Rise in real estate taxes may block fiscal gaps but will have social, economic impact

The Greek government plans to raise tens of millions of euros from real estate and related taxes in the next couple of years, in a bid to help close the budget gap. However, it may well find out its decision will have far-reaching implications in more than meets the eye. In the country’s fiscal adjustment effort to cut the budget deficit by as much as 12 percentage points of GDP in the next few years, in order to stabilize and then reduce the debt-to-GDP ratio, raising more revenues from taxing real estate holdings appears to be part of the plan. It is reminded that Greece wants to cut the budget deficit to 8.1 percent of GDP in 2010 from an estimated 13.6 percent or more in 2009. Last week, Finance Minister Giorgos Papaconstantinou denied press reports that suggested the government had plans to raise the so-called objective value of real estate, on which various taxes are based, as early as September instead of 2011. This was supposed to make up for a shortfall in tax revenues in the first few months of the year. It is noted that similar scenarios were circulating in parts of the real estate industry in the last couple of weeks, implying the announcement date of the increase could be brought forward to as early as July 1. However, Papaconstantinou stressed that the increase in the objective value of real estate property will take place in 2011. Undoubtedly, it is reasonable for a socialist government to seek ways to raise real estate taxes in a country where a great deal of household wealth is in the form of real estate rather than liquid assets, such as stocks and bonds. Moreover, many local real estate agents, company executives and foreign investors have complained for years about the lack of transparency in Greek real estate transactions. This emanates from the sizeable difference between the market value and the smaller objective value of the property set by the state. The amounts stated in the contracts are usually set equal to the objective value of the property, rather than the amount of money actually paid. Therefore, the state collects less in tax revenues, while the sellers enjoy more in nontaxable income. This is a long-well-known practice to everybody involved, including the state, the banks and the parties in the transactions, and so it is hypocritical to pretend that it is something new which the state just discovered. In this case, however, transparency may come at a cost. A significant increase in the objective value of real estate property is expected to put more pressure on key industries of the Greek economy, such as construction and related industries, including metallurgy and aluminum sectors, as it will most likely dampen demand for apartments, sites and other property. That is, unless the state reduces other types of taxes, i.e. tax rates in a transfer, to neutralize the impact – but it will come at the expense of raising less in taxes. A significant increase in the objective value of property, which brings it closer to the market value, is also going to have a lasting impact of the structure of the local construction industry. The latter is comprised of tens of thousands of small technical companies, about 14,300, according to the latest figures provided by their association. This whole structure relies on the sizeable difference between the objective and the market value of property as well as tax evasion. If the difference in price evaporates, so will be the case with thousands of small technical companies. In other words, the medicine will be tough with unemployment in the related industries rising further. Of course, at the end of this journey, a number of more efficient and well-organized companies will survive, tax evasion will be greatly reduced and the housing product may be better, attracting more foreign investment. But the effect of raising the objective values to the level of market values, even if it is done in two years, will be felt in areas other than those in which the socialist government would really like. By all accounts, the greatest differences between the objective and the market value of properties are found in poor and underprivileged, populous areas of the main cities, such as Peristeri in Athens. There, the objective values will have to rise much more than in privileged areas, where objective and market values are close, if not at the same level. So, the government may find itself with a social problem, since the required increases in the so-called objective values of property in the underprivileged areas will hurt more low-income households residing there, since they will pull up other taxes, i.e. local taxes. In all, it may make sense for fiscal and transparency reasons to raise the objective values on which real estate property taxes are calculated but there are social and economic consequences the government may have underestimated. Time will show.