Cadastral tax

Podatek - Homely Estates - Biuro Nieruchomości - Zdjęcie w tle
The introduction of a new property taxation system has been under discussion in recent years. What is a cadastral tax? How does it impose the tax? What are the chances of introducing a cadastral tax and will it only apply to second homes?

What is a cadastral tax and where is it used?

Real estate typically accounts for the vast majority of wealth that people have. Real estate market is often considered a good place to invest capital because of the higher returns than on deposits or bonds, as well as the relatively low risk, for example, compared to the financial market.
For this reason, the more affluent invest in rental property and those just getting by have to take advantage of such rental offers. This situation leads to a degree of social inequality.
To counteract this, at least to some extent, there are property taxes going to territorial entities, which can then invest in infrastructure, public education or anything that can enhance the well-being of the community in question.
Property tax is the most common property tax that applies in all OECD countries. In Europe, property tax rules vary from country to country and even from region to region.
However, two systems of property taxation can be distinguished: natural and value-based. In the natural system, property tax is calculated on the area of the property. In the value system, it is calculated on the market value of the property. In the real estate market, it takes the form of a cadastral tax.
Cadastral tax, from the Latin ad valorem tax, is a tax on the value of a property. It is calculated on the basis of the market price that can be obtained when the property in question is sold, or the highest market annual rental rate if it is rented.
Such forms of property taxation are used in the United States, the United Kingdom, Germany, and Lithuania, among others. Depending on the country and region, rates range from 0.2% to around 2%. In Poland, on the other hand, a natural tax is applied, but for years there has been talk of switching to a value-based system.

Advantages of the cadastral tax

Property taxation under the value system undoubtedly has many advantages. First and foremost, it does not lead to a situation where one pays less tax for an exclusive one-room flat in an apartment building with a panoramic view of the entire city than for a several-room flat on the outskirts of the city with a much lower value. This form of taxation contributes to reducing social inequalities by distributing the tax liability fairly.
In most cases, including Poland, this would increase revenues to local authority budgets. At the same time, when the tax depends on the value and not the size of the property, it would be an incentive for local authorities to manage land in a more efficient way, for example by adopting spatial development plans to contribute to a real increase in the value of the property, which would increase the revenue of such a territorial unit.
By planning their investments and urban space accordingly, local authorities can also influence property values. Using the increased property tax revenue, they can make needed investments to raise the value of all properties in the area. In this way, reinvesting the tax revenue can be multiplied as property values increase.
A cadastral tax could also result in neighbourhoods becoming more homogeneous. Attractive neighbourhoods, due to the amount of the cadastral tax, would only be inhabited by people with high incomes. This would also make the process of urbanisation, which has been present for years, to some extent regulated, halted or perhaps even reversed.
There has been much talk in recent years about a cadastral tax on second properties. The proponents of such a measure believe that, due to the high cost of the tax, it will no longer be profitable to invest in real estate, thus putting a brake on rising prices.

Disadvantages of the cadastral tax

The biggest disadvantage of a cadastral tax compared to a natural tax is the burden on property owners. The maintenance of the property would sometimes become several times more expensive. The tax is also not linked to the income of property owners in any way.
This can lead to a situation where the owners of more expensive properties simply cannot afford to maintain them due to the high tax to be paid. Often, these are older people who have lived in a particular location for a long time and, due to urban development, the value of the property has increased significantly. This could lead to them having to relocate, possibly even moving out of the city.
The introduction of such a tax could result in a reluctance to renovate, maintain properties to a good standard and, with construction itself, to finish them to a good standard. This could lead to a situation where the majority of people, due to their reluctance to pay higher taxes, would live in substandard housing than before and the neighbourhood would lose its attractiveness.
The introduction of a cadastral tax also entails increased administrative costs. The creation of cadastral registers that would classify and assess the value of real estate is required. Such registers would have to be updated periodically in connection with changes in the value of real estate, and would therefore require the appointment of special officials for this purpose. The very process of introducing and then handling a cadastral tax could be almost as costly for local governments as the value of the proceeds from changing the tax.
In practice, almost no tax results in a price reduction for the end customer. A likely scenario would be that the cost of the cadastral tax would be passed on by the owners of investment flats to the tenants. Even in the event that some of the flats were sold due to a significant increase in the cost of real estate, which would reduce the demand for housing, rental prices would probably remain unchanged or even increase, as those who would not give up their investment in real estate would expect an adequate rate of return.
The cadastral tax, due to its lack of a link to income, could also have the effect of widening social inequalities rather than eliminating them. Only those who could afford to pay the higher cadastral tax would live in cities and more attractive neighbourhoods. Given the value of real estate on the Warsaw market, many people would not be able to afford to pay such a tax with their current income, which would lead to the de-urbanisation of Warsaw.
Such a process could result in affluent people, with access to better quality infrastructure and utilities, living in greater prosperity than poorer people, and poorer people, lacking access to good quality services such as education and health care, as well as proximity to better-paid jobs, would have no chance of approaching the prosperity levels of affluent people.
Such a situation would lead to a segregated society. The same could be true at the level of territorial units where property is more expensive, as they would develop much faster than units with lower average property values, leading to an increase in the differences between large cities and smaller towns and villages.

Does the introduction of a cadastral tax make sense?

Cadastral taxation works well in many countries, but it cannot be clearly stated that it is a good way to address social inequalities. In some cases, it may even lead to greater segregation and a widening disparity of wealth in society. It is very likely that an attempt to introduce such a tax would be met with strong public resistance.
In order for it to be effectively introduced without risking disrupting the lives of many people, as well as the property market as a whole, the rate of such a tax would have to be low enough that it would not be very noticeable to most people, and possibly raised gradually thereafter. Such a solution, however, could entail high costs for local governments to service this tax, and the revenue would not be sufficiently higher to make it economically viable.
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