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Property Taxes in PolandProperty Taxes in Poland and other transition countriesand other transition countries

W. Jan BrzeskiW. Jan Brzeski

InnovationsInnovations in Local Revenue Mobilizationin Local Revenue Mobilization

World Bank, June 23-24, 2003World Bank, June 23-24, 2003

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Some Data on PolandSome Data on Poland

• Population almost 40 million people• 4.5 million buildings and 11 million dwellings• 92 cities with population over 50,000• property tax constitutes 14% of municipal revenues• property taxation raises 1.8 billion USD revenue• 5.5 million real property taxpayers• 2 million agricultural taxpayers• 1.2 million forest taxpayers• largest property tax revenue in post Soviet economies

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Strong Strong PPolitical olitical DDecentralizationecentralization

COUNTRY # Regions # Counties # MunicipalitiesFrance 22 96 36.559Germany 16 426 16.121Italy 20 108 8.104Spain 17 50 8.082United Kingdom - 135 319

POLAND 16 373 2.489

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Pros and Pros and CCons of ons of DDecentralizationecentralization

• ADVANTAGES OF DECENTRALIZATION:– Better match supply/demand of public services– More efficient provision mechanism– Increased political stability

• DISADVANTAGES OF DECENTRALIZATION:– Aggravations of spatial disparities– Less efficient budgetary macro-economic management– Higher fixed costs of territorial administration

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Weak Weak FFiscal iscal DDecentralizationecentralization

• Sub-national gov’t share in GDP only 8% vs. 15% in EU• Sub-national gov’t debt 1% vs. 10-20% in EU• Current problems with growing public finance deficit• Governments committed to lower income taxation• VAT is already very high at 22%• Cutting public expenditures through sector reforms• Need for greater role of real property taxation

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Significant Significant RRole of ole of PProperty roperty TTaxationaxation

COUNTRY

Property taxes relative to the economy: GDP

Property taxes: share of

government revenues

Property taxes: share of total local revenues

Property taxes: share of local autonomous

revenues Poland 1,2 % 3,0 % 13,9 % 31,8 % Average for the CE 0,6 % 1,7 % 8,1 % 15,3 % Average for the EU 0,9 % 2,2 % 7,3 % 32,5 %

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Contemporary Contemporary HHistory of istory of PProperty roperty TTaxax

• 1985 agricultural property tax introduced• 1986 real estate tax introduced• to expand non-income tax base in crumbling economy• capture wealth diverted to this untaxed area• lack of markets forced the use of area tax basis• 1991 Solidarity gov’t assigned the tax to municipalities• 1992 forest property tax introduced• 1997 amendments to close loopholes, more exemptions• 2001 rationalization of tax, broader tax base coverage• 2003 further amendments to existing regulations

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Present Present FFramework of ramework of PProperty roperty TTaxationaxation

• National budget stipulates max / min property tax rates• Law on Local Taxes and Fees - real estate tax• Law on Agricultural Tax• Law on Forest Tax• Real estate (urban based) property tax yields over 80%• Agricultural property tax yields 15%• Forest property tax yields 2%• Municipalities set their rates and additional exemptions

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Focus on Focus on RReal eal EEstate state TTaxationaxation

• Tax base: land and floor area, book value• Tax liability: natural and legal persons• Tax payable by owners or users/leaseholders• Land tax differentiates rates by categories• Building tax differentiates rates by categories• Structures tax on depreciable business assets• Exemptions granted by nat’l laws and local ordinances• Government properties usually not exempted

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Real Real EEstate state TTax ax RRatesates

TAX BASE TAX RATE CEILING (USD)

Residential building usable area 0.11

Business building usable area 3.69

Seed related building usable area 1.72

Other building usable areas 1.23

Book value of depreciable structures 2.00 %

Business use land area 0.13

Non-farm cropland area 0.01

Land under lakes, reservoirs, and power 0.72

Residential and other land 0.02

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Real Real EEstate state TTax ax AAdministrationdministration

• Most administrative work by local government• Fiscal cadastres are taxpayer (subject) based• Different procedures for natural and legal persons• Legal persons do self-assessment and pay monthly• Natural persons are billed and pay quarterly• Taxpayers pay on property portfolio• Enforcement: tax lien, foreclosure, seizure, garnishment• Several appeals instances possible through admin. code

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Evaluation of the Evaluation of the PPresent resent SSystemystem (1) (1)

• Simple, transparent and easily understood• Many taxpayers, administrators and politicians like it• Economists and public finance reformers want change• Discriminates business occupiers vs residential• Discriminates industrial occupiers vs commercial• Discriminates buildings vs land• Discriminates taxpayers with low value property

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Evaluation of the Evaluation of the PPresent resent SSystem (2)ystem (2)

• Residential tax kept at minimal levels:– home 120 m2 on 400 m2 parcel pays 21 USD in 4 installments

• Business tax 35 times higher than residential• Political economy: “business are rich, people are poor”• Business buildings yield 50% revenue, but store 5% value• Residential buildings store 70% value, but yield 10% rev.• Tax revenue contributions in small cities:

– residential land 7.8%, business land 23%– residential buildings 3.4%, business buildings 36%

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Evaluation of the Present System (3)Evaluation of the Present System (3)

• Effective taxation in ad valorem equivalent:– business use buildings: 7.8% of capital value– business use land: 1.4% of capital value– residential use buildings: 0.062% of capital value– residential use land: 0.046% of capital value

• Land use efficiency is low and riddled with speculation– spatial misallocations– functional misallocations– locational misallocations– user mismatch

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Ad Ad VValoremalorem RReform eform EEffortsfforts

• Parliamentary resolution in 1994 requesting ad valorem• Ad valorem included in governmental Strategy for Poland• In 1995 inter-ministerial group adopted basic premises:

– unified taxation replaces real estate, agricultural and forest taxes– the need for fiscal cadastre to be used for ad valorem taxation– the ad valorem assessment will produce “cadastral values”– ad valorem will induce better market and housing finance– central agency to manage cadastres and general valuation

• Task force at Finance Ministry prepared package of 5 Acts• The process stopped by intra-government disagreements

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Ad Ad VValoremalorem RReform eform EEfforts (2)fforts (2)• negative publicity incited by oponents of ad valorem• 1997 new government interested in more decentralization• return to idea of gradual ad valorem property tax reforms• international institutions advocated/supported ad valorem• Ministry set up Department of Local Taxes and Cadastre• reformers took study tours in F, D, USA, Cdn, NL• 1999 CEE conference - International Property Tax Institute• strategy to modify rather than discard area based system• linking property tax with fiscal decentralization reforms• new emphasis on tax zoning of land in 2002/03

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Ad Ad VValoremalorem RReform eform EEfforts (3)fforts (3)

• Modification of area based towards ad valorem:– replacing three taxes with one– possibility for local governments to select “taxation zones”– taxation zones would simulate land value zones– each taxation zone could carry different land tax rates– special rates could apply to vacant serviced building lots– business use buildings would be taxed on book/market values

• Longer-term ad valorem strategy:– residential buildings taxed on book values, later capital value– land tax using more value based coefficients– finally, capital value on whole properties

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Ad Ad VValoremalorem RReform eform EEfforts (4)fforts (4)• Political economy constraints / innovations:

– revenue neutrality of the initial stage – structural change– self-financing of the subsequent stages of the reform– discovery of more properties can bring extra revenues - cadastre– elimination of some exemptions can bring extra revenues– do not bring new system – modify the existing one– emphasize the need to shift from subject based to object based– tie in changes with other larger reforms – local finance– Enable municipalities and create incentives– Run strong public relations and taxapayer education campaign

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Future Future PProspects and rospects and CChallengeshallenges (1) (1)• Economic and technical feasibility of gradual strategy• Political economy a crucial element: recent refusal• Other own revenues of local governments diminish:

– central government transfers– real estate asset sales and rents– taxing local businesses

• Growth in property taxes cannot use present formula• Ad valorem property tax can grow with local economy• Balancing of budgets with property tax, not investments

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Future Future PProspects and rospects and CChallenges (2)hallenges (2)• Acceptance of recurrent wealth taxation a political issue• Newly enfranchised ownes of valuable assets opose• Politicians not craving for accountability/transparency• Territorial inequity financing of local basic services• “Income-poor and asset-rich” property owners issue• High potential costs of information support and valuation• Searching for mitigating instruments for taxpayers• Searching for cost efficient methods for administrators• Searching for politically safe modification of tax system

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Future Future PProspects and rospects and CChallenges (3)hallenges (3)• Chief beneficiaries - local gov’ts cling to present system

– technical simplicity, inexpensive admnistration– easy to understand, to verify by taxapayers– politically less risky, easier to spend central gov’t money– low residential rates allow to ignore equity arguments

• Strong forces are mounting for property tax reforms:– looming public finance crisis calling for more robust revenues– increased difficulty to tax incomes in “virtual new economy”– the need to stimulate SME sector through lower income taxes– higher property taxation should shift the focus to ad valorem– valuation and cadastral professional interests

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All Land Types