Local governments consider raising housing tax

  • Date: 2016-08-18

I. Background

In Taiwan, taxes on residential properties (“housing tax”) are levied by local governments. Local government-announced standard unit prices for homes, however, have not been adjusted for three decades. As a result, these long-standing standards are unrealistic, leading to unreasonably low assessed values and housing tax liabilities. In 2014, under its Sound Finance Program, the Ministry of Finance (MOF) officially notified local governments that in the future, assessed standard unit prices for home should be adjusted to reasonable levels. With several local governments adjusting the tax base used to calculate the housing tax in recent years, as well as the nationwide adjustment of land values announced on January 1, 2016, public concerns have grown over housing tax issues.

Former Premier Sean Chen even published an article criticizing the housing tax as “contravening the law and the Constitution.” Public opinion was focused on suspicions that the government is “robbing” homeowners and distorting the housing market, while subjecting citizens to double-taxation by incorporating a “location factor” into housing tax calculations. There was also some concern that unwieldy tax burdens will have a negative impact on certain industries, maintaining that the central government should not allow local authorities to impose unlimited housing tax increases.

 

II. Current housing tax principles and methods

A. Reduced tax assessments for owner-occupied homes

The housing tax is levied based on the “ability to pay” and “benefit” principles. Since homes are key assets and indicate the taxpayer’s ability to bear economic responsibility, taxes should be commensurate with the taxpayer’s ability to pay. To reflect increases in government services over the years, including transportation infrastructure and metro systems, the housing tax paid to the government should be commensurate with the value of benefits received. In years past, housing construction costs were relatively low, but the standard unit price figures used to calculate the housing tax remained unchanged for several decades.

So currently, after the increase in the tax base, some felt that the housing tax was raised. Under the current housing tax system, however, owner-occupied homes enjoy favorable tax rates and tax bases. The tax rate for owner-occupied homes is only 1.2 percent, while owner-occupied homes valued at less than NT$100,000 (US$3,167) or owned by low-income households are tax-free. Giving low-income households this tax-free advantage makes people’s basic human needs a priority, while lighter tax liabilities for owner-occupied homes ensure that any increase in the housing tax will not have a substantial impact on them.

B. Housing depreciation deductions

Many have expressed concern that newly adjusted standard unit prices for homes will also be used to calculate taxes on old houses. However, in places like Tainan City, the government has used price indices to adjust the standard where construction was completed prior to last year, allowing a depreciation deduction averaging 1 percent per annum. So even under the newly adjusted standard unit prices, for taxpayers living in old, owner-occupied homes eligible for a depreciation deduction, there should be no significant increase in housing taxes.

C. Housing Tax Act is constitutional

According to Constitutional Court Interpretation No. 369, the Housing Tax Act does not violate the ROC Constitution. Although opponents argue that the Act is unconstitutional because the housing tax violates constitutional rights associated with residence, government protection of ROC citizens’ residence rights and the housing tax are two separate issues. Guaranteeing residence rights means that government expenditures should be used to ensure that all citizens have a place to live. If government-funded public construction and urban development ensure that citizens have access to housing, and citizens are looking for the sense of fairness and public benefit that taxation based on “ability to pay” provides, then the government is justified in collecting taxes.

D. Housing tax is not double taxation

To make housing valuations reasonable, homes constructed of the same materials, but located in areas with divergent economic conditions, should not be taxed using the same standards. The Housing Tax Act therefore provides that standard unit price calculations include a sector adjustment rate. The Act, however, also stipulates that when comparing home prices to determine sector adjustment rates, land prices must be excluded. As land prices have never been a factor in the tax base used to calculate the housing tax, double taxation is not an issue.

 

III. Housing tax measures under consideration

A. Review provisions regarding the scheduling of standard unit price reassessments

Under the existing Housing Tax Act, standard unit prices for home are reassessed every three years, and thus do not reflect the current market. The government is therefore considering conducting reassessments every two years, or annually. This will allow for more timely updates to reflect changes in construction material prices and the economic prosperity of various locations, while also moderating the size of any single adjustment. When neighborhood prosperity declines, the sector adjustment rate can also be lowered to reflect the existing market. The MOF will thus gather feedback from all sectors of society, and then consider the feasibility of reducing the three-year assessment interval.

B. Review housing tax liabilities for owner-occupied residential property

Local government schedules and adjustment parameters for reassessing standard unit prices are not consistent. To see whether this affects tax liabilities for owner-occupied houses, the MOF will look at the most recent reassessments by various local governments and review the tax liabilities for owner-occupied homes.

C. Promote an assessment mechanism for housing and land tax bases

Because the assessment of tax bases for housing and land determines whether tax rates are reasonable and fair, the MOF and the Ministry of the Interior (MOI) will establish a platform for the joint promotion of an assessment mechanism for housing and land tax bases to ensure they are accurate and reasonable.

 

IV. Conclusion

The housing tax is an important revenue source for local governments, many of which have begun to adjust standard unit prices for homes that have long been unrealistic. This should result in more reasonable housing tax liabilities. Given that assessed home and land tax bases determine whether tax rate calculations are fair and reasonable, the MOI and MOF have established a review mechanism that will integrate real estate valuations, input from land administration and public finance scholars, as well as local authorities to examine housing and land tax base assessments and other relevant issues to achieve justice in land valuations and fair taxation.