Specific Central European Aspects of Economic Governance

Specific Central European Aspects of Economic Governance Presented by: Prof. Dr. KOVAČEVIĆ Date: 15 – 16 February 2024 Reasons To Give Special Consideration To The Taxation Of Immovable Property - Recurrent immovable property taxes are among the taxes least harmful to growth and can be designed in a way that reduces inequality of wealth and after-tax incomes - Property prices have experienced a substantial increase in the wake of the Covid crisis - Recurrent taxation of immovable property is rather low in many Member States. - General observation • The fundamental principles of taxation cannot be wholly realized and achieved with the primary taxation of income and the secondary taxation (turnover) - In other words, real estate tax should be introduced or remain in the tax systems, representing a sort on, tertiary circle" of taxation, having supplemental but important function • Well-designed can simultaneously provide tax revenues, reduce inequality and contribute to a sustainable environment and be growth friendly Position Of The Real Estate Tax And Structure Of This Type Of Tax In Croatia Three Developmental Stages - Constitutional guidelines that determine the issue of designing tax system in the Croatia are very scarce: - Art.51 explicitly refers to tax system "Everyone is obliged to participate in the settlement of the public needs, according to his economic capacity. Tax system is based on the principles of equality and equity." • Third part of the Croatian Constitution -Protection of Human Rights and Fundamental Freedoms contains provisions on the possibility of limiting rights and freedoms • Because of its broadness it is key constitutional instrument that limits the taxation state's power by protecting taxpayers rights and freedoms: in Art.48 provides a guarantee of the right of ownership, and it is generally understood as rule that excludes harsh or punitive taxation measures. • - Constitutional Court declared 3 taxes as unconstitutional on that ground The same provision contains the limitation of the right of ownership-prescribing that ownership implies obligation and that owners should contribute to the general welfare, this rules sometimes are interpreted as delimitation of tax authorities in the tax law designing - Basic economic rights and freedoms regulated in Constitution (art. 49) protecting entrepreneurial and (foreign) investors rights might be also understood as constitutional limitation of taxation Real Estate/Property Taxation In Croatia-The Only One Tax Type In A Tax System-Tax On Holiday Houses - Defined as municipality/city tax - It is a single, partial real estate tax in a current tax system - Revenue of local units' budget. - An optional tax- a need for the enacting the decision of a municipality or city - The amount of tax on holiday houses is prescribed by a municipality/city • When we come to the issue of market value of the real property it is obvious that, from current legal framework it is of importance in the real estate taxation.the consequence of the prescribed tax base provisions - does not depend on the value of the property but on its useable surface and location.  The lack of quality data, a lack of knowledge with appraisers and noncompliance with the regulations, it was decided to legally regulate the valuation procedure modeled after the German legislation. - EU -the most common tax base is the value of the property, either defined as capital value or annual rental value. - The value used as property tax base in practice differ substantially from the market value. - In some MSs the tax is based on the area of the property - many Member States have several RPTs, it is often the case that more than one tax base applies The Utility/User Charge As Hidden" Local Tax - Real Estate Tax" - Specific instrument of public revenue in Croatia- governed by The Utility Services Act - A local government representative body shall decide on utility compensation, prescribing in decision in more detail the factors relevant for to the user charge obligation. - Such a decision prescribes terms of payment, the real estate types that are fully or partially exempted from payment of user charge, the grounds for exemptions, sources of revenue that will be settled funds needed to finance earmarked activities, if individual users are exempted from paying charge, etc. • There is opened discussion about the legal nature of the user charge observations that find user charges as described are "hidden" local tax - real estate tax but not efficient in achieving functions of taxation - EU-almost all MS tax residential land and buildings; the taxes on land and on buildings differ/tax base and tax rate • Local governments often decide on rates and collect revenues  Most MSs the final rate determined by the responsible municipality, which levies the tax and receives the revenues.  Mostly the national tax law provides maximum and/or minimum tax rates Property Taxation - Issues: Political Economy, Tributing Function And The Issue Of Progressivity - EU- progressivity with respect to the property value is not common - POLITICAL ECONOMY ISSUES - low revenue from immovable property taxes explained by low public acceptability of property taxes • - But evidence is not clear The public reservations towards property taxes is strong, the reason for for the political unwillingness to introduce/rely on them - EU level • Rethinking on well-designed real property tax as important element of the tax mix functions:  Address policy issues related to inequality and contribute to the green transition with fostering growth o Nevertheless, tax revenues from recurrent property taxes are low in EU Member States. o The political economy of property tax reforms. o Potential RPT reforms to reduce inequality and support environmental goals  With a progressive rate schedule and a regularly updated tax base it should be efficient o To reduce income inequality Revenue Importance And Revenue Performance - Taxation of immovable property- low in many MSs • Contribution made by taxes on immovable property to MSs' budgets remains moderate:  2019: 2.2% of GDP on average in the EU o Low compared to labor (20.7%) and consumption taxes (11.1%) and a I below environmental taxes (2.4%) Concluding Remarks - Designing property tax and achieving public policies goals - DESIGNING - PROPERTY TAX TO REDUCE INEQUALITY - The effect of existing property taxes on income inequality does not seem to be very pronounced - The current taxation of immovable property in the euro area is not conducive to reducing income inequality, • - Changes in the design of RPTs can help make it more redistributive. The progressivity of RPT rates with respect to the property value could be increased in Ortler to reduce income inequality Concluding Remarks - Designing Property Tax And Achieving Additional Goals - Property taxes do not sufficiently take equity and environmental issues into account: value-based property tax base discourage environmental objectives but the energy performance of buildings could be included in an adjustment of the property tax base - New designed property taxes - social state functions - The economic rationale for property taxation is strong - well-designed property tax real estate tax can generate tax revenues, have positive influence on growth with protestation of the environment • Reforming the real property tax - especially tax base throughout property values aligned with market values and a progressive rate schedule  EATLP- annual congress 2025- real estate taxation- EU agenda and proposals