Department of Infrastructure
Building & Real Estate Economics
Royal Institute of Technology
Master of Science Thesis 234
PROPERTY TAXES AND REVENUE
GENERATION:
THE CASE OF SWEDEN.
________________________________________________________
Author
Supervisor
Ahmed Baah Futa
Hans Lind
Stockholm, February 2004
TABLE OF CONTENTS
1
1.1
1.2
1.3
1.4
1.5
1.6
INTRODUCTION…………………………………………………………………….7
Background…………………………………………………………………………....7
Statement of Problem…………………………….……………………………….….8
Objectives……………………………………………………………………….. …....9
Scope&Methodology……………………………………………………….…………9
Limitations of Study…………………………………………………………………..9
Structure of Thesis…………………………………………………………………..10
2
2.1
2.2
2.3
2.4
2.5
2.6
TAXES AND REVENUE GENERATION………………………………………...11
Characteristics of a Good Tax System……………………………………………..11
Requirements of a local tax…………………………………………………………12
Sources of local Revenue…………………………………………………….……...11
Emergence of Property Taxes……………………………………………………....13
Merits and Demerits of Property Tax……………………………………………...14
Property Tax as a Local Tax………………………………………………………..15
3
3.1
CENTRAL GOVERNMENT TAX REVENUE…………………………………...17
Sources of Tax Revenue for Central Government………………………………...18
4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
LOCAL GOVERNMENT AND REVENUE GENERATION…………………...21
Local Government Concept………………..……………………………………….21
Local Government and taxation in Sweden……………………………………….21
Functions of Municipalities…………………………………………………………23
Financing Local Government Activities…………………………………………...24
Local Government expenditures…………………………………………………...25
Equalization Principle……………………………………………………………....27
International Tax Quota……………………………………………………………28
5
5.1
5.2
5.3
POLITICAL PARTIES AND PROPERTY TAXATION………………………..30
Political Parties……………………………………………………………………...30
Views on Property Taxation………………………………………………………..30
State or Local Property Taxation…………………………………………………..34
6
6.1
6.2
6.3
6.4
PROPERTY TAX AND REVENUE GENERATION………………………….…36
The Property Tax Register……………………………………………………….…36
Property Tax Institutions……………………………………………………..….…36
Assessment Process……………………………………………………………….…36
Contribution of Property Taxes………………………………………………….…38
7
7.1
7.2
7.3
7.4
7.5
7.6
7.7
DETERMINING THE TAX BASE ………………………………………………..41
Introduction………………………………………………………………………….41
Valuation Concepts…………………………………………………………..……...42
Methods of Valuation………………………………………………………………..42
Valuation For Taxation……………………………………………………………..44
Determining the tax base for revenue generation…………………………………45
California Assessment Example……………………………………………………48
Current Property taxation process in Sweden…………………………………….48
2
8
8.1
8.2
8.3
FINDINGS, RECOMMENDATIONS AND CONCLUSION……………………54
Summary of Findings……………………………………………………………….54
Recommendations…………………………………………………………………...55
Concluding Remarks………………………………………………………………..56
REFERENCES………………………………………………………………………57
APPENDIX…………………………………………………………………………..59
3
DEDICATION
This work is dedicated to my parents, Alhaji Bashiru Futa and Hajia Lami Futa
for their immense interest and support towards my education.
4
ACKNOWLEDGEMENTS
I am most grateful to the Almighty God for giving me the strength to complete this Master of
Science programme in Real Estate Management at the Royal Institute of Technology.
I also owe a debt of gratitude to my project supervisor Prof. Hans Lind for his useful
comments and guidance, which enabled me to successfully complete this work.
My thanks also to the respondents interviewed during the research such as the representatives
of the political parties and Municipalities who found time to respond to my question inspite of
their busy schedules.
My sincerest gratitude also to my parents for their keen interest in my education and their
continued support, which has brought me this far.
I also wish to express my thanks to my sisters and especially Nana Hawa for her financial
assistance, which enabled me to pursue this programme.
Finally my regards to all my friends and classmates notably Stephen, Edmund, Onalethatha,
Esther, Leka, Divine and John who were all part of this Stockholm experience.
Ahmed B. Futa,
Stockholm,
February 2004.
5
Master of Science Nr 234
Title:
Property taxes and revenue generation: The case of Sweden
Author:
Ahmed Baah Futa
Supervisor:
Prof. Hans Lind
Keywords:
Property tax, revenue generation, taxbase, methods of valuation
ABSTRACT
A driving force of any economy is its ability to raise revenue from taxes to finance public
expenditure. As a result the potential of property to generate revenue and in particular the role
of the property tax as a source of revenue to either the local or central governments has been
recognized for a very long time.
In this regard this study was undertaken in Sweden to examine the contribution of the
property tax to the revenue profile of the State and to also determine whether the present
mode of assessment of properties offers the maximum potential revenue to the State.
The study noted that though the contribution of taxes on property was lower than revenue
generated from other taxes such as labour, it nonetheless was a useful form of revenue to the
state. Furthermore, it also came to light that the property tax (real estate tax) contributed the
most to the national treasury when compared to other taxes on property.
Additionally, it was observed that that in view of the regulated nature of the rental residential
market, the present mode of valuation of residential apartment through the Direct
Capitalization method does not offer the potential maximum revenue to the State.
The study therefore recommends among others for the adoption of the Cost Method as the
method of valuation for rented residential dwellings since it promises to offer the potential
maximum revenue.
6
CHAPTER 1
INTRODUCTION
1.1 Background
The management of any nation is usually the responsibility of a government. Governments
are responsible for the maintenance of law and order as well as ensuring the welfare of their
Citizens. These are done mainly through the provision of goods and services to satisfy the
needs and wants of the Citizens. However to be able to meet these various needs, it becomes
necessary for any government to raise revenue through several sources. One of the most
convenient and exclusive avenues available for raising funds is through the imposition of
taxes. The dictionary definition of a tax is a compulsory levy imposed on the citizens,
properties or companies within a country for the purpose of raising revenue to finance public
services.
In this regard, Stiglitz &Drifill (2000) recognizes that revenues are raised from a variety of
sources but the most important are the Direct and Indirect Taxes.
Direct taxes are levied directly on persons, properties or companies receiving the income and
cannot be avoided. There are various types of direct taxes of which the most common are
income taxes, which are charged and collected mainly by central and local government
authorities in respect of income earned from any form of employment. Furthermore, property
taxes represent a form of direct taxation on capital.
On the other hand Indirect taxes are levied on goods and services and are paid only when the
particular good is consumed or service is procured such as the sales tax or the value added
tax.
Taxes whether levied on persons, properties or companies are meant to achieve certain
objectives. A tax may be imposed for the benefit of raising revenue to finance the provision of
infrastructure or any other social or economic activity.
.
Secondly, a tax could be aimed at redistributing income whereby the rich are taxed more than
the poor and social services provided to cater for the needs of both the rich and the poor.
Furthermore an exceptionally high tax could be place on certain commodities to discourage
their consumption such as cigarette and alcohol.
Taxes on Properties come in various forms and are collected and used by both Central and
Local Government Authorities. The most common taxes on properties are the Stamp Duty;
Capital Gains Tax from the sale of property; Estate Duty tax and the Property Tax.
The Stamp duty is a fee that is charged based on a percentage of the value of the property
transferred whether in the form of a sale or lease.
A Capital Gains tax is charged on the difference in capital appreciation at the time of purchase
and at the point of sale of a Property.
7
The Estate duty is charged on the immovable assets of a deceased person and its paid by the
next of kin.
All the above are one-off payments made when property is about to change hands and the
valuation, assessment and collection are usually administered by State Authorities and the tax
paid into state coffers based on statutory regulations.
On the other hand, the “Property tax” (Fastighetsskatt) as it is known in international literature
is paid annually based on the value of property and in most countries its valuation,
assessment, collection and usage is usually the responsibility of the Local Authority
(Municipality).
In modern times the administration of a country is not carried out entirely by the central
government but rather power is decentralized to local government bodies to administer areas
of which they have jurisdiction over and provide the necessary infrastructure to support
economic development.
The report by the Organization for Economic Corporation and Development (OECD) 1991,
notes that there is the need to replace or rehabilitate existing infrastructure as well as provide
new infrastructure, which can cope with the demands of industries and activities
Furthermore, the OECD (1991) report indicates that Investments in urban infrastructure
constitute a significant element in total fixed capital formation and they represent together
with the running cost of existing infrastructure an important proportion of public budgets
(national regional and local). This has brought to the fore how the cost of urban infrastructure
should be financed and who should bear them.
For local governments to be able to meet the challenges of providing social and economic
services required of them under their jurisdiction they must be capable of generating revenue
constantly to finance their expenditures. This implies that local authorities must constantly be
exploring revenue generation avenues whilst at the same time not to overburden their
residents with numerous taxes or charges.
In this direction Dilinger (1991), indicates that Local Authorities rely on a combination of
User Charges and Local Income taxes as sources of revenue. The Property tax is to a large
extent, a globally adopted local tax and appears to be the most stable in terms of revenue
generation for Local Authorities. However at the same time it appears to come under a lot of
criticisms from some policy makers regarding its justification and appropriateness as a tool
for revenue generation.
1.2 Statement of the Problem
Sweden has a large public sector and for that matter both the State institutions and
Municipalities have a multitude of functions to perform. This entails huge expenditures,
which must be financed by either the central government or the Municipalities. In this regard
it is important that sound laws and policies are formulated to ensure that government derives
maximum revenue from taxation. To this end the property tax has been identified as one of
the tools adopted by either the state or local government to finance expenditures.
8
In order for property taxation to generate it’s potential maximum revenue the choice of the
appropriate means of assessment and the tax base are very important. However, it has been
realized that the current method of assessment of rental municipal apartment, may not provide
the potential maximum revenue, which can be derived from the taxation of such properties.
It is therefore critical to address the problem so that government would be able to generate the
desired revenue for it to continue to perform its obligations of ensuring the welfare of its
citizens.
1.3 Objectives
The objectives of this dissertation are as follows:
1. To determine the contribution of property taxes to the revenue profile of Sweden.
2. To analyse the arguments in respect of a State or Local property tax.
3. To analyse and suggest the method of valuation which should enhance revenue
generation.
4. To analyse and suggest the taxbase which should enhance revenue generation.
1.4 Scope and Methodology
The study was centred on soliciting the opinions of public officials on the property tax as a
tool for revenue generation as well as how a change in policy regarding the assessment of
property taxes would affect public revenue.
As a result the respondents were public officials involved in the formulation of policies and
laws such as political party representatives in parliament, civil servants and municipality
officials.
The primary sources of data were questionnaires, which were administered to the public
officials as well as direct interviews.
Furthermore literature on taxes in general and property tax in particular as well as the concept
of Local level Administration was used to clarify issues and concepts on the subject matter.
1.5 Limitations of the Study
The study was conducted in Sweden and for that matter there were certain materials which
though the author could have wished to review was nonetheless incapable of doing so due to
the limitation imposed by the fact that those materials were in Swedish.
Furthermore the respondents were very busy public officials and for that matter and for that
matter they were not easily accessible.
9
1.6 Structure of the Thesis
The thesis is divided into eight chapters.
Chapter two examines the characteristics of taxes generally as well as the requirements of a
local tax. In this regard the various general sources of municipal revenue are examined with
emphasis on the property tax.
Chapter three focuses on Sweden and looks at the contribution of the taxes generally to the
revenue profile of government.
Chapter four examines the concept of local government as well as how it is practiced in
Sweden. It also examines how the activities of local governments are financed in Sweden in
particular.
Chapter Five provides information on the views of the various Swedish Political Parties on
property taxation.
Chapter six provides an insight into the property tax machinery and the role of property taxes
to the economy of Sweden. It also discusses the relevance of either a state or local property
tax.
Chapter seven examines various options available in the choice of a tax base and which option
has the potential of yielding maximum revenue.
Chapter eight ends the study and provides a summary of the findings and recommendations of
the study.
10
CHAPTER TWO
TAXES AND REVENUE MOBILIZATION
2.1 Characteristics of a Good Tax System
In order to understand the conditions, which lead to a successful implementation of a local
tax, it is first and foremost important to consider the framework within which taxes operate. In
this regard, Harrison, Smith and Davies (1992) note that although Adam Smiths canons of
Taxation was written over two hundred years ago, they are still being used as a measure in the
assessment of a tax system. Consequently, they provide the criteria against which any tax
system must be judged as follows and not in order of importance:
The first criterion is convenience. The payment of a tax should not cause an appreciable level
of inconvenience to the taxpayer. The deduction of income tax at source, which implies the
taxpayer receiving his salary minus the tax, satisfies this requirement.
The second criterion is Certainty. There should be clarity in the tax system as to what should
be paid as taxes. This implies that there should be no ambiguities in the tax laws and the
taxpayers must easily understand the laws and procedures.
The third criterion is that the cost of tax collection should be a very small percentage of the
total tax collected to ensure cost effectiveness.
The last criterion is Equity. Equity refers to the fairness of the system of taxation. This
implies that the burden of paying taxes should affect people of similar financial circumstances
equally. As a result two principles are considered. Horizontal Equity and Vertical Equity.
Horizontal Equity implies that people in similar financial circumstances must pay similar
taxes.
On the other hand vertical equity implies that taxes should be progressive meaning that those
who earn higher incomes should pay higher taxes whilst those with lower incomes should pay
lower taxes.
A tax system in which poorer people pay a higher proportion of their incomes as taxes as
compared to rich people is said to be regressive.
The Studies on property taxes and revenue generation have generally focused on the property
tax as a local tax, which is paid to the Local Authority. According to OECD (1983) the
beneficiary institution of the property tax in Portugal and Turkey was the central government
whilst the tax was a municipal tax in most other European countries. Sweden operated a
Municipal Guarantee tax then which was introduced in 1953 and the beneficiary institution of
the tax was the Municipality.
A tax whether collected at the national or local level should in principle satisfy the
requirements laid out by Adam Smith. However in the case of property taxes collected for
11
local government usage, additional factors also have to be considered since circumstances at
the local level in most cases differ from national ones. Accordingly, to ensure maximum
efficiency in the collection of local taxes Owens and Panella (1991) identified five main
requirements, which a local tax should satisfy.
These conditions are specified as follows:
2.2 Requirements of a local tax
The first requirement is that of Immobility. It should not be possible for taxpayers to avoid tax
payments by easily moving from one place to another. This implies that the tax base should
not be easily mobile otherwise the abilities of local Authorities to raise revenue would be
severely restricted.
The second requirement is that of Visibility. The tax base should be visible and the
determination of the tax should be specified and accessible to ensure accountability. This
implies that revenue generated must be retained in the local area.
The third requirement is raising sufficient revenue. This implies that a local tax should be
capable of raising sufficient revenue to finance local government expenditure.
The fourth requirements relate to Local Benefits. It should not be easy to transfer the burden
of the tax from residents to non-residents otherwise the linkage between local taxes and local
benefits would be lost.
The fifth requirement demands ease of Administration. It should be easy to administer the
taxes. This implies that the cost of administration should be a small fracture of the total
revenue to be derived.
2.3 General Sources of Local Revenue
In order to raise the standard of living of local residents and thereby justify the mandate
reposed in them by their electorate, it is important for local Authorities to continue to strive to
improve the general well-being of their residents through the provision of social and
economic infrastructure as well as the continual maintenance of such infrastructure in order to
ensure regular and efficient service delivery.
The OECD (1999) report indicates that such infrastructure include water supply, sewerage
networks, surface water drainage, roads and bridges.
As a result, it is imperative for local authorities to raise revenue in order to finance these
expenditures. Dilliger (1991) identifies “User Charges” and “Local Income Taxes” as two
main sources of local government revenue.
12
2.3.1 User Charges
These are fees paid for services provided and the benefits of which are confined to individual
consumers. The rate of consumption can be varied by consumers and charges are based on the
level of consumption such as those paid for water and electricity consumption.
2.3.2 Local Taxes
Dillinger (1991) indicates that local taxes are in principle an appropriate means of financing
of services such as roads whose benefits are localized but cannot be confined to individual
consumers. The local income tax, which is levied on all residents within the locality and the
property tax, are the most widely used local taxes.
Local income taxes are normally taxes levied by local authorities and retained locally to
support the local provision of goods and services. Owens and Panella (1991) have identified
ways in which this arrangement takes place to include the following:
The situation where local authorities are allocated a fixed portion of total income taxes
collected by the State to represent their portion of local income.
Another situation is whereby both the State and local tax authority can specify and collect
their own income taxes as specified under the income tax law. In this regard the local
authorities determine their own tax rates and limit it to residents within their locality.
2.4 Emergence of Property Taxes
The emergence of taxes on land predates the feudal era and various forms of taxes on land
were collected in countries such as England. The earliest form of land tax in England was the
“geld” which occurred between the tenth and twelfth century” and was essentially tribute
money” calculated on land belonging to a family which was used to finance the military of the
Anglo-Danish invaders(Public Records: Doomsday Book 2003).
During the period 1016 to 1135, which was the Feudal era in England, the crown did not own
all land but instead it was owned by wealthy people known as lords who allocated the lands to
peasant farmers in return for the obligation to perform some kind of service.
(Public Records: Doomsday Book 2003).
The tax on Property as it exists today was adopted in Europe in the late nineteenth century.
According to OECD (1983), the tax was introduced in Ireland in 1838 and was a tax on
immovable properties known as rates.
The property tax plays a key role in the revenue profile of municipalities due to the income
earning attributes of property. This primarily arises out of the unique quality of property in
that it immovable. This unique feature implies that property is permanently located and
therefore a local resource, which has the capacity to generate revenue in perpetuity and for
that matter serves as a reliable asset from which municipalities, can raise revenue.
13
The property tax is by far the most important and well-known tax associated with property.
This annual tax is usually paid by residents of a locality to the local government Authority for
the provision of social and economic services. In most countries the local Authority under the
control or supervision of a central authority does the valuation, assessment, collection and
usage of the property tax. However the point of departure in Sweden is that the revenues are
paid into state coffers and forms part of State revenue.
2.5 Merits and Demerits of the Property Tax
2.5.1 Merits
The reliance on revenue from Property Tax to finance the provision of infrastructure and other
services at the State or local level is due to the quality of property as being immovable. As a
result the OECD (1983) report indicates that the primary function of the Local property tax is
to finance local government services for the benefit of the local community. In this regard, the
IAAO(1997) and the OECD (1987) reports specify the benefits of the property tax to include
the following:
Firstly it is noted that since the property tax is independent of income taxes, it enables those
with low income yet with substantial property holdings to make an appreciable contribution to
the provision of local government services. Additionally it enables municipalities to derive
revenue from its residents who do not reside in the localities yet maintain properties there.
IAAO (1997).
Secondly the property tax system is transparent as compared to other forms of taxes. Property
owners can always compare what they pay with what others pay for their properties and have
a fair idea of whether they are paying too much or too little taxes. Furthermore provisions are
always made for appeals and as such dissatisfied taxpayers can always appeal against any
perceived unfair tax levied on them. IAAO (1997).
Thirdly the property tax is essentially a local tax since the tax base is immovable and
permanently fixed within the locality. Consequently it provides a regular source of revenue
and the property itself acts as collateral security in the case of default. OECD (1983).
Fourthly it should be possible for the tax authorities to vary the rates of the tax without any
threat to the tax base or migration of property owners. With reference to the sales tax, an
increase in prices of commodities from a rise in the sales tax within the locality would result
in residents moving elsewhere to purchase those commodities. However in the case of
property, the tax increase must be very substantial to result in the sale of property and
relocation of the owner. OECD (1983)
Fifthly the income from property tax is predictable, since the value of the tax base can be
deduced. For that matter planning for provision of services is less arduous since the cost of
projects can be easily related to expected revenue from the property tax.
14
2.5.2 Demerits
The property tax is based on unrealised property wealth, which may not necessarily translate
into personal income wealth. The tax is perceived as regressive since all property owners are
levied the same tax rate based on the value of their property. This causes considerable
hardship to the poor and the vulnerable in society.
Secondly most residents are at pains to justify the imposition of property taxes since
invariably the tax would have to be paid from income, which has already paid income taxes,
and as such it is viewed as double taxation on income. Moreover, sharp increases in property
taxes after a period of revaluation cause appreciable increases in taxes, which draw a lot of
resentment from property owners.
Thirdly, it is sometimes difficult to perceive the linkage between the tax and the project,
which the tax is financing. For example a property tax, which is used to finance recurrent
expenditures, would not find favour with taxpayers.
Fourthly, the property appraisal process is a cumbersome and time-consuming exercise
especially when revaluations are due. Thus the administrative cost could be high in term of
personnel, and logistics required for a revaluation exercise.1AAO (1997). Generally it is
considered that though the administration of the property tax requires a lot of skilled
personnel and logistics for assessment, it should not exceed more than 3% of the value of the
revenue collected( Vlassenko 2001).
Fifthly, capital appreciation from property is realized only when the property is sold and as
such though values may rise as a result of capital appreciation, the gains are realized only
when the property is sold but however this increased appreciation can also be subjected to
capital gain tax.
Lastly a property tax reduces the market value of the property since the taxes are deducted
from the rent before the rent is capitalised, thereby producing a lower market value than if
there were no property taxes.
2.6 Property Tax as a Local Tax
The Property tax is a widely used tax at the local level and it is currently being used in one
form or other by members of the OECD. It satisfies most of the conditions outlined for a
successful implementation of a local tax such as Immobility, Visibility, Local benefits and
ease of administration.
It can be observed that though property owners may be able to move from one locality to
another, the tax base, which is the property, is fixed and therefore visible in the locality.
The revenue generation potential of property can be assured however the property tax alone is
incapable of providing the maximum revenue needed to finance local government expenditure
for local areas. Stiglitz and Drifill (2000 ) note that the property tax or rate forms only a small
percentage of local government revenue in the United Kingdom and that local Authorities are
able to generate only about twenty-three per cent of revenue from local sources. The rest is
catered for by the central government.
15
The local benefit principle of a local tax implies that the burden of the tax should not fall on
non-residents since they are outside the jurisdiction, which enjoy the benefit. However in the
case of property tax the tax applies to property and therefore owners of commercial properties
should be liable for the payment of the tax since property tax appraisal affects all types of
properties be it residential or commercial.
To a large extent it can be stated that the property tax is an efficient source for revenue
mobilization and whilst its genesis dates back to centuries ago it is believed that its reliance
by local Authorities would continue for a very long time.
16
CHAPTER 3
CENTRAL GOVERNMENT TAX REVENUE
3.1 Political Characteristics of Sweden
Sweden is located in the Northern part of Europe and one-sixth of the country lies north of the
artic circle in the region known as Nordkalotten (the northern skull-cap of Europe). It has a
population of approximately nine million and an area of 450,000square kilometres, which
makes it one of Europe’s most sparsely, populated countries. The distance from the
northernmost most to the southernmost point is 1572 kilometres and the widest distance from
east to west is 499 kilometres. The capital city is Stockholm and it is the most densely
populated city in Sweden with a population of 758,000(Svenska Kommunförnundet 2003).
The current day-to-day governance of Sweden is based on the Swedish Constitution, which is
the supreme law. Sweden is a Constitutional Monarchy and has a monarch who only holds
ceremonial powers and ascension to the throne is hereditary. There is also a Prime Minister
who is elected by Parliament for a term of four years and he is mandated to form a cabinet to
govern the Country.
The Constitution is a written one and the rules and methods of governance are contained in
four statutes namely the “instrument of government”; “the act of succession”; “the freedom of
the press act” and the “fundamental law on freedom of expression”. These altogether
constitute the “Constitution of Sweden”. However the instrument of government serves as the
building block of the Constitution and addresses issues on democracy and the rule of law.
The instrument of government states in Chapter 1 under Article 4, which deals with the basic
principles of government, that the Riksdag (legislature), which is the law making body, is the
foremost representative of the people. The Riksdag enacts the laws, determines the taxes and
decides how state funds shall be spent. This article denotes that, members of the Riksdag, who
represent seven different political parties based on the mandates reposed in them by their
electorates, represent government at the national level.
Popular government at the lower levels of government is exercised at the regional levels by
the County Councils and at the local level by the Municipal Authority. The Constitution states
in Article 7 of Chapter 1 states that “Sweden has Municipalities and County Councils. The
decision making power in these local Authorities is exercised by elected representatives. The
Local authorities may levy taxes in order to perform their tasks”.
17
3.2 Sources of tax revenue for central government in Sweden
The general tax base in Sweden consists of taxes on labour, capital and goods and services.
The main taxes on labour are income taxes paid to the state and local income taxes paid to
local government as well as social security contributions. On the other hand the main taxes on
capital are income taxes on company profits as well as property and wealth taxes.
3.2.1 General Government
The general government sector or public sector in Sweden consists of the Central Government
and the Local Government sectors, which are composed of Municipalities and County
Councils, and the social security sector. The budget for the general government contains all
the revenues and expenditures of the combined sectors and is a snapshot of the state of the
nations financial health. The major components of revenue from taxes and expenditure for the
year 2002 are indicated in the table below.
Table 1 Composition of Tax Revenue.
Revenue item
Percentage contribution
Direct tax on labour
36.4%
Indirect
tax
on
labour
(social
security contributions)
Taxes on capital (including property
tax)
Taxes on consumption
28%
Other taxes
0.1%
9.4%
26.1%
Source:Ministry of Finance
According to Table 1 above, most of the revenue came from taxes on Labour and
Consumption as well as taxes on capital to a lesser extent. These revenue sources go into
financing public expenditure in Sweden, which in the year 2000 was composed of the
following items.
The table below illustrates the level of expenditure commitment, which accrue to the general
government sector in any typical year. The pattern of expenditure for year 2000 has been used
as an example in this case.
18
Table 2 Public Sector Expenditure in 2000
Source of expenditure
Social security
Education and University Research
Health and Medical Care
General Public Services
Defence
Community protection and Justice
Culture and Leisure
Miscellaneous
Percentage share of expenditure
42.5%
12%
11%
10.4%
3.7%
2.3%
1.8%
9.0%
Source: Ministry of Finance
From the table above the largest government expenditure commitment was to social security,
which entailed expenditures on pensions, unemployment benefits and social security services.
The other units of expenditures are spelt out below:
Health and Medical care: e.g. hospital care, primary health care, and dental care
General Public Services: e.g. central government administration, and development assistance
Education and University Research: compulsory school, upper secondary school, higher
education, research and study support
Community Protection: e.g. Police, Judicial service, penal care.
Miscellaneous: housing, energy, and subsidies to agriculture
3.2.2 Central Government
The main sources of revenue for central government are taxes and charges, which consist of
income taxes whist the major sources of central government expenditures, were transfer
payments as shown in the table below.
19
Table 3 Central Government Finances Billion SEK
Year
2002
2003
2004
2005
2006
Revenue
742
743
782
812
844
Taxes
and
charges
Other income
678
678
716
741
771
64
66
66
71
73
Expenditure
756
796
822
839
855
Transfers to
private
sector
&
abroad
Contributions
to
local
government
Transfers to
the old age
pension
system
Consumption
and
Investment
Interest
301
345
354
352
357
120
123
126
132
134
41
43
48
51
52
219
230
238
242
248
66
54
56
61
64
Net lending
-14
-53
-40
-26
-11
Source: Statistics Sweden and Ministry of Finance
Taxes and charges are expected to provide the bulk of revenue to central government coffers
(90%) whilst the bulk of expenditures include transfers to local government, consumption and
investment which includes expenditures on health and education as well as interest payment
on government debt.
The central government budgetary positions are forecasted to result in expenditure exceeding
revenues for the duration of the projected period. These deficits are accounted for in the form
of net lending from the general government sector to the central government.
20
CHAPTER 4
LOCAL GOVERNMENT AND REVENUE MOBILIZATION
4.1 Local Government Concept
The concept of Local Government has been developed to fill in the vacuum caused as a result
of the concentration of political power in the central government. This concentration of power
is manifests in the central government taking full responsibility for governance directly from
the seat of government at the national level. As a result governance is carried out through
national institutions of the executive and legislature and other national governmental decision
making bodies and decisions, which affect local areas, are taken at the national level.
In response to this state of affairs, decentralization has arisen due to the need to make
governance more efficient by transferring political power from the central government to the
local level. Decentralization has become an acceptable form of governance and it is practised
in both developed and developing countries.
Miller (2002) defines local government as “a sub national level of government which has
jurisdiction over a limited range of state functions within a defined geographical area which is
part of a bigger territory”.
The attainment of a local form of government is manifest through a process of
decentralization. Miller (2002) defines decentralization as the transfer of State/National
responsibilities/functions from central government to sub national levels of government or
from central agencies to regional bodies or branch offices or to non-governmental
organization or private concerns.
In essence local government is a form of “mini government” at the local or municipal level
whereby officials are either elected or appointed to the local decision making body. This local
decision making body has the mandate to formulate local bye laws, raise local taxes and
spend such monies for local development subject to constraints imposed by national or state
laws.
However a major drawback is that it may lead to regional inequalities as a result of different
resource endowments. This is because different localities within a nation are endowed with
different revenue generating capacities. Thus there is the need for the central authority to
ensure that no locality is left deprived by ensuring that there is a fair distribution of the
national wealth.
4.2 Local Government and taxation in Sweden
The Swedish system of Local government is regulated by the Local Government Act of 1992.
Prior to that Sweden had had a long tradition of local governance whereby the Lutheran
Church administered both religious and civil duties, which dates back to the Government
Ordinance of 1862(Sweden.se 2003-07-22). Under this ordinance the function of the Church
of Sweden was split into religious and civic ones. The Church maintained the religious duties
whilst the civil duties were the responsibilities of city and rural Municipalities. The ordinance
also established county councils at the regional level.
21
As at 1862 there were 2,498 municipalities and this was reduced to 1,037 as a result of the
first local boundary reforms in 1952. Subsequently there was a second boundary reform
between 1962 and 1974, which created 278 municipalities. Ten more municipalities have
been created between 1994 and 1999 and the number stands at 298. Furthermore the number
of county council, which stood at 25 in 1862, has been subsequently reduced to 20 by 1999
(Swedish Government Article no98.057).
The present local government act of 1991 derives its strength from the instrument of
government, which is one of the four fundamental laws of the Swedish Constitution. It states
in Chapter 8 under Article 5 that “ the principles governing changes in the division of the
realm into local government districts, and the principles governing the organization and
working procedures of the local authorities and local taxation shall be laid down in an act of
law. Provisions concerning the competence and responsibilities of the local authorities in
other respects shall likewise be laid down in an act of law”.
As a result the Local Government Act of 1992 subsequently recognizes two main local
government bodies namely the Municipality (Kommun) and the County Council (Landsting),
which is the regional unit. There are currently 290 municipalities and 18 county councils.
These bodies derive their strength from the local Government Act, which specifies the duties
and responsibilities of Municipalities and County Councils.
The average population of a Municipality is about 15,000 and the Municipality of Stockholm
has the highest Municipal population of 700,000 inhabitants. On the other hand the
Municipality of Bjurholm has the least population of 3000 inhabitants. Furthermore the
county of Kiruna, which has the biggest land area of 19,477square km, has a tiny population
of 25,000 inhabitants whilst Sundbyberg county, which has a land area of 9square km and the
smallest in terms of area, has a population of 33,000.
The powers to raise revenue through taxation to finance local government activities are
contained in Section 5 of the Local Government Act. It states “provision concerning the rights
of municipalities and county councils to issue regulations and to levy taxation for the
discharge of their duties are contained in the instrument of government”.
The instrument of government specifies in Chapter 1 under Article 7, “the local authorities
may levy taxes in order to perform their tasks”
However the ability of local authorities to raise taxes and revenue in general is subject to state
control such as the State setting tax ceilings when it is in the national interest to do so and the
equalization principle.
22
4.3 Functions Of Municipalities
Section 1 of Chapter 2 of the Local Government Act states that “Municipalities and County
Councils may themselves attend to matters of general concern which are connected with the
area of the Municipality or county council or with their members and which are not to be
attended to solely by the state, another municipality, county council or some other body.”
Furthermore certain special legislations such as the Social Services Act, Rescue Services Act,
Education Act and health and Medical Services Act have also bestowed certain duties and
responsibilities on Municipalities.
According to Regeringskansliet (2000) and Sweden.se(2003-07-22), the functions of
Municipalities and County councils can be grouped into two categories. These are the
mandatory or compulsory services, which are traced to the Local Government Act and certain
special legislations. The other categories are the voluntary services which cannot be traced to
any law but which nonetheless are performed by Municipalities.
The compulsory functions of municipalities consist of the following:
Municipalities are obliged to provide pre school facilities for children from age one up to six
as well as to run the pre university level educational system through the enrolment of students
and recruitment of teachers. They are also to provide and maintain the educational
infrastructure such as classrooms and offices.
The Social services Act makes it mandatory for municipalities to provide services needed to
support the vulnerable members of the society. This include providing for the special needs of
physical and intellectually disabled members of the society which include housing to take care
of the physically disabled.
Additionally, it is the responsibility of the municipalities to cater for the welfare of the elderly
through the provision of home care services, senior housing, as well as adult care centres.
Municipalities are also responsible for physical planning and the issuance of building permits.
This involves ensuring that developments conform to the zoning of the area. Thus residential
developments would not be allowed in an area preserve for commercial developments.
Furthermore they are to ensure buildings conform to stated requirements before issuing out
permits for developers to build.
Furthermore, they are mandated to provide and maintain water and sewerage services, refuse
collection and street cleaning services, rescue services, civil defence as well as library
facilities.
As part of their voluntary activities, municipalities may provide technical services such as
energy supply, building and maintaining streets and roads within the localities and
maintaining parks and gardens. Municipalities also support leisure and cultural activities
through the provision of sports facilities, youth and recreational centres as well as museums.
On the other hand, tasks which are normally not confined to a single locality and which
require dealing with large inhabitants are handled by the county councils such as medical care
and public transport.
23
4.4 Financing Local Government Activities
In order for the municipalities to perform their functions effectively and efficiently it is
important that they are capable of raising revenue constantly to finance their expenditures The
Swedish Municipalities derive their revenue mainly from local income taxes and user fees as
well as central government grants. The different sources of finance are as follows:
Table 4 Revenue Distribution for Municipalities in 1999
Item
Tax revenue
Miscellaneous
Rates and Fees
Government Grants
Share of revenue
58%
19%
8%
15%
Source: Statistics Sweden
In the year 1999 local government revenue consisting of both Municipalities and County
Councils was 307billion Sek.. The Municipalities generated 208billionsek whilst the County
Councils generated 99billionsek.The share of revenue accruing to the Municipalities was 67%
whilst that accruing to County Councils was 33%.
The subsequent years has seen an increase in revenues accruing to local government and the
projected revenue for the period 2002 to 2004 are shown in the table and diagram.
Table 5 Projected
Local Government Revenue from 2002 to 2004
Year
2002
2003
2004
2005
2006
Expected Revenue
549
586
596
622
645
Sources: Statistic Sweden and Ministry of Finance
24
Diagram 1
Revenue in (SEK billion)
Local Government Revenue
660
640
620
600
580
560
540
520
500
2002
2003
2004
2006
2005
Years
Source: Table 5
On the whole the above diagram shows that revenue would rise during the projected period
although the rise would be less steep from the period 2003 to 2004.
4.5 Local Government Expenditures
The main components of local government expenditure are composed of expenditures in
respect of services, which the local authorities are required by law to perform as part of their
functions as shown below.
Table 9 Municipal and County council expenditures
Year
Revenue
Expenditure
Consumption
Other
expenditure
Net lending
2002
549
558
468
90
2003
586
580
492
88
2004
596
599
510
89
2005
622
623
531
92
2006
645
648
553
95
-8
6
-4
-1
-3
Source: Statistic Sweden& Ministry of Finance.
25
Diagram2
Local Government Expenditure
Expenditure in SEK(billion)
660
640
620
600
580
560
540
520
500
2002
2004
2003
2005
Years
2006
The Table above provides the expenditure pattern of the local government, which includes
municipalities and county councils. The municipal component of expenditure consist of
expenditures on education such as the compulsory schools elderly and childcare. Further cost
is encountered in the provision of and maintenance of infrastructure such as roads and
bridges. The bulk of expenditure by the county council is on the provision of health and
Medical care services. The graph above also rises steeply indicating that the increasing levels
of expenditures over the projected period.
When the revenues and expenditures are compared, it is realized that expenditure levels
exceed revenue levels for most of the forecasted period as shown below.
26
Diagram 3
Revenue and Expenditure
in SEK billion
Revenue and Expenditure pattern for local Government
660
640
620
600
580
560
540
520
500
480
Series1
Series3
Series 1
=Revenue
2002
2003
2004
Years
2005
2006
Series 2=
Expenditure
The bar graph above reveals the parity levels between revenue and expenditure over the
forecasted period. The diagram indicates that with the exception of the year 2003 when
revenue is expected to exceed expenditure, all the other years portray a situation whereby
expenditure exceed revenue albeit very marginal. This is contrary to the policy, which
requires municipalities to have balanced budgets each year.
4.6 The Robin Hood or Equalization Principle
This system was introduced in 1996 based upon the Robin Hood fairy tale of taking from the
rich and giving to the poor. The equalization principle is operated in two main ways namely
income equalization and expenditure equalization (Swedish Government Article no98.057).
The income equalization implies that municipalities with a higher than average revenue from
taxes must pay a fee to the state. This fee in turn is given out to those municipalities with
lower than average taxable earning capacities.
On the other hand expenditure equalization implies that structurally advantaged municipalities
pay a levy to the state. This levy is passed on to structurally disadvantaged municipalities to
finance development services.
4.6.1 Consequences
Equalization enables all parts of the country to receive equal levels of development projects.
As such equalization ensures that localities which have limited and low value properties and
for that matter generate low levels of revenue are also able to pursue their development
programmes through funds which are channelled from other richer municipalities. This is in
line with the welfare programme, which is to ensure that no segment of the country is
deprived of the national wealth.
27
Furthermore, it eliminates the tendency for local authorities to overtax residents since any
extra revenue would find its way out of the district.
On the other hand, equalization stifles initiative and rewards incompetence. This is because
municipalities, which do not embark on aggressive revenue mobilization programmes, are
assured of a secured revenue base in spite of their incompetence. Also municipalities, which
adopt aggressive revenue mobilization programmes, are penalized for their innovation.
Additionally, equalization takes away healthy competitive rivalry and for that matter there is
no reward for good performance. In the absence of this form of incentives, municipalities
capable of generating high revenue would consider it not worthwhile to do so and instead
adopt a lackadaisical attitude to revenue mobilization.
Furthermore municipal authorities would find it difficult to justify increases in taxes since
residents of the municipalities would not want to pay higher taxes to finance services in other
municipalities whilst residents of these municipalities themselves pay lower taxes.
4.7. The International Tax Quota
Sweden is generally considered to be the country with highest levels of taxes within the
OECD. According to Taxes in Sweden 2000, a study carried out in 1997 of the seven highly
taxed countries within the OECD, indicates that Sweden had the highest tax quota (percentage
of taxes in relation to GDP) in 1997 of 51% whilst the EU average was 41.5% as shown
below.
Table 10 1997 international tax quota
Country
Sweden
Denmark
Finland
Luxembourg
Belgium
France
Italy
EU average
Tax quota %
51.9
49.5
46.5
46.5
46.0
45.1
44.4
41.5
Taxes on Property %
4
3
2
8
3
5
5
4
Source:OECD & Eurostat
With regards to taxes on property, Sweden’s 4% was in consonance with the EU average of
4% though in most countries in Europe such as the United Kingdom and France, property
taxes are paid to the local government and forms part of local government revenue.
In a comparative study of the Property tax of Britain, France and Sweden, Vlassenko (2001)
indicates that the “peculiarity” of the Swedish system is its efficiency. It notes the property
tax collection process in Sweden is cost effective since the cost of the property taxation
process does not exceed 6% of the tax return.
Furthermore there is about 99% to 100% collection rate. It is difficult to evade property taxes
since they become a collateral, which are charged to the owners’ salary. The taxpayer has the
option to contest the property tax within five years of the assessment.
28
CHAPTER 5
POLITICAL PARTIES AND PROPERTY TAXATION
5.1 Political Parties
The Riksdag as the law making body consist of representatives of Political Parties, which are
elected on the basis of the manifestoes of their Political Parties in a general election every
four years. Elections to the County councils and the Municipalities are held at the same time.
Article 1 of Chapter three contained in the instrument of government states that “ the Riksdag
shall be appointed by means of free secret and direct elections. In such elections votes shall be
cast for parties with an option for a voter to express a preference for a particular candidate.
The Riksdag shall consist of a single chamber comprising three hundred and forty-nine
members.
There are presently seven political parties in the Riksdag, which consists of 349 members who
are elected for a period of four years. The parties which make up the Riksdag are the Social
Democratic Party; the Left Party: the Green Party; the Moderate party; the Liberal Party , the
Christian Democratic Party and the Centre Party. These Political parties have different
ideologies though broadly speaking each Party may be either from a Socialist or Conservative
School of thought.
5.2. Views on Property Taxation
5.2.1 Social Democratic Party
The Social Democratic Party was founded in 1889 and is the current single largest Political
Party in the Swedish Parliament. At the last election in 2002 it obtained 144 seats out of the
349 unicameral or single legislature (Riksdag), which was equivalent to 39.8%. This however
fell short of the number needed to from a government single-handedly and for that matter it
formed a coalition government in alliance with the Left Party and the Green Party. The Social
Democratic Party has governed Sweden for sixty-one out of the last seventy years. The goal
of the Social Democratic Party is to build a modern welfare and democratic society based on
equality and which will provide each citizen with the opportunity of leading a rich and
meaningful life.
The Social Democratic Party introduced the current form of property tax as State tax. The
party believes in the usage of taxes to achieve economic development throughout the country
and the equal distribution of the wealth derived from the resources of the nation.
The Party support the property tax but it is now reviewing the system so that it reduces the
hardship faced by poor house owners as a result of values increasing in areas such as holiday
resorts and thereby making the tax less regressive.
The Party will continue to maintain the tax as a state tax since it brings in revenue, which is
quite substantial and equivalent to the income spent on child support. They maintain that if it
is a local tax there will be differences in tax rates and revenue between the localities, but a
state tax smoothens these differences. Furthermore the abolition of the property tax will lead
29
to higher taxes being paid on other taxes on property such as capital Gains tax, stamp duty
and wealth tax.
5.2.2 The Green Party
The Green Party is a relatively young party and was founded in 1981. It is currently part of
the ruling coalition government. The aim of the Party is to build a sustainable democratic
party within the framework of the limits of nature locally and internationally. It also aims at
ensuring the equal distribution of resources within the context of a general welfare system.
The Green Party believes that though the property tax is unpopular it has few harmful effects
since it is visible and evasion is difficult as compared to financial property tax which is on
registered wealth and often leads to tax evasion. The Party also believes that there should be a
tax reduction for low-income earners. The party is also prepared to support a shift in the tax
base from the property itself to the resource used to warm and light peoples houses such as oil
and electricity and that houses per se should not be taxed unless the usage produces a harmful
effect on the environment. Furthermore it is of the opinion that it is the Municipality, which
should collect such a tax, and not the State.
5.2.3 The Left Party
The Left Party is a Socialist Party and forms part of the coalition ruling party although it has
fewer numbers of seats totalling thirty in the Riksdag. It was founded in 1917 and its aim is to
create a welfare state in which each individual regardless of his status can enjoy a high level
of social services such as education, health, shelter and secured and full employment.
The Left Party supports the use of property taxes to finance public spending and a just
distribution of wealth and also supports the present situation where the property tax is a state
tax.
5.2.4 The Moderate Party
The Moderate Party was formerly known as the Conservative Party and was formed in 1938.
The Conservative Party changed its name to the Moderate party in 1969.It obtained 55 seats
in the Riksdag during the 2002 general election, which is equivalent to 15.2%. It is currently
the largest single opposition Party in the Riksdag. The Party’s ideology is based on liberalism
and conservatism. The party holds the view that individual goals can be best achieved in a
market oriented economy.
The Party’s view is that taxes generally in Sweden are astronomically high and it is in favour
of income taxes being lowered to reduce or eliminate reliance on subsidies. The Party is
against the property tax in principle and it will gradually abolish the real estate tax if it comes
into power since it is unfair because it is paid on something, which gives no money in itself.
Furthermore the party indicates that there is no targeted expenditure for revenue derived from
property taxes, which they believe, is paid to a “black box”. They agree to taxes such as sales
tax and capital gains tax but are opposed to property taxation. They believe that residents have
paid income taxes, which should pay for the cost of infrastructure. The Party is of the view
that Property taxes hurt poor tenants the most since wealthy house owners pass on the
property tax to poor tenants in rented premises.
30
Additionally the Party believes that the tax is regressive since poor people pay more as a
percentage of their income. They believe also that when people are taxed less on property
they will have more money in their hands and be able to build more and invest more.
5.2.5 The Liberal Party
The Liberal Party was founded in 1934 following the merger of a number of liberal Parties.
The central ideology of the party is for every individual to pursue its own goals in a free
environment and that political decisions should not override personal responsibility.
The party does not support property taxation in principle and they hold the view that taxation
of property should be lowered substantially and be completely abolished in the long run. At
the same time the tax on capital Gains when people sell their houses should be increased to
compensate for the loss in property taxes.
They however want the tax to continue to be a state tax until it is abolished. They also share
the opinion that property taxes are a disincentive to house ownership. They would also want
to see the tax on personal fortunes reduced since the bulk of these taxes are paid off by older
people who have also paid off their loans.
5.2.6 The Christian Democratic Party
The party does not support property taxation in principle and it is of the opinion that the tax
should be abolished since the tax on wealth also takes account of real estate and that it is not
everybody who owns property who is capable of paying a percentage of the value each year in
taxes.
The Party also thinks that though the wealth tax (förmögenhetsskatt) (which includes real
estate) is progressive it is totally irrational since about 40% of the tax is paid by homeowners
who have also paid property taxes. The party thinks that the property tax and wealth tax on
property should be modified and replaced by a local fee on real estate of not more than 2600
sek per year, which should be paid to the local government. It should also be used only for
local services that pertain to the homeowners such as maintenance of roads and all other
property taxes should be abolished. The party does not also support the argument that
property taxes make houses cheaper. They note that the taxes lead to segregation since
pensioners often have to leave their homes because of taxes and other low-income groups
cannot purchase property in certain areas because of taxes.
5.2.7 Centre Party
The Centre party was originally a merger between the Agrarian union, which was founded in
1913, and a National Farmers Organization founded in 1915. This merged into the agrarian
union in 1922. The Centre party ideology is woven around both the free market and social
responsibility. The party’s ideology is based on equal rights irrespective of gender, religion,
ethnicity or sex as well as environmental awareness.
The party holds the opinion that the present manner of property taxation is unacceptable since
some people have to abandon their houses because of high taxes. However, they point out that
the tax is a useful form of revenue, which cannot be abolished. Furthermore the interest on
31
loans are deductible from the taxes which eases the burden for loan repayment especially on
the part of young people who want to own houses through mortgages.
They are however opposed to the wealth tax and would abolish it since it is damaging to the
economy. They indicate that the tax cost more to the society than what it yields. Furthermore
the property taxes on wealth is harmful because it is only on Swedish investors and excludes
foreign investors which implies that the foreign investors can repatriate all their profits
outside the country even though they have not paid any substantial taxes to the country.
5.2.8 Observations
An overview of the views expressed by the political parties indicate that the socialist ruling
alliance made up of the Social Democratic Party, the Left Party and the Green Party support
the adoption of the property tax though the Green Party would prefer that the tax is collected
by the local Authority and applied to the resources used to warm and light the houses.
On the other hand the Conservative Parties such as the Moderate Party, Liberal Party and
Christian Democratic Party are opposed to property taxation in principle and have all
indicated their intention to abolish the property tax when they come to power. The Liberal
Party has proposed increases in the Capital Gains tax from the sale of property to compensate
for the loss of revenue. On the other hand the Christian Democratic Party intends to introduce
a local tax of not more than 2600 sek to replace the property tax.
The Centre Party stands in the middle in terms of ideology and also stands in the middle in
terms of the property tax. The party recognises that although the tax has some defects it is still
a relevant source of revenue, which cannot be discarded.
Almost all the Parties with the exception of the Social Democrats and the Left Party are
against the payment of wealth tax on property. The wealth tax is charged on the combined
assets of a person comprising of real estate, stocks/bonds and bank deposits in excess of
1,500,000kr that a person owns and 2,000,000sek for married couples at a tax rate of 1.5%.
According to the parties it is usually the same people who pay property tax who also pay
wealth tax.
There is however consensus on the issue that property taxes hurts low income people and the
Social Democratic Party is taking steps to alleviate the suffering and hardship faced by very
poor property owners.
Finally the Social democratic party and the Left party hold the view that the Property tax
should be a state tax whilst the Green Party is of the view that it should be a local tax. The
Liberal Party is however opposed to the tax in principle but wants it to be a state tax until it is
abolished. The Centre party is of the opinion that though property taxes should be a state tax,
provision should be made for the local authority to partake in the share of the revenue. The
Christian Democrats however hold the view that any real estate tax should be local. On whole
three parties think that the tax should be a state tax whilst two parties think it should be local.
Another two parties do not have any clear-cut choice.
32
5.3 State or Local property taxation?
The issue of whether revenue from property taxes should be utilized by the state or local
authority continues to be the focus of discussion due to the differing opinions held by
different segments of the Swedish society, such as the political parties and the association of
local government. It seems that both schools of thoughts have legitimate grounds for their
opinion and some of the pertinent issues surrounding the discussion are presented as follows:
5.3.1 State Property taxation
The political manifesto of the ruling party in government, that is the Social Democratic Party
demands that no part of the country is left behind in the socio-economic development of the
country. This implies that if revenue from property tax were localized, areas with abundant
real estate would have an advantage over areas with limited real estate. The attractive areas
would be able to generate substantial revenue from property taxes to implement their
programmes whilst the areas with limited resources would not be able to generate sufficient
funds. In order that no part of the country is left behind the state utilizes all available
resources for equal development irrespective of where the revenue is coming from to finance
the social welfare programme
Furthermore there is a case for the state to cream off betterment, which lead to appreciation in
property values. Such valuable and expensive services provided by the state such as the
maintenance of law and order which is the main duty of the police, feeder roads, which
facilitate transportation all, contribute to property price appreciation. A state property tax
provides the state with an opportunity to tax this increased values arising from state funded
services.
Moreover, a state administered property tax and the Swedish equalization principle implies
that a locality does not suffer adverse effects if its citizens decide to locate their buildings
elsewhere with the hope of paying lower taxes. This is because equalization ensures that all
revenues from property taxation would be used for developments in all parts of the country
Finally, state property taxes provide uniformity in property related taxes since all taxes on
property in Sweden such as capital gains, stamp duty and property taxes are administered by
the state.
5.3.2 Local Property taxation
As a result of the large number of responsibilities required to be performed by the
municipalities, it is necessary that municipalities have access to a lot of revenue generation
avenues including the revenue from property taxes within their municipalities. This situation
is made more complex due to the present regulation that municipalities in Sweden are
required to balance their budgets annually. The result is that municipalities are constrained to
embark on any infrastructure development since they would not be able to finance large-scale
projects within a year.
Furthermore the adoption of Local property taxes will lead to healthy rivalry amongst
Municipalities. This is because if municipalities know that they can charge property taxes
they will be more aggressive in attracting high value properties such as hotels into their
municipalities since they will be able to collect more taxes from such properties.
33
Since property is a local resource it implies that taxes from property should accrue to the
local authority. Residents are more likely to associate with a property tax, which benefits
them directly since they can quantify the benefits they derive from their taxes. There is a high
risk of tax evasion if the taxes are not local since residents would hold the opinion that their
taxes are being used to develop other areas.
A local property tax will enable municipalities to determine their own tax rate depending on
the peculiarity and special needs of the community. It will then be no longer relevant to adopt
a uniform tax rate but that each locality should be able to raise or lower the tax rate depending
on the needs of its localities.
Additionally, an examination of the revenue profile of local Authorities indicate that the
state’s contribution in the form of grants constitutes about 15% of local government revenue.
This implies that the bulk of local government resources are generated locally. Thus the
addition of property taxes which constitutes about 3% of government revenue would lead to a
reduction of state grants to the Municipalities to between 10% to 12%.
Additionally, it would be easier for residents to take their representatives in a local assembly
to task for non-performance of service delivery since they are easily accessible rather than
representatives in a national assembly.
34
CHAPTER 6
PROPERTY TAX AND REVENUE GENERATION
6.1 The Property Tax Register
In order for public institutions to derive maximum revenue from property it is important to
have a well-structured land information system, which provides records of all properties on
which tax officials can rely upon
Real properties are required to be registered in the Real Property register in Sweden which
contains information about the geographical attributes of the Property. Furthermore legal
rights such as freehold and leaseholds, mortgages and easements are registered in the land
register to give legal effect and state protection. These two registers are used together through
a coordinating system known as the Land Data Bank System (Swedish Land and Cadastral
Legislation 1998)
The law on Property Tax was passed by the Riksdag in 1984 and spells out what should
constitute the tax base and the tax rates. Prior to that the law on property assessment known as
the Real Property Assessment Law was promulgated in 1979.
The data on Property taxation is kept by the Tax Authorities in what is known as the Property
Tax register and relies on the Land Data Bank System for basic information on ownership and
location details of real properties. The Property Tax Register provides information on the
owner, description of the property as well as the assessed values. Most of the information is
supplied by the owners of the property who are require to fill in a tax assessment form and
handed to the tax authorities (Kjellson 1994).
6.2.Property Tax Institutions
The Property tax is a state tax in Sweden and for that matter property taxes collected are not
retained by the municipalities but rather they are channelled into state treasury and form part
of state revenue.
As a result both state and local agencies play different roles in the assessment and collection
of property taxes. Sandquist (2003) identifies the main agencies involved in the property
taxation process as the National Tax Board and the National Land Survey.
6.3 Assessment Process
The Property taxation procedure consists of two main parts. These are the actual assessment
procedure itself and the preparatory work, which precede the assessment work. The National
Tax board which is under the Ministry of Finance is responsible for the actual assessment
work to arrive at the value on which the tax rates are based and relating the information of the
taxes to be paid to the owners of the property.
Prior to that it is the responsibility of the National Land Survey to supervise the preparatory
work, which involves market analysis of the real estate sector in order to depict price trends
35
from comparables for different categories of properties. The bulk of this work is outsourced to
valuers in the private sector.
There is also currently operating a Computer Assisted Mass Appraisal, which relies on the
LDBS for most of the data for the preparatory valuation work. It enables analysis on
comparable rents and helps in the detection and deletion of irrelevant data on purchases and
sales. This operates within the framework of a Geographic Information System where
computer based maps are used to support the property data in the LDBS in such a way that
each individual property data can be linked to its corresponding map.
The process of determining the property tax to be paid by the owner requires a valuation of
the properties by the various county tax boards under the supervision of the National Tax
Authority to arrive at the assessed value. The law on real Property assessment indicates that
the assessed value should be 75% of the open market value of the property two years before
the assessment date.
The taxbase consists of all real properties (both land and buildings) within a municipality
subject to properties exempted by the law on real estate assessment. The exemption covers
properties used for religious activities, educational purposes, state, county and municipal
administration as well as properties belonging to the Nobel foundation.
Furthermore new buildings are not liable to pay property tax during the first five years after
construction and the taxes for each category of property are halved for the next five years.
The process of determining the value of the taxbase requires an assessment. In Sweden two
procedures are normally distinguished namely general and special assessment. A general
assessment requires a valuation to determine the values of different types of properties
according to a specific schedule. This assessment is done every third year and in the year
2003 and 2006 there will be an assessment for one and two family houses. The next
assessment for apartment blocks will take place in the year 2004 and dwelling units on
agricultural land will be assessed in the year 2004.
A special assessment is carried out when considerable refurbishment, renovation or
demolition is carried out on the property so as to increase or decrease the value arrived at
during the general assessment by 20% or a minimum of 24000sek (Sandquist 2003).
The tax rate, which is applied to the assessed value to determine the exact amount to be paid
by the property owner, varies for different categories of properties and the rates are uniform
throughout the country. As at 2003 the tax rate for one and two family houses as well as
dwelling houses on agricultural land was 1% of the assessment value. It is 0.5% of the
assessed value for apartment blocks and industrial buildings. The rate is 1% for commercial
buildings such as offices and shops.
The method currently adopted by the tax authorities for the valuation of one and two family
units is the comparative approach. Where the usage of the comparative method is
impracticable it is permissible to use the Yield Capitalization Method. The Cost method of
Valuation is used for special industrial properties which are normally not for sale.
Any property owner who is dissatisfied with the amount to be paid as tax can file a complaint
within a period of five years and the law allows owners who are dissatisfied with the amounts
36
levied against them to lodge a complaint to the county tax court. In the event of default on the
part of the owner, the law provides for the property to be sold to recoup the amount owed to
the tax Authorities.
6.4 Contribution of Property Taxes
Revenue from property and in particular property tax is an important source of revenue due to
the role of real estate in the socio- econonomic development of Sweden. Every economic
activity demands the usage of one form of real estate or another whether in the form of
residential, commercial, agriculture or industrial. The values of the various type of real estate
are shown in the table below.
Table 6 The Swedish Real Estate Stock Market Values
Type of Company
Market
Value
billion)
200
200
350
350
350
350
300
2000
700
200
5000
Public real estate companies
Institutional Investors
Private Owners
Municipal Housing companies
Owner occupiers
Public sector real estate
Tenant owned real estate
Detached houses and summer houses
Farm and forest real estate
Other Real Estate: Power Plant
Total
(SEK
Source: real estate in urban context. (2003 Lecture notes)
The table above indicates that the total value of Swedish real estate is estimated at 5000billion
SEK and this is estimated to constitute about twice the size of the GDP in Sweden. A
considerable amount of real estate is owned by Institutional Investors and Municipal Housing
Companies, which indicate the extent to which real estate is viewed as a source of investment
in Sweden. This implies that there is a considerable amount of money to be derived from the
taxation of real estate since the bulk of the real estate described above is taxable except those
exempted by law. Thus over the past ten years annual property taxes has contributed between
2%to 3% of state revenue as shown in the table below.
Property taxes are a source of income for the state since individual municipalities do not
retain the taxes collected but rather form part of total state revenue, which is utilized by the
state in the administration of the country. The table below indicates the projected revenue
sources from the annual property taxes and other taxes and fees on property for the period
2002 to 2006.
37
Table 7 Property Tax (Real Estate Tax) and Taxes on Property in Sweden
Year
2002
2003
2004
2005
2006
Total State
Revenue
Revenue
from
property
Property
Taxes
Wealth tax
742
743
782
812
844
36.1
37.0
38.2
39.2
40.2
23.2
24.0
24.5
25.1
25.6
4.1
4.6
4.8
5.0
5.2
Inheritance
and
Gift
Tax
Stamp duty
3.0
2.7
2.8
2.7
2.8
5.8
5.7
6.1
6.4
6.6
Source: Ministry of Finance &Statistics Sweden
From the table above it can be deduced that the contribution of property taxes to state or
central government revenue is averaged about 3% for the forecasted period, which is
significant in absolute terms, and there is a marginal increase of an additional 1% from taxes
on property, which raises the total contribution to about 4%. The other sources of taxes on
property are derived from wealth tax, inheritance and gift tax and stamp duty.
However when considering the roles of the various property contribution it can be deduced
that Real Estate or property taxes contributed the most to revenue generation from the
property sector. The pie chart below using year 2002 illustrates the situation.
Table 8 Share of Real Estate Taxes in relation to total taxes on property
Item
Property tax
Wealth tax
Inheritance and Gift tax
Stamp duty
Contribution
64.3%
11.4%
8.3%
16.1%
Source: Table 7
38
Diagram 4
Share of Property taxes in relation to Taxes on Property
16%
8%
11%
65%
property tax
wealth tax
inh.& gift tax
stamp duty
Source:Table 8
From the above diagram, it can be inferred that the contribution of the property tax to revenue
generation is significant within the real estate sector since it accounts for about two-thirds of
total revenue collected within the sector. This implies that any policies to augment revenues
within the real estate sector must be targeted at property taxes where the potential still exist
for revenue to be increased.
39
CHAPTER SEVEN
DETERMINING THE TAX BASE FOR REVENUE ENHANCEMENT
7.1 Introduction
In order to ensure that there is a constant source of revenue from property tax to either the
central or local government, it is necessary to ensure that the tax base, which is the source of
revenue, is secured and capable of serving as a revenue source in perpetuity.
This implies that there must be a well-structured and functioning land administration system
capable of guaranteeing the security of tenure of land and property. This is established
through the registration of title to land, which guarantees security to land, and for that matter
protects the tax base on which the assessment of taxes depends from litigation.
It is significant to note that the subject of Economics identifies three major factors of
production namely land, labour and capital. Dale and Mclaughin (1999) define Land as “… a
physical thing that encompasses the surface of the earth and all things attached to it both
above and below. It is also an abstract thing that is manifest, as a set of rights to use with a
value that can be traded even though the physical object cannot be moved”.
Labour refers to the workforce used in the production process. Capitals on the other hand are
manmade machinery, which are employed in the production process to generate goods and
service. Furthermore, capital is any financial resource, which is capable of earning periodic
income over a period of time.
Land can be viewed as the earth’s physical surface or as a capital resource capable of
generating further income. Land acts as a capital resource from two main perspectives. The
first example is when undeveloped land is purchased through a contract known as a ground
lease and ground rents paid by the tenant to the landlord periodically. On the other hand land
could be developed into say residential or commercial property and sold or leased for a capital
sum or income in the form of rents over a period of time.
In the above two scenarios land has been transformed into capital and used as a form of
investment. The subject of valuation has come about due to the necessity of determining the
capital or rental value of land and property.
Land provides the bedrock for any activity and Real Property constitute both land and the
buildings or other fixtures and fittings attached to the land. In Sweden Land is divided into
real property units and this forms the basic unit of ownership.
For practical purposes, a distinction is made between land and real estate. The appraisal
institute (2001) notes that land is termed as real estate when other structures such as buildings
are attached to it. However in order for real estate to be transformed into a capital resource, it
is necessary to establish ownership of the property through the process of registration of title.
In this regard Desoto (2000) observes that what prevents poor people from transferring their
properties into a financial resource in the form of loans from financial institutions is that the
40
title to their properties are defective and this prevents them from raising capital out of their
properties. He writes that “because the rights to these possessions are not adequately
documented, these assets cannot be traded outside of narrow local circles where people know
and trust each other, cannot be used as a collateral for a loan, and cannot be used as a share
against an investment”.
A secured title to land implies a higher demand for land and property since ownership can be
easily ascertained and the authenticity of the tax base can be justified from the land or tax
registers. This enables public authorities to generate income through property taxation and
thereby increase the level of social services they provide to the community.
7.2 Valuation Concepts
According to the Appraisal Institute (2001) though concepts such as Price, Cost and Value are
sometimes used interchangeably, they however differ in meaning. It indicates that “price
refers to a sale or transaction price and applies to an exchange; a price is an accomplished
fact. The price represents the amount that a particular purchaser agrees to pay and a particular
seller agrees to accept under the circumstances surrounding the transaction.
On the other hand cost refers to the amount of money spent in construction. It refers to
production rather than an exchange between parties. A related concept is that of value.
Value relates to the estimation of the monetary worth of land and property. There are various
concepts of values such as use value, investment value and forced sale value but the most
important value concept to appraisers is that of Open Market Value.
The Appraisal Institute (2001) further states that the International Valuation Standards
committee Defines Market Value as follows;“…..the estimated amount for which an asset
should exchange on the date of valuation between a willing buyer and a willing seller in an
arms-length transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion”.
7.3 Methods of Valuation.
The basis of most appraisal work is to determine the Open Market Value of Land and
property. The open market value arrived by valuers is based on estimation and may or may
not coincide with the price based on negotiations between a willing seller and a willing buyer.
The Open Market value serves as the basis for the determination of other values such as the
assessment value for property taxation and mortgage values.
There are a number of methods used in real estate valuation to arrive at the Open Market
Value namely the Sales comparison method, the Income capitalization method and the Cost
Method.
41
7.3.1 The Sales Comparison Method
The Sales Comparison method of determining the Open Market Value of a property is based
on the premise that no two properties are identical although they may be similar. In order to
determine the value of a subject property, the method prescribes the selection of similar
properties or comparables in the same location which have recently been sold in the open
market and adjusting for differences between the subject property and the comparables to
arrive at the value of the subject property.
The need for adjustments arises due to differences such as location, legal rights and physical
characteristics. The adjustments in most cases involve the subjectivity of the valuer and as
such the valuer has to rely very much on his skill and experience. (See Appendix 1a)
7.3.2 The Direct Capitalization Method
This method also known as the yield capitalization method is used to determine the value of a
property by examining the property as an investment. The method seeks to advise the investor
on the capital or initial investment he should invest to purchase a property in order to derive
income or rent over a period of time or in perpetuity. In this situation the rent derived from a
property is known and the valuers task is to determine the capital amount, which can purchase
the property and produce the known rent.
The Direct Capitalization method is used to “convert a single year’s income expectation into a
value expectancy”. Appraisal Institute (2001). The capital value of a subject property is
arrived at through the following procedure.
The first step is to calculate the initial yield from comparable properties by dividing income
by the price. Next the Net Operating income from the subject property is estimated by
deducting the operation and maintenance cost as well as property tax from the rent to arrive at
the Net Operating Income. Thereafter the Net operating income from the subject property is
divided by the yield obtained from comparable properties to arrive at the market value for the
subject property. (See Appendix 1b)
7.3.3 Discounted Cash Flow Method
The discounted cash flow method is also an example of the investment approach to valuation
of property. It is based on the concept that value is created by the anticipation of benefits to be
derived in the future. The procedure involves cash flow projections of rents over a period of
time say five or ten years and make allowances for inflation and deducting operational and
maintenance cost as well as property taxes during the period of the projections. The values are
then discounted by an appropriate discount rate.
Thereafter the rent for the period after the lease is also estimated and capitalized using the
Gordon’s formula and discounted to the present value. The values for the term and
reversionary period are then added to arrive at the market value. (See Appendix 1c)
42
7.3.4 The Cost Method
The Appraisal Institute(2001) describes the cost approach to valuation as a “set of procedures
through which a value indication is derived for the fee simple interest (freehold) in a property
by estimating the current cost to construct a reproduction of, or a replacement for, the existing
structure plus any entrepreneurial profit or incentive to arrive at the total cost. Thereafter the
cost of depreciation is subtracted to reflect the condition of the property. To this is added the
open market capital value of the land and other site works. The cost approach to valuation
assumes that cost will be equal to value.
The cost components are made up of direct and indirect cost. Direct cost includes the cost of
labour, construction materials and equipments whilst examples of indirect cost include
professional consultancy fees and administration and marketing cost.
Depreciation on the other hand, is defined by the Appraisal Institute (2001) as “the difference
between the market value of an improvement and its reproduction and replacement cost. It is
normally due to these reasons.
The first is Physical obsolescence, which is also referred to as wear and tear. It arises from the
normal everyday use of the property. On the other hand, functional obsolescence arises as a
result of a defect in the building materials used or the architectural design, which leads to a
reduction in the function of the building. External influences arise from factors, which cannot
be controlled or avoided such as adverse market conditions and natural hazards.
This method is usually used for the valuation of properties which are not normally put up for
sale such as hospitals and religious places of worship. It is also employed in valuation for
insurance purposes where the object is mainly to replace the building in case the property is
destroyed by fire or other natural and manmade disasters.(See Appendix 1d)
7.4 Valuation For Taxation
The aim of any property taxation assessment is to determine the amount to be paid as tax on
the property. The procedure normally involves a three-part approach. The first approach is to
determine the open market capital value or the open market rental value of the Property or tax
base using either of the methods of valuation described above. Thereafter the assessment
value is derived from the open market value of the property. The Appraisal Institute (2001)
defines assessed value as the “value of a property according to the tax rolls in advalorem
taxation. It may be higher or lower than market value or based on an assessment ratio that is a
percentage of market value”. An advalorem tax depends on the value of the property, which
varies from time to time.
The next step is to make any necessary adjustments to the assessment value depending on
statutory regulations. The last step is to apply the tax rate approved by the legal authorities to
arrive at the rate or property tax, which must be paid by the taxpayer. Valuation for taxation is
described as statutory valuation since the calculation of the tax is guided by official rules and
regulations normally passed by the legislature.
The various methods described above are usually used to determine the Open Market value in
order to determine the assessment value for property taxation. However the choice of the
43
appropriate method of valuation depends on the policy objectives upon which the introduction
of the tax was based. In order to determine the tax to be paid the assessment value could be
based on the rental or capital value of the property.
Where the assessment value would be based on rental value then the readily available method
should be the Direct Comparison method since the other methods of valuation normally
provide a capital sum than an annual or rental value. Where the property is owner occupied
the rents passing on comparable properties would be used to assess the rents for the subject
property and making the necessary adjustments to the rent.
Where the object of the assessment is simply to know the value of properties for statutory
purposes such as taxation and the assessment value is based on capital values then the Direct
Comparison approach, the Direct Capitalization method, the Discounted cash flow method or
the Cost method can be adopted. Where the properties are owner occupied and do not produce
any revenue to the landowner and there have been a lot of comparable sales then the method
of valuation to be adopted will be the Direct Comparison approach.
On the other hand where the property is being used for investment purposes, such that there is
an active rental market for both residential and commercial properties then the best way to
arrive at the open market t value is to adopt either the Direct Capitalization method or
Discounted cash flow method.
However in the case where there are no active sales or an investment market in properties
then the cost method of valuation could be adopted to arrive at the Open market value since
the objective of the method is to equate cost to value.
7.5 Determining the tax base for revenue generation
The discourse about the tax base has often woven around whether the tax base should be land
or the improvement on the land. Dunkerly (1983) notes that the main contenders of the tax
base are the total property value, site value and betterment. The relevant issue in the Swedish
cases in terms of revenue generation would be whether the tax base should be changed from
the total property value to taxation of either the site value or the improvement value, which
refers to the development on the buildings.
The tax base on which the tax rate is applied usually varies from country to country. There are
usually four alternatives for consideration in property taxation namely the land, the building
or both the land and building collectively called the property. The purposes for taxing land,
building or the total property could be different.
7.5.1 Land as tax base
The taxation of land to a large extent depends on whether the land is urban land or rural land.
With urban land, due to government provision of infrastructure and excess demand over
supply, the values of such lands tend to rise rapidly.
The main reason is to encourage development and prevent speculation as a land use policy
mechanism by taxing undeveloped land. Dunkerley (1983) reports that in order to encourage
landowners to develop urban lands in certain areas in Taiwan and Chile, a tax on the
44
undeveloped land was introduced. In Jakarta a higher tax rate was imposed on lands, which
did not comply, to the zoning regulations whilst there was a tax on the speculative gains on
land values in the republic of Korea.
On the other hand, Dale and Mclaughlin (1999) reports that Land taxes in rural areas have at
one time or the other been levied on the productive capacity of land in countries such as New
Zealand or South Africa. In New Zealand the objective was to discourage the individual
holding of large units of arable land in 1878.
Dunkerly (1983) notes that theoretical arguments have been put forward in terms of land
taxation but there is yet substantial proof to indicate the benefits to be gained from taxing only
the land value. However he notes that a change to land taxation can be justified on equity
grounds where the high-income earners are the landowners and the taxes are aimed at
distribution of land by making the rich release some of their land holdings.
Additionally, it is noted that where land has a residual value such that the value of the land is
higher than the building as occurs in many peri-urban areas then taxing land would yield
higher revenues than taxing property.
7.5.2 Building as tax base
On the other hand the tax base could be on the building and the advantage is that since
buildings are more conspicuous than undeveloped sites and buildings are almost always
identified, it is easier to identify the owner of a building for tax payment than the owner of
undeveloped land. However the drawback with taxation of buildings is that it discourages
investment in owner occupied properties since the payment of taxes could become a cost
burden on the owner particularly those who later on retire and have no regular source of
income.
7.5.3 Total Property(Land and Building) as tax base
On the contrary, a tax on the total value of the property would necessarily generate higher
income than a tax which was only levied on the site value or improvement value assuming the
tax rate were the same. Taxing the total property also satisfies the definition of real estate as
land and the building on the land
In Sweden, property taxes are levied on the assessment value of the total property defined by
75% of market value two years previously and for that matter the tax base constitute both the
land and the improvements on the land and the tax is to be paid by the owner of the property.
7.5.4 Betterment as a tax base
This refers to increases in land values resulting from the provision of infrastructure or other
services such as roads, street lightning or police service by the central or local government.
Even though annual property tax payments aim at creaming off betterment, the property tax
cannot always provide means of financing investment or recouping the cost of investment. At
times the tax authorities find it necessary to charge a one-off payment for specific projects,
45
which are usually treated as a separate charge and distinct or additional to the usual property
tax.
This is so because since the tax rates on assessment values are small, they cannot pay off large
public investments at once. In such a situation, Dunkerley (1983) indicates that the tax base is
the increase in land or total value before the project is undertaken and the value of the project
after the expenditures have been incurred .In order to determine the betterment tax to be
levied on house owners, the comparative approach method is preferred for determining the
value of the properties before the infrastructure project and after the infrastructure project.
However the issue to be examined is whether all the betterment value needs to be creamed off
as tax or a percentage of it. It will be unfair to property owners for tax authorities to assume
that all the betterment value is a result of public investment since landlords’ activities on the
properties such as periodic repairs and maintenance of the property also leads to increase in
values as well. However it is acknowledged that location upgrading as a result of public
investments within the locality are likely to influence values more than improvements in the
individual characteristic of the property. A tax rate of 50% to 75% of the betterment tax is
considered to be appropriate for creaming off betterment.
The studies conducted by Macon and Merino Manon(1979) on betterment levies in Latin
America revealed the problems associated with determining the area benefited by the public
investment, determining the total betterment to be recovered and how to divide the levy
among benefited properties.
Alternatively if a public activity leads to a reduction in land values should the local authority
compensate landowners? However the response to this lies in the fact that an activity, which
leads to reduction in land values, would result in residents paying reduced annual property
taxes since it will lead to the reduction of the assessment value.
For a betterment tax to be effective, it implies that the tax must be applied to a specific area or
a locality. This can be most effective in a situation where the local authority collects and uses
the tax. In such a situation the local Authority can justify the collection of the tax based on the
betterment since the local investment, which brought about the increase must be creamed off
so that further investments can be made in the locality.
It is worthy of note that it is difficult to identify all properties affected by betterment value
and litigation may occur if not well managed. As an example certain areas may be included in
a betterment tax simply because the investment such as a road may bypass their properties yet
the values of such properties may not appreciate much. On the contrary, the effect of an
investment may result in a spill over to other properties who experience increased values yet
may be excluded from the list of benefited properties because the infrastructure such as a road
does not bypass their properties.
Yet another problem is that the values of properties must be known immediately before the
investment and immediately after. This could make the cost of assessment very expensive.
46
7. 6 The California Assessment Example
The California model calculates the open market value for assessment value based on the date
of acquisition or construction of the property. Subsequently as the years go by the assessed
value of the property cannot be increased by more than 2% per annum and the maximum tax
rate is also pegged at 1%. However when the property is sold it is reassessed at current market
value for the new buyer for that particular year alone. As long as the new buyer retains
ownership, there is no reassessment but the value is only adjusted by 2% yearly.
The main advantage of this model is that property owners who purchase similar property at
the same time pay similar taxes. Moreover since the acquisition value, growth rate and tax
rate are fixed, local authorities can calculate with certainty the revenue to be derived for a
period of time. Thus it is easier to assess how a project can be financed.
The main drawback to the model is that similar property within the same locality pay different
taxes for the same services due to differences in the date of acquisition. Furthermore this
model is likely to result in decreased revenues to the local authority since the assessment
value would depend on market values, which are outdated. Additionally, since the rate of
indexation is constant, it means that there is no room to adjust for variation if the rate of
inflation happens to be higher the rate of indexation.
The similarity to some extent between the California model and the Swedish model is that in
both cases the assessment value is not the current prevailing open market value. Whilst in the
Swedish case the open market value applicable is 75% of the value two years earlier, the date
of valuation may be longer in the California model since the open market value is deferred to
the date of acquisition.
7.7 The Current property taxation process in Sweden
The present situation as regards the property tax is that the assessment value is based on 75%
of the market value of the property two years prior to the date of assessment. It is calculated
on the total property, which includes both the land and the buildings, and the tax is to be paid
by the owner of the property. This implies that the market values for properties in 2003
would be based on the values of properties in 2001.The base values for year 2001 are then
indexed by an appropriate factor upwards to account for inflationary increase between year
2001 and 2003. (See appendix 1e)
7.7.1 Observations on the Determination of the Taxbase.
It must be observed that the starting point in the determination of the property tax to be paid
by the property owner is the calculation of the Open Market value of the property. However a
critical factor, which affects the determination of the open market value, is the existence of
regulated rents on residential properties. This leads to a situation whereby contract rents are
constantly below what should be obtained in the open market.
The effect of this is to produce lower assessment values and a reduction in revenue collected
by government .If the rent regulation was non-existent, then higher revenues would be derived
from higher assessment values, which are based on the open market value. The valuation
method such as the Direct Capitalization Method and the discounted cash flow method are
dependent on multiplying rents by an appropriate capitalization rate or discounting factor to
47
produce the required value. As such if the rents are subsidized the capital values produced
would also be subsidized values.
7.7.2 Issues For Consideration
The method of valuation adopted for residential and commercial properties as noted earlier is
the comparative approach as well as the yield capitalization method where the adoption of the
comparable method is impracticable. The Cost Method is adopted in the case of properties,
which are not readily sold on the market.
It is noted that there should be a direct relationship between the comparative method and the
yield capitalization method in the sense that the value of a property just sold should equate to
the capitalized rent from that property at an appropriate yield.
The observations based on the rental and price determination in the property market suggest
that the rents and prices derived from commercial transactions are realistic since prices are
arrived at through the direct interplay between demand and supply. Thus for commercial
properties, the open market value of the tax base should produce the same or similar value if
the rents are capitalized through the yield method or a direct sale is effected on the open
market. The tax authorities can expect to collect about the same revenue since the value of the
tax base does not vary substantially with the different methods of valuation and as such there
should not be a substantial decrease in revenue due to the method of valuation applied.
However the residential market poses a different scenario because of the existence of
regulated rents. According to the publication by the Swedish Association of Tenants
“Hyresgästföreningen”(2003) there are 1,600,000 rental dwellings out of which 860,000 are
owned by Municipal housing companies and 710,000 owned by private Companies and
individuals.
The Rent Negotiation Act of 1978 repealed the Rent control Act of 1948. The Rent
Negotiation Act allows tenant associations to negotiate rents with landlords based on what is
termed the prime cost principle. This implies that municipal housing companies are supposed
to operate without profits or interest and as such the rents are supposed to defray only the
annual expenditures of the Municipal Housing Companies. This principle also extends to the
private sector since rents operating must be similar to comparable dwellings owned by the
Municipal Housing companies.
The Comparative Method and the Direct Capitalization method could have been the most
appropriate in determining the capital value since most apartments are being used for
investment purposes. Furthermore it constitutes direct evidence of rents being charged on the
properties. However the regulated nature of the rents possibly implies that the value of the
capitalized regulated rent would be lower than the open market value in a deregulated market.
This leads to lower revenue from apartments arising from the regulated rent structure as well
as the method of Valuation adopted
48
7.7.3 The Case for Cost Method
In view of the regulated nature of the apartment rental market, in order to come out with a
market value, which is not subsidized, the cost method is considered appropriate since it is not
dependent on rents. Therefore in arriving at the capital value the cost method could be
applicable for the valuation of residential apartments since under the current system of rent
regulation, rents are not entirely dependent on location which is a crucial factor in the choice
of rents of the property, but rather on age and condition and as such it distorts capital values.
However it must be noted the construction cost is not affected by location and as such
location difference does not distort market values when the cost method is adopted.
According to Andersson and Söderberg(2000) a political weapon used to ensure that low
income people had access to housing in the inner part of Stockholm and to avoid segregation
between the rich and the poor was the combined policy of rent controls and subsidized
housing.
However the practice of providing subsidies to public housing companies to construct houses
could not be sustained and immediately the subsidies provided to developers were halted the
construction stopped. The situation currently is such that though construction subsidies for
developers have been removed, regulated rents continue to persist.
Thus the situation now is that construction costs from apartment blocks reflect actual market
cost whilst rent and sale prices derived from rent capitalization continue to lag behind open
market values for apartment blocks. In such a situation the adoption of the cost method of
valuation would produce assessment values closer to “free”open market values. Even though
valuation principles normally do not advocate for the adoption of the cost method where there
is an active investment market, in this situation the rent controls have defeated the purpose.
Furthermore the main objective of property taxation is to generate revenue and therefore the
comparison and the yield methods become less relevant when it can be proven that the cost
method is capable of providing higher revenues for residential apartment .
The two components involved in the cost method are the price of land and the cost of
construction of the building. The capital values of these variables can be determined without
the reliance on rents. Land values can be derived from comparable sales in the market whilst
the total cost of construction is derived based on the cost for materials, labour and other
indirect cost. The summation of the land price and the cost of construction form the open
market value from which the base value can be derived. The tax rate is applied to produce the
property tax to be paid.
The advantage of the Cost method is that it is a relatively easier and does not require
extensive technical expertise. As such it can be carried out with the minimum training of
middle level manpower.
Below is an example to indicate that given the existence of regulated rents on municipal
residential apartments, the cost method should produce a higher capital value on a given
property in a locality than the Direct capitalization method. This example is based on data
derived from the open market in Stockholm
49
Table 15 Illustration using the Cost method based on market data.
Cost of Building in square metres (sqm)
Floor Space per apartment
Construction Cost per square metre
Cost of building
80sqm.
20,000sek per sqm
20,000x80
1,600,000sek.
80,000
1,680,000
168,000
1,680,000-168,000
1,512,000
Entrepreneurial profit at 5%
Total Cost
Less depreciation@ 10%
Depreciated cost of building
Site value in square metres
Approxm area of apportioned site
(out of total land area) per apartment
Site value per square meter
Price of land
30sqm
10,000sek per sqm
10,000x30sqm
300,000sek
Value estimate
1512,000+300,000
1,812,000sek
The above example is based on the total property (land and building) .As a result a tax base,
which excludes the land value, would produce a lower tax base. However in order to achieve
a higher revenue the tax rate can be increased. If for example the tax rate for calculating the
construction cost based on total property value is 1%, then a tax base that excludes the value
of the land could be fixed at 10%.
The example below illustrates the situation when regulated rents are used to calculate the
capital value of property through the Direct Capitalization method.
50
Table 16 Example using the Direct Capitalization Method to capitalize regulated rents
derived from the open market
Floor Space
Regulated Rent
80sqm
750Sek per sqm
750x80
60,000sek
80 Sek per sqm
80x80
6400
60,000sek-6400Sek
53,600Sek
0.04
53,600
0.04
1,340,000Sek
Operation and Maintenance cost
Net Operating Income
Yield
Capital value
The above table results in a lower capital value when regulated rents are used and illustrates
the possible superiority of the cost method when rents are regulated and construction
subsidies are non-existent.
The current trend whereby tenant associations buy the rented premises from the landlords
thereby converting them to condominiums has tended to produce market values, which are not
related to the capitalized rents in the events of sale.
This implies that the tenants in order to convince the owners to relinquish the current lease
contract, which has not expired, would have to pay the owners a premium equivalent to the
value of the unexpired lease duration of the contract as a first option. Thereafter the tenants
must then pay the value of the capitalized regulated rent. The summation of the premium and
the capitalized regulated rent should result in the open market capital value to be paid by the
tenants. Having established an appropriate open market capital value devoid of the influence
of regulated rents, subsequent sale transactions would also be on the basis of the open market
capital values.
The issue at stake is then what method of valuation should be used to determine the open
market value for assessment for tax purposes for tenant owned apartments. In this situation
since the tenant-owned apartments are being sold freehold at their open market capital values,
the comparative method would be ideal method for the determination of the market value for
the purposes of assessment.
In the case of owner occupied single-family houses since the properties are not dependent on
rents the value of the tax base can be determined through sale values based on the direct
comparative sales method.
51
The above analysis points to three categories of relationship within the residential property
apartment market.
The first situation is that where the buildings are residential apartments and the rents are
regulated, then the cost method appears to provide a higher open market capital value for
assessment purposes than the Direct Capitalization method.
In the second case, where the apartments are tenant owned, then maximum revenue should be
derived through the usage of the comparative approach to determine the open market value.
The third situation refers to single-family owner occupied properties. In this case also since
capital values do not depend on rents, the comparative approach to determine the open market
value should result in higher revenues.
The peculiar nature of the Swedish property market implies that different revenue generation
options should apply to the different situations. It is therefore important for tax administrators
to consistently appraise the strengths and weaknesses of various property sectors .As it stands
now, there is virtually no growth in rental apartment and innovative means of revenue
generation would have to be devised in order to improve revenues from such properties.
52
CHAPTER EIGHT
FINDINGS, RECOMMENDATIONS AND CONCLUSION
8.1 Summary of Findings
The study examined the canons of taxation as proposed by Adam Smith and noted the
relevance of the criteria of convenience, certainty, cost of collection and equity to taxation. In
this regard it was observed that the issues most relevant to any local tax were that of
immobility, visibility of the tax base, revenue maximization, local benefits and the ease of
administration.
Furthermore there was mixed reaction on the relevance of property taxes by the Political
Parties. Whilst the Social democrats appear to be in support of the property taxes, the
Conservatives were against it. An issue worth noting was that by the Centre Party which
though found the property tax to be unjust all the same recognized that it provided a
substantial form of revenue which any party could not do away with. This was buttressed by
the Social Democratic Party, which indicated that the revenue realized from property taxation
was essential to national development since it was sufficient to take care of the expenditure on
child support.
The study also provided information on the functions of the Municipalities. These functions
included the provision of education, care of the elderly and disabled and provision of water
and sewerage services. Also the main sources of finance for Swedish municipalities were a
combination of user fees and local income taxes as well as central government grants. Unlike
most other countries where the property tax is collected by the local Authority and utilized by
them, the situation is different in Sweden since the property tax forms part of the state
revenue.
Additionally, an insight into the property tax machinery in Sweden was provided as well as
the procedures involved in the tax assessment. There were two main procedures of assessment
namely a general assessment and a special assessment. The tax rate for one and two family
houses as well as commercial buildings is 1% of the assessment value, whilst that for
apartments is 0.5% of assessment value. In the case of taxes on real estate which includes
property tax, wealth tax, inheritance and Gift tax and stamp duty, it came to light that the
property tax contributes the most to the national coffers since it contributes about 65% of the
total revenue from taxes on real estate. The issue of weather the property tax should continue
to be a state or local tax was found to be a contentious one since both options appear to be
meritorious
Finally as regards the important issue of a tax base it was discovered that there were four main
options namely the land, building, land and building (total property) and betterment.
Furthermore there were four traditional methods to determine the open market value namely
the Sales Comparison Method, the Direct Capitalization Method, the Discounted Cash Flow
Method and the Cost Method. Moreover it was discovered that an alternative view, which was
applicable in California in the United States of America, was to base the valuation not on the
current open market value but rather the value at the time of acquisition or new construction.
53
It was found that the method used for the valuation of one and two family houses was the
Sales comparison Method and the Direct capitalization Method whilst the Cost method was
adopted for industrial properties. However with hypothetical examples and data collected
from the real estate market, it was illustrated that taken cognisance of the existence of
regulated rents on the residential apartments market, it appears more beneficial in terms of
revenue generation to apply the cost method in the valuation of rented residential units since
the cost method was not dependent on rents.
8.2 Recommendations.
Firstly, it is also proposed that the local authority be authorized to levy one-off betterment
taxes from property owners to finance immediate and pressing infrastructure projects since
the property tax per-se is incapable of financing large scale projects since they are collected in
small quantities. In the Swedish case where municipalities are required to balance their
budgets, a betterment tax may enable local authorities to recoup their cost of investment. In
such a situation the property tax for that particular year could be reduced substantially. Also,
since the property tax is now a state tax, the collection and utilization of the betterment tax
should be the responsibility of the municipalities since they will be in a best position to
identify properties, which have benefited from public services provided due to their local
knowledge.
Secondly, the issue of whether the property tax should continue to be a state tax or should be
localized cannot be given a clear-cut answer. It is recognized that both the central government
and the local government have important roles to play in order to implement the social
welfare programme. As it stands now the state contributes to local government finance and if
the tax should revert to the local authority, the state may intend reduce its contribution to local
government finance. This implies that the impact of property tax going to local authorities
may not be felt at all. The decision should therefore be a matter for each political party to
decide.
Thirdly, in line with the findings of the study, it is proposed that the Cost method of Valuation
must be considered as a possible alternative to the other methods of valuation to determine the
open market value for residential rental apartments for property tax assessment purposes. This
as illustrated, would enable the state derive the maximum revenue possible from rental
residential properties since the cost method should not be affected by decreasing revenues
arising from regulated rents.
However with condominiums and single family houses it is suggested that the present system
of valuation through the sales comparison approach and alternative yield capitalization should
offer the maximum revenue possible and be maintained for the calculation of open market
values.
Fourthly, the present mode of a tax base of both the land and property appears to be in the
right direction since it yields higher values than if only the land was applied or the building
was applied. However the adoption of the total value must also imply a low tax rate as
currently operating so that the tax does not become unbearable to all categories of taxpayers.
Fifthly, since the Swedish welfare programme demands a high level of public expenditure it is
difficult to envisage whether the property tax can be dispensed with in the near future
considering its contribution to the national treasury. Consequently, a mechanism would have
54
to be put in place to alleviate the suffering of vulnerable groups such as pensioners who are
badly affected by rising levels in property taxes. It therefore becomes necessary to identify the
properties of such vulnerable groups and apply the California model of assessment, which
relates the valuation date to the date of acquisition. This will ensure that such vulnerable
groups do not suffer unduly from appreciation in property values.
Lastly, it is envisaged that in the long run, the potential for revenue generation lies in the total
deregulation of the rent control system as suggested by Andersson and Soderberg (2002). A
total deregulation would ensure that enough revenue is derived from rental properties to allow
for profit. This would be an incentive for developers to enter the rental market where there is
acute shortage. The effect is that it would also widen the tax base and to increase the revenue
from property taxes since more properties will enter the residential apartment market.
Additionally, it will allow open market valuations to be carried out through the direct
capitalization approach and the discounted cash flow methods, which ultimately is the best
method for the assessment of the capital values of rented properties.
8.3 Concluding Remarks
This thesis has sought to show to a certain extent the linkage between the tax base, the method
of valuation and revenue generation. It is reckoned that the driving force of any economy
depends on its ability to raise revenues from taxes and importantly for a country such as
Sweden where the welfare programme demands a high level of public expenditure.
The Swedish case has shown the importance of the property tax to revenue mobilization. As
the function of all levels of government continue to increase arising out of the huge task
required to be performed by the public sector, it becomes important for the central and local
government Authorities to formulate pragmatic policies and programmes which will increase
revenue to the national treasury.
In this regard, it is hoped that the adoption of the recommendations would in one way or the
other help to augment revenues from property taxes and thereby increase the portion of the
contribution of the property tax to the revenue profile of Sweden.
55
References
Andersson R & Söderberg B, 2002, Deregulation of the Swedish Rental Market for Housing.
Why and How?
Appraisal Institute, 2001,The Appraisal of Real Estate. Appraisal Institute, Chicago.
Bradfied R, 2000,The Constitution of Sweden (revised translation).
Dale P &McLaughlin J, 1999, Land Administration. Oxford University Press, New York.
De Soto , 2000, The Mystery of Capital. Basic Books, New York.
Dillinger W, 1994, Decentralization and its implications for urban development. The World
Bank, Washington.
Dunkenley B H, 1983,Urban Land Policy, Issues and Opportunities. Oxford University Press,
New York.
Ellis C B,2003, Nordic Countries Office Properties.
Harrisson, Smith and Davies, 1992, An Introductory Economics. Macmillan Press, London.
International Association of Assessing Officers, 1997,Standard on Property tax policy,
Chicago.
Kjellson B,1994, Computer Assisted Valuation in Sweden.
Lantmäteriverket , (1998),Swedish and Cadastral Legislation, KTH
Högskoletryckeriet,Stockholm.
Lundström S, 2003, Real Estate in Urban Context (Lecture notes).
Macon J and Manon M, 1975, Betterment levies in Latin America, Inter American
Development Bank, Washington.
Miller L K, 2002 Advantages and Disadvantages of Local Government
Decentralization: Georgetown Guyana June 25 to 28, 2002(Seminar).
Ministry of Public Administration-Ds1992: 110,The Swedish Local Government Act.
Newsec, 2003, Nordic Report
Organization for Economic Co-operation and Development , 1983, Taxes on immovable
property. OECD, Paris.
Organization for Economic Co-operation and Development 1991, Urban Infrastructure:
Finance and management. OECD, Paris,
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Owens J &.Panella G, 1991, Local Government: An International Perspective.Elsevier
Science Publishers, Amsterdam, Netherlands.
Regeringsksnsliet, 2003,Local Government Finance.
Regeringsksnsliet, 2003,Municipalities and County Council in Sweden.
Regeringsksnsliet, 2003, Sweden’s Economy (Budget Bill 2004).
Riksskatteverket,2003, Taxes in Sweden.
Stiglitz & Drifill, (2000), Economics, Norton and Company, Newyork,Macmillan Press Ltd,
London.
Sundquist A, 2003, Real Property Assessment in Sweden.
Sundquist A, 2003, The use of tax values in Sweden.
Swedish Government Offices Article no.98.057, (2003), Municipalities and County Councils
in Sweden.
Svenska Kommunföfbundet, 2003, Levels of Local Democracy.
Vlassenko I, 2001, Land and Property Taxation: Development, Evaluation and Perspectives.
Royal Institute of Technology, Stockholm.
Www.medievalgeneology.org.uk, (2003-10-12), Public Records, 2003, Doomsday Book.
Www.svekom.se, (2003-08-2), About the Swedish Municipalities
Www.sweden.se, (2003-07-21), Government and Politics.
Www.riksdagen.se, (2003-08-10), The Riksdag at work.
Www.regeringen.se (2003-8-10), Ministry of Finance
Www.hjta.org/content/ARC00024A_Prop13.htm(2003-11-5), California model of property
taxes
57
APPENDIX 1
1.A. EXAMPLE OF SALES COMPARISON APPROACH
In the simplest form of the Comparative Analysis as an example, if a comparable property in a
first class neighbourhood with a floor space of 500sq m has recently been sold for
500,000sek, then a subject property with similar features except a smaller floor area of
300sqm can be expected to command a value of about 300,000sek.
1.B EXAMPLE OF DIRECT CAPITALIZATION METHOD
The following example illustrates the calculation of the capital value from the Direct
Capitalization method of valuation based on the following assumptions.
Assumptions:
Net operating income (NOI) of Comparable
Price of the comparable property
NOI of the subject property
50,000sek
1,000,000sek
45,000 Sek
Hypothetical illustration of Direct Capitalization Method of Valuation
Assumptions
Net Operating Income of comparable Property
Price of Comparable Property
Yield
50,000sek
1,000,000sek
NOI
Price
50,000
1000,000
0.05 (5%)
Calculation
The market value of the subject property
NOI (of subject property)
Yield
45,000
0.05
900,000sek
58
1 C EXAMPLE OF DISCOUNTED CASH FLOW METHOD
An illustration of the calculation of the capital value using the Discounted Cash flow method
is provided in the hypothetical example below based on the following assumptions.
Inflation rate
Discount rate
Exit yield
Growth rate for all cash flow variables
2%
8%
6%
4%
Hypothetical illustration of Discounted cash flow method
Year
2003
2004
2005
2006
2007
Rents
500,000
520,000
540800
562432
584929
Operation & 100,000
Maintenance
Property Tax 50,000
104,000
108,160
112486
116,985
52,000
54080
56243
58492
Net
Operating
Income
Discounted
NOI
350,000
364000
378,560
398703
414651
324074
312071
300516
293058
282204
Residual
Value
6910850
Discounted
Residual
Value
Market Value
5474040
6703759
The above Table indicates that the operational and maintenance cost as well as property taxes
are deducted from rents in order to arrive at the net operating income. Without property taxes
the Net operating income would be higher and therefore when capitalized would produced a
higher market value as shown below based on assumptions in the above table.
59
Hypothetical Illustration of Discounted Cash Flow method without Property taxes
Year
2003
2004
2005
2006
2007
Net
Operating
Income
Discounted
NOI
400,000
416,000
432640
449946
467944
370370
363350
353163
330723
318474
Residual
Value
7799066
Discounted
Residual
Value
Market Value
5732546
7150152
The example shows that when property taxes are not deducted the market value is higher. In
the example the market value increases from 6,703,759sek to 7,150,152sek due to the absence
of property taxes. This example clarifies the earlier assertion that the absence of property
taxes tends to increase the market values of properties. Consequently the abolition of property
taxes would lead to an increase in the amount paid as Capital Gains Tax.
1D EXAMPLE OF THE COST METHOD
Table 11 Hypothetical Illustration of the Cost Method of Valuation for a residential property
Assumptions
Cost of Building in square metres (sqm)
Floor Space
Construction Cost per square metre
Cost of building
750sqm.
10,000sek
10,000x750
7,500,000sek.
375000
7,875,000
787500
7875000-787500
7,087,500
Entrepreneurial profit at 5%
Total Cost
Less depreciation@ 10%
Depreciated cost of building
60
Site value in square metres
Area of Site
Rate per square meter
1000sqm
10,000sek per sqm
Price of land
10000x1000
10,000,000sek
Value estimate
7,087,500+10,000,000
17,087,500Sek
1E EXAMPLE OF BETTERMENT TAX
Two ways in which the betterment tax can be calculated are described below.
Table 12 Hypothetical Illustration of a betterment tax
Assumptions
Value of all properties before infrastructure project 10,000,000 sek
Value after infrastructure Project
50,000,000sek
Betterment Value
50,000,000sek-10, 000,000sek
40,000,000
Total number of benefited Properties
40
Betterment value per property
40,000,000/40
1000,000sek
The problem of the above example is that it assumes that all properties would benefit equally
from the investment. However this is not the case since even adjacent properties may be
affected differently in terms of public investment. Another option would be to value each
individual property before the investment and after the investment and the difference would
be the betterment to be creamed off. An example is provided below.
61
Table 13 Another example of calculation of betterment value on a single property
Assumptions
Value of individual property before public investment
Value of property after public investment
Betterment value on particular property
1,000,000sek
I, 500,000sek
1,500,000sek-1, 000,000sek
500,000sek
In Table 13 the betterment values are calculated on each individual property and the tax to be
paid is based on the betterment value of each single property separately.
1.F CALCULATION OF THE PROPERTY TAX
Table 14. Hypothetical illustration of the calculation of Property tax for year 2003
Assumptions
Type of area
Residential site
Residential Building
Total
Base Value 2001
500,000
1,500,000
2,000,000
Increase factor 2003
1.5
1.5
Tax rate
0.5%
0.5%
Tax rate
0.5%
0.5%
Amount
3750
7500
11,250
Calculation of Tax Paid
Type of area
Base Value in 2003
Residential Site
750,000
Residential building 1,500,000
Property Tax
62
APPENDIX 2
QUESTIONS DIRECTED TO OFFICIALS OF THE ASSOCIATION OF LOCAL
AUTHORITIES
Infrastructure Finance
1. What are the problems you encounter in the management of local infrastructure?
2. Generally, do you think you perform too many functions?
3. Which of the functions would you like to be removed and on which do you incur the
most expenditure.
4. Is revenue derived from various sources capable of financing local infrastructure?
5. Can the Municipalities finance their infrastructure projects without State support?
6. Does the municipalities own any housing units?
7. Does the Municipality pay any property tax if it owns these housing units?
Contribution of Property Taxes
8. What is the tax rate for different types of properties?
9. Do you think the tax rates should vary amongst municipalities based on the
availability of infrastructure?
10. What has been the contribution of property tax to government revenue over the last ten
years?
11. Do you think the revenue collected from Property taxes is sufficient?
12. What is the level of default in the payment of Property taxes
13. What can be done to increase revenue from Property taxes?
14. Do you think there is the need to redefine the tax base or method of valuation so as to
enhance revenue mobilization?
63
State or Local Property Taxes
15. Do you want the Property tax to be a State or a Municipalities tax?
16. What are the advantages of the State receiving Property Taxes?
17. What are the disadvantages in the State receiving Property taxes?
18. What will be the benefits if the Property taxes are received and used by the
Municipalities?
19. What will be the disadvantages of the Municipalities receiving Property tax?
Policy Issues
20. What is the purpose of equalization?
21. Do you think it is a good system?
22. Does equalization stifle initiative on the part of Municipalities?
23. Would you like a system without equalization and why?
24. Do you think the property tax is a regressive tax and why?
25. What measures are in place to support the poorer members of society who cannot
afford the Property tax?
64
QUESTIONS DIRECTED TO OFFICIALS OF THE NATIONAL TAX AUTHORITY
Organization Set up
1. What are the various institutions involved in the assessment process?
2. What are the difference in roles between the National Tax Office and the National
Land Survey?
3. Why is it necessary to separate the two roles?
Method of Assessment Procedure
4. What information is contained in the Property tax register?
5. What is the basis and method of valuation for taxation?
6. Do you think there is a need to change the tax base and/or the method of valuation?
7. Would such a change lead to increased revenue for the Municipalities?
8. To what extent is computer assisted Mass appraisal used in the assessment process?
9. How useful is it as a tool for Property valuation
10. Is any aspect of the assessment and collection of Property taxes outsourced?
11.If yes is the outsourcing to Public or Private companies?
12.Is the tax office satisfied with the quality of outsourced work?
Cost Of Assessment
13.What is the cost involved in the assessment process?
14.What is the percentage of the cost in relation to the total revenue?
15.Do you think the cost involved is large and what can be done to reduce the
administrative cost.
65
QUESTIONS ADDRESSED TO POLITICAL PARTIES IN SWEDEN
1.Does your Party support property taxation?
2.Why do you want the property tax to be retained or abolished?
3. If it is retained do you expect any changes to be made to it?
4. If abolished what is your alternative to the property tax?
5. Do you think the Property tax is regressive?
6.Do you think the property tax should be a state or local tax?
7. Do you think there are too many taxes on property?
8. Do you think it is a disincentive to home ownership and investment?
66
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