The Latvian government plans to impose a new real-estate tax on private dwelling space next year, with the aim of raising an additional 24 million lats (34.15 million euros) annually to the state's almost depleted coffers.
The Finance Ministry's new real-estate tax plan proposes an annual rate from 1 percent to 3 percent depending on the size of the living area.
According to Finance Ministry spokeswoman Diana Berzina, the law is designed to protect poor people living in small apartments. Thus apartments with less than 40 square meters of dwelling space will be exempt while the same will go for private houses below 80 square meters.
Though analysts say the move makes sense, some believe the government's decision comes three years too late.
Back then, the economy was booming with average gross domestic product (GDP) growing in double digits annually. Since then Latvia's real-estate bubble and credit bubble have burst and GDP growth fell 18 percent in the first quarter this year, prompting both the central bank and the Finance Ministry to revise their forecasts this year to -16.5 percent and -16 percent to -18 percent respectively.
A researcher at the Baltic International Centre for Economic Policy Studies (BICEPS) said there was nothing strange or unfair about the planned tax, which is common in many other countries.
"People can go away if they do not like to be taxed and take a job in another country, but property cannot go away. It is always tricky when you introduce a new duty, but internationally speaking, there is nothing strange or unfair about this tax," Morten Hansen said.
"What surprises me is the timing of this tax being proposed. It would have been more logical to impose it during the period of excessive growth in the Latvian real-estate market. Back then, it could have become a significant source of income for the budget. It seems a little suspicious, that property owners were allowed to have such a good time and have not been taken advantage of," he said.
Some analysts have predicted that the biggest problem facing implementation of the tax plan is its absolute ambiguity to cadastral value. This increased dramatically during the real estate boom in the Baltics and became completely inadequate. Now it does not correspond to real market prices. For example, a four-bedroom apartment in The Old Town on Kalku Street was sold for 800 000 lats in 2007, now a similar flat in the same dwelling-house is offered for 160 000 lats.
Janis Pocs, a senior analyst with the Latvian Institute of Economics, said the proposed tax law should be revised before it's adopted as it contains several flaws and possible loop- holes.
"The tax should not be accepted in its current edition. There is a range of problems that have to be addressed first. As I suspect, the government might have based their calculations of the tax rate on real estate prices of summer 2007. There is another obvious issue. Consider a property owner, who has six flats, all less than 40 square meters and rents them all out. Does the real estate tax apply to him at all?" the analyst said.
As an example of how the new law would be implemented, an apartment of 70 square meters would only be taxed for the surplus area above 40 square meters. This could mean anything from 300 lats to 900 lats per year based on the 1 percent to 3 percent taxation span.
Latest data provided by the central statistics bureau show that an average monthly income in 2008 was 480 lats, however, this is expected to decrease dramatically this year under government plans to cut both salaries and jobs in the public sector.
"It is going to be extremely difficult for the population to bear one more tax in the current economic situation. The government should reconsider imposing it", said leading Latvian economist Raita Karnite.
Despite the criticism, Finance Minister Einars Repse has ensured that the real-estate tax will only affect a minority of Latvian property holders.
"It is a luxury tax. Poor families are not going to suffer from it. Only rich people who own royal apartments will have to pay extra money. Fortunately, they can afford it," the minister said.
According to the ministry's data, 70 percent of apartments in Latvia do not exceed the size of 40 square meters.