Introduction of a value-based property tax – barriers & drivers

Introduction of a value-based property tax – barriers & drivers Frances Plimmer and William McCluskey United Kingdom

Contents • Reform programmes; • Sources of funding; • Sustainability of a new tax; • Ad valorem basis; • Non-market value basis; • Drivers and Barriers; • Examples; • Conclusions.

Reform programmes • Decentralisation; • Independence from central control; • Better quality of services; • Subsidiarity; • Establishment of local authorities; and; • Methods of funding.

Sources of funding • Local Income Tax; • Property Tax; • User charges; • Fees; • Grants from centre Only property tax achieves local autonomy.

Sustainability of a new tax: • Stable; • Transparent; • Affordable; • Sufficient revenue; • Growth; • Wide tax base; • Socially acceptable.

Ad valorem Basis • Reflects changes in economy; • Objective constraint; • Public comprehension; • Buoyancy; • Vertical and horizontal equity; • Reflects link between property values and services; • Assumes annual revaluations; • Relies on comparable transactional data; • Resource intensive – human and technological.

Non-market value Basis • Reflects reality of resource limitations; • Appropriate where there is no market; • May distort market values; • Variety of systems possible; • Accurate and exact measurement; • Objective not subjective; • Can reflect market-based economic criteria; • Lower administrative costs; • Less resource intensive; • Taxpayer comprehension.

Drivers • Systems and data necessary to support market value are being developed; • Problems with non-market based systems; • International perceptions;

Barriers • Market Value does not reflect ability to pay – social issue; • Need for: • comprehensive legislation; • healthy and active property market; • range of human and technological resources; • taxpayer education; • political will.

Examples of non-market based property tax systems • California – Acquisition Value; • Since 1978, taxable value is purchase price + 2%; • Actual figure, fixed by taxpayer; • Promotes neighbourhood stability; • Socially acceptable; • Reduced revenue affects services; • Disadvantages mobility and new owners; • Horizontal and vertical inequity.

Examples of non-market based property tax systems • Israel – Arnona; • formula based on: • Property use; • Location; • Type of property; • Size of property; and • Age. • “reflects factors normally expected to influence property taxation in market economy.”

Conclusions • Establish a set of acceptable outcomes; • Consider: • Taxpayer acceptability; • Resource implications; • Practical and political considerations; • National, cultural and social environment. • Ensure an open and full discussion to identify rationale for what is acceptable – unusual!

Introduction of a value-based property tax – barriers & drivers