Chapter 3. Reforming the tax on immovable property1

Ancient civilisations taxed land and property for thousands of years – long before they discovered income, business or consumption taxes. More recently, policy makers have again become enthusiastic about this oldest of taxes and immovable property taxation has returned to the fore. This chapter surveys and evaluates immovable property tax policy in the OECD. The first section shows main property tax trends and developments. Section 2 surveys and evaluates property tax regimes currently in place in OECD countries. Section 3 analyses the economic impact of property taxation on, for example, investment and growth, income distribution, macroeconomic stability and revenue buoyancy and, finally, on land use. Section 4 reviews the relationship between property taxation and intergovernmental relations. Section 5 presents an alternative to property taxation, namely the taxation of imputed rent as part of income taxation. The sixth and final section deals with the political economy of property taxation and how to make property tax reforms happen.

  

Main trends and developments

The property tax: capital, income and consumption tax

Taxes on immovable property – often simply called “property” or “real estate” tax – comprise levies on land and buildings and other physical capital like machinery. They defy classification in any one of the broad tax categories. They can be considered a capital tax since they tax an asset or an input to production. They can be considered a consumption tax since they tax the services that derive from living in an apartment or a house. They can be considered an income tax since they tax the imputed rent from owning a house. The tax on immovable property is not neutral since it taxes certain forms of property only (e.g. physical assets), while leaving other types of property untaxed (e.g. financial assets). The taxation of property shows up not only in the “recurrent immovable property taxes” category of the OECD Revenue Statistics, but also in income taxes (e.g. tax on rent or imputed rent) or consumption taxes (e.g. value-added-taxes arising from the refurbishment of a house).

The special nature of immovable property taxation is policy-relevant. It points to different policy approaches for land and buildings, for residential and business property, and for owner-occupied and rented houses. And policy makers must carefully evaluate the way it may interact with other taxes. How efficient it is depends much on its design. While pure land tax is seen as one of the most efficient, equitable taxes – since it taxes rent only –taxes on physical capital is much less well-regarded because capital taxes can deter business investment, economic development and efficient land use.2 The distributive effect of property taxation also depends on policy design, e.g. on whether poorer or liquidity-constrained households benefit from tax exemptions. The immovable property tax can be paid by either the owner or the occupant of a property, and in several countries both types of recurrent immovable property tax co-exist.3

The significance of the property tax varies strongly across countries

The size of the property tax take varies widely from country to country as a percentage of both total tax revenue and GDP (Figure 3.1). Overall, though, its significance is modest. Across the OECD, immovable property taxation made up around 3% of the total tax take and a little over 1% of GDP in 2013. Countries with a high property tax-to-GDP ratio include the United Kingdom, Canada and the United States, while it is almost nil in countries such as Luxemburg, Switzerland and Mexico. The property tax is more prevalent in English-speaking countries, but constitutional set-ups are irrelevant: there are both federal and unitary countries with both high and low property taxation.

Figure 3.1. The significance of the recurrent immovable property tax varies across countries
Share of recurrent immovable property tax revenue in GDP, 2013
picture

Source: OECD Revenue Statistics Database, http://dx.doi.org/10.1787/data-00262-en.

 http://dx.doi.org/10.1787/888933342006

The share of the property tax is low but has started to rise

Despite the advantages ascribed to the property tax, its share of GDP has remained largely stable over the last few decades, hovering at around 1%. It declined as a share of total sub-central revenue until 2008 when it started to rise again, partly because it withstood the crisis better than other taxes and partly as a result of property tax reforms. Property tax revenue currently accounts for around 31% of sub-central tax revenue; personal income tax makes up 30%, consumption taxes 20%, and other taxes the remaining 19% (Figure 3.2).

Figure 3.2. Property tax as a share of sub-central tax takes is rising again, 1995-2013
Share of major taxes in the total sub-central tax take
picture

Source: OECD Revenue Statistics Database, http://dx.doi.org/10.1787/data-00262-en.

 http://dx.doi.org/10.1787/888933342016

Various factors, mostly related to political economy, could explain the relatively modest role the property tax plays. Voters contest it because it is not linked to the ability to pay, thereby hitting social groups that are income poor, but housing wealthy. The rise of property prices prior to the recent crisis created sustained political pressure on sub-central governments (SCGs) to limit property tax increases, as exemplified by the tax revolts in many US states. As a result, a variety of measures – often social-policy-induced such as caps, abatements and exemptions – are gnawing away local property tax revenue. In many OECD countries, the tax base – i.e. property/cadastral values – has not been updated for years or even decades, creating distortions and unfairness between different types of property and property owners. As for business property taxation, the dwindling significance of manufacturing with large physical plants – for long the backbone of property tax revenues in many jurisdictions – may also explain the declining share of property tax revenue in the total local tax take. Business taxation still makes up a significant share of total immovable property taxation in some countries (Figure 3.3).

Figure 3.3. Business property taxation is still important in some countries
Shares of business and residential property tax revenue, in % of total immovable property tax revenue, 2013
picture

Source: OECD Revenue Statistics Database, http://dx.doi.org/10.1787/data-00262-en.

 http://dx.doi.org/10.1787/888933342027

A survey of property tax systems in OECD countries

The OECD area is home to a variety of property tax regimes. Some yield considerable revenues, others very little. Some countries boast several distinct taxes on immovable property that have different tax bases and rates. This section surveys, assesses and compares property taxation across the OECD. The survey draws chiefly on a questionnaire sent to OECD member countries in early 2014 that considers property tax systems from four main angles: 1) coverage and scope; 2) assessment and evaluation; 3) tax abatements; and 4) tax rates. (For further detail, see Tables 3.A.1 and 3.A.2 in the Annex.) Most property tax regimes are administered by sub-central governments, which constrains full assessment of property tax regimes.

Scope of recurrent immovable property taxation

The scope of the property tax can be assessed along two lines: 1) the purpose of use i.e. residential (main and secondary) and business property; 2) the taxed items, i.e. land and improvements. Some countries also tax agricultural land, forests and undeveloped land. Most exempt property owned by the state and non-profit-organisations.

  • Residential and business taxation. Most countries tax residential and business property. A few countries levy separate taxes on both (such as Belgium) and some, like Italy, exempt the main residence. Secondary homes are always taxed, while undeveloped land is quite often exempt. Agricultural land is often not taxed or subject to special regimes.

  • Taxation of land and taxation of improvements/buildings. Most countries tax both land and buildings, sometimes with lower rates on the buildings and other investment than on the land itself. Only three OECD countries levy a pure land tax. They are Australia (the state of New South Wales), Denmark and Estonia. Conversely, property taxes in Ireland and Italy apply to improvements only.

The variety of taxable items translates into a variety of property tax regimes. Accordingly many countries have a single integrated property tax; some have separate land and property taxes (e.g. Denmark), some have separate property and building taxes (e.g. Italy), and finally some have separate land, property and building taxes. A number of countries (e.g. Czech Republic) use physical indicators such as the size of a plot of land or a building to assess property values. The variety of tax bases is sometimes related to intergovernmental frameworks, with different property taxes accruing to different tiers of government. In Australia, for example, land tax accrues to the states and property taxes to the local/municipal level.

Valuation and assessment of immovable property

Adequate valuation and assessment of immovable property are key to a fair, efficient property tax system (Table 3.A.1). Unlike most other taxes, property values are generally presumptive – they must, in other words, be estimated. Appropriate valuation and assessment of land and improvements is therefore crucial to both tax policy and administration. A property’s potential market value is usually considered the most appropriate yardstick for determining the property tax base. Indexation can help update property values between market updates, but the less frequent such market assessment is, the more indexed property values will deviate from actual market values. For further details, see Almy (2014).

Property assessment practices across the OECD can be summarised as follows:

  • Valuation methods. Comparing sales prices is the most common method of assessing property values. A practice that has become widespread is mass appraisal, whereby a property’s value is determined by comparing the sales price of similar properties. Several countries (e.g. Finland and Italy) combine the sales price and cost methods, estimating land at sales prices and approximating the value of improvements by the cost of constructing or replacing a building. A few countries, such as Belgium, use the income method – i.e. actual or imputed annual rent – to calculate property values, while a few apply all three forms of property valuation, depending on the type of property and the purpose of its use (e.g. United States). There are also a number of countries, such as Poland, that apply simplified versions of “fiscal zoning”, using some indicators (size of plot, location close to public infrastructure) to help assess property values.

  • Value updates. Updating property values and, thereby, the tax base is arguably the most difficult issue, both administratively and politically. OECD countries address it in various ways. Some – such as Denmark or Korea – update property values annually, while others – like Portugal and Turkey – update every three to four years. Legislation requires several countries to update property values periodically, although they actually fail to do so (e.g. Belgium and Germany). There are also many instances in the OECD areas of price indexation – e.g. construction, house, and consumer price indices or combinations thereof – as a way to update property values. Indexation is an alternative to regular reassessment and can help maintain buoyancy in tax revenues. However, property values may evolve differently across different areas, distorting property assessments.4 A few countries use a simplified assessment method, allotting value bands to properties – the United Kingdom, for example, has eight value bands.

  • Tier of government responsible for assessment rules. In general, property tax revenues accrue to local governments. Yet the responsibility for determining assessment rules – and thus for setting the tax base – is usually incumbent on higher tiers of government, i.e. the state level in federal countries and the central government in unitary countries. Research in the United States suggests that standard setting by a higher government level improves the quality of assessment (Strauss and Sullivan, 1998). In many countries valuation is assigned to special valuation agencies that cover wide areas, which prompts calls for some centralisation, at least of tax administration. In a few countries, taxpayers are required to self-assess their properties. Owners who occupy their property must therefore impute rent, so running the risk of sanctions if their returns are wrong, as in Ireland, Italy and Mexico.

Tax abatements and reductions

Tax abatements reduce the property tax base and drive a wedge between assessed and taxable immovable property values. Tax abatements can partially explain the decline of property tax revenues as a share of total tax revenue (Kenyon, Langley and Paquin, 2012). Most countries provide a wide range of abatements, e.g. relief, credit, and exemptions for both residential and business property (Table 3.A.2). Some of these reductions can be justified on the grounds of equity and may make a system less regressive, even progressive. Others, though, are difficult to defend on economic grounds.

When it comes to tax abatements and reductions, policies in the OECD can be summarised as follows:

  • Taxable values are often set below assessed values. In some countries taxable values are set as a fraction of assessed property values. The practice is one of the main reasons for the persistently wide disparities in ratios of property tax revenue to GDP across the OECD area. Germany sets taxable values at 33% of assessed values only, while elsewhere percentages are higher. Korea initiated a wide-reaching property tax reform in 2005 to bring taxable values into line with assessed values, but political obstacles have kept the percentage at 60% to 70%. In 2013, as part of a sweeping property tax reform, the city of Philadelphia in the United States lifted the percentage from around 30% to 100%, while lowering tax rates to one-third of their previous level.

  • Tax exemptions for residential property. There is a broad range of breaks and exemptions in property tax in most of the OECD area:

    • for owner-occupied housing (e.g. in Italy);

    • for low-income households (most countries);

    • lump-sum allowances granted to both residential and business property owners – usually in the form of one allowance per owner and, though more rarely, per property;

    • deductions in certain spending categories, e.g. for green housing technologies and energy-saving investment (e.g. Norway),

    • tax holidays for owners who build their new homes (e.g. Austria and Slovenia).

  • The taxation of under-used property is particularly interesting. While some countries (e.g. the United Kingdom) reduce the taxable amount if a property is under-used, others increase due tax (e.g. Slovenia). While lighter taxation of under-used property can be defended on social grounds, especially for elderly single-person households unable to pay high property taxes, occupation is a rather imprecise indicator of poverty.

  • Tax exemptions for business. The corporate sector benefits from a variety of tax breaks and abatements – e.g. tax holidays for start-ups and allowances for certain types of activity. With increased corporate cross-border mobility, local governments have come to use property taxation as an economic development policy tool. However, it seems that the effect of property tax relief on corporate behaviour is generally negligible. Experience from the United States suggests that business property tax incentives have a poor record in promoting long-term economic development (Kenyon et al., 2012). In some cases, though, they may help revive distressed areas – if properly designed.

Property tax exemptions are like any other tax exemption: although sometimes well intentioned, they narrow the tax base and often have unintended side-effects. A short assessment of some property tax exemptions may shed a little light on their effects (Box 3.1).

Box 3.1. A short assessment of a long exemptions list

There is a long tradition of granting property tax exemptions to ease the burden on people viewed as vulnerable and to promote desirable activities. Educational, religious and charitable institutions are exempt from property taxes in most countries. Upper-tier governments usually pay no tax on property they own in local jurisdictions. Policy measures to reduce property tax liabilities include reductions of assessed or taxable property values, reductions and exemptions for low-income earners, exemptions for selected property uses or property owners, special tax abatement programmes for enterprises, certain types of spending on property, and many others. Other policy measures, including caps on annual property value or tax liability increases (sometimes called “circuit breakers”), also narrow the tax base but are not considered exemptions.

There is wide-ranging analysis of the effects of property tax exemptions on both residential and business property taxation, especially in the United States. Its overall view of the effectiveness of exemptions is rather sceptical, since exemptions reduce the tax base and revenues and may have unintended consequences. Sometimes they even fail to achieve the desired objective.

A few common (and less common) tax exemptions emerged from countries’ responses to the OECD’s 2014 questionnaire on property tax regimes:

  • Lump-sum and proportional exemptions. They are fixed-amount deductions from assessed or taxable property values. They tend to make property taxation more progressive with respect to property values – though not necessarily to income – since the resulting effective tax rates are lower on small than on large properties. Granting a lump-sum exemption for every property – rather than just one per owner – gives owners incentives to split up properties for tax purposes. Granting proportional exemption – i.e. taxing property at below 100% of its assessed value – may severely reduce tax revenues with no discernible effect on equality.

  • Tax holidays. Tax holidays are tax abatements over a limited time period. They are often granted for new buildings and for periods up to ten years. Tax holidays for new construction drive a wedge between different types of property. They are an incentive to invest in new property development rather than to re-use infrastructure on developed land. They thereby foster rather than limit urban sprawl and are unlikely to curb equality.

  • Tax exemptions for under-use. Some countries offer tax relief for under-used properties, e.g. houses that are inhabited by fewer people than what could be considered “normal”. Tax relief for under-use is generally designed to help elderly people live on their family home even after their offspring have left for good. Although many people own large houses but have small incomes after retirement, there is no automatic relationship between age and poverty. Tax exemption for under-use is therefore not well targeted from a social policy point of view. Moreover, providing an incentive to stay on in a dwelling deprives others of opportunities or, in more general terms, reduces spatial and intergenerational mobility.

  • Tax deductions for certain types of spending. Property tax exemptions to promote energy-saving technologies and other forms of green investment have become more widespread in recent years. The overall experience is mixed, however (Brandt, 2014). While some studies claim that exemptions do indeed “green” housing investment, others are more sceptical, concluding that property owners are largely free-riding – i.e. they would have invested in green technologies anyway.

  • Business property tax exemptions. Most countries provide a myriad of tax incentives for businesses, mostly in the form of tax holidays for new or expanding firms and other property tax abatement programmes. These incentives are usually designed to attract and retain businesses and promote local economic development. Again there is a vast body of analysis which is largely sceptical as to the effectiveness of targeted incentives – as opposed to lower tax rates. Indeed, some analysts see them as a pure zero-sum game since the upshot is lower tax revenues with no truly discernible effect on development (Kenyon, Langley and Paquin, 2012). Experience from the United States, however, suggests that when targeted at distressed urban areas, business property tax exemptions might benefit local development.

Some tax exemptions may be more justifiable than others. For low-income households they are defendable on social grounds, although means-tested income support still targets beneficiaries more accurately. Generally speaking, transparent information as to the costs and benefits of tax exemptions and the revenues foregone could help policy makers make informed decisions about when and where to provide property tax exemptions. A property tax expenditure database showing foregone tax revenue for each tax exemption could be a useful start.

Tax rates

Differences in average property tax rates explain, to a large extent, the differences between countries in property tax as a share of GDP (Table 3.A.2). Average tax rates range from 0.1 or 0.2% to more than 2% of the tax base. Property tax rates are usually the only tax policy lever for local governments, since the tax base tends to be determined by upper-tier governments. In many countries tax rates vary by two or threefold across jurisdictions. In a few others local governments do not have tax rate setting power or do not make use of it. Some apply a progressive scale, with tax rates rising with property values. In general, though, statutory property tax rates might be a misleading guide when it comes to assessing effective tax rates, since the tax base – i.e. property values – is not assessed uniformly across countries or even jurisdictions within them.

Economic effects of property taxation

Property taxation is efficient – but that still depends on design

The tax on immovable property is usually seen as one of the most efficient and among the least detrimental to economic growth.5 The tax base is immovable and inelastic – in other words, households generally react little to changes in tax policy. The property tax differs from income or business taxes which tend, more markedly, to shape behaviour. Since property taxation largely maintains firms’ and households’ decisions to save and invest, it should be less of a drag on economic growth. OECD analysis suggests that immovable property taxes are the least harmful to economic growth (Arnold et al., 2011).

Property taxation also shows a close link between taxes paid and public services received, which make it more like a user fee for local services (Figure 3.4) and explains why it is generally kept at levels commensurate with the preferences of residents. Differences in property taxation and service levels across jurisdictions are capitalised in house prices, thereby reducing tax competition (Blöchliger and Pinero Campos, 2011).

Figure 3.4. The property tax is a typical sub-central tax
Share of each government level in the recurrent immovable property tax take, 2013
picture

Source: OECD Revenue Statistics Database, http://dx.doi.org/10.1787/data-00262-en.

 http://dx.doi.org/10.1787/888933342039

There is an important caveat to this rosy view of property taxation, however. Property taxation is not neutral because it discriminates between physical and non-physical capital. Taxing property might affect the capital spending of both businesses and homeowners. Businesses may be discouraged to invest in physical capital, especially if machinery is included in the property tax base (Zodrow, 2001), and homeowners will be discouraged to improve their dwellings if the result is higher taxes. More specifically, business property taxes are difficult to defend on the grounds of the benefits principle, since the business sector receives fewer services from local communities than residents, and taxes may be exported to non-residents – consumers, workers and capital-owners. Business property taxes seem to be more harmful for growth than residential property taxes (OECD, 2010). Finally, taxing improvements may prompt the under-utilisation of land and lead to urban sprawl if the land-to-capital ratio declines (Brandt, 2014). Still, business property taxes can be a backstop against the avoidance of residential property taxation through excessive incorporation – much as the corporate income tax acts as a backstop against avoiding personal income tax (OECD, 2007).

If different property tax regimes were to be ranked, a pure land tax with a uniform tax rate across all types of property and property owners would come out first.6 Land is immobile, and land taxation has hardly any impact on investment decisions.7 What is more, a pure land tax is more effective against urban sprawl than the two-tier property tax. Still, a move towards stronger land taxation requires careful policy design. Land values are only a fraction of property values, so land tax rates would have to be higher than current property tax rates to keep tax revenues constant (Brandt, 2014). Property taxes with a higher tax rate on land than on improvements could be an intermediate solution. Finally, since land values have to be separated from the value of improvements, methods of assessing land values have to be well designed to be effective.

Property taxation is not very progressive

The progressivity of property taxation depends on tax incidence, e.g. which individuals and households ultimately have to pay a tax (Zodrow, 2001). Views on incidence are, in turn, often overshadowed by debates about the true nature of the property tax. Those who consider the property tax a tax on housing services deem it regressive since, they argue, the share of housing-related spending declines as income increases. Those who see property tax as a capital tax contend that it is progressive since capital is concentrated more heavily in the hands of high-income earners. Those who view it as a fee for local public services (benefit taxation) argue that it is neutral since any redistributive effect it might have is offset by the redistributive gains from consuming public services. Moreover, property tax can be designed to be more or less progressive, e.g. by allowing for lump-sum tax allowances or for tax exemptions for low-income earners.

The empirical evidence on tax incidence suggests that the property tax can indeed be anything from progressive to regressive. From a life-cycle perspective, it appears proportional since spending on housing is supposed to increase in line with income over the life span (Fullerton and Metcalf, 2002). In highly urbanised areas, where capital tends to be more heavily concentrated among high-income groups and it is difficult to shift the property tax onto rent-paying tenants, it is considered progressive (Chang, 2006). An OECD analysis that relates income deciles to property tax payments suggests that the property tax is regressive, probably because homeownership is more equally distributed than income (Joumard, Pisu and Bloch, 2012). Tax incidence also depends on the wider central or sub-central policy setting in areas like land use, rent control and the labour market. The more property owners are able to forward-shift the property tax to tenant, consumers or workers, the more it tends to become regressive. The tax might therefore be perceived differently depending on which end of the income distribution is being considered: it might be regressive in the low- to medium-income range and progressive in the highest income brackets.

In sum, the redistributive effect of property taxation hinges on various factors. Overall, though, property tax is probably less progressive than personal income tax, which is sometimes seen as an alternative in sub-central government finance.

Property taxation can help stabilise housing markets

The tax on immovable property can be used as a policy instrument for asset price stabilisation. Property taxes can dampen house price volatility and excessive house price increases. Rising property tax revenues that evolve in line with rising property prices – assessed by regular updates of property values which broaden the tax base – can temper the intricate boom-and-bust-cycle of property markets. Property taxation may thus help ease fluctuations in the overall economy and act as an automatic (counter-cyclical) stabiliser over the business cycle.

The stabilising effect of property taxation on house prices can be attributed to capitalisation, i.e. the inverse link between house prices, imputed rent and the property tax. Property taxes are capitalised in house prices – the net present value of a house can be obtained from the discounted stream of cash-flow (rents) or services (imputed rent) minus maintenance costs and property taxes. As house prices rise, property taxes account for a growing share of rents, thereby reducing the net present value and counteracting further house price appreciation (Muellbauer, 2005). Higher property taxation may also curb the amplitude of house price fluctuations around the long-term trend and thereby help avoid property boom-and-bust cycles. The reason is that in a high-tax environment the demand for housing with respect to house prices is more elastic, whereby an (exogenous) housing demand shock has a weaker impact on house prices (van den Noord, 2005). Lower house price fluctuations would, in turn, ease fluctuations in GDP, given the various channels through which house price developments affect GDP.

New empirical analysis from the OECD provides some evidence for the volatility-dampening impact of property taxes, although the effect is relatively weak (Table 3.1a). Doubling the tax-to-GDP ratio – e.g. by lifting it from 0.5% to the current OECD average of 1% – would curb house price volatility by between 1% and 4%.The dampening effect has remained largely stable over the last 50 years, as well as during and after the 2008 crisis. Similarly, a higher property tax-to-GDP ratio seems to slow the growth of house prices, particularly as house prices tend to follow the business cycle (Table 3.1b). Countries with low property taxation and less frequent property value updates tend to show steeper house price fluctuations, although the relationship is again weak (for details see Blöchliger et al. [2015]).

Table 3.1. Property taxation dampens house price volatility
a) Changes in house price volatility and changes in the property tax-to-GDP ratio

Period: 1965-2012

Reaction of house price volatility to …

Property-tax-to-GDP ratio

-0.033**

-0.040**

-0.009*

-0.010*

Volatility of output gap

0.008**

Volatility of changes in output gap

0.005**

Volatility of real growth

0.867**

Volatility of changes in real growth

0.353**

b) Changes in house prices and changes in the property tax-to-GDP ratio

Period: 1965-2012

Reaction of house price volatility to …

Property-tax-to-GDP ratio

-0.036**

-0.002

-0.009

-0.024**

Output gap

0.003**

Changes in output gap

 

0.013**

Real growth

 

1.209**

Changes in real growth

 

0.790**

Note: Coefficients are derived from multi-variate regressions linking house price volatility to the property tax-to-GDP variable and from a number of variables reflecting the business cycle. Coefficients represent percentage changes, e.g. -0.04 means that a 10% increase in the property tax-to-GDP share reduces house price fluctuations or growth by 0.4%. An asterisk (*) denotes significance at the 10% level and a double asterisk (**) denotes significance at the 5% level. Details of the estimation strategy may be found in Blöchliger et al. (2015).

Empirical results also suggest that property taxes do not respond much to the business cycle and, therefore, provide a relatively stable revenue source (Table 3.2). Property taxes are a-cyclical or pro-cyclical, depending on how the cycle is measured, and do little to stabilise the economy. The a-cyclical behaviour may be the result of two countervailing forces: on the one hand, property taxes may have a stabilising effect on the economy by lowering house price volatility; on the other hand, they may have a destabilising effect due to their inertia over the business cycle. Rapid tax increases during a slowdown – or tax reductions during a boom – cause property taxation to exert a strongly destabilising effect on the economy, which suggests that property taxes should be raised only when both the housing market and the economy are in good shape. A more regular update of the tax base in line with property market developments could help ensure that property tax revenues evolve more in line with the cycle – although it would then provide a less stable revenue source for SCGs.

Table 3.2. Property taxation is counter-cyclical or a-cyclical, 1965-2012
Correlations between property taxes and the cycle, various tax and cycle variables

Period 1965-2012

Reaction of the tax-to-GDP ratio to…

Reaction of real tax revenue growth to…

Output gap

-0.004

-0.001

Changes in output gap

 

-0.013**

 

-0.003

Real growth

 

-1.227**

 

-0.457

Changes in real growth

 

-0.206

 

0.159

Note: Coefficients are derived from multi-variate regressions linking the tax variable (real tax revenue growth or growth of the tax-to-GDP ratio) to a number of variables reflecting the business cycle. Coefficients represent percentage changes, e.g. -1.227 means that a 1% increase in real growth reduces tax revenue growth by -1.227%. Double asterisks (**) mean significance at the 5% level. Details of the estimation strategy may be found in Blöchliger et al. (2015).

Property taxation can promote sustainable land use

Land use has become a prominent environmental policy issue. The growth and sprawl of urban areas eats up and fragments open space, threatening biodiversity, landscapes, and the use of land for recreation. Dispersed land-use patterns generally lead to increased energy use and transport needs like commuting, and exert an adverse effect on the environment. Since property tax is – at least partially – a tax on land and its use, it has potential as an instrument for shaping land use. It could reduce pressure on land development or re-direct it towards areas which are already infrastructure-connected. Properly designed property taxes could also support land use planning and help reduce the environmental impact of transport and energy use. However, if property tax is to help drive the effective use of land, policy makers must address a number of issues (Brandt, 2014).

  • Policy makers must view property taxes in the context of other policy instruments, such as land use planning and transport policy, which can also help internalise externalities related to urban sprawl. Such instruments generally have a much stronger impact on land use than the property tax, whose effect is weak. Furthermore, while property taxes can have an overall impact on land use patterns, they are too rough an instrument to ensure the protection of specific plots of land or to foster patterns of land use such as the protection of natural amenities from any development whatsoever. The property tax can, however, underpin such land use policies such as urban spatial planning or transport policy.

  • The impact of property taxation on land use hinges on its design and, again, different property taxes should be distinguished. A pure land tax increases the cost of hoarding land and offers incentive to put it to its most valuable use. Development becomes a more attractive prospect, particularly in areas where land values are high, such as those close to existing infrastructure. In this way, a pure land tax fosters denser cities. The effect of the traditional property tax (or two-tier tax), which covers both land and improvements is less clear-cut, however. On one hand, if the tax is shifted onto consumers, house prices increase and drive the demand for smaller housing units, so increasing population density. On the other hand, property tax may promote urban sprawl in that it reduces the capital-to-land ratio and, by the same token, the number of housing units per unit of land area.

  • Property transaction taxes are bad for sustainable land use. They increase incentive to buy cheap land, which generally lies far from city centres and transport infrastructure, while deterring transactions that might help put land to a more efficient use. They also encourage the purchase of undeveloped land for new development rather than upgrading developed areas.

  • A number of specific land-use taxes to contain urban sprawl and curb excessive land use have been considered in OECD countries. A tax on land area is a stronger incentive for making efficient use of land than tax on land value, especially when the latter is low. Germany, for example, is addressing the possibility of levying taxes on new property development and soil sealing, while the Netherlands and the United States have discussed the feasibility of taxing property developments to reduce the loss of open space and associated loss of well-being. The social value of open space, however, has proven difficult to estimate. Another proposal is to tax value added to land after it has been re-zoned. Since changes in land value are often caused by re-zoning and yield, in essence, windfall gains for land owners, it is often argued that such gains should be taxed. Some Swiss cantons are discussing provisions for taxing the value added – and compensating the value lost – that stems from re-zoning land. Finally, development impact fees to cover the costs of new infrastructure are fairly common in North America. Such fees could ensure that developers internalise infrastructure cost and slow down urban sprawl.

  • Spatial planning is the best and most widely used instrument for controlling the use of land. In some countries it serves explicitly to contain sprawl – through urban growth boundaries and greenbelt policies, for example. Spatial planning and the taxation of land and property taxation are complements, however, not alternatives. Property taxes could be designed to discourage sprawl, while land-use planning, which is much more arms-length, can achieve such specific targets as the protection of individual land plots from development.

  • Property taxes generate revenues which can create perverse incentives for SCGs whose tills they fill. They may eye land development or re-zoning for purely fiscal reasons and might even be tempted to increase revenues from such environmental levies such as soil-sealing or greenfield taxes, thereby undermining their original purpose.8 Governments should handle such perverse incentives through proper land-use planning instruments, with local authorities addressing local land-use externalities and upper-level governments those with a wider geographical reach.

  • Property taxes can be redesigned to foster green investment. Local governments in the United States have numerous property tax incentives for boosting energy efficiency and renewable energy use, while the Czech Republic, Italy, Norway and Spain are further examples of countries that offer property-tax relief for renewable energy installations. The environmental effectiveness of such rebates needs to be weighed against losses arising from a narrower property-tax base and less tax revenue. However, no studies have yet assessed the efficiency of property tax relief as a way to promote investment in energy efficiency and renewable sources of energy.

Although property taxes seek primarily to raise revenue, they can also be a useful instrument for increasing the density of land use and curbing urban sprawl. Yet their overall effect on land use much depends on other instruments such as land use planning.

Property taxation and intergovernmental fiscal relations

Property tax is levied primarily by sub-federal and local jurisdictions (Figure 3.4). Any reform of property tax regimes must therefore be tied to reforms of intergovernmental fiscal frameworks. This section endeavours to answer two questions that arise from the link between property taxation and fiscal relations:

  • Do property tax reforms require the reform of intergovernmental grants and sub-central taxation and spending?

  • Do reforms to fiscal relations give sub-central governments an incentive to increase property tax revenues?

Property tax reforms may entail reforms of intergovernmental relations

Property tax reform to increase the share of property taxation in the total tax take may require changes to the wider intergovernmental fiscal framework. Without flanking policies, a rise in property taxation increases sub-central taxation as a share of both general government taxation and GDP, which may not be warranted. A hike in property tax that is revenue neutral with regard to revenue and the level of government therefore requires amendments to both spending and taxation across all tiers of government. There are, however, different options when it comes to reforming property tax in a revenue-neutral way:

  • The easiest option is to adapt the sub-central tax system without changing the intergovernmental framework. One way forward would be to abolish sub-central property transaction taxes (i.e. stamp duties and similar taxes on the transfer of ownership), considered bad for labour mobility and unfair since they depend not on the value of the property but on how often it is traded (Norregaard, 2013). Another option would be to reduce sub-central business or labour (payroll) taxes. In order to avoid disruptive changes involving hefty tax raises for some property owners, reforms could be phased in through relatively small changes to the annual tax base or rate.

  • The second option would be to cut intergovernmental grants by the same amount that local tax revenues are raised. Since grants exceed property tax revenue by a multiple in all countries, central government funding may be reduced without damaging sub‐central finances, particularly as around half of all grants are non-equalising and raise little redistributive concern (Blöchliger and Petzold, 2007). Moreover, since property tax revenues are less pro-cyclical than revenues from intergovernmental grants in many countries, overall SCG revenues would become more stable over the cycle (Blöchliger and Égert, 2013). Still, since tax-raising capacities vary across jurisdictions, and would do so even more widely after a property tax hike, remaining grants will have to focus more clearly on equalisation.

  • The third reform option would be to introduce a dual central and sub-central property tax. The additional revenue would be allocated to central government which would have to cut some other taxes to compensate for the higher property tax. The grant system would remain untouched. The downside to this option is that it would complicate the property tax system and could lead to vertical tax competition between central and sub‐central jurisdictions with a tendency towards excessive tax rate increases (Devereux, Lockwood and Redoano, 2007). A dual property tax also goes against standard policy recommendations that property tax should be assigned to sub-central governments.

  • The fourth, and most complex reform option, is to devolve additional spending responsibilities commensurately with increases in property tax revenues. This option could well work in countries where decentralised spending is clearly below the OECD average. The flipside, though, is that it would require reform not only on the tax side but also on the spending and responsibility side within the intergovernmental fiscal framework, which might be difficult to achieve. Moreover, inter-jurisdictional disparities might become an issue if new spending responsibilities have a redistributive effect.

Property tax reform could cause tax revenues to evolve unevenly from one SCG to another because house prices assessed at market value evolve differently. A study in Germany finds that – depending on the model chosen – property tax reform intended to value property at market value would considerably change relative tax capacity across the Länder (Färber, Salm and Hengstwert, 2013). To offset the redistributive effects, fiscal equalisation would have to kick in, even though many OECD countries do not equalise property tax bases across jurisdictions. The need to combine tax reform with changes to intergovernmental relations would make reform more complex. However, it would also yield opportunities from a political economy perspective since it would allow the bundling of different reforms (Blöchliger and Vammalle, 2012).

Intergovernmental relations may help underpin property tax reform

Reforms to intergovernmental fiscal frameworks may, in turn, trigger property tax reform. In many countries, equalisation penalises tax collection because, when SCGs raise tax revenue, central government often cuts equalisation grants, which defeats the point of property tax collection. Breaking the link between equalisation and property tax collection, or at least reducing the marginal equalisation rate at which additional tax revenue is skimmed off, could give SCGs greater incentive to collect more property tax revenue. Central government might even foster the tax effort by disbursing higher intergovernmental grants to SCGs if they collect more property tax. No such scheme is currently in place, however.

Some countries have instituted property tax regimes that, at least partially, reward SCGs for collecting more property tax revenue. Fiscal equalisation in Norway does not factor in municipalities’ property tax revenues, while in Germany only 64% are taken into account. In Norway, therefore, all property tax revenues stay in the jurisdiction where they were generated and in Germany over one-third do. In 2012, Finland also removed the property tax from the municipal equalisation system. The extent to which a property tax can be excluded from equalisation probably depends on how important it is as a source of revenue. In countries where it is a minor source, it is easier to exclude fully.

Personal income tax on imputed rent as an alternative to the property tax?

As an alternative to the property tax, immovable property may be subject to the personal income tax. In this case, imputed rent of owner-occupied real estate is considered personal income, as already the case for rental income. If so, then the benefit derived from owning real estate is added to a household’s other income streams – e.g. from labour – and taxed at the personal income tax rate. The taxation of immovable property as income has been examined at length in a considerable body of OECD work (Van den Noord, 2005; André, 2010; Brys, 2010; OECD, 2010; Andrews et al., 2011; Caldera Sánchez and Johansson, 2011; and Harding, 2013). This section therefore touches on the subject only summarily.

Taxing income derived from imputed rent indeed seems an alternative to immovable property tax as a way of ensuring that real estate is properly taxed. A stronger property tax tends to go together with te lighter income taxation of imputed rent and vice versa, which suggests that the two forms of taxation of immovable property are viewed as alternatives. Countries that levy a wealth tax, which includes the net value of immovable property, usually have also relatively low immovable property taxes. Nevertheless, the correlation is weak and in some countries real estate is hardly taxed at all (Figure 3.5). Making immovable property liable to income or wealth tax rather than immovable property tax produces a generally more progressive tax system because income tax rates, which are usually progressive, apply to imputed rent. The European Union also sees the income taxation of immovable property as an alternative to the immovable property tax (Gayer and Mourre, 2012).

Figure 3.5. The personal income tax and the property tax tend to be alternatives to each other
Immovable property tax-to-GDP ratios set against income taxation of imputed rent, 2012
picture

Note: The vertical axis shows the sum of two indices: the extent to which mortgage interest payments are income-deductible and the extent to which imputed rent is subject to personal income tax. The mortgage deductibility index is taken from Andrews, Caldera Sánchez and Johansson (2011). The index of taxability of imputed rent is based on individual country information and takes on the value of 1 if imputed rent is taxable, 0 otherwise.

Source: Calculations based on OECD Revenue Statistics (2014), http://dx.doi.org/10.1787/rev_stats-2014-en-fr and Andrews, D., A. Caldera Sánchez and Å. Johansson (2011), Housing Markets and Structural Policies in OECD Countries”, OECD Economics Department Working Papers, No. 836, OECD Publishing, Paris.

 http://dx.doi.org/10.1787/888933342046

Essentially, imputed rent should be taxed jointly with personal income from other sources. If tax system provisions allow capital and labour income to be taxed at different rates, real estate may be taxed at capital tax rates, although this might distort households’ incentives to shift between labour and capital income. Although mortgages should be deductible, ceilings could be applied to loan-to-value ratios to avoid excessive leverage. In order to ease the tax burden on the poor and/or liquidity-constrained households, a basic allowance which exempts part of the owner-occupied immovable property from personal income tax could be considered. Immovable property taxes already contain such provisions. Property values and imputed rent need to be assessed in a way that puts all property and property owners on an equal footing – possibly through the use of fair market value. In sum, taxing imputed rent as personal income, but offsetting it with some limited deductibility of mortgage interest, could make immovable property taxation more politically palatable.

Taxing real estate as personal income would fundamentally change intergovernmental fiscal relations, however. While revenue from the immovable property tax overwhelmingly accrues to local government, personal income tax widely belongs to central government. A shift from property to income tax would shift revenue to national governments and strip local jurisdictions of their most important tax source of income. A partial solution could be a tax-sharing system where national government would cede part of personal income taxation to local governments. The share of income allocated to lower-tier jurisdictions could reflect different criteria, which could include the income generated from the taxation of imputed rent. Still, such a tax-sharing system would curtail the tax autonomy of sub-central governments and change their tax mix. A move from real estate to income taxation might also have redistributive consequences for all sub-national governments.

Making property tax reform happen

The political economy of reform is about the interaction between policy proposals and the procedures for adopting them. Political economy deals with the economic and political factors that influence the design, decision-making process, adoption and implementation of institutional reform – the property tax regime in the present instance – and the resulting options and constraints.

Political economy issues in property tax reform

Property tax reforms are relatively rare and piecemeal, and there are many reasons why the property tax, despite its assumed benefits, is so deeply unloved. The following political economy issues may help explain why reforms are difficult to bring to fruition:

  • The property tax is capitalised in property prices and any tax hike is reflected in lower property values and higher tax payments. Since property cannot be moved, unlike income or consumption, for example, property owners resist any tax rises in their jurisdiction. And they “voice” their unhappiness at tax increases particularly strongly because there is no “exit” (Hirschmann, 1970).

  • The property tax is a presumptive tax, i.e. one based on an estimated value. The need to value and assess properties sets property taxation apart from other taxes that are levied on more easily measured flows – income, sales or consumption. Unless property is sold or bought in a transaction that adequately reflects its true value, valuation and assessment remain contentious. Many countries do not update values on a regular basis. Updates of property values spark political reactions from taxpayers who demand caps and brakes on higher tax payments. Tax revolts in the United States and other countries were, and are the political reaction to rising house prices, property reassessments and unhappiness with ever-rising tax liabilities.

  • The property tax is highly salient, or visible. Property taxes are usually paid once a year in retrospect and are difficult to avoid – unlike consumption taxes, which are paid continuously in small amounts, and personal income tax, withheld at source in most OECD countries. Salience is often seen as one of the main reasons for the unpopularity of property tax and seems to drive tax revolts (Cabral and Hoxby, 2012). Yet salience improves the efficiency and accountability of the sub-central tax system since it raises taxpayers’ awareness of the cost of public services. But if some taxes are more salient than others, and if voters dislike them, it is difficult to sell a reform that increases the burden of the most salient tax.

  • The property tax is often seen as regressive. Although the redistributive impact of a property tax hike is unclear – it can be anything from regressive to progressive – perceived regressivity makes it difficult for politicians to sell reforms to property tax. Moreover, even if its precise redistributive characteristics are unknown, property tax is probably less progressive than personal income tax, even as an alternative to a flat sub-central surcharge on a (progressive) national income tax. An SCG tax reform package that sought to balance higher property taxation against lower personal income taxation would therefore be difficult to sell or would require even more complex changes to the intergovernmental fiscal framework.

  • Property tax can be a burden on liquidity-constrained households. It is based not on cash flow, but on an illiquid asset and, moreover, on gross rather than net property values, so indebtedness (mortgages, etc.) is not accounted for. The imperfect association between household income and property tax liabilities may put an excessive burden on income-poor but housing-wealthy households, such as the elderly. One way to address liquidity issues is to offer the elderly tax relief through deferral schemes, where tax becomes payable only when the property is sold. Although tax deferral is an efficient solution to the liquidity problem, it is not yet very popular or widely used. Once again there is divergence between the economics and the political economy of the property tax.

Making property tax reform happen

The costs and benefits of any tax reform are likely to be unevenly distributed across social groups, and there will always be winners and losers. Losers tend to defend their acquired rights vigorously, while winners often have lower stakes in a reform and are often not even aware of its potential benefits. Such asymmetries might be especially important when it comes to the property tax, which is particularly salient, and immediately felt in the pocket of every home owner or tenant whenever it is increased. Property tax reform is deeply country-specific and must be carefully calibrated to fit particular circumstances.

However, a few general pointers may help increase the chances of a property tax reform being both economically efficient and politically palatable (Table 3.3). The most distinguishing feature of the property tax is that it has a presumptive tax base. Any reform must therefore try to establish a property appraisal system that is considered fair and equitable. Country experience shows that regular market value updates can successfully brought through the political process. Additional measures for the crucial purpose of making property tax more acceptable could be means-tested exemptions for low-income households and deferrals for those that are liquidity-constrained. Salience – in itself a laudable feature because it helps taxpayers realise the cost of public services – may be addressed by allowing home owners to pay their tax in instalments. Some transitional and phasing-in mechanisms – like smoothing tax liabilities during the transition period – may be necessary to assuage opposition to reform (Blöchliger and Vammalle, 2012).

Table 3.3. Strategies for property tax reform
Promising and less promising approaches

Issues and problems

Promising approaches

Problematic approaches

Salience: The property tax is more visible than other taxes

Tie tax reform to improvements in local services

Tax paid in instalments, tax withheld at source, and other payment options

Assessment limits

Property tax capping

Liquidity constraints: The tax is a burden on the housing-rich but income-poor, especially seniors

Tax deferrals for seniors

More payment options

Assessment limits

Property tax capping

Perceived regressivity: Taxes can be higher as a percentage of income for low-income taxpayers

Property tax credits

Tax deferrals

Bundle with other tax reforms

Package with expenditure changes

Low-income housing exemptions

Banding

Classified tax rates

Progressive tax rates

Assessment limits

Property tax capping

Volatility: Potentially large swings in taxes for some taxpayers

Annual reassessment

Indexing between reassessments

Taxpayer education

Information in understandable form

Assessment limits

Property tax capping

Presumptive tax: The tax base is inherently arbitrary

Taxpayer education

Consultation

Accessible appeal process

Self-assessment

Classified property tax rates

Assessment limits

Property tax capping

Source: Based on Bird, R. and E. Slack (2013), “The Political Economy of Property Tax Reform”, OECD Working Papers on Fiscal Federalism, No. 18, OECD Publishing, Paris.

Property tax is a local tax. It should be in local governments’ own interest to increase the revenues they derive from it and to see it reformed. Nevertheless, upper-tier governments also play a crucial role in fostering property tax reform. They largely shape the tax base and enjoy a certain scope for encouraging local governments to increase the property tax take. They may, for instance, remove the property tax base from equalisation, thereby leaving all additional tax revenue to the collecting jurisdiction. Or they may link certain intergovernmental grants to the tax effort and local property tax collection. Governments should make use of such incentives as part of their property tax reform strategies.

References

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Andrews, D., A. Caldera Sánchez and Å. Johansson (2011), Housing Markets and Structural Policies in OECD Countries”, OECD Economics Department Working Papers, No. 836, OECD Publishing, Paris.

Arnold, J.M., B. Brys, C. Heady, Å. Johansson, C. Schwellnus and L. Vartia (2011), “Tax Policy for Economic Recovery and Growth”, The Economic Journal, Vol. 121.

Bird, R. and E. Slack (2013), “The Political Economy of Property Tax Reform”, OECD Working Papers on Fiscal Federalism, No. 18, OECD Publishing, Paris.

Blöchliger, H., B. Égert, B. Alvarez and A. Paciorek (2015), “The Stabilisation Properties of Immovable Property Taxation: Evidence from OECD Countries”, OECD Economics Department Working Papers, No.1237, OECD Publishing, Paris.

Blöchliger, H. and O. Petzold (2007), “Taxes or Grants: What Revenue Source for Sub-Central Governments?”, OECD Economics Department Working Papers, No. 706, OECD Publishing, Paris.

Blöchliger, H. and B. Égert (2013), “Fiscal Consolidation across Government Levels – Part 3. Intergovernmental Grants, Pro- or Counter-cyclical?”, OECD Economics Department Working Papers, No. 1072, OECD Publishing, Paris.

Blöchliger, H. and J. Pinero Campos (2011), “Tax Competition between Sub-central Governments”, OECD Working Papers on Fiscal Federalism, No. 13, OECD Publishing, Paris.

Blöchliger, H. and C. Vammalle (2012), Reforming Fiscal Federalism and Local Government: Beyond the Zero‐Sum Game, OECD Publishing, Paris.

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Cabral, M. and C. Hoxby (2012), “The Hated Property Tax: Salience, Tax Rates, and Tax Revolts”, NBER Working Paper, No. 18514.

Caldera Sánchez, A. and Å. Johansson (2011), “The Price Responsiveness of Housing Supply in OECD Countries”, OECD Economics Department Working Papers, No. 837, OECD Publishing, Paris.

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Devereux M.P., B. Lockwood and M. Redoano (2007), “Horizontal and Vertical Indirect Tax Competition: Theory and Some Evidence from the USA”, Journal of Public Economics, Vol. 91.

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Table 3.A.1. The valuation of immovable property
Assessment and valuation of immovable property, OECD countries, 2014

Country

Property tax name

Coverage

Assessment and valuation

Scope

Main purpose

Other types of property taxed

Valuation method

Frequency of market value updates

Last market value update

Other updating methods

Responsibility for tax base setting

AUS

NSW Land tax

Land only

Residential and business, except owner-occupied

Undeveloped land

Every three years

2014

State government

AUS

NSW Council rates

Land only

Residential and business

Undeveloped land, agricultural land

Sales prices

Every three years

2014

State government

AUT

LTA+LTB

Land and buildings

Residential and business

Undeveloped land, agricultural land

1973

Irregular updates

National government

BEL

Households

Land and buildings

Residential only

Undeveloped land, agricultural land

Income method

Every ten years

1975

Consumer price index

National and regional government

BEL

Businesses

Land and buildings

Business only

Undeveloped land, agricultural land

Income method

Every ten years

1975

Consumer price index

National and regional government

CAN

-

-

-

-

-

-

-

-

-

CHE

Canton of Berne

Land and buildings

Residential and business

Undeveloped land, agricultural land

Mix of sales prices and income

1998

Irregular

State government

CHL

Land and buildings

Residential and business

Undeveloped land, agricultural land

Sales prices, cost method and income method

2009/2014

National government

CZE

Land and buildings

Residential and business

Undeveloped land, agricultural land

Area-based assessment

National government

DEU

Land and buildings

Residential and business

1935/1964

Index

National government

DNK

Land only

Residential and business

Undeveloped land, agricultural land

Sales prices

Bi-annually

2011

National government

ESP

Land and buildings

Residential and business

Undeveloped land, agricultural land

Sales prices

Various indices

National government

EST

Land only, all types of land

Residential and business

Undeveloped land, agricultural land

Sales prices

2001

National government

FIN

Land and buildings

Residential and business

Undeveloped

Sales prices for land, cost method for buildings

Every five years

Construction price index

National government

FRA

-

-

-

-

-

-

-

-

-

GBR

CT

Land and buildings

Residential and business

None

Sales prices

1991

National government

GBR

NDR

Business only, including machinery

None

Sales prices, cost method and income method

Every five years

2010

GRC

-

-

-

-

-

-

-

-

-

HUN

Land and buildings

Residential and business

Undeveloped

Sales prices

Annually

National government

IRL

LPT

Buildings only

Residential and business

None

Sales prices

National government

IRL

NPPR

Buildings only

Business only

None

Fixed lump sum

Varies

ISL

-

-

-

-

-

-

-

-

-

ISR

Local authorities rates

Land and buildings

Residential and business

agriculture

Consumer price index

ITA

IMU

Land and buildings

Residential and business, except owner-occupied

Undeveloped land, agricultural land

Sales prices and cost method

National government

ITA

TASI

buildings only

Residential and business

none

Sales prices and cost method

National government

JPN

CPT

Land and buildings

Residential and business

Undeveloped land, agricultural land

Sales prices and cost method

Every three years

2012

National government

JPN

MPT

Land and buildings

Residential and business, including machinery

Undeveloped land, agricultural land

Sales prices and cost method

Every three years

2012

National government

KOR

Land and buildings

Residential and business

Undeveloped land, agricultural land

Sales prices

Annually

National government

LUX

Land and buildings

Residential and business

Undeveloped land, agricultural land

Sales prices

no update

National government

MEX

Impuesto predial

Land and buildings

Residential and business

Undeveloped land

Sales prices

Annually

2014

NLD

Buildings only

Residential and business

Undeveloped land

Sales prices (and other methods for business property)

Annually

2014

National government

NOR

Land and buildings

Residential and business

Undeveloped

Sales prices

Every ten years

House price index

National government

NZL

Land and buildings

Sales prices

varies

Local government

POL

Land and buildings

Residential and business

Undeveloped land, agricultural land

Area-based (residential), income method (business)

PRT

Land and buildings

Residential and business

Undeveloped land, agricultural land

Sales prices

Every three years

National government

SVK

Land and buildings

Residential and business

Undeveloped land, agricultural land

National government

SVN

DPQ

Residential and business

none

Local government

SVN

NUSZ

Land and buildings

Residential and business

Undeveloped

Local government

SWE

Land and buildings

Residential and business

None

Sales prices

Income base accounts

National government

TUR

Land and buildings

Residential and business, except owner-occupied

Undeveloped land, agricultural land

Sales prices for land, cost method for buildings

Every four years

GDP inflator

USA

Philadelphia local property tax

Land and buildings

Residential and business

Undeveloped land, agricultural land

Sales prices, cost method and income method, depending on type of property

Annually

2013

State and local government

Source: OECD Immovable Property Tax questionnaire.

Table 3.A.2. Property tax abatements and property tax rates
OECD countries, 2014

Country

Property tax name

Tax abatements

Tax rates

Tax value set below assessed value

Exemptions

Level and variation across local governments

Progressive tax rates

AUS

NSW Land tax

Low income households

0% to 2.6% depending on property value

AUS

NSW Council rates

AUT

LTA+LTB

Tax holidays for new buildings

No local variation

0.25% to 0.75% depending on type and size of properties

BEL

Ménages

Tax value is 140% of assessed value

Lump-sum exemption for one property; exemptions for under-use

BEL

Sociétés

Yes

Certain businesses

CAN

-

-

-

-

-

CHE

Canton of Berne

Low-income households

0%-1.5%

CHL

Yes, 63% (residential), 79% (business)

Lump-sum exemption for each property; exemptions for disabled

0.98%-1.14% (residential)

Only for agricultural land

CZE

No, rate depends on type of property (CZK 1 to 6 per square metre)

DEU

Yes, 33%

DNK

1.6%-3.4%

No

ESP

Yes

Low-income households; spending types; certain businesses

0.3%-1.3%

EST

Lump-sum exemption for each property; low income pensioners

FIN

Yes, 70% (buildings), 74% (land)

0.32%-0.7% (owner-occupied), 0.6%-1.35% (other)

No

FRA

-

-

-

-

-

GBR

CT

8 value bands

Various reliefs granted individually by local governments

GBR

NDR

Lump-sum exemption for each property; low income pensioners

GRC

-

-

-

-

-

HUN

18 value bands

No local variation

IRL

LPT

No local variation

0.18% below, 0.25% above EUR 1 million property value

IRL

NPPR

ISL

-

-

-

-

-

ISR

Local authorities rates

Low income households

ITA

IMU

Yes, 50%

Low income households

0.2% (land)/0.46% (buildings) -1.06%

ITA

TASI

Low income households

0.10%

JPN

CPT

Yes

Low income households; certain spending; certain businesses

JPN

MPT

Yes

Low income households; certain spending; certain businesses

KOR

Yes, 60-70%

Certain spending; certain businesses

No local variation

0.1%-4%

LUX

No abatements

3.3%-100%

No

MEX

Impuesto predial

Yes

Between 0.13% and 0.33% depending on property value

NLD

No, 100%

None, except some local exemptions

0.04%-0.5%

NOR

Tax holiday for new buildings

Each local government to decide

0.2%-0.7%

NZL

No

POL

Low income households

PRT

Lump-sum exemption for each property

0.80%

SVK

SVN

DPQ

Lump-sum exemption for one property; higher tax for under-use

SVN

NUSZ

Low-income households; tax holiday for new buildings

SWE

Yes, 75%

Yes

TUR

No

Low-income buildings

0.1%-0.3%, double in metro areas

USA

Philadelphia local property tax

No, 100%

Lump-sum exemption for one property; tax holiday on new buildings, certain spending; certain businesses

Source: OECD Immovable Property Tax questionnaire.

Notes

← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

← 2. The property tax is sometimes said to be the combination of the “best and the worst of all taxes” (Vickrey, 1999). See also the Mirrlees Review (2011).

← 3. For example, France levies a recurrent tax both on the owner of an immovable property (taxe foncière) and on its occupant (taxe d’habitation).

← 4. In 2011, the German Federal Court of Justice considered the German property tax system unfair because it applied different tax values on otherwise identical properties (Schulemann, 2011).

← 5. Some environmental taxes such as a carbon tax might even have less harmful effects on growth, while improving welfare.

← 6. Henry George, 19th century political philosopher and economist, was the most influential proponent of the land value tax and the capture of land rents (George, 1881).

← 7. Land use may react to a land tax at the margin, however. The taxation of “polder” in the Netherlands may affect human-led transformation of sea into land and hence total land surface.

← 8. This is a more general problem of ecological tax reform, which has to do with the fact that ecological taxes should change behaviour but, as a side effect, generate revenue. Tensions often came into play between the ecological and fiscal objectives of environmentally related taxation, with governments interested in green taxes for fiscal rather than environmental reasons.