08/04/2019 Two-level Modelling of Real Estate Taxation – The Case of Czech Republic Jaroslav Gall Czech Technical University in Prague, Czech Republic Department of Mapping and Cartography Dr. Erik Stubkjær Aalborg University, Denmark Department of Planning and Development Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic UDMS, 15.-17.5. 2006, Aalborg, Denmark

Overview Introduction Objectives of investigation Methodology: context (taxation, land value maps, market-based value) Objectives of investigation Methodology: modelling of processes, actors, systems and databases Analysis – Investigation I) market-value-based system, II) land value maps (LVM), III) political process Outcomes: the diagrams of models Conclusion Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Introduction (1/2)- context Land tax experts recommend us regarding the land taxation system: „The market approach: is more effective and fairness helps to discourage under-utilisation and speculations with land“ UNECE 2004, WPLA workshop in Lithuania: normative values for taxation are not sustainable market-value-based taxation + mass valuation establish the taxable values Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Introduction (2/2) – current tax current property tax in the Czech Republic = Land property tax + Structure (Building) tax = income for municipalities, based on normative value/m2, doesn't relate to market values (index of consumer prices between 1993 –2002 = 2,14; but tax rate is basically without changes) levying is ineffective and expensive low tax -> more under-utilised land parcels lower social equity objectives but current real property tax is also: univocal, rather simply (taxpayer can count his tax himself), there is no space for corruption behaviour (determine the land value) Possibilities?? cancel real property tax ??? market-based-value approach ??? Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Research Questions Where are the barriers for taxation based on market value? (in both levels - the technical and political processes) Do we have sources of land value data? Are these sources available? Are they used? How can we apply the value maps for real property taxation – based on market value? Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Objectives of Investigation IDEA: prepare such set of models which will bring understanding and strong arguments for introduce in land taxation the „market principle“ in the Czech Republic consider of land value maps as an important component of the taxation processes ACTIVITY/ METHODOLOGY: analysis of the Czech real estate tax system identify present practise, barriers as well as identify the possible approaches and space for improvement by addressing of two levels (technical and political) – propose the wider application of market-based values Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Methodology TWO-LEVEL hypothesis Modelling modelling the change process by providing a comprehensive view of point Technical level Political level (~99%) Modelling Methodology developed by project COST, action G9: Modelling of Real Property Transaction Model: a descriptive and/or specification of a selected part of reality, representing a simplified mapping the conceived and interpreted notion Models help to shape and understand both the problem and its solution domain Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

I) Market-value-based System and Taxation Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Who wants the market-value based system ? Politicians: „Hot potato“ – explain to people the relevance of an alternative tax system Citizens: They of course don´t want to have a potentially higher tax and get worries for their property (not every property can generate a profit) Experts (urban planners, appraisers, etc.): The change is a logical step, which leads to: stronger relation between munic. and taxpayer, more effective usage of land, generally to the development of the real estate market The change is not simple: Characteristics like efficiency (1), fairness (2) and simplicity (3) do not always go in the same direction. If 1 and 2 increase, 3 decrease. Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Normative vs. Market value (2/2) Market value approach Normative value method based on: the market value of property (from realised prices) fixed value, depends on the type of area only rural area is based on the value) advantage: higher tax fairness motivate to more effective use of land simply determination disadvantage: more expensive tax administration, determination of value by mass valuation low tax revenue low fairness (doesn't reflect the local conditions) Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Normative vs. Market value (1/2) Comparing of the realized prices (market price) and normative values: market price normative value Divergence of value Number of cases < 10 % 24 % 10 - 100 % 46 % >100 % 22 % >200 % 8 % 100% 100% Source: 894 market sales, 2002 Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Barriers for market-value-based taxation imperfect real estate market after the Velvet revolution in 1989 (deformation by rent control, lack of sales, etc.) higher property tax? – rather unpopular, not every real property can bring an income responsibility of municipalities for the tax rate in according to local conditions – to explain and defend their decision to inhabitants municipalities usually doesn't accept the value map (LVM) as the background for property taxation (LVM are expensive and demanding) Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Bodies related to taxation and value of real property Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

II) Land Value Maps (LVM) and Taxation Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Land value map (1/2) 08/04/2019 Defined by law: „graphic representation of building lands (parcels) with marked prices (CZK/m2) within the municipality territory, map with scale of 1:5000 or more detailed“ Why is VM important? convenient way of presenting information about land value useful in many fields (taxation, valuation, investment, land decision-making, mortgaging, purchasing, …) improve the real estate market transparency Data source for VM: realised sales only -> not sufficient source for determine the current value -> we need a knowledge of locality and other economic indicators + mass valuation Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic UDMS, 15.-17.5. 2006, Aalborg, Denmark

Land Value Map (2/2) Usage of LVM: 08/04/2019 Usage of LVM: currently 19 municipalities (1% of all municip., 24% of the population) Why VM aren't used more? made from realised sales – only by comparative method BUT, if there is not enough of sales (cannot be used) - > doesn't cover all territory of municipality data of realised prices are collected in database by Tax offices –municipalities doesn't have access to this database municipalities aren't sufficiently motivated Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic UDMS, 15.-17.5. 2006, Aalborg, Denmark

Real Estate Taxation municipalities have a key function they know their locality very well stores already related data (spatial planning) have a free access to cadastral system data (real property and owner information) some institutions (state) and organisation (private) have a land value databases => need of: negotiation with state authorities and private associations and companies relative to data collecting and connecting of existing databases and registers as well use a mass valuation (CAMA system) Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Land value map for taxation? Requirements for land value maps: VM should be prepared according a set of generally agreed methods VM should cover all territory of the country Existing sources on land price should be available VM should be related to the urban plan Availability of VM for taxpayers and tax offices: paper version – on municipality electronic version – on the Internet Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Real estate taxation (1/3)- now Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Real estate taxation (2/3)- with value map Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

VM for real estate taxation (3/3)- collection data Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

III) Political Process Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Political process basically everybody can propose new legislation (group of parliamentarians, senators, institutions, an association or e.g. the Union of Towns and Municipalities) the Treasury dep. of the Ministry of Finance is in charge of taxation and preparation of new act Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Political interests in market-value-based taxation 1997-1998: A draft emphasises that the value of property and tax rate is determined by the municipalities (1999 blocked by government) 2000: A revised draft, where the real estate tax is based on common (~market) value of property, rate determined by municipalities (blocked by parliament) 2003: A draft proposed to cross to value approach only for land property tax (blocked in the internal ministry process) 2006: A new draft is in preparation (propose to use the mass valuation) Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Political process – standard (1/2) Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Political process (2/2) – through UTM Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Political process – conclusion (1/2) 08/04/2019 1997-2003: An afford to market-value-based taxation – without resulting in a new act found difficulties? communicating the taxation technicalities to the consistency Propose: more flexible approach (in what?), reducing the demand on uniformity to the minimum ????? provision of data on property attributes and on sale prices provided municipalities are assisted (UTM, private comp., and/or more experienced municipalities Is reasonable to assumead the growing number of municipalities. 50 – 70% of municip. have a LVM draft an act To what extent does privacy concerns objects to the dissemination of more or less aggregated sales data? this information would likely make it an accomplishable (but not trivial) task to prepare LVM in municipalities, who are willing and able to prioritise that task Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic UDMS, 15.-17.5. 2006, Aalborg, Denmark

Political process – conclusion (2/2) to lifting the restriction on use of data, there is a need to establish technical connection between existing registers and systems, which contains the price information (attempt in Pilsner) UTM covers the task of facilitating of information exchange among municip. => this exchange address the political as well the technical level => gained experience can than be reaped to fuel the standard political process => task of switching from normative to a market based taxation approach Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Outcomes from Investigation Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Outcomes 1 – Land Value Maps Municipalities: LVM provides a potential for improving: real estate taxation, urban planning and land management Keepers of information on real estate (Ministry of Finance, Cadastre Office, Statistical Office) An analysis raises the question: „On whether and on what conditions the authority over data can be shared in wider circles?“ Banks, insurance service: LVM would assist the industry to comply with: demands of rational risk management support the market in credits and mortgages Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Outcomes 2 - Two-level Analysis Hypothesis: to enhance the change process by providing for a more comprehensive view of options Outcome: proposal to shift the attention FROM providing a legal base for a countrywide, uniform taxation scheme TO the (still complex) issue of allowing for wider access to data on sales prices and immovable properties attributes. Wider access to these data will support the broad adoption of the land value map and thereby accelerate the implementation of a market economy in real estate Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic

Thank you for attention!! Questions? Jaroslav Gall, jaroslav.gall@fsv.cvut.cz Czech Technical University in Prague, Czech Republic Department of Mapping and Cartography Dr. Erik Stubkjær est@plan.aau.dk Aalborg University, Denmark Department of Planning and Development Two-level Modelling of Real Estate Taxation – The Case of The Czech Republic