Germany’s property tax legislation must be re-enacted by the end of 2019 at the latest, or so the Federal Administrative Tribunal ruled. Olaf Scholz, the Federal Minister of Finance and a Social Democrat, therefore presented a draft concept for reforming the tax in late November 2018—yet it has met with consternation in the real estate industry. For its consequence would be that, of all households, those already shouldering high rental costs would face a property tax hike that would further increase their burden. So, it fits the picture that another Social Democrat politician, Katharina Barley, the Federal Minister of Justice, came out with a plan to suspend the recoverability of the property tax.1
The property tax base underlying the reform proposal of Olaf Scholz orients itself to the respective building and property values. Not only does this model differ from the other three reform proposals that have been on the table for months and not only does it kick-start an entirely new debate. It is also at odds with the efforts of the Grand Coalition government, which is deeply committed to tenant protection, because the model would result in higher tax loads for tenants, especially so in anyway strained housing markets. Reactions from the body politic and the economy have therefore been critical of Scholz’ plans virtually across the board.
Eliminating Recoverability Carries the Risk of Higher Assessment Rates
But the reform model of Scholz is matched by a demand from the Social Democrat ranks to make it illegal to pass the property tax on to the tenants. If this demand was enacted, the full property tax load would be borne by the property owners while their tenants would be spared. Politically, it would be quite opportune to ensure that the planned rise in the property tax load in strained housing markets—or elsewhere, too—would not hurt tenants, meaning the tenant constituency of the Social Democrats.
Meanwhile, representatives of the real estate industry and parts of the Christian Democrats have rallied against the Social Democrat plans.2 Jan-Marco Luczak, for instance, a Christian Democrat member of the German Parliament, has criticised the plan, arguing that landlords would recover their additional costs by raising net rents. Trade associations worry that investments in the property stock and in new-build construction might dry up in the wake of the Social Democrats’ proposal. Others call for rescinding the property tax altogether because of the excessive amount of red tape in involves. They suggest using the income tax to make up for the loss in revenue—a proposal, by the way, the German tenant union embraces as well.
Another reason why the Social Democrat plans to put an end to the recoverability of the property tax should not be underestimated is that it would make it easier for municipalities to keep raising their assessment rates. As long as tenants are among those who pay property tax, raising the assessment rate will remain a politically difficult feat, whereas public criticism would be limited if property owners bore the brunt of it. The plan is clearly modelled on the steady increase of real estate transfer tax rates, which affects home and condominium owners while sparing tenants.