“The Tax Base Should Reflect Current Property Values”

In April of 2018, the Federal Constitutional Court declared Germany’s procedure for assessing property tax unconstitutional and ordered the government to adopt policy reforms by the end of 2019. So far, however, politicians have been slow to propose new legislation. Prof. Dr. Sebastian Siegloch, head of ZEW’s Research Department “Social Policy and Redistribution” and professor of economics at the University of Mannheim, argues that property tax assessments should be based on current market values.

Which reforms are now under discussion?

The debate, while multifaceted, comes down to two competing proposals. One completely disregards the value of the property; the tax base is simply based on plot size and square footage. The other proposal factors in the current market price of the land and how it is structured.

Which do you think is the better proposal?

I think it makes sense to have a tax policy that takes the value of the land and the buildings on it into account. Otherwise a 2000-square-foot penthouse apartment in Munich’s chic Schwabing neighbourhood would be subject to the same property tax as a similarly sized rowhouse in Mannheim’s Käfertal, a much less posh address. Such an approach is hard to justify economically, let alone politically. Politicians should aim at a tax base – the amount on which the tax rate is applied – that reflects current property values as closely as possible. The values used today for property tax assessments in western Germanydate back to 1964.  

Opponents of this and similar proposals stress that enormous amount of work involved for state government, which would have to reassess some 35 million properties.

It is true that accomplishing this would be no small feat. But the real problem is that German legislators lack the political will to think about how best to approach such a task. I am an economist, so I believe in prices. Local assessment committees have access to information on dates of sale, purchase prices and locations. By combining this data with publicly accessible parameters such as plot size and square footage they could easily, and with sufficient accuracy, appraise property values without having to unleash a horde of tax assessors on German cities. Such methods are common in other countries.

But basing property tax on market values would increase the tax burden.

Hold on. Raising the value of the tax base need not increase the tax burden. Local governments still have to set the tax rate – or perhaps a system of tax rates. It would be easy to propose a tax schedule that leaves properties below a certain value no worse off than they are today. Moreover, if municipal officials wanted to they could also tax high-value properties more heavily and funnel the additional revenue into the local community for, say, public housing projects.

This would turn the property tax into wealth tax.

Real estate makes up most of household net worth in Germany, so in this sense property tax is already a wealth tax, though the tax rate is very low relative to actual property values. One thing to keep in mind is that real estate is not only an investment; it is also where people live and work. A smart tax rate system with generous tax exemptions could take these uses into consideration.

The property tax can be passed on to renters through surcharges. Won’t they be the ones ultimately footing the bill?

If the housing supply is rigid and the demand for apartment is flexible, landlords who increase surcharges in response to higher property taxes are likely to forgo planned rent increases as well – and hence will shoulder part of the burden themselves. Of course, housing demand in Germany’s major urban areas is enormous, and big-city landlords would indeed be likely to pass on additional property taxes to tenants. But municipalities with convenient transportation links to nearby cities could set lower property tax rates in an effort to attract apartment seekers. Tax competition between cities and the smaller communities surrounding them could make demand more flexible. Moreover, on the supply side, that is the real estate, is not very flexible either. There are many indications that, in the long run, landlords in urban areas will have to pay a considerable part of the tax burden themselves.

For further information please contact

Prof. Dr. Sebastian Siegloch, Phone +49 (0)621-1235-140, E-mail sebastian.siegloch@zew.de