background and reform steps toward a “green smart local tax” · „goldenrule for local public...

Department III:

Regional Development and Financial Policy

Background and Reform Steps toward a“Green Smart Local Tax”

5th International Summer School 2018„Green Economy: Theory and Practice“

André W. Heinemann

University of Bremen

Kiev, August 31, 2018

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Outline

1. Introduction and Motivation

2. Challenges for cities and the „Smart City“ concept

3. Theoretical background

4. The Real property tax in Germany and problems

5. Reform approaches

6. Conclusions

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6. Conclusions

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Introduction and Motivation

Worldwide, cities are faced with several specific challenges in future:

• Demographic change (aging urban populations require changes in urban infrastructure)• Climate change (e.g. rural migration because of climate change related-crises, fight against climate change

impacts (rise in sea level, changes in urban climates etc.)e.g. Sethi and Oliveira (2015) -> from global „North-South“ to local „Urban-Rural“

• Re-Urbanization

Cities need solutions for urban growth and sustainable urban developments.

Sustainable financing of municipalities in multilevel systems.

Efficiency of Sustainibility of financing of municipalities

• Sufficient revenues

• Efficient spatial and local allocation

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Introduction and Motivation

Some research questions:

What type of financing system ensures sufficient revenues for municipalities?

What special type of taxation covers requirements of an economic municipal tax system?

How to combine municipal tax system with sustainable local land allocation?

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6. Conclusions

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Global Urbanization Trends

The importance of taking into account urbanization trends results from observations of migrationprocesses.

Increasing urban population worldwide by 2050 (UN 2015).

1950: 30 per cent of world´s population was urban 2014: 54 per cent of world´s population was urban 2050: 66 per cent of world´s population will be urban

At present, high-income regions show high urbanization levels• North America: 82 per cent living in urban areas• Europe: 73 per cent living in urban areas

Also in Latin America and the Caribbean, 80 per cent of population lives in urban areas.

In contrast, in Africa and Asia approximately 40 and 48 per cent respectively of the population areurban, substantial increase is likely by 2050 (56 and 64 per cent).

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Development of Population in Urban Areas

4

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

100,0

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Po

pu

lati

on

1)in

Urb

an A

reas

in p

erce

nta

ge

World Africa Asia Europe North America South America

* At Mid-Year Residing.

Source: United Nations, Department of Economic and Social Affairs, Population Division (2014). World Urbanization Prospects: The 2014 Revision.

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Global Urbanization Trends

The United Nations point out, all regions “are expected to urbanize further over the comingdecades.” (UN 2015)

Hodson et al. (2012) also suggest that a second wave of urbanization is under way andacknowledge the need to “reconfigure the world’s urban infrastructures to reshape resource flowsthrough cities in more innovative ways.”

Explanations:

• Demographic change

• Climate change

• Agglomeration effects

For example, Geys et al. (2008) have pointed out, municipalities and in particular Germanmunicipalities are expected to suffer from demographic changes in the upcoming decades.

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Consequences of Global Urbanization Trends

Henderson (2010) has already pointed out that rapid urbanization is related with enormouspopulation movements and as a consequence of this, enormous local and inter-city infrastructureinvestments will be required.

Taking into account that cities and agglomeration cores respectively are centers of economicgrowth because of related markets (factor markets and goods markets), agglomeration effects,higher incomes, and areas of economic development, “some of the most important urbanadvantages require urban infrastructure, policies and planning that support the transition to moreresilient, healthy and sustainable cities” (McGranahan and Satterthaite, 2014).

Henderson (2010) describes the relation between urbanization and economic development asfollows: „While urbanization per se does not cause development, sustained economic developmentdoes not occur without urbanization.

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Relevant Types of Infrastructure

Mobility-based infrastructure

Covers transportation modes where individuals move from point to point within a municipality. Thissubset of the urban infrastructure sector includes individual transportation modes and masstransportation modes.

Supply-based infrastructure

Covers network structures where goods can be transported to consumers. Examples arewaterworks systems, sewerage disposal and solid waste management facilities (cf. Pethe andGhodke 2002). Further examples are street lightning or power grids.

Social infrastructure

This term describes required infrastructure that is not “technical” as defined above. The term“social infrastructure” is a subset of the infrastructure sector and refers to a class of assets thatsupport social services. For example, publicly funded schools, universities, medical centers,community housing, publicly funded community and sports facilities can be grouped under theheading “social infrastructure”.

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About the term „Smart City“

One highly discussed issue in the last two decades is the concept of “Smart City”.

The concept of “Smart City” can be the answer to several local problems in future.

First contributions in the middle of the 1990 have focused on ICT-infrastructure, but this is no moreadequate.

“Although several different definitions of smart city have been given in the past, most of them focuson the role of communication infrastructure. However, this bias reflects the time period when thesmart city label gained interest, viz. the early 1990s, when the ICTs first reached a wide audience inEuropean countries. Hence, in our opinion, the stress on the internet as „the‟ smart city identifierno longer suffices.”

(Caragliu et al. 2011: 69 f.)

The term “Smart City” can not be restricted to one dimension.

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The six dimensions of the term „Smart City“ by Giffinger et al. 2007

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Smart economy (Competitiveness)

1. Innovative spirit

2. Entrepreneurship

3. Economic image & trademarks

4. Productivity

5. Flexibility of labour market

6. International embeddedness

7. Ability to transform

Smart people (Social and Human Capital)

1. Level of qualification

2. Affinity to lifelong learning

3. Social and ethnic plurality

4. Flexibility

5. Creativity

6. Cosmopolitanism, openmindedness

7. Participation in public life

Smart governance (Participation)

1. Participation in decision-making

2. Public and social services

3. Transparent governance

4. Political strategies and perspectives

Smart mobility (Transport and ICT)

1. Local accessibility

2. (Inter-)National accessibility

3. Availability of ICT-infrastructure

4. Sustainable, innovative and safe transport systems

Smart environment (Natural resources)

1. Attractiveness of natural conditions

2. Pollution

3. Environmental protection

4. Sustainable resource management

Smart living (Quality of life)

1. Cultural facilities

2. Health conditions

3. Individual safety

4. Housing quality

5. Education facilities

6. Touristic attractiveness

7. Social cohesion

Source: Giffinger et al. (2007: 12).

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Literature review and relevant „Smart City“ definitions

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Rohde and Loew (2011)

“Smart City denotes a city, in which systematically ICT and resource-saving technologies are used to gothe way to a post-fossil society, to avoid resource consumption, to raise citizen´s living conditions andlocal competitiveness, an hence to improve the future sustainability of the city. Thereby, the areas ofenergy, mobility, urban planning and governance must be taken into account. Elementary characteristicof a smart city is the integration and cross-linking of the areas above to realize the recoverable ecologicaland social improvement potentials. Substantial are comprehensive integration of social aspects of urbansociety and a participative access.”

Rohde and Loew (2011: 6; own translation).

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6. Conclusions

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Fiscal principles• Guarantee of adequate financial funds to cover public expenditures• Short-term flexibility (to adjust public funds)

Ethic and socio-political principles• Generality• Uniformity• Proportionality• Differentiation of tax burden (redistribution)

Principles for economic policy• Active flexibility• Passive flexibility• Support of economic growth• Neutrality of taxation

Principles of Law and Techniques• Transparency of taxation rules• Practicability of taxation• Consistency of tax law• Unambiguity of taxation• Minimizing the costs of tax collection and administration/ tax enforcement

Taxation principles (Fritz NEUMARK 1970)

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Autonomy

Less cycling ups and downs in municipal fundings

Tangibleness of taxation

High yield

Strong relation between local taxes and residents („örtlicheRadizierbarkeit“)

Principles for a Municipal Financing System

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Local taxation

Income taxes

Sales taxes

Property taxes

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Land Supply, Demand, and Land Rent

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14

Formal and Effective Tax Incidence

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𝑆

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Landowners receive the entire land rent.

Landowners bear the entire burden of taxation.

Henry-George-Theorem (1879), Progress and Poverty.

„Golden Rule for Local Public Finance“

• Under certain conditions, public spending on public goods (e.g. infrastructure) willincrease aggregate rent based on land value (land rent).

• Public sector is a “rent creating institution”

• Public revenue levied based only on land rents would be sufficient to cover publicexpenditure.

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Land tax – theoretical conclusion

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“Consider what rent is. It does not arise spontaneously from land; it isdue to nothing that the land owner has done. It represents a valuecreated by the whole community. Let the landholders have, if youplease, all that the possessions of the land would give them in theabsence of the rest of the community. But rent, the creation of thewhole community, necessarily belongs to the whole community.”George, Henry (1886: 328)

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State creates land rent

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3. Theoretical considerations



6. Conclusions

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In Germany, every property owner (e.g. private household, firm etc.) is liable to pay realproperty tax (“Grundsteuer”).

In Germany, two types of Real property tax are levied:

• Real property tax „A“: Real property used for agriculture and forestry.

• Real property tax „B“: Constructible real property or real property with buildings.

Legislation is assigend to Federation and Laender (concurrent legislation, but realproperty tax is not a joint tax).

The tax rate of a municipality depends on the type of real property which are set by localauthorities (11,054 municipalities in Germany in the year 2017).

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Real property tax in Germany

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Real property tax in Germany

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Source: Federal Ministry of Finance (2016), Federal Statistical Office (2017), Fachserie 14, Reihe 4 (Steuerhaushalt); Own calculation; Own diagram.

13.260

394

0

2000

4000

6000

8000

10000

12000

14000

Am

ou

nts

in €

m

Real property tax "B" Real property tax "A"

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Real property tax in Germany - 2016

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Source: Federal Ministry of Finance (2016), Federal Statistical Office (2017), Fachserie 14, Reihe 4 (Steuerhaushalt); Tax revenue estimates of the„Working Party on Tax Revenue Forecasting “, 151st Meeting from May 9 to May 11, 2017 in Bad Muskau; Own calculation; Own diagram.

79,3%

20,7%

89,6%

10,4%

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

70,0%

80,0%

90,0%

100,0%

Western Germany Eastern Germany

Shar

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even

ue

in p

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ge

Real property tax "A" Real property tax "B"

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The real property tax is regulated in the real property tax legislation(“Grundsteuergesetz – GrStG”) and the determination of the assessed tax value isregulated in the German Assessment Code (“Bewertungsgesetz – BewG”).

Assessed value of the real property

• The assessed tax value is the basis for real property taxation.

• Last ascertainment:

1935 (Eastern Germany) 1964 (Western Germany)

• Actually § 21 BewG includes a 6-year-cycle for the appraisal of property.

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Real property tax in Germany - Calculation

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Assessed value (Single family house) 1,000,000 €

X Basic real property tax rate 0.35 percent

X Municipal multiplier “B” 695 percent (Bremen City)

= Real property tax burden 24,325 €

Highest Municipal multiplier 2016:960 % (Nauheim, 10,357 residents); 900 % (Dierfeld, 12 residents)

Lowest Municipal multiplier 2015:0 % (10 municipalities); 45 % (Christinenthal, 65 residents)

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Real property tax in Germany - Calculation

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6. Conclusions

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Reform necessity:

Judicial (constitutional compliance, noncompliance of periodic assessment) Political (justice and equality, worth development) Economic (efficiency, complex, obsolete valuation method, outdated data, bureaucracy)

Reform requirements:

Efficiency and equality Easier assessment method Neutrality for taxpayers after reform

Different reform models:

„South-model“, „Thüringer-model“, „North-model“, Land value tax

German Property Tax – Reform necessity and requirements

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Decision of the German Bundesrat of November 4, 2016:

Clear assigment of tax competence to the Federation

Amendment of German Assessment Code• „Cost-value-Model“• Land: Ground value• Building: Construction costs

Competence for Laender to set Basic real property tax rate autonomously

Problem:• Only 14 of 16 Laender• Difficult to calculate construction costs for old buildings• Impact on German Financial Equalization

German Property Tax – A Joint Design of the Laender

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Decision of the federal Constitutional Court of April 10, 2018

Specification

• New assessment rules until December 31, 2019.

• If new assessment rules will become effective until December 31, 2019, to unconstitutionalassessment rules can be used until December 31, 2024.

• Up to December 31, 2024, all economic units must be assessed with the new assessmentrules.

Decision of the Federal Constitutional Court

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6. Conclusions

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Cities are faced with some future challenges.

To become „smart“ could be a successful strategy for solving future municipal problems.

„Smart Cities“ need „Smart Infrastructure“.

To finance municipal smart infrastructure, sufficient financing instruments are needed.

Land value tax may be a contribution

to avoid land speculation, to mitigate space consumption in urban areas, to achive optimal utilization of land and lo levy revenue for public spending on local infrastructure on stable level of

revenue.

Real property tax and Sustainability of „Smart Cities“

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Department III:


Thank you very much

for your attention!

www.iaw.uni-bremen.de

background and reform steps toward a “green smart local tax” · „goldenrule for local public...

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