The Introduction of a Value-Based Property Tax - Barriers and Drivers: A Case Study of Central and Eastern European Countries

As part of their applications to join the European Union, ten central European countries are required to meet certain criteria, including stability of institutions, rule of law, democracy, a functioning market economy and the ability to adhere to the aims of political, economic and monetary union. Over the past 18 years, since the change from a central economy, there is evidence that these countries have sought (by varying degrees) to develop a range of local government functions supported by local finance, in many cases, including a range of real estate-based taxes. In the absence of a fully functioning property market, it has not been possible to base the taxing of real estate open market values. Instead, either an area or formulaic basis, or more recently on a modified area basis, which seeks to reflect relative ìvaluesî within different geographical zones has been developed. Thus, there is evidence of a growing shift towards value-based locational factors within the tax bases developed in some of the countries, but there is also evidence of resistance to such a move. There are political as well as practical reasons for at least being cautious about introducing a totally market-based local tax. Until the emergence of a fully-functioning property market for all taxable property types within the jurisdiction, there will be a paucity of suitable evidence for achieving an ad valorem property tax base in every case. There may be an opportunity to run two systems (value-based in cities and area-based in rural areas) in some cases, but there are also arguments for not having an ad valorem tax base at all, with other countries demonstrating how non-market value bases systems can achieve both tax payer and tax spender approval. This paper will explore the drivers and barriers to a market value-based real estate tax system in central and eastern European countries, based on their development of democratic institutions (particularly local government and their functions), their strategies for developing a local property tax, the level of funding involved, the approach within their existing tax systems for dealing with social and environmental issues and how the wider arguments for and against a value-based tax are being reflected.