The German Property Tax: A Public Finance Analysis and Reform Options

Tasks

In April 2018, the Federal Constitutional Court declared the current procedure of assessing property values to determine tax base for the property tax as unconstitutional. The German legislature must revise the assessment procedure by December 2019, or else the property tax must no longer be collected. The study at hand provides an evaluation of the property tax in general, as well as specific reform proposals that have been made up to date. Based on this evaluation, the study also derives criteria for an economically sensible reform of the German property tax. In addition, the study provides estimates of the impact that different property tax concepts have on tax revenues and the tax burden for property owners. Lastly, it assesses the influence of different property tax concepts on the German fiscal equalization scheme.

Methods

At first, a set of criteria for an economically sensible property tax is identified. This is followed by a comprehensive discussion of different reform proposals and an economic assessment of these proposals based on the established criteria. Particular attention is paid to four different property tax concepts that differ with regard to the tax base: one based on market values of property, one based on construction costs, one based on land values and one based on the plot and floor space. The implications of the different models regarding the tax burden for property owners, as well as the municipalities’ tax revenues, are empirically analysed using an extensive dataset collected specifically for this purpose. Lastly, the study evaluates the consequences of a property tax reform for the German Länder fiscal equalisation scheme (Länderfinanzausgleich).

Data and other sources

In order to estimate the effects of different property tax concepts on tax revenues and the tax burden of property owners, an extensive dataset is collected. The dataset combines data on building, living and commercial space, as well as prices for development land from the regional database of the statistical offices with property market values from the Income and Consumption Survey (EVS) and rental data provided by F+B. Data on land values are made available by local property valuation committees (Gutachterausschüsse).

Results

From a public finance perspective, the better arguments speak in favor of a property tax with a simple tax base. A property tax based on plot and floor space would meet this criterion. In contrast, value-based procedures to determine the property tax would involve substantial problems. Assessing market values for property would involve significant assessment costs, which is hardly justifiable given that the revenues from the property tax are only of minor importance compared to the revenues collected from other taxes that involve lower assessment costs (i.e., property tax revenues amount to roughly 14 billion EUR as of 2017). However, the application of standardized procedures in an attempt to lower the assessment costs would again raise doubts about the constitutionality of the property tax. Moreover, our estimations indicate that value-based procedures to determine the property tax would lead to an unequal distribution of the tax burden. Property owners or tenants living in major cities would have to pay significantly more property taxes than they currently do. Finally, value-based procedures would imply that economically strong states like Baden-Wurttemberg or Bavaria would have to make larger contributions to the German fiscal equalization scheme.

Publication (in German)

Fuest, Clemens, Lea Immel, Volker Meier and Florian Neumeier, Die Grundsteuer in Deutschland: Finanzwissenschaftliche Analyse und Reformoptionen, ifo Studie im Auftrag von Haus & Grund Deutschland – Zentralverband der Deutschen Haus-, Wohnungs- und Grundeigentümer e.V. sowie ZIA Zentraler Immobilien Ausschuss e.V., ifo Institut, München, 2018, 01–41| PDF Download