Evidence is mounting that Germany's municipalities and local authorities are looking to pad their coffers with increasing revenue from the Grundsteuer, or local property tax, even in advance of the property tax reforms that are due to come into effect in 2025.
The principle behind the property tax reform was that overall the level of tax raised would remain at previous levels, but would be higher or lower depending on each individual situation. Some would pay less, some would pay more, after all 36 million properties in the country had been fully assessed for a more updated apportionment - or at least that was what the government promised.
But a recent study by consulting firm EY has shown that more and more municipalities have been actually raising their property tax rates in advance of the reformed assessment. The reason: they are suffering from cost increases in their expenditure, such as housing refugees, increased spending on childcare and healthcare, and higher energy prices, along with high wage settlements for employees and civil servants. These costs are being passed on to local property owners. The property tax is the most important source of revenue to local authorities to finance these expenditures.
The then Finance Minister and now Chancellor Olaf Scholz made it a fiscal - and subsequent electoral campaign - pledge that Germany's federal states, as well as their top municipal associations, would not increase property tax revenues beyond the then current level. But data from the Federal Statistics Office shows that property tax revenue for municipalities rose from €14.21 to €15.28 billion between 2018 and 2022. An increase of over one billion euros.
This new level is likely to be used as the basis for the government's new revenue-neutral policy when the new individual assessments are announced in advance of 2025. But in the meantime cities and municipalities are pushing through their own local tax increases to fund extra spending, in a sleight-of-hand maneuver that will enable them to say that this has nothing to do with the property tax reform.
It's a canny scheme to help federal states put a gloss on their so-called transparency registers, which identifies the assessment rates which municipalities will choose to ensure their 'revenue neutrality'.
The adjustment of property tax revenues is based on the 'assessment rate'. The assessment rate is the factor by which the (now completely outdated) property value previously determined by the tax office is multiplied to calculate the tax liability of the individual property owner. These were based on property values last assessed in 1935, in the case of eastern Germany, and 1964, in the case of western Germany.
For example, in 2022, the average assessment rate in Germany was 391%. The highest rate is the municipality of Lorch in the Rheingau in Hesse with 1050%, while Kefenrod in Hesse saw the strongest increase, from 397% to 850%. However, there were also a few municipalities that lowered their assessment rates, most notably Friedrichsgraben in Schleswig-Holstein, where the assessment rate fell from 350% to 0%.
In Germany's complicated municipal financial equalisation scheme, whereby richer states pay more into the kitty to support weaker states to ensure a levelling of living standards across the country, it helps for municipalities not to allow their tax rates to fall below a certain level, hence the wide level of assessment rate rises nationwide.
Dr. Heinrich Fleischer, Partner, EY Deutschland
The property value, along with the assessment rate, both play a role in calculating the actual property tax payable by property owners, which is set independently by cities and municipalities. It applies to both developed and developable land and is paid by owners, who can apportion a certain amount of the burden on to their tenants. The proportion of local authorities who actually increased their assessment rate in 2022 was 12.6% in North-Rhine Westphalia, the highest state, followed by Saarland and Rhineland-Palatinate. Those least likely to increase their rates over the last years were Saxony-Anhalt, Saxony and Thuringia.
EY's property expert Dr. Heinrich Fleischer said he clearly observed a nationwide trend towards increasingly higher property tax assessment rates, as local municipality budgets come under ever-heavier pressure. It's another factor creating uncertainty in the housing industry, raising costs for both owners and tenants. Without a lowering of these assessment rates, fears of further increases in the burden of housing are well founded, he said.
