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. Last Updated: 07/27/2016

Putin Puts Property Tax Reform Back on Agenda

Prime Minister Vladimir Putin has revived the idea of introducing a unified property tax, which would help local governments with funding during the crisis and noticeably knock down prices for expensive housing.

The government committee on budget planning decided to speed up the introduction of a local real estate tax, Putin said last week, Prime-Tass reported. He said the new tax would replace those on property and land and that it should significantly increase revenue for city governments - not because it will be higher but because it will be progressive. Owners of expensive real estate and large tracts of land will pay more, whereas those with "modest property" will pay a discounted rate, Putin said.

Currently, there are separate taxes for land and the buildings on it, going to either the local or regional budgets.

Corporate property taxes are determined regionally but do not exceed 2.2 percent and go into the region's budget based on its value according to the firm's balance sheet. Individuals pay property taxes to the city government, putting them in the 0.1 percent to 2 percent range, with valuations determined by the Bureau of Technical Inventory.

Land taxes are determined by the city administration and go into local budgets. For farmland and housing, the tax is no more than 0.3 percent and no more than 1.5 percent for other plots.

Merging both into a tax that will be taken from the market value of the property has been part of the country's budget plans for a while, and a bill was passed several sessions ago in a first reading by the State Duma, said Natalya Burykina, a member of the Duma's Budget Committee.

The economic crisis, however, could help push the reforms through. Previously, the unification was not expected to take effect before 2011, said Sergei Belyakov, an aide to Economic Development Minister Elvira Nabiullina.

The conditions to introduce the tax will be created next year, Putin said. The Finance Ministry is considering the new tax as one of the primary sources to replenish local budgets, which have been hard hit by the economic downturn.

In the first quarter, city governments' revenue has fallen 11 percent compared with the same period in 2008, Putin said, with transfers from federal and regional budgets accounting for more than 31 percent of the total volume of local revenues in 2009.

But the federal government is planning to cut its expenses further: The anticipated deficit of 8 percent of gross domestic product this year should be cut to 3 percent by 2011, Putin and President Dmitry Medvedev have said. To do that, funding needs to be found for local budgets, a Finance Ministry official said.

"We're talking about preparing the tax at first for residential property and then, perhaps, for industrial property," Belyakov said.

It's difficult to estimate how much would be added to local budgets because no one has done adequate property assessments yet, a different Economic Development Ministry source said. But there will be an increase, he said: "For poor cities, it might not be that significant, but for wealthy ones [revenue will increase] severalfold."

Viktor Sidnev, mayor of the Moscow region city of Troitsk, and Irina Pereverzeva, the former mayor of Kostroma, agreed that the tax would increase municipal revenue.

The unification would mean a lot of work for bureaucrats, who would first have to create a property register and then get market valuations for all of the real estate, said Belyakov, Nabiullina's aide.

Real estate appraisals will become the biggest obstacle, the Economic Development Ministry source warned. There is no agreed-on methodology, and the valuation process would require major outlays. "With land, there's at least some sort of starting point with the registry of land prices, but the valuations of the Bureau of Technical Inventory for apartment prices haven't the slightest correlation with reality," he said.

A large apartment in an old building in downtown Moscow is valued for tax purposes as being worth less than a new apartment in the city's southern Konkovo district, said Nadezhda Kosareva, president of the Institute for Urban Economics.

She said Putin's idea on differentiating the tax levels could be arranged through a tax exemption, with the size depending on the location of the apartment. Thanks to the lower real estate prices, some people would be paying even less than now, said Sidnev, the Troitsk mayor.

The new tax could also affect real estate prices more broadly. Taxes on apartments' market value will lead to more rational behavior among buyers, Belyakov said. For example, fewer people might buy apartments as investments, which would lead to lower prices.

Downtown apartments will become too expensive to own, agreed Artyom Tsogoyev, a managing partner at the Moscow Central Real Estate Exchange.

An apartment in the city center could cost $1 million, while its appraisal by the property bureau could be up to 1 million rubles ($30,300), he said, meaning that even under the current rates (0.5 percent for apartments worth more than 500,000 rubles) people will have to pay $5,000 instead of 5,000 rubles. "As a result, people could start dumping apartments they bought as investments, and rental rates will jump," he said.

Mikhail Gorokhovsky, vice president of Best-Nedvizhimost, said the new tax would prove a heavy toll for owners of apartments in prestigious areas.

"If there aren't any discounts or exemptions, many will have to move," he said. "My apartment has a market value of 16 million rubles. [The bureau] valued it at 300,000 rubles," he said.

Rising taxes invariably lead to increased aversion to paying them. Staying the owner of an expensive property will become too expensive, a tax service official said.

Lawyer Mikhail Orlov said tax evasion schemes could appear. For example, it is unclear who would pay the taxes if a property were handed over as a contribution to a mutual fund.

In such a situation, tax inspectors could accuse the apartment owner of receiving an unfounded tax benefit, warned Dmitry Kostalygin, a partner at Taxadvisor.

Many owners will contest the results of appraisals, said Tsogoyev and Orlov. The term "market value" is entirely murky, agreed Kirov Governor Nikita Belykh.