Local real estate taxes face ceiling

EIGHT months after giving municipalities complete freedom last year to levy local taxes, the state wants to install a ceiling on annual real estate taxes. Local businesses claim that unrealistic real estate tax hikes have been crippling their operations.

EIGHT months after giving municipalities complete freedom last year to levy local taxes, the state wants to install a ceiling on annual real estate taxes. Local businesses claim that unrealistic real estate tax hikes have been crippling their operations.

The Finance Ministry prepared an amendment to the law on local taxation and waste management, hoping to prevent inappropriate increases in real estate taxes.

According to the amendment, the maximum real estate tax rate that a municipality can levy against a certain group of taxpayers cannot exceed 20 times the lowest real estate tax rate charged to another group.

"The ministry confirmed that, in several cases, the absence of tax regulation led to a dramatic increase in the tax burden on certain groups, mostly businesses," Finance Minister Ivan Mikloš said.

Mikloš is working with the Association of Towns and Villages of Slovakia (ZMOS) and local businesses to help improve the business environment in Slovakia, the ministry said.

The cabinet passed the amendment in late August. Once approved by parliament, it should take effect in early December of 2005.

Although the amendment pleased the business community, the ZMOS is not entirely aligned with the ministry's proposal.

"The proposal to set an upper limit on real estate taxes did not appear in the original draft amendment. It was inserted only after the cabinet's review," ZMOS spokesperson Oĺga Gáfriková told The Slovak Spectator.

To the question of whether a tax ceiling goes against the spirit of fiscal decentralization, Gáfriková responded by saying that decentralization was "built on the principle that municipalities would decide on a tax rate based on local conditions".

The vast majority of municipalities have not elevated taxes inappropriately, according to Gáfriková, but there are exceptions. "If increasing taxes five times the previous year's rate is unacceptable, then 13 of 2,900 municipalities have done so," she said.

ZMOS is uncertain whether setting a ceiling on annual real estate taxes and intervening into municipal autonomy, which is one of the main principles of decentralization, is a good idea before the first year of decentralization is wrapped up and analyzed.

"We assume the amendment will address particular cases [municipalities that dramatically elevated taxes.] But a question remains over whether the law should alter general rules and principles or rather treat concrete situations," she told the Spectator.

The cabinet appointee for fiscal reform, Viktor Ňižńanský, said that the ministry's draft revision does not contradict the principle of decentralization.

"The revision, in fact, creates a relationship between the highest level of real estate taxes and the lowest. In other words, there is neither a ceiling for the highest levels nor a limit for the lowest, but they are proportional to each other. This ensures that taxes imposed on certain groups are not inappropriately high compared to taxes levied on others," Ňižńanský told The Slovak Spectator.

The cabinet appointee explained that if the municipality defines the lowest real estate tax rate at Sk5 per square metre for a family house, it can at the most impose a utility company with twenty times that rate, or Sk100 per square metre.

"If the municipality wants to increase taxes for businesses to Sk200 per square metre, it must increase the lowest tax rate to Sk10 per square metre. Municipalities can carry on in their tax policies but not to the disadvantage of one particular taxpayer group," Ňižňanský said.

He does not expect the amendment to seriously impact the municipalities.

"The proposed regulation was based on an analysis of avaliable data. In the case of investments, I think that municipalities should create favourable conditions, part of which should be reasonable tax policies," Ňižňanský told the Spectator.

Experts say that the municipalities tend to increase taxes on businesses rather than private individuals because private individuals constitute a larger voter base.

Since January, municipalities have had the power to determine local tax rates without state approval. Some expectations - that municipalities would unrealistically raise taxes - have been fulfilled.

Employer unions and business associations are critical of new local tax rates, suggesting that some municipalities increased levels by more than 100 percent.

They warn that high local taxes could liquidate businesses.

The city of Bratislava is not enthusiastic about the tax revision and says tax increases are justified.

"The municipalities have lost considerable sources of financing in the form of state subsidies. Bratislava itself lost a state subsidy for mass transportation worth Sk0.9 billion (€23.2 million) annually. These losses were supposed to be offset by giving towns the right to set local taxes, most importantly real estate taxes, freely and without any limits," Milan Vajda, the spokesperson for Mayor Andrej Ďurkovský, told The Slovak Spectator.

According to the mayor's office, the city was able to offset all losses in subsidies in mass transportation and social services by increasing real estate taxes.

The Bratislava City Council will meet on September 22 to discuss possible impacts of revision might have on Bratislava's pocket.

"The revision contradicts the principles of last year's reform [fiscal decentralization]. The municipalities, with their tax policies, take direct responsibility towards its citizens and we feel that installing a ceiling is not justified," Vajda said.

Local taxes climbed mainly in larger cities. Jaslovské Bohunice, home to one of Slovakia's two nuclear power plants, levied the highest real estate tax increase, charging power plant operator Slovenské elektrárne Sk500 (€12.9) per square metre as opposed to the previous Sk50 (€1.30) per square metre.

The increase pumped the municipal's budget up Sk65 million (€1.7 million), taking in Sk90 million (€2.3 million) instead of last year's Sk25 million (€644,000).

Jaslovské Bohunice mayor Peter Ryška told business daily Hospodárske noviny that if the Finance Ministry's proposal to limit real estate taxes goes through, "the whole of Europe will know." The mayor says that the municipality has the right to interrupt the operation of the nuclear power plant.

"We will block the roads so that workers cannot enter," Ryška told the daily. "After a certain time the blocks will shut down."

Jaslovské Bohunice agreed to build integral storage for nuclear waste on its territory in exchange for a liberal tax system.

Restaurant owners in Bratislava were also hit by real estate tax increases, seeing them climb to around Sk50,000 (€1,288) annually.

About 70 restaurants in Bratislava's Old Town organized a strike in March, closing one weekday at lunch to protest the tax increases on outdoor patios.

Since January 2005, municipalities have been able to set taxes on property, dog ownership, public area usage, accommodation services, vending machines, gaming machines, car entry to historic areas of towns and for nuclear facilities.

As part of fiscal decentralization, the state also handed the fiscal reins to regional governments, allowing municipalities to take a direct proportion of individual income taxes into their budgets.

Most mayors welcomed fiscal decentralization of regional budgets. They said it would redistribute public finances in a way that treats towns and villages more fairly than before. However, experts warned in December 2004 that citizens of larger towns would likely end up paying higher local taxes, mainly real estate tax.

Another downside to decentralization, some argued, is that municipalities would be forced to raise taxes to make ends meet while the state would remain the "nice guy" in the eyes of citizens. For example, municipalities have to make up for lost state subsidies for social projects, such as mass transportation, by raising taxes.

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