Pragmatism or Principles? Property Taxation Valuation in Finland Mika-Petteri Törhönen, Lead Specialist Kauko Viitanen, Professor

Pre-conditions for value-based property taxes; FAO and WB Study 2015 Active and efficient property market with significant numbers of properties traded each year Market is transparent in which the prices can be discovered. Comprehensive register of properties Characteristics and attributes of properties are recorded Valuers exist who are able to estimate the market value of properties in a consistent and accurate fashion http://www.fao.org/3/a-i5429t.pdf

Key Challenges to Value Based Property Taxes Political will Conservative mind-sets Regulatory hurdles Capacities Business model development Resources (smallest problem)

Finland – A Nordic Welfare State High taxes (43% vs. 34.3% OECD) Free: Health care Education Social services ‘Everyone is equal before the law’ ‘No one shall be treated differently’

Property Taxes and Valuation Municipal value-based property taxes of 0,80–1,55 % levied on Land Building Increasing demand for local revenue sources Ageing population need more services across the country Income tax revenue concentrates to cities Sales comparison method used for land plots Replacement cost method with age deduction used for buildings Very few complaints, good collection rate

Land and Building

Modern Finland

Helsinki New

Property Valuation Issues Low yield; 1.4% of GDP vs. 1.86% OECD and 4.1% UK Comparison land sales rare in city centres Standard replacement cost tables applied regardless of the location Condominiums divide building taxes to apartment owners based on area, not based on value of each apartment Last comprehensive valuation carried out 11 years ago

Taxation Valuation Equality Top floor Seaview apartment owner may pay the same tax per area with a parking lot view owner in the ground floor Building tax value may be the same for an abandoned building and ‘equivalent’ building in a prime market location Building tax value may be the same in the capital city centre and remote rural town suburb True property tax rates of apartments often lower in the city centre than in the suburb Are everyone equal before the property taxation?

Reform of Simplification and Automation Unify the property tax base to the objects in the land register and cadastre Value and levy taxes to land and buildings jointly (standalone properties) Open access to market price data Register, publicise, value and tax condominium apartments separately Create Mass Valuation system for annual valuation of each property

Takeaways Principle: Note: Suggestions: Register, value and tax properties as they sell in the market (land and buildings together, apartments on their own). Note: Separate land and property taxes may result to unequal taxation Unified property taxes and application of true market values lead to equitable property taxation Suggestions: Apartment valuation should be based on comparison of apartment sales rather than on building values Good land records and valuation infrastructure merit a mass valuation system that produce new values annually.

Many thanks for listening Mika-Petteri Törhönen mtorhonen@worldbank.org Kauko Viitanen kauko.viitanen@aalto.fi