German Property Tax Needs a More Market-Oriented Approach

In a recent ruling on the standard rateable valuation for calculating property tax, the German Federal Constitutional Court determined that the current procedure for tax collection based on outdated assessment values for the more than 35 million real estate properties in Germany is in violation of the principle of equal treatment in the German constitution. Dr. Oliver Lerbs, head of the Research Department “International Finance and Financial Management” at the Centre for European Economic Research (ZEW), Mannheim, comments on the court’s ruling.

“The ruling from the Federal Constitutional Court has placed the onus on lawmakers – and provided a welcome opportunity – to set a fairer and more market-oriented approach to Germany’s property tax (Grundsteuer). Essentially, a good property tax should only be targeted at land and not at buildings. The proposal currently being discussed of calculating property tax based on plot size would have the advantage that the tax basis for assessment would be very easy to calculate. That being said, the amount of property tax to be paid would also be entirely independent of the actual market value of the property, which could be seen as unfair.

From a public finance perspective, the far superior solution would be to calculate property tax based on the value of the land plots. The basis for assessment could easily be calculated using the ground values generated by local committees of valuation experts (Gutachterausschüsse für Grundstückswerte). These values are available at a highly disaggregated spatial scale for almost every part of Germany and are regularly adjusted to keep up with the latest price developments on the land market.

It is, however, unlikely that a reform of the law governing how property tax is collected in Germany will eliminate the extreme regional variations in the local tax multipliers for the Grundsteuer B, which is levied on residential property by municipalities in Germany. As studies carried out at ZEW have shown,under otherwise comparable conditions, residential property in municipalities where most residents are home owners is taxed at a lower rate than in municipalities where most residents live in rented accommodation.”

For further information please contact:

Dr. Oliver Lerbs, Phone +49 (0)621/1235-147, E-mail oliver.lerbs@zew.de