A short while ago, Germany’s Constitutional Court of Justice declared the calculation basis for the property tax unconstitutional. The ruling cast final clarity on a fact that was basically common knowledge in the body politic, meaning that the German property tax needs to be reformed. Various property tax models have since been debated, but the body politic keeps emphasising that any reform chosen will have to be structured along revenue-neutral lines. The idea being that, going forward, households should not pay more or less on average than they did before the reform. However, the property tax reform is rather likely to place a heavier burden on some households while affording relief to others, as Professor Dirk Löhr of the Trier University of Applied Sciences determined.1
Undeveloped Plots Likely to be Taxed at a Higher Rate
Under discussion are now three models for revising the calculation of the property tax. The so-called construction cost model, which a majority of the German Länder had advocated at one point in 2016, factors in the land value as well as the value of the land’s development in addition to the assessment rate defined on the municipal level. The problem with this model, however, is that it would necessitate the reassessment of all buildings in Germany, a task that will be virtually impossible to accomplish before the transitional period expires at the end of 2024.
Easier and faster to implement would be the land value model. In addition to the assessment rate, it would only take the land value into account when calculating the property tax rate. Especially for undeveloped plots, both the land value model and the construction cost model would result in a considerably higher property tax rate than at present. A third option currently discussed is the area-based model. Calculations using this approach would be based neither on the plot nor its built-up development but the size of its land and usable area. It would mean that the property tax would not automatically rise in proportion to a property’s appreciation.
Municipalities Co-Determine the Property Tax Rate
What ultimately matters for private households is, of course, whether their expenses will rise or fall. Since landlords can allocate the property tax to their tenants, its revision will affect virtually all households, those of owners and those of tenants alike. According to the math done by Professor Dirk Löhr, whether you will have to pay more or less property tax after the reform depends not just on the calculation model that the German body politic will have to pick before the end of 2019, but also on the place of residence and the type of building.2
Residents of West Berlin, for instance, could expect a lower tax burden from any of the models, whereas residents of the eastern, formerly communist part of town would have to brace themselves for higher taxes. The most favourable option for owners of single-family detached homes in Berlin would be the land value model while the area-based model would be the least favourable one. The exact opposite would be the case in smaller towns such as Zweibrücken. All of the three models would result in more or less the same tax charges for multi-family dwellings in Berlin, whereas the differences between the more affordable land value model and the costlier area-based assessment model would be considerable in Zweibrücken.
Ultimately, the city councils exert strong influence on the local property tax rate by setting their municipal assessment rates. Each year, the property tax flushes approximately 14 billion euros into the coffers of the often overindebted municipalities, which makes it one of their most important sources of revenue.3 Between 2006 and 2016, the assessment rate of the Class B property tax rose from 394 percent to 464 percent.4 In Berlin, the going assessment rate is 810 percent. So, whether private households will have to pay a higher or lower property tax rate after the end of the bridging period will not solely depend on the calculation model used. Rather, it will also and not least hinge on the question whether or not a given municipality is strapped for cash.