The property tax burden of poorer tenants is more than four times higher than the burden of richer tenants. Landlords are able to fully pass through the tax to rental prices after three years. On the other hand, sales prices do not react to tax changes. A recent study by ZEW Mannheim in cooperation with Maastricht University confirms this. The property tax is therefore a regressive tax. Relatively speaking, it burdens households with lower incomes more than households with a higher financial standing.

 Symbol image to property tax with miniature house on calculator.
Households with a low income incur a welfare loss that is up to four times higher than that of richer households.

With the aid of an economic model, the researchers investigated how the tax burden of property tax increases is distributed amongst various income groups. They consolidated data from the online platform Immobilienscout24 as well as from the Federal Statistical Office of Germany and the Institute for Employment Research (IAB). The data showed that a one percentage point increase in the property tax places more of a burden on the welfare of poorer families than that of richer ones. The poorest 10 per cent of households suffer a relative welfare loss of 1.14 per cent, whilst the relative loss amongst the richest ten per cent only amounts to 0.27 per cent. This relative welfare loss is calculated as the consumption they have to forgo to meet the cost of a higher tax. “When local authorities increase their property tax, households with a poor income incur a welfare loss that is up to four times higher than that of wealthier households,” says Sebastian Siegloch, researcher at ZEW Mannheim and co-author of the study.

Significance of property tax

Local business and property taxes together account for approximately 25 per cent of the revenue made by cities and municipalities. The share of property tax in municipal taxes amounts to just over 20 per cent. Property tax revenue thereby totalled on average 155 euros for each citizen in 2015. In comparison to the US, where the property tax amounts to 850 dollars per person, this form of taxation plays less of a decisive role in Germany, despite having been continuously increased in many places over the years. On average, local property tax increased from 0.9 to 1.4 per cent between 1990 and 2018. About 90 per cent of all cities and municipalities in Germany changed the scaling factor and consequently the property tax within this time period. 95 per cent of changes involved an increase to the tax.

The researchers at ZEW compared the property tax adjustments with socioeconomic data. The comparison shows that those responsible in townhalls and local councils seldom hinge their decision to increase the property tax on the local economy. “We are able to see a strong correlation between the budgetary situation amongst local authorities and an increase in the property tax. If these authorities are no longer able to break even, they are more than willing to increase taxes on property,” explains ZEW researcher Siegloch.

Implications for the debate on property tax in Germany

The property tax in Germany is currently being reformed. The Federal Ministry of Finance proposed a model that will ensure that property tax is more closely geared to the actual value of the land and property from 2025 onwards. At present, this is not the case and an official complaint was made by the Federal Constitutional Court. However, the federal states will be able to deviate from the model proposed by the ministry and can implement their own framework concerning the valuation of property and land. For example, Bavaria wants to gear its framework solely towards plot size, whereas other federal states such as Baden-Württemberg only want to look at the value of the land itself.

“These new models should take the distributional effects of the property tax into consideration. Property tax in its current form and as an area model is simply unjust,” remarks Siegloch. There is much to be said about making the property tax more progressive. This could be possible by making tax allowances more generous, so that smaller rental dwellings for poorer households would be significantly less burdened. At the same time, it would be sensible to increase taxes on expensive real estate. “It is important to know the exact value of land and property if such progressive measures are to be implemented,” says Siegloch. “This speaks volumes for an implementation of the nationwide model that is in the pipeline.” A justifiable compromise is the so-called ‘land value model’. Current analyses show that the value of the land is a good indicator for the value of the property built on top of it.





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