Local governments prepare real estate tax reform

Warsaw (CC By UggBoy-UggGirl)

Local governments have abandoned their dreams of the cadastral tax for now, but they are still after higher revenues from land and buildings.They came up with geographical tax progression in order to save the budgets of communes [gmina]. Respectively, the real estate tax rates would be higher in sub-regions where GDP per capita stands above the national average.

The Union of Polish Metropolises has recently started working on draft amendments to the law. Amendments are also postulated by the Association of Polish Cities and treasurers of numerous municipal authorities as they expect them to add to communes’ revenues. They also hope that the new method would rationalise the calculation of real estate tax and resemble those applied in other countries.

In the vast majority of western states, such as Germany, France, United Kingdom, United States, Sweden, Austria, Ireland and Belgium, but also in Lithuania, Latvia, Estonia, Romania, and even in Belarus, the amount of real estate tax has been determined in accordance with the real estate value for years now. This kind of tax is called cadastral tax.

Make the most out of metres

In Poland, the tax on buildings and land is determined in accordance with their surface area, not taking real estate value into account. Real estate value is only considered while determining the fee for the so-called perpetual usufruct that is paid apart from the real estate tax (in the times of the Communist rule in Poland, more specifically in 1961, a rule was adopted that the State was to be the sole owner of land in cities; land was not sold, but perpetual usufruct was granted, usually for 99 years). In practice, holders of perpetual usufruct of a parcel on which a house has been built in a city pay a usufruct fee and additionally real estate tax for the building.

Amounts of taxes on buildings and land are determined in Poland in the following way: first the Ministry of Finance defines, each year, their maximum rates, the same for the entire country. Specific values are stated in zlotys or fractions of a zloty per one square metre. For example, in 2013 the rates will be: PLN 0.45 per one square metre of land under residential buildings, PLN 0.88 per one square metre used for business, PLN 0.73 per one square metre of usable space of residential buildings and PLN 22.82 per one square metre of a building whose use is related to running business.

Next, communes take decisions on the specific rates to be applied in their territory. Due to the difficult financial situation of local governments, recently most communes have decided to apply the maximum rates.

The effect is that the amount of tax ‘per metre’ of a parcel, house or a craftsman’s workshop in a poor peripheral town is the same as the amount of tax for a metre of a parcel or a luxury skyscraper in the centre of Warsaw. For this reason, a number of experts, and recently also local government representatives, fiercely criticise the structure of the tax. They claim it is inequitable because it favours the wealthier taxpayers and cities that are better developed. It is obvious that entrepreneurs would not set up their businesses in less attractive places if the real estate is the same as in gminas whose location has more appeal.

Professor Leonard Etel, Rector of the University of Bialystok, highlighted another shortcoming of the present solution. In his view, it encourages keeping undeveloped land in large cities for speculation purposes, as it is not financially burdensome for the owners to postpone sale in anticipation of an increase in their value.

Politically incorrect cadastral tax

Yet, the cadastral tax has many flaws as well. It has very high servicing costs that result, inter alia, from the need to appraise thousands of real estate and update the appraisals on a systematic basis (for example in Singapore appraisals are updated once a year).

In addition, it requires setting up a precise, comprehensive and integrated system of data on all real estate (i.e. the cadaster) that must include data such as real estate surface area, borders, owners and restrictions of their rights that result e.g. from mortgage.

The Supreme Audit Office (NIK) claims that such system, whose creation started in Poland in 2000 as a commitment to the EU, will be completed in 2018 at the earliest. Hundreds of millions zlotys are necessary to complete it. Polish local governments cannot afford it at present, hence it is highly likely that the system’s completion will be postponed to an even later date.

On the other hand, introducing the cadastral tax in Poland would translate into a dramatic increase in the tax burden on many Poles, particularly those worse-off who live in large cities. Therefore, for political reasons, several months ago the Ministry of Finance and the Ministry of Regional Development have explicitly denied claims of the opposition that the government was planning to introduce the tax. The Ministry of Finance did not even want to talk to local government representatives who advocated the solution.

Local government representatives emphasise nonetheless that introducing the cadastral tax is not the only way to reform the real estate tax in Poland. The Union of Polish Metropolises suggested to improve the system currently in place by eliminating certain reliefs and exemptions, and by introducing the ‘geographical tax progression’ following the example of the Czech Republic and Slovakia.

Sub-regional alternative

The Czech model envisages a solution where the single basic real estate tax rate adopted for the entire country, calculated per one square metre of living area, is multiplied by a coefficient determined depending on the population size. The larger the population, the higher the coefficient. The smallest towns with a population of up to 1,000 are attributed the coefficient of 1, while for the country’s capital, Prague, it stands at 4.5. In other words, in Prague the tax on houses and flats is 4.5 times higher than in Czech villages. This solution is simple and easy to implement, as it does not require setting up a cadaster.

Polish local governments postulate a similar system, with slight modifications. The Union of Polish Metropolises suggests to determine Poland’s sub-regions (cities, towns, communes and poviats – counties) where GDP is higher than the national average and assign maximum real estate tax rates there, much higher than in other regions (the upper ceiling would still be defined by the Ministry of Finance).

In the richer sub-regions, real estate tax could also be diversified depending on the appeal of a given real estate location. The idea is that tax rates on land in a city centre should be higher than on a parcel in city outskirts.

Local governments suggest dividing richer cities, communes and poviats into zones with different rates of tax per one square metre of surface area. It could be done by using special coefficients, similar as in the Czech Republic. It was also suggested to make tax rates in a given city and its parts dependent on average real estate prices.

‘We should start from the land tax, whose maximum rates are very low in Poland,’ said Bogdan Mościcki from the Union of Polish Metropolises. ‘If land tax was increased in communes where GDP stands above the national average, local government budgets would be replenished with hundreds of millions zlotys. At the same time, the vast majority of citizens or investors would not be affected by the rise, simply because the land tax is very low in Poland.’

Mościcki said, nonetheless, that local governments were not only after higher revenues. He claimed that thanks to dividing cities or poviats into ‘tax zones,’ local authorities would be better equipped to steer their development and stimulate the development of all city parts in a more uniform way than today. Lower rates would be imposed in districts or neighbourhoods where local authorities are looking to stimulate economic activity, attract investors and businesses.

Chances for the reform

Is there a chance that the government would follow the postulates of local governments on reforming the real estate tax? It seems so.

The draft Assumptions for the National Urban Policy until 2020, developed recently by the Ministry of Regional Development, suggest ‘reforming the real estate tax system (e.g. by introducing a tax on real estate value ad valorem or a tax whose amount would indirectly depend on real estate value by the introduction of zoning of maximum tax rates, e.g. depending on a sub-region’s GDP or the population or functions of a city/town/village).’

The Team for the Governmental Programme for Developing the Integrated Real Estate Information System, appointed in 2009 by the government, will also work on the real estate tax reform. The Team comprises, inter alia, the Surveyor General of Poland and Undersecretaries of State from eight ministries.

All indications are that the government considers the reform a possible scenario. Changes could be accelerated by the difficult financial situation of many local governments that consider the government guilty and demand an increase in communes’ share in PIT and CIT. Yet, the ruling coalition may not allow it as State finances are not in a better shape either.

It would be easier for the government to yield to the real estate tax reform advocated by local governments because local governments would decide on the rates (within the limits set out by the Ministry of Finance). If they overstate the rates, the resulting social discontent would be directed at local authorities, not the government.

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