Germany's outdated property tax needs a reform. Photo: Teo Angelovski / Shutterstock. Germany's outdated property tax needs a reform. Photo: Teo Angelovski / Shutterstock.

Property Tax: Which Model Will Lawmakers Choose?

Germany’s Federal Constitutional Court has ruled that the basis hitherto used to calculate property tax is unconstitutional, a decision which was as much to be expected as it was logical. The rateable value used to calculate the amount of tax is based on values determined more than fifty years ago in West Germany and, in the case of states formerly constituting East Germany, even more than eighty years ago. This is obviously a peculiar situation, one which legislators have for decades found themselves unable to correct. The court’s decision is a slap in the face for politicians and finally compels them to decide on a model for reform. The Federal Constitutional Court set the end of 2019 as a deadline for legislators to reach a decision.

 

Cost value, ground value or surface model?

There are basically three models from which they can choose. While most of Germany’s states have opted for the so-called “cost value model”, this reform proposal would entail recalculating the value of all buildings on the basis of their construction costs. Considering that there are about 35 million properties in the country, this would involve excessive bureaucracy and take far too much time, so that the cost value model seems a relatively unrealistic solution.

 

Some economic research institutions tend to be more in favor of the “land value model”. In this method, only the land value is considered in determining the property tax. This would be easy to implement, but in my view questionable, as it would place vacant lots at a disadvantage in terms of their market value vis-à-vis land with buildings, which might be unconstitutional. Lawmakers would run the risk of ending up back at square one.

 

That is why the IVD concurs with other property associations in supporting the so-called “Southern-European” or “area” model. In this case, both the total land area and the usable floor space of any building(s) would be used to calculate the property tax, which would be easy and quick to implement. A further advantage is that the tax burden would not increase automatically as land values and building costs rise. For politicians, however, this is of course a counter-argument because communities would not automatically generate higher tax income based on future increases in property values, but would have to actively raise their assessment rates – which is, of course, not exactly popular.

 

At least politicians up and down the country agree that the property tax reform should not alter the overall tax revenue. This seems obvious because property tax affects both owners and tenants, and politicians have absolutely no desire to be accused of being responsible for higher rents.

Leave a Reply