KyivPost

Lack of property taxes a major blight on Ukraine

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Aug. 2, 2012, 10:50 p.m. | Op-ed — by Brian Bonner

A man walks out of the deteriorating Murashko mansion on 14/12 Mala Zhytomyrsa. It is surrounded by a high green fence, with a poster over the balcony that reads: "Authorities, let Murashko mansion live."
© Ganna Bernyk

Brian Bonner

Brian Bonner has served as the chief editor of the Kyiv Post since 2008. He also held the job in 1999, three years after first arriving in Ukraine to teach journalism. Bonner is a veteran American journalist who spent most of his professional life with the St. Paul Pioneer Press in Minnesota, where he covered international, national and local news during a nearly 24-year career in which he was a staff writer and an assigning editor. Bonner left the St. Paul newspaper in 2007 to become the associate director of international communications at the Campaign For Tobacco-Free Kids in Washington, D.C. He also served as a political analyst with the Organization for Security and Cooperation in Europe during six election observation missions in Ukraine, Belarus, Turkmenistan and Kazakhstan. To contact: email bribonner@gmail.com, Facebook at www.facebook.com/brianbonner, Twitter @BSBonner and Skype at brian.bonner1959.

Kyiv, an ancient and majestic capital, is looking more like an urban ghetto with each passing year.

Dozens of old buildings stand empty, almost in ruins, with knocked-out windows and graffiti-painted walls. It’s all the more heartbreaking since some of these were once architectural monuments.

There are many reasons for such a condition, but one of them stands out: Building owners haven’t had to pay any property taxes. They should, and those taxes should be substantial, as they are in the West.
The status quo means that buying commercial and residential real estate has been one of the best ways to “optimize” – read: “not pay” – taxes in the 21-year history of independent Ukraine.

And the new residential property tax law that went into effect on July 1 won’t help much. It’s not a “full-fledged property tax” that will deliver meaningful government revenue, said Vladimir Kotenko, the head of the tax and legal department of Ernst & Young’s Kyiv office.

The property tax law charges an absurdly low rate to homeowners on the basis of square meters, not on the value of the property. That means the owner of a 250-square meter shack gets hit as much as the owner of a luxurious apartment of the same size, only with a market value of 10 or 100 or 1,000 or even 10,000 times more than the shack. Moreover, commercial properties remain exempt. 

A substantial commercial and residential property tax, based on the property’s estimated market value, would be one way to attack this urban blight. 

Buying real estate without having to pay property taxes makes ownership much more lucrative in Ukraine than in the West. In Ukraine, after the purchase cost is covered, owners face much lower expenses. They often just have to spend small amounts for subsidized monthly utility bills, and whatever maintenance costs they are willing to undertake. 

This is a shame.

The lack of property taxes rewards the wrong people – usually the well-to-do, who don’t need these breaks.

And it rewards wrong behavior by not forcing owners to pay for their socially irresponsible decisions to do nothing with their properties. The current no-tax plan, in fact, encourages speculation on the future value of their holdings.

President Viktor Yanukovych even recognized the problem during the July holiday for tax professionals, when he called for property taxes to be substantial. “This symbolic tax should turn into a major source for pumping up local budgets and a tool to limit speculation in real estate,” Yanukovych said. 

At long last, Ukraine started on July 1 to enact its first-ever residential property tax. But homeowners will pay a small amount based on apartment size rather than market value, a concept that is at odds with standard practice. But as people get used to paying the tax, experts think government will switch to a value-based tax and raise the amount collected over time.

This spot-on assessment of the problem makes it even more mystifying why the administration – which holds all the levers of political power in the nation – is not fixing the situation.

The new tax that went into effect on July 1 won’t accomplish the president’s aims.

Experts say that the property tax would assess the owner of an average-sized apartment – some 50 square meters – only Hr 550 (about $70 a year) in property taxes. The owner of a 500-square meter apartment – a high-end rarity – would pay Hr 15,000 a year, or $1,875, based on a two-tier rate in place per square meters. 

Such a meager tax leads to the conclusion that rich and powerful real-estate owners still aren’t ready or willing to pay substantial property taxes.

Longtime Kyiv lawyer Alex Frishberg thinks the government finally decided to impose property taxes out of financial desperation – and because the Yanukovych administration sees a potential huge stream of tax revenue “to play with” in the future.

Frishberg noted that, after the nation’s inventory of properties is on record and taxes are collected, government officials can simply hike the annual property tax. It is now set at 1 percent of the monthly minimal salary of Hr 1,102 per square meter for buildings of less than 240 square meters.  That’s only Hr 11 – not even $1.50 – per square meter each year.

So in that sense the new tax is just a start, said Ernst & Young’s Kotenko. After people get used to paying taxes on their homes, then government can switch to a property tax based on value rather than size of the assets, he said.

That’s the way America and many Western nations charge the tax – usually 1 to 2 percent of the property’s assessed value each year.

The money goes to local governments in the city where the building – be it a home, an office or a shopping mall – is located and the tax is collected. This revenue source provides funds for schools, police, roads, trash collection and whatever other services that local governments provide
 It’s a very accountable and, if done right, progressive way to raise revenue.

In my state of Minnesota and many others, property tax breaks are given to poor people or those with modest incomes. Meanwhile, the tax rates are usually progressive – a higher percentage for higher-valued properties.

The property tax encourages owners to keep their buildings well-maintained and for productive uses. Allowing a building to sit empty in the West becomes costly for building owners, even costlier if the city assesses extra fines for vacant and unsafe properties.

The property tax has to be paid each year, or else a lien or legal claim is attached against the property, leading to eventual government seizure to cover unpaid taxes. Simply put, property taxes encourage owners to sell properties not in use. 

The "House of Gargoyles," one of Kyiv's most beautiful yet neglected and abandoned buildings, is at 1 Yaroslaviv Val. (Ganna Bernyk)

So why is Ukraine’s property tax based on the size of an apartment and not its value?

As Frishberg points out, America has a competitive and transparent real estate market, in which the true value of the property is disclosed at sale, and where armies of government assessors have become adept at setting accurate market values.

In Ukraine, by contrast, salaries and property values are not disclosed with any degree of honesty.
Also by contrast, Ukrainians are not likely to trust government assessors to inspect private properties. “We all know what happens when you give that much power to government,” Ernst & Young’s Kotenko said, meaning that assessments might be susceptible to arbitrary abuse and might bear no relation to market realities.

But, Kotenko said, once all properties are inventoried by size and  people get used to paying even a nominal tax, then government can start seeing how many properties are owned by the same person or legal entity – and then check that person’s income declarations to see how realistic the disclosures are.

Another problem, as California-property owner Frishberg points out, is that local governments in America – the beneficiaries of local property taxes – operate with a higher degree of transparency and accountability than governments in Ukraine. The recently approved property tax in Ukraine would go to the central government, where there is “no real accountability” for spending, Frishberg said. 

The concept of private property has been taking root again only for the last 21 years, interrupted by 70 years of the Soviet Union, where everything was state-owned and, before that, centuries of czarist Russian empire, in which only the rich could own property, land or people (until serfdom was abolished in 1861).

The property is “very normal anywhere else in the world,” Frishberg said. “It should be applied in Ukraine, with the caveat that the money should be for the benefit of the nation.”

The longer these tax injustices linger into the 21st century, the worse the nation’s financial future will be – and the more grand cities like Kyiv and Kharkiv and Odesa will look like urban ghettoes. 

Kyiv Post chief editor Brian Bonner can be reached at bonner@kyivpost.com

The Kyiv Post is hosting comments to foster lively debate. Criticism is fine, but stick to the issues. Comments that include profanity or personal attacks will be removed from the site. If you think that a posted comment violates these standards, please flag it and alert us. We will take steps to block violators.
dave Aug. 3, 2012, 5:27 p.m.    


And Ukraine wonders why its local governments are always broke and begging for handouts from the national budget. In Western countries, its primarily property taxes that fund local services...

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