Real Estate Angst Germany’s convoluted property tax could be illegal

Properties are valued differently in the east than in the west. The country’s highest court is asking whether this is unconstitutional – a decision that will impact 35 million pieces of real estate, billions in state revenues and hundreds of jobs.
Quelle: dpa
This would be worth more in the west.
(Source: dpa)

It's been almost 30 years since the wall came down, but Berlin is still a city divided. The old border between east and west Germany may be almost invisible, and buildings may stand on what was once no man’s land, but there is still one significant way in which the German capital is split: Property tax.

German property tax has been criticized for years because of the bizarre, arbitrary and outdated way in which it is calculated. Property taxes in the former West German states are based on unit values from 1964, whereas taxes in former East German states are based on unit values from 1935. Authorities had the option of updating these values every six years, but in practice this never happened. In Berlin, where east meets west, this means that property taxes are higher in western Berlin than in the former east. You can even live on the same street and actually pay a different tax rate.

Margaretha Sudhof, state secretary for the Berlin's finance senator, says reform is badly needed, “because in one united territory, we have inconsistent values.” This week, Ms. Sudhof may finally get her wish: The country's highest court is starting deliberations as to whether the tax infringes on the principle of equality as embedded in Germany’s constitution, also known as the Basic Law. A final ruling is not expected for several months.

The court will begin hearing arguments and consulting experts on Tuesday, before deciding whether the country’s property tax is unconstitutional. A win for Berlin (and for equality) could mean a massive bureaucratic headache for everyone else.

Any reform could unleash a bureaucratic and administrative avalanche. Statement, national association for real estate agents

If the court says the system needs reforming, German municipalities have suggested that up to 35 million pieces of real estate will need to be revalued. Sector experts have already said that this ambitious project could take up to 10 years. Officials in Germany’s 600 tax offices have added they would need to double their staff. Reforms "could unleash a bureaucratic and administrative avalanche," a statement from the national association for real estate agents warned back in 2016, when changes were first proposed.

There have been doubts about the constitutionality of the property tax for years. German municipal authorities have long lobbied for changes, but the German government decided it was a federal matter. Proposed reforms in 2016 ended up in the political wilderness after parties like the Christian Social Union, based in the state of Bavaria, opposed them. Under the outdated system, Munich, the Bavarian capital, has the highest property prices in the country but only ranks around the middle of the country when it comes to property tax.

After years of bickering, the matter has been taken out of politicians' hands and moved to the Federal Constitutional Court, based in Karlsruhe. And it has a big decision to make. “Politicians have abdicated responsibility on this,” argues Matthias Kollatz-Ahnen, Berlin’s senator for finance. “There should not be any difference between east and west in the future.”

Property tax is one of the most important forms of income for German cities and municipalities, adding up to around €14 billion ($17 billion) in revenue per year and making up between 10 and 15 percent of their annual takings. Every resident in Germany pays about €150 a year – property owners can choose to include the tax in rental fees – but the amount you pay varies wildly based on where you live, since it's basically at the discretion of each municipality.

Calculating the tax is complicated (see graphic above). It involves three criteria: the (outdated) unit value; a federally-mandated rate based on how the property is used (whether an apartment of a single-family home, for example); and then what is known as a “Hebesatz.” The latter translates literally to “clause for an increase.” It is set by every municipal authority separately and used to make up for the unequal and outdated valuation: On average it adds a whopping 500 percent to the base value, and tends to be higher in the east and lower in the west.

The Constitutional Court will examine the legality of the entire construct, including the Hebesatz, which is re-assessed every year by local authorities depending on their annual budgets. The increase has been criticized because it is applied unequally and arbitrarily – and it just keeps going up (see graphic below).

Given the amounts involved, both in financial and logistical terms, it is no wonder that Germany’s municipalities are nervous about Tuesday’s case.

16 Property Tax-01

Should the high court judges find the current property tax unconstitutional, they could put municipalities in a predicament by pushing for quick solutions. This is why local authorities are pushing the German government to move forward on the reforms originally proposed in 2016, which suggest simply reassessing land values, rather than every building. Other associations have made similar recommendationss: The main thing everybody seems to want is simplification and a unified system.

“I remain convinced that the state authorities made a good suggestion,” says Edith Sitzmann, finance minister of the state of Baden Württemberg. “Whatever the reforms eventually look like, we need to move on them quickly and under no circumstances should we lose any more time.”

Property owners are looking on warily as well, since updating property valuations will almost certainly mean raising the base rate of their home. Landowner associations have suggested the basic rate could be 30 times higher, in some cases. Of course, local authorities could compensate by cutting the other two criteria that make up the tax – the federally-mandated rate and the individual municipal rates – but there are fears that a cash-strapped municipality may see the tax reform as a way of getting more money.

Mr. Kollatz-Ahnen of Berlin insists this is not the intention: “The reform of property tax must remain revenue-neutral,” he says. “It should be no reason for authorities to expect higher revenue.”

Albert Funk is a Berlin-based editor for Der Tagesspiegel, specializing in tax, governance and finances. Cathrin Schaer is an editor for Handelsblatt Global. To contact the authors: [email protected]