The Individual Property Tax can be Increased, but Tax Privileges for Low-Income People are Needed

In 2015, a law was passed to charge an individual property tax on the basis of the cadaster (market) value and not on that of state assessment of the property as it used to be done fr om 1992.

Decision on introduction of the tax on the basis of the cadaster value is still at discretion of regional authorities, so, as of the beginning of 2016 only 49 constituent entities of the Russian Federation switched over to a new system of property taxation. However, from 2020 the property tax on the basis of the cadaster value is to be charged all over the country. Growth in individuals’ tax payments and tax collections is expected and thereby the property tax may start to play a key role in the country’s municipal finances.

No doubt, people are concerned about tax burden growth. Annual property tax payments will prompt (have already prompted some) people to ask the question: “Where does our money go to?” So, it is appropriate to explain the role and place of the property tax in the budget system of the Russian Federation.

In Russia, the individual property tax is normally a local tax. Due to the fact that real property is conspicuous and immovable, the property tax is fairly easy to collect. More importantly, the greater desire people have to settle in a particular area, the higher the price of real property is. It is to be noted that the quality of local governments’ work to provide such areas with public services and amenities promotes such a desire.

The state of Russia’s local budgets is often deplorable. On the one side, budget revenues are hardly sufficient for satisfactory execution by local governments of their main responsibilities (mainly, power, heat, gas and water supply, as well as waste water disposal). On the other side, it is to be noted that even current revenues are made up 50%-80% of inter-budgetary transfers which situation actually makes local government dependent on superior authorities in making responsible financial decisions.

Naturally, superior (regional and federal) authorities cannot take care of all the local problems, so, solution of simple issues, such as a road repair or garbage disposal may take quite a long period of time due to a lack of financing. If funding is received, there is an issue of impartial distribution of state costs: the project is implemented in one place though taxes were collected from the population of the entire region. The above undermines responsibility of local authorities and local residents for prosperity of their rural communities and cities.

A new version of the property tax opens up a way to a more flexible fiscal policy: the existing law permits, for example, to establish within the frameworks of a municipality different tax rates depending on the location of the real property. And there is no need for people to raise funds for local projects to inquire later who paid and who did not – the tax agency will collect funds from all.

Projects larger than garbage disposal ones require higher costs. To make it possible for local governments to implement them singlehandedly and decide what is to be done in a city or a rural area to make life better, local authorities should be permitted to collect more property taxes, including by way of charging higher tax rates. According to our estimates, a tax rate of 0.1% to 0.5% of the cadaster value of the property will have no adverse effect on the economy, nor create an overwhelming tax burden on households provided that the system of tax privileges is developed correctly.

The existing tax privileges remain in effect from the period of the property tax charged on the basis of state assessment of the property value. Occasionally, the sum of that tax did not exceed the cost of a payment order, so, it was expedient to relieve as many people as possible from paying it. So, in 2013 25 million people were exempted completely from that tax. At present, most persons entitled to exemptions from the property tax -- pensioners, disabled persons, military servicemen, Chernobyl workers and other – undoubtedly need tax privileges and subsidies, but they should be granted financial assistance within the frameworks of other support programs, rather than through tax benefits.

The growing property tax burden is critical only for low-income people. In western countries, wh ere the property tax is rather high, they found the way of granting target benefits to the needy quite long ago. Following that idea, we propose to relieve persons whose income is below the minimum subsistence level (that is, low-income people according to the Russian definition) from paying the property tax. The tax privilege should be granted to persons with higher incomes (but maximum 2-3 subsistence wages) if their tax payment exceeds 5% of their income, but only in an excess amount. In both cases, the maximum amount of tax privileges should be limited by a ceiling of Rb 5,000-Rb 10,000 depending on housing prices in the region to prevent persons who have much real property from getting tax benefits.

Even with proposed maximum rates (0.5%) and absence of an overall deduction, the property tax will not exceed on average 2% of personal income, while benefits for low-income people guarantee that tax payments do not exceed 5% of anybody’s income (except for very rich persons who prefer to have much property). The existing property tax privileges for pensioners, disabled persons, military servicemen and Chernobyl workers should be abandoned as such privileges suggest rather high benefits for beneficiaries-owners of expensive property (up to Rb 300m).

On the other side, tax payment amounts will not be that big to resolve social inequality problems. But a higher tax will create stimuli for individuals to take interest in local government issues and participate in them.

We do not believe that the property tax proposed by us will automatically resolve all the problems of local government. It is important to solve beforehand minimum the following two problems. First, for the property tax to be fair and just and operated as everyone expects, it is necessary to ensure strict accountability and quality appraisal of real property.

Second, for correct management of property tax revenues local residents should exercise control over local budgets. It is noteworthy that only direct participation of individuals in local government and determination of lines of budget expenditures is able to help utilize local resources in the interests of local residents.

So, success of the property tax depends on the way it is implemented. Individuals can contribute to that by showing greater initiative and helping local governments (sometimes even urging them) utilize the property tax as an instrument of development.

Аndrei Korytin, Researcher, RANEPA