That hurts: Germany’s Federal Constitutional Court this week quashed the legal basis of the EUR 14 billion land tax. Accounting for around one sixth of municipal tax revenue for many local authorities, this tax is a welcome source of funds that the municipalities can also increase by means of a rate of assessment. The tax revenue is also very stable, as it is practically immune from economic influences. Speed is of the essence to maintain the status quo. According to the court’s ruling, the system must be reformed by the end of 2019 with an implementation period up to 2024. But how did it get this far?
The land tax itself is not unconstitutional, but rather its totally outdated basis for assessment, which is based on valuations from 1935 for East Germany and 1964 for West Germany. Land price development has varied completely by region in the last few decades, potentially leading to a wide gulf between land values and the basis of taxation. Pursuant to section 21 of the Valuation Law, rateable values should be reassessed every six years. This, however, did not occur. The complexity of this task also highlights why no alternative solution was agreed. The authorities have struggled since the 1990s with a reform of the valuations that were outdated even then. The urgency escalated further with the submission of two constitutional complaints in 2011 and 2012, and the situation was exacerbated once again by the unconstitutionality determined by the Federal Fiscal Court in 2014. Nevertheless, a new regulation based on the cost-value model failed in 2016 due to opposition from two out of the 16 federal states – Bavaria and Hamburg.
The land tax problem also creates confusion regarding the areas of responsibility of the federal, provincial and municipal authorities, especially with regard to its reach. It impacts on the financial basis of every city and municipality. 35 million parcels of land throughout Germany must be assessed to calculate the tax. And it is payable by every private household, regardless of whether rich or poor, as the land tax is also charged to tenants via the service charges. On average, land tax of around EUR 350 is charged annually on each of the 40 million residential properties in Germany; the tax is made up of the rateable value, the base rate depending on the type of building and the municipal rate of assessment.
If the cost-value model is realised, which is based on the existing standard land value plus a flat rate building surcharge, the regional differences in land tax would however likely vary greatly in the future. While it would probably be somewhat cheaper in structurally weak regions with low land prices, the charge is likely to rise in the conurbations, even in case of reduced rates of assessment. This would further impede efforts to make housing more affordable there. Ultimately, plots of land in Frankfurt, Hamburg or Munich on which comparatively cheap rental properties are built, are easily worth several million euros. The Bavarian draft, whereby land tax is calculated on the basis of land and building area, would not lead to such severe shifts. That is easy because a one-off valuation is generally sufficient. However, the land tax on single-family homes in East Friesland or Uckermark would be similar to that on villas on the island of Sylt or Lake Starnberg, which are considerably more expensive. Other solutions are only based on the plot size or on the pure land value. This could counteract the housing scarcity as it would raise the incentive to use undeveloped sites for living space.
The time available for acting on the overdue reform is tight. However, the different variants and their implications are already on the table. It remains to be seen whether the politicians will allow their decision to be guided by the fact that complex evaluation procedures are hardly workable. As regards implementation, calculation models based purely on the area have an advantage. As mayor of Hamburg, the serving finance minister Olaf Scholz was opposed to the more complex cost-value model. Whatever the outcome, the tax authorities’ staff should prepare themselves for plenty of overtime.