On 30 November 2021 the OECD issued a report on property tax reform. Some detailed focus in the report is on China, which is launching pilot property tax schemes in some regions and aims to eventually introduce a wider tax on residential properties.
The report looks particularly at the important aspects of reform to recurrent taxes on property. This includes the challenges arising for the tax administration and how these are affected by different designs for property taxes. The report also examines potential obstacles in gaining approval for the implementation for tax reforms and makes suggestions for approaches that can be used to overcome these obstacles.
The report notes that a design frequently used is a value-based property tax that applies to a broad tax base and is charged at a low rate. The taxes would cover land and buildings that are used for residential, industrial or commercial purposes. The wide tax base reduces distortions in the allocation of the tax and the tax rates are quite similar across different jurisdictions. This means that there is little incentive to move to another country or to change the use of the land and buildings solely for tax purposes.
Property taxes can be designed for various objectives such as preserving agricultural land, promoting business, or facilitating urban development. These objectives can be pursued using different tax rates for property types, locations or uses, or by offering tax relief for certain types of property. These measures can often be used in combination with non-tax measures such as transport policies.
Property taxes can therefore be used to pursue combined objectives such as raising more tax revenue and assisting urban planning or environmental protection. This makes it worthwhile to spend time in planning and implementing the taxes and keeping them updated. This work may be done by central government or by lower levels of government with planning and financial input from the centre.
The valuation of property for the purposes of recurring taxes is costly in terms of money and administrative time. Value-based property taxes require regular valuations to ensure the tax is aligned with current market values. Alternative systems such as indexation can cause distortion over time and lead to unfairness.
A value-based tax base can be more progressive than the alternatives, raise more tax revenue and have little impact on economic growth. The value of retail and most residential property can be assessed by the sales comparison approach, which can be mostly automated and therefore done at a low cost.
Taxpayer compliance can be encouraged by providing additional information with the tax bill, such as an outline of the tax system, the compliance rate and the public services funded by the tax. Any taxpayer liquidity problems can be handled by an instalment option.
Differences in wealth between regions can be mitigated by designing the equalisation system to take into account the differences between regions in revenue-raising capacity and by using central or provincial support for the introduction of the property tax. Support could include capacity development programs and financial incentives for the efforts involved in introducing the tax.
