.” But, as an exercise of power, it “must not repress industry . . . check commerce . . . [or] punish thrift . . .”

LL: What are some of the major tax issues facing tribunals today?

TJ: On the real property taxation side there is the taxation of contaminated property; the use and misuse of the cost approach; valuation of subsidized housing; the effect of low-income housing tax credited property; and the changing face of charitable and nonprofit entities. There are so many other issues: the application of traditional sales, use, gross receipts and income tax principles to an ever-expanding and global economy; related questions of nexus jurisdiction and extraterritorial power; the impact of e-commerce; the clash and interrelationship of the due process and commerce clauses; local autonomy challenged by movements to adopt model acts.

Other more general concerns include alternative dispute resolution; pro se litigants; ethics (appraiser, assessor, judicial); regulation versus deregulation; court management; and the role of policy in decision making. Added to these are the routine daily determinations that must be made by tribunals and agencies that form the grist of the taxation process, which is the lifeblood of government—that which Oliver Wendell Holmes characterized as “what we pay for civilized society.”

LL: How does the National Conference of State Tax Judges interact with other professional associations?

TJ: Many members of the conference are active at the state and local level with continuing legal education (CLE), appraisal or assessment organizations, such as seminars offered with the Appraisal Institute. Others take part in presentations sponsored by local directors of revenue or bar-related symposia on tax issues. Some sit on advisory commissions, boards, panels and task forces. Still others, including myself, have a continuing relationship with the IAAO, which offers an especially valuable and practical access to the assessment side of the real property world.

LL: Any final thoughts on the conference and its future?

TJ: Having just completed my two-year term as chairman, I hope it can be said that the conference maintained the high standards set by my immediate predecessors—Ignatius MacLellan, Joseph Small and Blaine Davis. I certainly feel that the future is in capable hands with our new chair, Arnold Aronson. With the biannual rotation of the conference to different locations around the U.S., it returns to Cambridge next year to celebrate its twenty-fifth year. I will simply echo what many of us say every year when we convene: This conference is the finest and most beneficial professional education endeavor in which any of us are engaged.

The property tax has been subject to much popular criticism and political pressure in recent decades. Several states have implemented, or are considering, a variety of caps and limits on property assessments, property tax rates, or total revenue raised from the property tax. Perhaps the best-known example is California’s Proposition 13, which ties property assessments to the purchase price of a dwelling (rather than its current market value) and limits the tax rate that can be levied on homes. It is worth taking another look at the property tax and considering its strengths and weaknesses as a source of funding for local government services.