By Hansjoerg Blöchliger and Mame Fatou Diagne, OECD Economics Department
Taxes on immovable property or real estate taxes are underutilised across Central and Eastern European (CEE) countries and the Baltics, but reform in this area faces steep challenges. Recent health and energy crises have put public finances under strain in many countries, and long-term challenges such as rapid population ageing require them to look for fiscal policy reform. Strengthening real estate taxation can contribute to maintaining fiscal sustainability, as recommended in several recent OECD Economic Surveys for CEE and Baltic countries (see references below).
Property tax revenues: a trickle in Central and Eastern Europe
Revenues from taxes on immovable property are low in most CEE countries. While Poland collects more property tax revenues (slightly above 1% of GDP) than the average OECD country, other CEE countries collect considerably less (Figure 1). Most countries in the region have failed to benefit from the steep rise in property values over the past ten years or so, relying instead heavily on labour taxes, which are more harmful to growth, or consumption taxes, which tend to be regressive. Some other countries in the OECD also collect little property tax revenue, but they either implement wealth taxes including on immovable property (e.g. Switzerland), or they tax the imputed rent of the main residence as part of the income tax (e.g. Denmark, Greece, or the Netherlands).
Figure 1. Revenues from immovable property taxation are low in CEE countries and the Baltics
Revenue from recurrent taxes on immovable property, % of GDP, 2020 or latest available year
Immovable property taxes can help raise revenue with lower losses to economic growth than alternative taxes. In the Czech Republic or Estonia for example, a rise in immovable property taxation to reach the OECD average and a concomitant reduction of labour taxes could help lift potential GDP per capita growth by up to 0.7% (Oguzhan, Cournède and Fournier, 2017). Immovable property taxes can help cushion housing boom-and-bust cycles and can be designed to reduce inequality. They can also help fund local governments and contain urban sprawl. The risk of tax competition eating up tax revenues is low because property taxes are capitalised in property prices: the lower the tax, the higher property prices and vice versa, largely sterilising relocation effects, as is the case in the USA.
Local governments could be the main beneficiaries of more buoyant tax revenues, strengthening their capacity to spend on local infrastructure. More own-source revenues would also reduce pressure on central governments or EU programmes to fund local investment. Local governments should exploit the new tax room granted to them. In Hungary, currently a quarter of municipalities only levies a property tax. In Latvia, some municipalities set very low tax rates in a bid to attract high-income earners.
Design failures and data limitations reduce the potential of the property tax, however. Most CEE countries hardly update property (or cadastral) values. Moreover, owner-occupied housing is often fully or partly exempt, further cutting revenues. Unlike most OECD countries, Poland, the Czech Republic and the Slovak Republic apply area-based rather than value-based indicators to assess the value of land and buildings, thereby underestimating property values especially in urban areas and making the property tax regressive. A land tax as in Estonia would be the most effective property tax because it encourages housing construction and discourages land hoarding. Yet revenues from the Estonian land tax remain very low as land values are outdated and tax rates low. In Lithuania, property taxation is sometimes seen as a “luxury tax”, with minimum thresholds so high that few properties are taxed.
Property tax reform is challenging
Navigating property tax reform through the political process is difficult. A saying goes that the property tax is loved by economists and hated by everybody else. Homeowners dislike property tax reform, especially in a context of rising house prices and, therefore, rising tax bills. Property taxes are also unpopular as they are salient and raise issues of fairness, including in comparison to the taxation of other forms of wealth, such as financial assets.
While in many countries in the OECD housing wealth is concentrated among high-income, high-wealth and older households, it is more broadly distributed in CEE countries. Homeownership rates are very high, exceeding 90% in Slovakia, Lithuania, and Hungary (Figure 2), considerably higher than in most Western European countries or the United States. Incomes of many property owners are low, limiting their capacity to pay higher property taxes. Furthermore, house price rises in CEE countries have exceeded the OECD average over the past decade, especially in the Baltics. Adequate valuation could hence mean a steep rise in the tax bill for almost everyone, especially as houses and apartments were often acquired very cheaply during the privatisations in the 1990s.
Figure 2. Homeownership is high in Central and Eastern Europe
Share of owner-occupied housing, % of total housing, 2020 or latest available year
Making property tax reform happen
To buoy property tax revenues, CEE countries should tax all immovable property including owner-occupied residential property, as recommended in various OECD Economic Surveys. Local governments should be encouraged to make use of their taxing power, including through reforms to intergovernmental fiscal relations that would raise incentives to collect their own resources. Increasing property tax revenues would also require strengthening information systems to update land and property values regularly. Such upgrades should be supported at the central or regional level of government. Digitalisation of cadastral information could help to keep abreast with developments on property markets.
Some design options could help address political deadlocks and garner support for property tax reform. The most important is a gradual phasing-in, to help avoid an abrupt hike in tax bills that would hurt homeowners. Tax deferrals – i.e. tax is paid only when a house is sold or bequeathed, as is done in Canada, Denmark, Ireland or the United States – can reduce pressure on liquidity-constrained households, although deferrals could raise issues of intergenerational fairness. Furthermore, progressive taxation, either directly by setting progressive tax rates or indirectly by granting tax allowances, can protect low-income households and thereby bolster acceptability of increased property taxation. Lastly, comprehensive reform packages, such as lowering more harmful taxes (for example transaction taxes); improving local public services; or funding social housing programmes, may also foster much-needed political support.
Comprehensive property tax reform can be successful: In 2017, Denmark adopted a major property tax reform, which entailed a reassessment of properties’ fair market values, while tax rates were lowered. Tax payments can be deferred until a house is sold, alleviating liquidity constraints. Ireland designed property tax reform in a similar way in 2013, fostering political support especially by allowing households to defer tax payments.
References:
OECD Economic Surveys:
OECD Economic Surveys: Estonia (2017, 2019, 2022); Hungary (2019, 2021); Latvia (2022); Lithuania (2018, 2022); Poland (2020); Slovenia (2017, 2020, 2022).
Other references:
Blöchliger, H. (2015): “Reforming the Tax on Immovable Property”, OECD Economics Department Working Paper 1205.
Cournède, B., J. Fournier, and P. Hoeller (2018), “Public finance structure and inclusive growth”, OECD Economic Policy Papers, No. 25.
OECD (2022), Housing Taxation in OECD Countries.
OECD (2020), Raising Local Public Investment in Lithuania.
Oguzhan A., B. Cournède and J-M. Fournier (2017): “The effect of the tax mix on inequality and growth”, OECD Economics Department Working Paper 1447.
The Mirrlees Review (2011), Tax by Design, Institute of Fiscal Studies.