Former premier Sean Chen’s statement that housing taxes are illegal and unconstitutional has sparked heated debated on whether such taxes should be abolished. At the core of the controversy are two points of contention that need to be addressed.
First, are current housing tax adjustments — including the tax base, the tax rate and regulations governing old and new home — unreasonably high? To quote Chen, the housing tax adjustments show “a lack of humility” on the government’s part.
Second, should residential properties be exempted from the housing tax, as people who have invested their hard-earned life savings in a house should not be negatively affected by the government’s tax policy?
Here are a few things to consider. First, while local infrastructure is without doubt essential, there has been little discussion as to who should be responsible for paying for them.
Under a user pays system, that cost should be split among all citizens. However, aside from providing general public benefit, public infrastructure enhances the value of a property, keeping prices high and stable. This is why it is a widespread practice — both here and abroad — to have real-estate owners participate in the cost of public infrastructures, with the housing tax serving as a primary source of funding for local governments’ public infrastructure projects.
Second, what would be a more reasonable way to split the cost? Usually, that depends on the property value and whether its owner lives there or if it is sublet. Both the advantages provided by infrastructure and its cost are thus shared among residents.
However, the way the cost is divided might not be entirely fair or reasonable depending on a variety of factors. For instance, the method used to assess real-estate value — the tax base — might be unfair. While old and new houses are taxed differently, at present houses built before July 2014 are considered “old,” while those built after that date are considered new.
Another instance is the lack of clear differentiation between houses used for self-occupancy and those that are not. A person who owns three properties has the right to claim that all are being used for self-occupancy. There is also little difference in the tax rates for self-occupied properties and those that are not.
Homeowners are taxed 1.2 percent for properties that they occupy, and between 1.5 and 3.6 percent for those that they sublet, with the lower rate more often applied. If the tax rate between the two differs too widely, that could result in an unreasonable division of infrastructure costs.
For instance, if most self-occupied homes are exempt from taxes, the minority of homeowners who sublet their properties would have to cover all the infrastructure costs and that would obviously be an excessive burden.
Third, is the current housing tax unreasonably high? That depends on the financial ability of the owner, local government finances and the quality of the infrastructure which the tax is used to fund.
An owner of a NT$10 million (US$312,940) house might be paying as little as a few thousand New Taiwan dollars in housing tax. In contrast, in other countries it is not uncommon to have to pay NT$100,000 in housing tax.
However, local governments in Taiwan are usually poorly funded and often financially dependent on the central government, leaving them with limited control over their own budgets to tackle local infrastructure needs. As such, the current tax rate is clearly too low, rather than too high.
Fourth, has the housing tax been raised too drastically in the past several years? The standard unit cost for the construction of housing remained the same for three decades until recent years. Under the current system, that cost is reassessed once every three years and adjusted by an average of 60 percent.
Even so, the assessed cost still varies significantly from the actual cost. Is the scope of adjustment too drastic? When will the assessed cost eventually meet actual cost? At the moment, we lack a yardstick to answer these questions.
One possible yardstick would be to judge the tax adjustment by how much it increased in NT dollar terms, rather than the ratio of increase. For instance, a house on Yongkang Street in Taipei’s Daan District (大安) valued at more than NT$60 million, which would have been taxed at 0.014 percent, or less than NT$9,000, under the old system, is now taxed at 0.038 percent, or about NT$24,000.
Compared to its value, with an appreciation rate of 1 percent, the current tax rate is extremely low. In other words, because of the low tax rate in the past, the tax increase might be perceived differently depending on whether one is looking at the percentage or the actual value. However, both in fact fall far below a reasonable amount and appreciation rate. Whether that is unreasonably drastic is open to debate.
Finally, is the increase in the housing tax causing innocent homeowners to suffer? As mentioned earlier, homeowners benefit from infrastructure in their areas. Giving them tax exemptions is therefore unreasonable. Requiring homeowners who do not live in their properties to cover all the cost for infrastructure is also unfair — and on top of that it would be impossible as the tax would be unaffordable.
Nonetheless, there is a consensus that the housing tax should be increased for non-self-occupied homes, especially large, expensive and luxurious properties, in order to lower the housing tax for self-occupied homes. In addition, properties should be taxed differently depending on when they were built and how much they have depreciated, to avoid putting a strain on law-abiding homeowners.
To create more equitable living conditions over the long term, the government should also work toward combining the capital gains tax for housing and land sales, and increasing the difference in the tax rate between owners of self-occupied properties and other homeowners by promoting a system for registering actual property transaction cost.
Chang Chin-oh is a professor of land economics at National Chengchi University.
Translated by Tu Yu-an
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