Taxes on Land and Buildings

Case Studies of Transitional Economies
Jane H. Malme, May 1, 1999

The introduction of property taxation in transitional economies offers a unique perspective from which to study fiscal and governmental decentralization, land privatization and market development. These reforms all involve fundamental changes from the centrally controlled and planned societies of the communist period. The Lincoln Institute has a particular interest in the experiences of countries that are adopting property taxation and is underwriting a series of case studies in consultation with research associates in Armenia, the Czech Republic, Estonia, Poland, Russia and the Slovak Republic.

These studies demonstrate similarities in the challenges and problems faced by countries in transition and the extraordinary changes that have taken place in less than a decade since the fall of communism. At the same time, each country has followed a somewhat different path, adopting strategies that reflect its unique set of past traditions and current circumstances.

Decentralization and Privatization

Among the challenges facing these countries after nearly 50 years of communist rule are the decentralization of fiscal and political control and the reduction of the role of government in favor of private-sector ownership and activity. Privatization of land ownership has been a particularly sensitive issue. Taxes on real property have been introduced as part of a strategy to provide a revenue source to local governments, to encourage privatization of government-owned real estate assets, and to improve land utilization. Although in most cases the central governments continue to play a dominant role, a degree of local fiscal authority and autonomy has been introduced. Poland and Estonia have assigned these taxes to local self-governments, with authority to determine tax rates within limits established by their national parliaments.

In the other countries, national law sets the rate of taxation, but some local control is achieved by adjusting the coefficients applied to area measures that establish the tax base. The revenues raised from land and building taxes are still a relatively modest source of local revenue, and generally benefit rural communities more than urban areas. Although property taxes raise a minor portion of these countries’ total taxes at present, central governments envision a larger role for them in improving inter-governmental finance systems.

Privatization of state assets and ownership rights to real property is an essential yet complicated process that is still underway in each of the countries studied. In Estonia, for example, the desire to restitute land to pre-Soviet-period owners or their heirs initially complicated the determination of property rights. The adoption of a land tax in 1993, within two years of independence, was an essential element of Estonia’s land reform program, which also included privatization and market development. Limiting the tax base to land alone was intended to encourage its productive use, stimulating owners of restitution rights “to develop the property or sell it.”

In the former Soviet satellites, considerable private ownership remained under communism, but the formal cadastral systems were not maintained and the recording of property rights is still far from complete. During the Soviet period, land was treated separately from buildings, and this practice has continued in some countries, making real estate units more difficult to assemble for investment purposes. Property (buildings and structures) is treated separately from land for taxation purposes in Armenia, the Czech and Slovak Republics, and Russia.

While housing and business privatization has progressed to a degree in all countries, the release of land to private ownership and especially to ownership by foreigners has been a contentious issue. In Russia, although the Constitution and Civil Code provide for private property, the government and the Duma have failed to agree on a Land Code to provide a legal basis for land ownership. Most countries have placed some restrictions on foreign ownership, but permit long-term leases. Land taxation offers a potentially broad and expanding revenue base as privatization continues.

Market-based Reforms

In the absence of secure property rights and developed property markets, most countries have taken an incremental approach to incorporating market-based elements into their property tax bases. With the exception of Estonia, the countries in this study levy taxes on the basis of land or building area, adjusted by coefficients related to location, population, usage or other factors not derived directly from market indicators. As a logical step in their transitional reforms, Armenia and the Czech Republic are each exploring the addition of ad valorem elements to their area-based property tax, and Poland is considering proposals to shift to a market-based system. Plans for an ad valorem tax in the Slovak Republic await further fiscal, governmental and market reforms.

Estonia’s strong ideological commitment to a market economy led its Parliament to take the bold step in 1992 to base its land tax on market value. The first valuation assigned price zones to each assessment area, with the expectation that the methodology could be refined as understanding of real estate markets improved and as the markets matured. The collection of land tax information has strengthened real estate market activity and has been a catalyst for the development of land records, sales registries and cadastral maps. A revaluation in 1996 incorporated the expanded market databases.

Recent efforts to develop a pilot project for market value-based real property taxation in two Russian cities illustrate both the potential and the frustration of tax reform in the current Russian fiscal climate. The program began with funding from USAID in 1995, and federal legislation authorized the “experiment” in 1997. Before the current fiscal crises, the city of Novgorod anticipated implementation of the new tax in 1999 to replace the three existing non-value-based taxes on land, property of individuals and assets of enterprises. Whether the local officials will consider it possible to risk implementation under current conditions is now unclear.

Other Challenges

The reorganization of administrative functions and the cost of integrating and collecting property tax information are other challenges to the development of modern market-based property tax systems. Each country is struggling with structural reforms of Soviet-based administration and are seeking to improve inter-agency cooperation and efficiency in planning for property tax reforms.

The case studies illustrate the complex transitions that are underway in each of these countries. At the same time, the studies point out the important role that property taxation can play in providing a stable source of independent revenue to local governments, developing democratic and accountable public institutions, and maintaining a public claim on property entering the private market.

The potential benefits of market value-based taxation in stimulating real estate markets and promoting urban revitalization and efficient land use are just beginning to be recognized. The financial hardships still experienced by many people in these countries may keep property taxes at very modest levels for some time, making the design of a broad-based system with limited exemptions particularly important to the viability of property taxation in these new economies.


1. “Unlikely Icon,” Economist (February 28, 1998): 78.

Jane H. Malme is a fellow of the Lincoln Institute specializing in the development and implementation of property taxation in diverse international contexts.

She is coordinating the preparation of case studies with colleagues for the following transition countries:

Armenia: Richard R. Almy, consultant, Almy, Gloudemans, Jacobs & Denne, Chicago, Illinois, with Varduhi Abrahamian, International City/County Management Association, Yerevan, Armenia

Czech Republic: Gary Cornia and Phillip Bryson, Romney Institute of Public Management, Marriott School of Management, Brigham Young University, Provo, Utah, with Dr. Alena Rohlícková, Ministry of Finance, Czech Republic

Estonia: Jane H. Malme with Tambet Tiits, director, AS Kinnisvaraekspert, Tallinn, Estonia

Poland: Jane H. Malme with W. Jan Brzeski, president, Cracow Real Estate Institute, Cracow, Poland

Russia: Jane H. Malme with Dr. Natalia Kalinina, Center for Real Estate Analysis, Moscow, Russia

Slovak Republic: Gary Cornia and Phillip Bryson with Ing. Sona Capová, Univerzita Mateja Bela, Banská Bystrica, and Milos Koncek, Ministry of Finance, Slovak Republic

Sources: These figures are based on official country data sources and were provided by the research associates. No data was available from Russia.