IMF says property taxes much too low

  • 2010-03-10
  • From wire reports

PAY FOR SERVICES: The landed class has gotten away too easily with unrealistically low property tax rates.

RIGA - The International Monetary Fund is advising Latvia to increase its assessed property valuations, after the group’s technical mission determined that the assessed property values in major cities are lower than their market values, reports business daily Biznes&Baltija. The international lender is in addition pushing for an adjustment of assessed valuations for real estate, to correct for discrepancies and corresponding loss of tax revenue.

The IMF mission was in Latvia from Feb. 17 to March 1, carrying out a detailed analysis of the Land Register. After comparing assessed value data with their market values, it was established that the average assessed property value in Riga was 17,100 lats (24,400 euros), while the average market value in 2009 was 20,100 lats. In Daugavpils, these figures were 4,600 lats and 5,800 lats, respectively, while in Liepaja the comparison is 8,900 lats and 9,700 lats.
In other large cities, the situation was diametrically opposite; for example, property in Valmiera was selling last year for an average of 7,700 lats, while the assessed value was 10,800 lats; in Jekabpils the figures were 8,800 lats and 12,100 lats, respectively.

The IMF called for a readjustment of assessed property values, as otherwise the system is unfair, and leads to poorer people paying too much, and the wealthier not carrying their fair share of public spending. The IMF also criticized the procedures which property owners must carry out in order to bring about a reassessment of a property’s value. It was also suggested to local governments that they provide reductions for certain groups in society.

Specifically, the IMF has asked Latvia to increase its property tax from the current 0.1-0.3 percent progressive rates, to a flat 1.5 percent of the registered value. This means that the tax for a three-room apartment in the suburbs of Riga would be around 200 lats a year. The predicted additional revenue from this tax increase would be 115 million lats annually.
As of now, the current progressive tax schedule is: for one- and two-room homes the tax is 0.1 percent of the assessed value, up to 40,000 lats assessed value; a 0.2 percent tax rate applies to property with an assessed value of between 40,000 lats and 75,000 lats; a rate of 0.3 percent applies to property with an assessed value exceeding 75,000 lats.

Two other flat rate possibilities are being discussed - increases to 1 percent, or to 1.3 percent. In these scenarios, the state would receive increased tax revenue of around 111 million lats yearly.
The possibility is also being discussed of changing the progressive rate to: 0.5 percent for property with a value up to 10,000 lats, 1 percent if the assessed value is between 10,000 lats and 20,000 lats, 1.5 percent where the value is from 20,000 lats to 40,000 lats, and 2 percent if the value exceeds 40,000 lats. This would bring in an additional 113 million lats to the state treasury. A second possible progressive tax structure could be levels being set at 0.75 percent, 1.25 percent, 1.75 percent, and 2.25 percent, respectively.

Property tax rates in Latvia fall far behind levels in other economically developed countries, where these taxes provide a substantial part of government revenues, and in which Latvia now misses out on. Low, or non-existent, property tax rates were one of the forces in driving the speculative real estate bubble in Latvia, which burst in 2007.
With no taxes to pay on the property, it is virtually costless for a speculator to buy and hold a non-income producing property, and just wait for prices to increase. Higher real estate taxes force the property owner to fix and improve the building (and indirectly the neighborhood) so as to generate a higher income from it, in part to pay the taxes.