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. Last Updated: 07/27/2016

Valuation Experiment Helps Write Tax Reform

An experiment to introduce a market-value-based system of calculating real estate taxes in Novgorod and Tver has shown that a mass appraisal system could work across Russia, said one of the experiment's architects.

"The experiment shows both how to go, where to go and what not to do," Natalya Kalinina, secretary of the government's working group overseeing the trial and director of the Institute for Real Property Registration, Assessment and Taxation, said last week in an interview.

The experiment was funded by the U.S. Agency for International Development as part of a $6 million urban land-reform program. From 1995 to 1999, land and buildings in the two cities were documented and a market value assigned to them.

Kalinina said local interest in the experiment was not high. Only 10 Novgorod businesses have taken part since 2000, and in Tver, where the tax and land registry office did not want to exchange information, the experiment could not proceed.

Federal assistance has also been patchy. "Between 2000 and April 2002, there was no support for the experiment at the federal level whatsoever," she said.

But support for the experiment resumed in May this year, when the working group was reconvened. And the Federation Council recommended last month that the experiment be extended in the two cities until 2005.

Mikhail Orlov, head of the Economic Development and Trade Ministry's tax policy department, said in August that the experiences in Tver and Novgorod had helped the ministry in its decision to promote the tax reform.

A market-value-based system of calculating real estate taxes could be introduced nationwide in the first quarter of next year, Orlov said. "It is expected to increase revenue from the [property] tax by 10 to 15 times," he said. "The purpose is to have a more rational tax that is in proportion to the market value of a property and that reflects people's ability to pay."

The current property tax is assessed at 2 percent of a "prime" value that is based on a property's age and cost of construction. The tax now fetches about $44 million per year.

The prime value tends to underestimate the market value of real estate in cities and overestimate it in the countryside.

The taxes are paid to municipalities and regions.

Kalinina said Novgorod and Tver were chosen because, of 15 prospective cities, they appeared to be the most advanced and ready to be a leader both in terms of political will and in terms of infrastructure.

The idea behind the experiment was that a firm could switch to a property tax based on market valuations. An incentive to switch would be that by doing so, they would be relieved of liability to pay some other taxes.

In addition, the property tax levies can be predicted and businesses are eager to know how much they will have to pay, rather than having to face wild fluctuations in tax demands each year.

Although city real estate records had been based on declarations, rather than inspections, the international team was able to accurately form a real estate register.