Property Tax

The Rough Road to Compromise

How was this achieved? In April 2018, the Federal Constitutional Court declared the existing regulations unconstitutional. To date, property tax has been levied on the basis of very out-of-date property values known as assessed values. Some of these values date from 1935 and bear no relation to the current market values of the properties. Owners of new and older properties carry an unequal tax burden, which in the opinion of the court violates the principle of equality enshrined in the Basic Law. The legislator had to adopt a new regulation by December 31, 2019.

In February 2019, Federal Finance Minister Olaf Scholz and the state finance ministers presented a model that takes into account the value of land, the age of buildings, and the average rental costs. The Bavarian government in particular rejected the proposal. It feared tax and rent rises as well as more bureaucracy due to time-consuming valuation procedures.

From the ifo Institute’s point of view, the model is acceptable, as it does not require the valuation of individual properties. The latter would entail considerable effort, which can hardly be justified in view of the relatively low level of revenue generated from property tax.

In principle, property tax does not have to be based on real estate values. You can, for example, also use the size of the property or the amount of living space and usable area in the buildings as the basis for assessment. The ifo Institute’s Research Group Taxation and Fiscal Policy recommends a reform that is simple, based on some measure of floorspace, and avoids the need for time-consuming market valuations.

Important Source of Income for Municipal Authorities

Property tax is a levy on developed and undeveloped properties. It covers both residential and commercial real estate. The basis for assessment is regulated uniformly throughout Germany. The tax rate may be determined by each municipality independently. The revenue goes to the cities and municipalities. The revenue from property tax throughout Germany is around 14 billion euros per year, i.e. around 175 euros per head of population. By way of comparison, the revenue from tobacco tax is similarly high, while the revenue from income tax is 3,538 euros per capita. Property tax is important for municipal authorities as it accounts for about 15% of their tax revenues.

Will Granting the Laender Flexibility Create a Patchwork of Tax Models?

Bavaria has already announced that in future it will use only the area of land and buildings for the tax calculations. Saxony and Saxony-Anhalt are also expected to take advantage of this opportunity and deviate from the federal law when setting their property tax rates.

Critics fear that the flexibility clause could create a “patchwork” of 16 different property tax models and lead to tax competition among the German states. Advocates, however, argue that the proposed model is fair, does not cause too much bureaucracy, and allows for tailor-made regulations for individual countries.

From the point of view of the ifo Institute, the property tax compromise is a good solution. Property tax is better suited than most other taxes to have its assessment basis and tax rates to be decided decentrally. Since land is not mobile, fears that some federal states – above all the affluent ones – will position themselves as low-tax Laender are unfounded. That’s because you can’t attract land from other federal states. Secondly, property tax is a tax on property itself and is therefore set at a level that does not depend on who owns that property. There are no complications if the user of a property in one state has their main residence in another state. And in the long run, the best solutions can prevail if the country learns from different models of different federal states.

Status: December 2019