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Fiscal & BudgetJul 01, 2020
Property Tax: No More Vacancy Exemptions (Press room)
- Mona Fawaz, Abir Zaatari
The current economic and financial crises in Lebanon require reconsideration for how policymakers approach land and its management. To date, built-property is considered an income-generating asset and consequently only profits reaped from the exploitation or sale of this commodity are taxed. Similarly, financial regulations have incentivized investment in land, favoring its role as an asset where wealth can be stored. In both cases, the role of land as a basic ingredient for improving livelihoods or enhancing production is compromised. As the Lebanese look for options to reignite a failing economy, we argue in this brief that property taxation needs to be used to influence social policy and economic decisions positively. We show that the current practice of exempting vacant built property from taxes undermines the vital contributions the built environment could play to boost the economy. Therefore, we recommend revoking those tax exemptions and reintroducing taxes on all built property, irrespective of the occupancy status, within a progressive scale that accounts for hardship cases.
Our argument is based on research we conducted at the Beirut Urban Lab at the Maroun Semaan Faculty of Engineering and Architecture at the American University of Beirut, taking the case of Municipal Beirut. Vacancy figures are based on a thorough field survey of all 2,692 filed construction permits between 1996 and 2018. Figures about officially reported municipal vacancies were obtained from the City of Beirut’s Municipality directly. All laws were reviewed through the official gazette records. Calculations of property taxation and their exemption benefited from the generous review of a municipal employee.
Vacancy in the Built-Property Taxation Law in Lebanon
The property taxation framework in Lebanon encompasses the typical bundle of registration and property transfer fees, built property tax, land tax, and enhancement taxes. Two annual property taxes exempt vacant properties: The Built Property Tax Law of 1962 and the Municipal Rental Value Fee. The Built Property Tax[1] (ضريبة الاملاك المبنية) is collected by the Ministry of Finance annually and paid by all property owners as long as they benefit from a rent reaped from the use of their property. Article 15 of the law explicitly exempts vacant property of the Built Property Tax on the grounds of a cessation of revenues. Law 60/88 on Municipal Charges and Fees (الرسوم و العلاوات البلدية) regulates all taxes and fees imposed by municipal authorities on city dwellers. These fees include the Rental Value Fee (رسم القيمة التأجيرية) in article 3, which is imposed on the occupant (الشاغل) of any unit, whether residential or commercial, against municipal services such as security, sewer cleaning, and sweeping. By imposing the charge of municipal service fees on occupants, the law implicitly exempts any empty unit from the payment of municipal taxes. Both the Built Property Tax and the Municipal Rental Value Fee have been amended several times since they were originally passed in the 1920s, but they maintain a similar spirit in their approach to taxation.
Exempting Vacancy from Taxation is a Bad Proposition
At the surface, there may be a logic behind the vacancy exemption: If taxes are reaped on profit, then an unexploited unit is not taxable. However, as they stand, tax exemptions on vacancy (i) provide the wrong incentives and encourage speculative behavior; (ii) reduce tax revenue potential for both local and central authorities; and (iii) facilitate tax evasion. As such, they are counterproductive to economic development and detrimental to urban livability.
Reverse tax incentives
First, vacancy tax exemptions have encouraged speculative practices in the real estate sector by allowing developers and homeowners to hoard empty apartments at no cost while the housing crisis soars. The Beirut Urban Lab survey of all buildings developed between 1996-2018 found that 23% of the housing stock developed during this period in Municipal Beirut were unoccupied. These amount to more than 7,000 apartments, distributed across the city. Of those, 65% are unsold while 35% are kept by property owners fully unoccupied. Vacancy is particularly high in Beirut’s high-end market where one in two apartments is vacant. The 23% vacancy ratio is in line with an earlier rapid investigation conducted in Municipal Beirut that estimated that one in five apartments of the pre-1990 housing stock was vacant.
Real estate developers and investors have been able to develop and hoard large numbers of housing units for extended periods without adjusting prices, since the costs of holding on to empty property is minimal given tax exemptions. Among those, the Beirut Urban Lab survey of building developments in the 1996-2018 period showed that bank subsidiaries and investment companies that make up 5% of the total number of real estate developers in Beirut, have developed more than 15% of the city’s built-up area. Similarly, the practice of Lebanese expatriates to purchase often luxurious real estate property in Beirut as a safe destination for their accumulated wealth has turned housing units in Beirut into tax-free safe deposit boxes. Locally, the breakdown of Lebanon's banking sector has also encouraged many to invest in real estate. Although a potentially interesting option for account holders, the general impact of this strategy is to intensify the ongoing trend of using vacant apartments in Beirut as assets. Ultimately, the social value of land as home and/or workplace has been compromised. Apartment prices in Beirut are inaccessible to wide sections of society and the cost of rent is prohibitive for businesses. Conversely, land speculation has provided an attractive investment that deters investors from other potentially productive sectors.
Losing out on Revenue
Second, by exempting vacancy from taxation, local and central authorities incur substantial losses in revenue. Taking the assumption that 20% of Municipal Beirut is vacant, and based on the current rates of taxation, a rapid estimate of the Municipality of Beirut’s yearly losses with this exemption exceeds $33 million. These losses are equal to 13% of the municipality’s reported annual budget, which is about $240 million. As for the Ministry of Finance, its losses amount to a hefty yearly $100 million based on the back of the envelope calculation of tax exemptions in Beirut’s municipal districts alone. These numbers show that local and central agencies are losing a sizable source of funding. Extending the study beyond the municipal administrative districts of the capital city will increase substantially the numbers.
Increases Tax Evasion
Third, the current taxation system facilitates over-reporting of vacancy and consequently tax evasion practices, inflating public losses. At least three laws and circulars regulate the process of reporting vacancy for exemption,[2] and these successive revisions have gradually eased vacancy reporting mechanisms, consequently facilitating over-reporting. The analysis of data indicates that homeowners tend to report vacancy even when a unit is occupied, hence evading taxes. A comparison of the Beirut Urban Lab surveys with the numbers reported by the Municipality of Beirut reflects gross overestimations in public records, where an inflated figure of over 50% vacancy is reported for Beirut’s housing stock. A simple estimate of the losses in taxation revenues given this over-reporting of vacancy brings up the loss of municipal revenues at $86 million (or more than one third of the municipal budget) and an additional $260 million in losses for the Ministry of Finance from vacancy only.
A readjustment of the property taxation law that introduces vacancy tax is necessary to limit speculative practices, enhance the real estate market efficiency, and increase much needed revenues for local and central public agencies. The reversal of this exemption will however be unpopular and requires an informed policy dialogue. The wide range of stakeholders who benefit from vacancy exemptions such as real estate developers, associated syndicates, and property owners might argue that lifting the exemption will discourage private investments and interrupt Lebanon’s economic cycle that relies heavily on the contribution of the real estate sector to its GDP, amounting to at least 15%. Although a potential consideration, this argument should be brushed in favor of balancing the economic value of land and apartments for their use value over their role as asset, a direly needed correction in a market where a severe distortion has reduced land to the role of an asset. Furthermore, these concerns could be eased by encouraging rental options that facilitate the occupation of housing units without requiring developers, expatriates, or other investors to lose the asset dimension of their apartments.
Opponents of lifting the vacancy exemption also argue that the measure may remain ineffective for incentivizing occupancy.[3] It may well be that well-off property owners will choose to pay the tax and hold on to their vacant units, while more vulnerable property owners risk losing their properties due to their inability to pay the tax. It is worth recalling here that what is proposed as a first measure is not a vacancy tax but rather lifting the vacancy exemption. Neither of the two property taxes already in place exempts lower income property owners from paying taxes in their current form. Therefore, we strongly recommend introducing such measures to support cases of vulnerability and hardship, easing in on the long run progressive taxation that accounts for income inequality.[4] As it stands, the law incentivizes low-income property owners to misreport, making it an inadequate policy approach.
More and more global capitals are adopting stringent vacancy regulations that impose progressively higher taxation on units left empty. As they have become aware of the economic losses incurred by such speculative practices, cities such as Paris, Barcelona, Berlin, and Vancouver, among others, have introduced tax on homes that remain vacant for an extended period. The measures proposed in this short piece for lifting the tax exemption in Lebanon are a small step in the right direction. While standard policy taxation design may seek to minimize the taxes’ effects on economic choices, an adequately designed policy taxation scheme can stimulate more efficient and sustainable uses of land, foster a better environment for economic development, and improve the equity of the distribution of the overall tax burdens.[5] For Lebanon to recover, it will be imperative to set in place a sound economic policy. Land regulations are a pillar in that direction.
[1] The Built Property Tax was first passed in 1922 by decision 1481 and adopted a regressive tax model on net revenues generated from properties.
[2] These are Law 0/1962, Law 583/2004, and Circular 2179/2011. In its 1922 version, the Built Property Tax imposed tedious short-term revisions of the procedures that mandated homeowners to report on vacancy every six months through intensive declaration and inspection procedure.
[3] Dye, R.and R. England. 2010. ‘Assessing the Theory and Practice of Land Value Taxation.’ Cambridge, Massachusetts: Lincoln Institute of Land Policy.
[4] Only the built property tax accounts for a progressive scheme whereby the value of property tax increases substantially on pricy units.
[5] Bahl, R., J. Martinez-Vazquez, and J. Youngman. 2008. ‘The Property Tax in Practice.’ In Making the Property Tax Work: Experiences in Developing and Transitional Countries (pp. 1-15). Cambridge, Massachusetts: Lincoln Institute of Land Policy.