Some of you may have already seen a report published recently by the Organisation for Economic Co-operation and Development (OECD) entitled “Housing Taxation in OECD Countries” which provides an interesting comparative assessment of housing tax policies in OECD countries and identifies options for reform. The study starts with an overview of recent housing market trends and challenges and an analysis of the distribution of housing assets. It then examines the different types of taxes that are levied on housing in OECD countries, assessing their efficiency, equity and revenue effects. It also evaluates the role of specific tax policy instruments in addressing current housing challenges. Based on the assessment, the study outlines a number of reform options that governments could consider to enhance the design and functioning of their housing tax policies.
Looking at the report in more detail, extracts from the Executive Summary state: “Housing plays a central role in our lives. Access to shelter is a basic human need and a key determinant of individual welfare. Access to well-located, quality housing shapes people’s social lives as well as their access to health care, education, job opportunities and recreational activities. Housing also affects well-being on a daily basis as the home is the centre of family life and, increasingly, of professional life, with the widespread adoption of teleworking during the COVID-19 pandemic. In OECD countries, housing is, on average, the single-largest expenditure item across all income groups and has accounted for an ever-larger share of total household expenditure in recent years.
Housing also constitutes households’ largest lifetime investment and the majority of their wealth, though its significance varies across countries. Housing is a key vehicle for wealth accumulation and is a particularly important asset for middle-class households. In OECD countries, owner-occupied housing accounts on average for 50% of total household wealth across all households and for more than 60% of middle-class wealth. However, the importance of housing varies widely across countries. For instance, homeownership rates range from 44% (Germany) to 93% (Lithuania), while housing wealth (including both owner-occupied and secondary housing) accounts for at least 80% of total household wealth in Chile, Latvia, Lithuania, and Greece, but less than 40% in the United States and New Zealand.
Housing taxes are of growing importance given the pressure on governments to raise revenues, improve the functioning of housing markets, and combat inequality. As they emerge from the COVID-19 pandemic, many countries are looking to restore public finances by raising tax revenues while supporting the economic recovery. Many governments are also under increasing pressure to address rising inequality and declining housing affordability, which is more acutely affecting low-income and young households. In addition, in the context of growing international mobility of both capital and people, governments may aim to raise more revenues from less mobile tax bases, in particular real estate. This increased attention on housing taxes reinforces the need to design them effectively and fairly.
Housing taxation already plays an important role in the OECD, with countries levying a wide range of taxes on immovable property. All OECD countries (though not all sub-central governments) levy recurrent taxes on immovable property. Owners of rental properties are taxed on their rental income and, in a minority of countries, owner-occupiers are taxed on imputed rent. Transaction taxes are also commonly levied upon housing purchases and capital gains taxes are levied on the disposal of housing, although many countries exempt capital gains on the sales of main residences. Inheritance and gift taxes may also be levied when immovable property is transferred to heirs.
Nevertheless, the report finds that the way housing taxes are designed often reduces their efficiency, equity and revenue potential. Many countries still levy recurrent property taxes on outdated property values, which significantly reduces their revenue potential (as revenues have not risen in line with property values), their equity (as households whose properties have increased in value may not be paying more tax), as well as their economic efficiency (as property taxes levied on outdated values provide incentives for people to remain in housing that is subject to a lower outdated valuation, even if it no longer suits their needs). Reliance on transaction taxes is high, despite the potential for these taxes to reduce residential, and to some extent, labour mobility. The majority of countries fully exempt capital gains on main residences, and while there may be justification for such an approach, an uncapped exemption provides vastly greater benefits to the wealthiest households and further distorts the allocation of savings in favour of owner-occupied housing. Other forms of tax relief for owner-occupied housing, in particular mortgage interest relief, have been found to be regressive and ineffective at raising homeownership rates. In some countries, features of rental income taxation and inheritance tax rules applying to housing also reduce progressivity and revenue potential. The assessment also shows that, while housing taxes are viewed as harder to avoid and evade than other taxes, tax systems often leave room for such behaviours, reducing the efficiency, fairness and revenues of housing taxes.
This report also finds that some housing tax policies may help address current housing market challenges, although tax policies may not always be the most effective tools. Tax policies may be used to address specific housing market challenges, such as significantly reducing the carbon footprint of housing, encouraging a more efficient use of land and housing, and boosting the supply of affordable housing. However, tax policies may sometimes be a blunt tool and may even be counterproductive under certain circumstances. In particular, where tax relief is intended to encourage homeownership, it can sometimes contribute to raising house prices and redistributing wealth to current homeowners if housing supply is fixed. Even where tax policies can play a positive role (e.g. vacant home taxes, tax incentives for energy-efficient housing renovations), they may not necessarily be as effective as alternative policy instruments (e.g. regulations) and will generally need to be complemented by other policy measures.
The report identifies a number of reform options that countries could consider to simultaneously enhance the efficiency, equity and revenue potential of housing taxes. The report discusses a wide range of reform options that could help enhance the design, functioning and impact of housing taxes, which includes the following:
• Strengthening the role of recurrent taxes on immovable property, in particular by ensuring that they are levied on regularly updated property values, while lowering housing transaction taxes would increase efficiency in the housing market and improve vertical and horizontal equity.
• Considering capping the capital gains tax exemption on the sale of main residences to ensure that the highest-value gains are taxed would strengthen progressivity and reduce some of the upward pressure on house prices, while continuing to exempt capital gains on the main residence for the majority of households.
• Gradually removing or capping mortgage interest relief for owner-occupied housing would also have positive impacts on progressivity, tax revenues and house price affordability.
• Tax incentives for energy efficient housing renovations could be better targeted to ensure that they reach low-income households. This could contribute to greater emissions reductions and enhance the equity of tax incentive schemes.
• Caution should be exercised when considering tax incentives to encourage homeownership; in most cases, encouraging the supply of housing and promoting the more efficient use of existing housing stock through both tax and non-tax measures is likely to have a greater impact on housing affordability.
• Strengthened reporting requirements, including third-party reporting to the tax authority and international exchanges of information for tax purposes, are also key to ensuring that housing taxes are enforced properly.
Any assessment of housing tax policies should take a holistic view of their interactions with other tax and non-tax policies and with housing market conditions. Interactions between different housing tax policies should be carefully assessed. For instance, residential mobility will be affected directly by both transaction taxes and capital gains taxes, and indirectly by the design of recurrent taxes on immovable property. Reforms aimed at enhancing mobility should therefore consider all three taxes. Carefully assessing interactions between taxes may also help identify cases where, before introducing new tax instruments, countries could consider reforming the design of existing housing taxes. For instance, there may be less need for special taxes to reduce speculation where short-term capital gains are adequately taxed. Similarly, a recurrent tax on immovable property based on regularly updated market values may reduce the need for tax instruments (e.g. infrastructure levies) aimed at capturing property value increases resulting from local public investments. Interactions between tax and non-tax policies are also key. There may be cases where non-tax policies may provide a more effective and equitable alternative to tax measures, especially when the goal is to promote housing affordability. There may also be cases where the success of tax measures depends on other policy settings or housing market conditions.
Housing tax reforms require careful timing and consideration for their impact across different households. Housing tax reforms can have a sizeable impact on house prices, with potentially significant distributional effects as well as wider financial and economic repercussions. A gradual implementation of reforms can help prevent negative macroeconomic shocks while also alleviating the adverse effects of reforms on specific groups of individuals, at least in the short run. Accompanying housing tax reforms with other tax or transfer measures may also help mitigate the impacts of some reforms on more vulnerable people and enhance the public acceptability and political feasibility of policy changes. Governments considering housing tax reforms should also be mindful of the evolution in the macroeconomic environment, in particular changes in interest rates and their potential impact on housing markets and households.”
Another recent report that I would like to mention is the latest in a series of annual reports prepared by the Lincoln Institute of Land Policy and the Minnesota Center for Fiscal Excellence called the “50-State Property Tax Comparison Study”. The report found that, in states with tax assessment limits, disparities in property tax bills for new and long-time homeowners grew rapidly. An example is given in relation to San Diego where the owner of a newly purchased, median-priced home paid more than $9,000 in property taxes last year, about $3,400 more than somebody who has owned an identical home for 14 years, the average duration of home ownership in the city.
The report states: “Assessment limits restrict the growth in the assessed value of a home for tax purposes, usually allowing a property to be assessed at its full market value only after it is sold. Over time, as the value of a home increases, its owner receives an increasingly large tax break. New and recent homebuyers make up for these tax breaks by paying higher bills. San Diego is one of 29 large cities with assessment limits analyzed in the study. In these cities, long-time homeowners receive an average tax break worth $1,600, a 30 percent discount compared with tax bills of new homeowners.
The 50-State Property Tax Comparison Study provides a comprehensive analysis of local property tax rates by calculating the effective tax rate - the tax paid as a percentage of market value - for 74 large U.S. cities and a rural municipality in each state. The study considers property tax exemptions, credits, the accuracy of assessments, and other factors to provide meaningful comparisons of tax rates and bills for residential, commercial, and industrial property. It also analyzes the key factors that drive differences in tax rates among cities.
One of the main drivers of variation in tax rates is the extent to which each city relies on the property tax. In Bridgeport, Connecticut, for example, the report states that residents pay one of the highest effective property tax rates on a median-valued home, but they pay no local sales or income taxes. Birmingham, Alabama, by contrast, has some of the lowest effective property tax rates, but its residents pay significantly more in total local taxes than Bridgeport's - $3,201, per capita, compared to $2,221 in Bridgeport - because Birmingham also relies on local sales and income taxes.
A second major driver of variation in tax rates is the difference in property values in different markets. Cities with high property values can collect the same revenue with a lower rate than cities with low property values. For example, to collect $3,424 - the average amount collected for a median-valued home in the study - the effective property tax rate would need to be 20 times higher in Detroit, which has the lowest home values in the study, than in San Francisco, which has the highest home values.
Other factors in the variation of property tax rates include differing levels of local government spending, and differences in how various classes of property, such as residential, commercial, and industrial, are treated relative to each other.
The study found that among the largest cities in each state, the average effective tax rate on a newly purchased, median-valued home was 1.3 percent in 2021, with wide variation across cities. Three cities had effective tax rates that were at least double the national average, and eight had rates that were less than half the average.” The report provides a wealth of interesting detail about the issues.
I have devoted a relatively large part of this month’s newsletter to the foregoing reports as I think they are likely to be of interest to most readers. However, it is now time to move on to IPTI activities.
We are currently working on a number of projects, one of which has resulted in IPTI developing a framework to audit the quality of an assessing agency’s operational processes. We have not yet concluded our work on this project but, when we have, I think it will be interesting to see how our quality audit framework could be applied to other assessing agencies. I am also pleased to announce that IPTI has been successful in the award of a tender to carry out an audit of the revaluation to be undertaken by the assessing department of a major city.
In terms of events, we are looking forward to the Ontario Property Tax Summit (OPTS) which is being held as an in-person event in Toronto on 8 September. The OPTS will be considering the current challenges that stakeholders are facing in the province and exploring ideas for strengthening and improving the current property tax system. The following week we will be involved in the annual Property Tax Workshop (PTW) being held in Denver, Colorado. The PTW is organised by the US Council on State Taxation (COST) and is delivered in cooperation with IPTI. We are in the process of designing the next series of webinars concerning a variety of topical property tax issues starting in the Autumn. Our in-person Caribbean conference, which is being delivered in partnership with the RICS, will take place in Montego Bay, Jamaica on 13-14 October. We are also facilitating the next “Conference of Valuation Agencies” (CoVA 2022) which will be held, as an in-person event, on 8-9 December at an Oxford college in the UK. This should be an important, and very enjoyable, opportunity to reinforce the CoVA network. As usual, for full details of all forthcoming IPTI events, please visit our website: www.ipti.org.
Now it’s time for a quick look at what is making headlines concerning property taxes in selected jurisdictions and countries around the world.
In the USA, Cleveland has been reviewing the impact of tax-exempt non-profits on the burden of property taxes paid by other taxpayers. A recent article starts by stating that, fifty years ago, when Clevelanders needed to fund schools, pay for parks or expand libraries, they relied on booming tax revenue from large companies. These companies, all household names, employed thousands of people and provided a tax base to fund services for the community. But, it continues, the economy has changed. As those industrial jobs dried up and many companies left the area, governments and local communities could no longer count on those tax dollars to support services. And, it says, the Cleveland area can't fall back on property tax dollars from the industries that have replaced manufacturing companies. It continues, the Cleveland Clinic and University Hospitals, both non-profits, are among the largest employers in Cuyahoga County and together own billions of dollars of tax-exempt properties. While they do pay income taxes, the non-profit hospital systems do not pay property taxes on the vast majority of their real estate, said the research group.
The report indicates that Cleveland Clinic owned at least $2.4 billion in tax-exempt property countywide as of 2018 assessments. If that property was taxable, it would likely contribute about $84 million to government and school coffers annually. University Hospitals owns at least $797 million in property, the records show. Their property taxes could contribute about $28 million to county coffers each year. The report looked at other parts of the country where municipalities are encouraging non-profits to make payments in lieu of taxes (PILOTs), rather than changing property tax exemptions. Boston, home to Harvard University, Boston College and Boston Medical Center, has had a voluntary PILOT program in place since the early 1960s. In 2021, the city received more than $35 million in cash contributions and more than $55 million in community benefits through the program. PILOT programs are also being touted in other parts of the Rust Belt. In May, Pittsburgh officials called for a PILOT program in their region which is home to the University of Pittsburgh and Carnegie Mellon University. A spokesman said, “When you have a loss of revenue from the exemption, then the local government has to make choices. They either cut services or push the burden onto other taxpayers to make up for the loss of revenue.”
In Germany, more information is being published about reforms to its property tax system. People who own property in Germany pay an annual property tax (Grundsteuer) on its assessed value. However, with the system criticised in recent years as hopelessly outdated, the property tax is undergoing a major reform. Owners of the 36 million properties in Germany have to pay taxes each year to the local tax office. The property tax is calculated according to the value of the property and the buildings or business operations that stand on it. This value is multiplied by the local tax rate to provide the total tax amount. The recent reform has been a long time coming: the property values currently used to calculate the tax date from 1964 in the western federal states and as far back as 1935 in the eastern states. Back then, property tax was based on so-called unit values that only took into account the size of the property, and not its location. In 2018, the Federal Constitutional Court ruled that the current system used for assessing property tax rates in Germany treats similar properties differently and therefore violates the principle of equal treatment enshrined in the Basic Law. The court, therefore, called for the tax to be reformed. In a major overhaul, property values are now set to be recalculated between 2022 and 2025, before the new tax rate comes into effect on 1 January 2025. The new property tax will take multiple different factors into account to determine a property’s value, including the value of the land and the (theoretical) net rent, as well as the size of the property, the type of property, and the age of any buildings on the property. The figure will then be multiplied first by a tax index and then by the local tax rate to calculate the overall property tax. To make these calculations, the tax offices need up-to-date information about properties across Germany. Between 1 July and 31 October 31 2022, all property owners in Germany are therefore required to submit a tax return for their properties and land in Germany. Most federal states have already informed property owners in writing about this requirement.
And finally, it seems that not everyone running for political office in the USA is as careful as they should be about paying their property taxes. When the individual concerned in a recent news article was questioned about non-payment of his overdue property taxes, he responded that he was too busy campaigning to pay the property tax. As excuses go, that seems to be one of the less convincing!
Paul Sanderson JP LLB (Hons) FRICS FIRRV
President, International Property Tax Institute