Real estate taxes as a source of funding for local authorities
Real estate taxes as a source of funding for local authorities
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Real estate taxes as a source of funding for local authorities

A survey that describes in detail both the options and the resources of the municipalities today, as well as the exact operation of the real estate taxes and, more specifically, of the well-known ENFIA property tax, paid by the Greek taxpayers since 2013, was carried out by diANEOsis.
RE+D magazine

Extensive research by "diANEOsis" that seeks to shed light on all aspects of a possible reform.


The research, carried out by professor of Public Economics at Panteion University, Nikos Tatsos, investigated the exact characteristics of a reform, which would concern the credit to the municipalities, partly if not the wholy, by ENFIA.

The idea of ​​a tax on real estate that strengthens local communities is not new. In fact, since 1993 the Real Estate Tax (TAP) is credited to the municipalities through the electricity bills. The research also leads to a specific eight-point proposal, which sets the direction for such a reform, so that it gives more independence to the municipalities, but does not burden the central government, the municipalities or the taxpayers further.

1. The Municipalities

There are many variations and a wide variety of financial support models for local government and municipalities worldwide. Besides, in the OECD countries there are 132,555 municipalities, while respectively in the 28 (before Brexit) EU countries there are 87,091 municipalities. Only in Greece today there are 332 municipalities (the study of diANEOsis was based on data from 2017 when the number of municipalities was 325). However, in all respects, it is commonplace that the more decentralized a state is and the more independent its municipalities are, the greater the benefits it enjoys.

Why do we need decentralization? The international literature has several convincing answers to the above question: Public goods and services produced at the local government level best meet the needs of local communities, especially in countries where these needs differ significantly from region to region. In addition, the autonomy and decentralization of local government favors innovation and experimentation, as there is more flexibility to test and evaluate new ideas and practices at the local level and, once effective, to find wider application.

Benefits related to reducing bureaucracy and increasing productivity in the public sector have also been observed. Of course, there are not only advantages but also some disadvantages to a decentralized management system. According to the diANEOsis study, "risks or problems in its operation have been identified regarding corruption, social fragmentation, macroeconomic instability, lower levels of development, etc." However, the benefits remain so significant that it is impossible to ignore them.

Greece lags far behind the decentralization indicators, which are often published by the OECD. Local governments in Greece are among the least autonomous among EU and the OECD countries. Indicatively, in terms of expenditure Denmark is in the best place (63.55%), while in terms of revenue Sweden (34.21%) comes first. In both cases, Greece ranks last among the countries included in this ranking.

How are municipalities financed in Greece?

Municipalities today are funded by a number of sources, which can be regular or extraordinary. Regular funds include institutionalized resources, income from movable and immovable property, reciprocal fees and rights, income from other fees, taxes and levies, and other income. Extraordinary income includes loans, donations, bequests and legacies, exploitation of assets, grants to cover expenses and investments, fines, and other sources.

Examining relevant at the data, it turns out that about 40% of the revenues of the municipalities come from state subsidies to finance the necessary operating expenses. Although in all countries of the world the central government subsidizes local government, a look at the numbers makes it clear that the municipalities in Greece are very much financially dependent on the central government. This is precisely the need for them to become more independent and, therefore, to converge with the practice of other European countries.

Going a little deeper in the revenues of the municipalities, which allow them to provide their services, one finds that the main volume of state subsidies comes from the category of the state budget entitled "Central Independent Resources" (CIR).

But how does the central state find the necessary money to pay those Central Independent Resourses to the municipalities? Most of them come from taxes, which very often occupy the public debate in Greece. 40% of the CIR comes from the income tax of individuals and legal entities,12% comes from VAT and 11.3% from ENFIA. This money is collected by all taxpayers, which are valid at national level, and then, by joint decision of the respective Ministers of Interior and Finance, which is issued after the opinion of the Central Union of Greek Municipalities (KEDE) is returned to municipalities. The allocation criteria are many and varied. Indicatively, they are related to the length of water supply and sewerage networks in each municipality, to the length of the road network, to their mountainous or insularity, to demographic trends, etc.

2. Real Estate Taxes

Looking at these issue the other way around, ie from real estate taxes, one realizes that, even from this point of view, Greece does not look like most European countries.

Among the advantages of real estate taxes that stand out in the international literature is that they make the current tax system fairer, as they reflect benefits beyond the income of the owners (eg security) and focus mainly on the upper classes, who often have the largest real estate. In addition, these are "controlling" taxes, helping to increase revenue from other taxes as well: for example, through the evolution of a taxpayer's possession of real estate, authorities can better detect property income (returns, rents, etc.); but also cases of sudden enrichment. In this way, real estate taxes generate direct and indirect income.

However, there are drawbacks, often significant. A disadvantage of real estate taxes is the imbalances in taxation of those who have invested their property in real estate compared to those who have other assets. And often, lower income classes's property consists mainly of real estate. Finally, like almost all taxes, real estate taxes do not take into account the overall living conditions of the persons to whom they are levied, while one's real estate property does not necessarily reflect one's income at the time it is taxed.

However, despite the significant disadvantages, to which the study refers extensively and can be, to some extent, offset by other interventions, the advantages of property taxes remain significant. Therefore, such taxes are almost universally applicable in developed countries. However, not all countries tax real estate in the same way. For examble, European countries are pursuing different mixes of real estate tax policies, certainly seeking to exploit the benefits and minimize the weaknesses of such taxes.

How did we get to the ENFIA proprty tax

The first time that property was taxed in Greece was in 1923, in the form of an extraordinary contribution, in order to cover the wounds of the Asia Minor Disaster and population exchange.

After 1923, the first time that a real estate tax was imposed in Greece was in 1975, when the so-called Occupation Tax was imposed, which, however, did not remain in force for a long time. Another attempt to impose a property tax was made in 1982, when the then government imposed the Real Estate Tax (FAP), with tax rates ranging between 0.5% and 2%. The FAP was also accompanied by political unrest and was adjusted to include those who had real estate above a high threshold.

The Real Estate Tax was completely abolished in 1992, when an extraordinary contribution was imposed on those who had electrified properties and, the following year, a new real estate tax, TAP, was imposed, as a resource of the local government, which was charged with the electrification bill and is valid until today. In 1997 there was yet another attempt to tax real estate with the Large Real Estate Tax (FMAP), which burdened those whose real estate exceeded a limit, which characterized it as "large". Eleven years later, the FMAP was replaced by the Single Real Estate Tax (ETAK), which covered all real estate. In 2009, an extraordinary contribution was imposed on real estate, while in 2010, the ETAK was abolished and the FAP was restored, which now had a tax-free value of initially 400,000 and then 200,000 euros.

But time in the era of the memoranda became denser. In 2011, the Extraordinary Special Fee for Electrified Structured Surfaces (EETIDE) was imposed, which charged the structured surfaces, through the electricity bill, without a tax-free limit. In 2013, EETIDE was replaced by the Extraordinary Special Real Estate Tax (EETA) which was replaced in the same year by the well-known Single Property Tax (ENFIA), which, after amendments, is still valid today.

Can ENFIA be transferred to the municipalities?

But is ENFIA a "good tax" to strengthen local government and especially municipalities?

ENFIA is imposed on real estate located in Greece and owned by individuals or any kind of legal entities, on January 1 of each year. It is a tax with two components: that of the main tax, which concerns all real estate and that of the additional tax, which concerns real estate with a value of over 250,000 euros. ENFIA is paid by about 7.3 million individuals and 58,000 legal entities, while the income that ENFIA brings to the Greek state is of the order of 3 billion euros.

The imposition of ENFIA resulted in an increase, very sharp and by a very large percentage, to the tax burden on real estate as a percentage of GDP, so that from 0.8% in 2008, it reached 2.8% (EU average: 1.6%), to become the highest, along with that of France, in the European Union. Respectively, as the study says, "in 2008 real estate tax revenues in Greece accounted for 2.6% of total tax revenues and in 2016 this percentage increased to 7.1%, with an average of 4.1% in the European Union. And the remarkable thing is that this increase in property taxation was achieved in a short period of time and in an extremely unfavorable economic situation, with the consequence that ENFIA is not only unbearable for taxpayers but also very loathsome."

Another problem of ENFIA, according to the study of diANEOsis, is that it is calculated on the basis of real estate prices, which are higher than the actual ones (the so-called objective values), something that discourages investments and causes some distortions in the real estate market. Also, ENFIA is a tax, which contains contradictions. The study cites a typical example:

"While for the calculation of the objective values ​​a 'commercial factor' of the roads where the commercial properties are located is applied, for the calculation of ENFIA such a factor is not used. But also the building age factors used for the calculation of ENFIA, differ from the age factors applied in the method of calculating the objective values, ​​not only in terms of their value, but also in terms of their philosophy. In particular, in ENFIA, the age coefficients range between 1 and 1.25, while in the case of the objective values ​​between 0.6 and 1. However, the differences are not limited to this, while in ENFIA the age factor 1 is applied to buildings aged 26 and over and increases as the age of the buildings decreases, in the method of objective values, which is used to calculate other property taxes (real estate transfer tax, inheritance tax, etc.) the opposite is applied".

The above contradictions, the circumstances in which ENFIA was established and imposed, but also the polarized political debate that caused the most difficult point of the economic crisis of the last decade, are all factors that make tax reform a particularly difficult case.

 3. What does diANEOsis propose

However, ENFIA also incorporates several of the characteristics of a good local tax. Its enforcement is directly related to the area (municipality) in which its tax base (property) is located, which can not be hidden - and therefore there can be no tax evasion - nor can it be transferred from one place to another. In any case, however, the idea of ​​utilizing real estate tax revenues to strengthen local government in Greece is not new.

Corresponding proposals have been submitted to the public debate since the end of the 1980s, a few years before the establishment of the TAP, following a proposal by the Hellenic Society for Local Development and Local Government (EETAA). But even later, in the early 1990s, many politicians stressed the need for local government to become independent of the central government through direct revenues, while a 2017 study by KEDE highlighted the benefits of a possible transfer of ENFIA revenues to the respective municipalities. In 2018, the then official opposition and current government included such a transfer of funds in its election program.

It is clear that many see significant benefits in such a reform. But how easily can such a reform be done and ultimately bring these benefits?

The diANEOsis study maps the ways in which ENFIA, which despite its weaknesses remains an efficient tax, could change and make a decisive contribution to the decentralization and autonomy of municipalities, an area in which, as we have seen, Greece lags behind, significantly. For this reason, the study presents a specific, comprehensive proposal for the transfer of revenues from ENFIA to local government and, especially, to municipalities.

However, the study considers the possibility that the tax will be transferred as it is to the municipalities, as many demand, after the abolition of the CΙR, an idea that is not very realistic. According to the research, if this happened, it would be possible for some municipalities to find themselves with much more or much less revenue at their disposal, since the tax base of ENFIA is not evenly distributed per municipality, nor does it certainly coincide with the distribution of the CIR. In other words, the value of real estate in each municipality does not necessarily reflect the financing needs of the same municipality. As the study notes, "especially when the transfer is made from one level of management to another, where other, much more complex and important factors are involved than those related to the purely cash / accounting part. So, any thought of transferring ENFIA to the Local government is facing significant challenges." Therefore, any attempt to transfer the tax to the municipalities as such, would create very significant imbalances.

For this reason, the study of diANEOsis proposes a reform of ENFIA, which will consist of three parts: a) the transfer of part of the main ENFIA to the municipalities, b) the equal reduction of the CIR received, but also c) simultaneous maintenance of the rest of the main ENFIA, and the entire additional tax, at the disposal of the central state. Under this scenario, all stakeholders, including taxpayers, pay and receive the same amount, but this money is used efficiently.

The eight points

More specifically, the basic idea of ​​the proposal of the study of diANEOsis, in order to see the benefits of a reform in this direction, can be analyzed in eight points:

1. For reasons analyzed in the study, at least in the first stage, ENFIA is not proposed to be assigned wholy to Local Authorities. It is proposed to split the main tax, ie the one that is imposed on all property owners, in two similar taxes, one of which will be assigned to the Local Government. At the same time, however, there is an equal reduction of the CIR, the main part of the regular state subsidies to the municipalities. The rest of the main tax as well as the additional ENFIA, which is borne by the real estate worth over 250,000 euros, will remain in the central state.

2. The transfer of part of ENFIA to the Local Government does not need any other changes in the institutional framework of the tax, without this meaning that this does not need improvements. But in this way the transfer can be done immediately, "without delays, changes in the distribution of burdens, possible setbacks or 'adjustments' to the original objectives, which are usually observed when changes are made to a tax". In general, it does not seem appropriate to link the transfer of the tax to the Local Government with changes in its institutional framework.

3. The transfer of part of ENFIA to the municipalities is done in replacement of an equal part of the CIR, which, to a large extent, are currently provided to the municipalities for specific uses. This part of ENFIA will be the new Real Estate Tax (TAP), which will continue to be available for the specific uses. Thus, the burdens on real estate will remain, as today, two: The reduced ENFIA with its additional tax that will remain in the Central State, and the new TAP that will arise and will be a resource of the Local Government. In addition, in this way in real estate there will be, as today, only one charge from each level of administration. But the most important thing is that the issue of constitutionality is not raised, because the new TAP remains as the current one, reciprocal.

4. In the scenario of such a reform, the local authorities will have the opportunity to increase or decrease the new TAP within predetermined limits, e.g. by 20%, by decision of the respective municipal council, in order to adjust their revenues according to the needs of the municipality.

5. This new tax, the new TAP, will be collected by GSIS/AADE (and not through the electricity bill) together with ENFIA and the additional tax of the Central Administration. Each municipality will inform GSIS/AADE about the rate of point 4, and it will reimburse the respective revenues by deducting a small percentage of management costs.

6. The revenues of the current Real Estate Tax can be either incorporated in the rates of the section of ENFIA that will be transferred to the municipalities (in the new TAP, that is) or in the rate that, according to point 4, is decided by the municipal councils.

7. With the reduction of the CIR by the amount of ENFIA that will be transferred to the municipalities, the revenues of both the state budget and the Local Government as a whole will remain unchanged. Some differences that will inevitably exist in relation to the previous situation in the finances of the municipalities can be offset by the system of distribution of state grants (remaining CIRs), such as the deduction from the CIRs corresponding to each municipality of its revenues from the new TAP.

8. The practice of the above discount helps to avoid two very important distortions: As the study states: "a) Local authorities who decide to increase the TAP because they want to provide increased services to their citizens or to finance some of their needs are not punished for the additional amount of CIR that they will receive with a reduction by this amount of the CIR that is due to them, and b) the local authorities that decide to reduce the CIR are not compensated for the loss of their income by granting additional CIR and consequently do not deprive the CAP decision by the other local authorities".

In the end, the idea of ​​transferring ENFIA, or a part of it, to the municipalities has significant advantages. But the very way in which such an idea can be realized presents many challenges. The study of diANEOsis results in a well-balanced and above all realistic proposal so that the transfer of part of the ENFIA to the municipalities does not have a financial cost for anyone, but at the same time contributes to the independence of local government.