‘Adopt single system of property tax’

The T&T Guardian has teamed up once again with Ernst & Young to provide analysis of the national budget. This is the first in a series leading up to the budget which will be read on October 1 by Finance Minister Larry Howai.

The new minister of finance is set to deliver his maiden budget address in the context of falling government revenues and increasing expenditure. This has resulted in successive years of budget deficits—a trend that the minister has already signaled is likely to continue for the foreseeable future. At this juncture we wish to explore the revenue opportunity that continues to be lost because of the Government’s decision to “axe the property tax.”

In July 2004 the Caricom Secretariat requested that a survey be prepared by Paulo dos Santos and Laurel Bain (Santos and Bain Study) with one of its objectives being to identify best practices in taxation in the Caricom region. As one of its recommendations of the Santos and Bain Study the following was stated: “A property tax with minimal exceptions, set at a reasonable tax rate to produce the equivalent of between one to two per cent of GDP. Adequate balance should be achieved between recurrent property tax rate and property transfer tax.

The tax on property transfers should not be high as it cascades and affects the real property market. The recurrent property tax provides a more stable flow of revenue to treasury.” Based upon the Santos and Bain Study Trinidad & Tobago (T&T) was found to have the lowest property tax revenue as a percentage of Gross Domestic Product (GDP) in the entire Caricom region at 0.1 per cent. This finding has been exacerbated by the non-collection of property taxes in this country since 2009. 

In fact, based upon publicly available information $23, 976 of tax was estimated to be collected in 2010; $10,347 in 2011; and $15,000 in 2012. For a country with a GDP of more than $150 billion these amounts are nominal, clearly inadequate and markedly under international norms.

As of today, the Property Tax Act is enacted but not enforced and a bill piloted by Government to repeal the legislation and reintroduce the former tax regime lapsed in Parliament. For the purposes of the Property Tax Act, the tax was to be computed as a percentage of the Annual Taxable Value (ATV) of the property.

Agricultural, residential and commercial properties were to be taxed at the rates of 1 per cent three per cent and five per cent, respectively. With respect to residential and commercial properties, the ATV was the expected annual rent and not the present market capital value of the property.

Industrial property was taxed as follows:
• Plant & machinery housed in a building six per cent of ATV.
• Plant & machinery not housed in a building  three per cent of ATV.

The Ministry of Finance in a circular had advised that for Industrial Properties, the ATV would be six per cent of the installed cost of plant and machinery, whether inside or outside of a building. Prior to the enactment of the Property Tax Act, properties in Trinidad and Tobago were subject to tax either under the provisions of the Lands and Buildings Taxes Act (LBTA) or, for properties located within the area of a Municipal Corporation, the Municipal Corporations Act (MCA).

Under the provisions of the LBTA, tax was charged at the rate of 7.5 per cent of the ATV. The MCA prescribed a tax of up to 10 per cent on the Annual Rateable Value (ARV) of a property. In addition to the amended rates of tax, the major difference between the Property Tax Act and the former tax regimes is that valuations under the Property Tax Act were expected to be current. Thus for the purposes of implementation on January 1, 2010, the property valuations were based on 2009 market. In addition, the Property Tax Act broadened the definition of real property that would be brought within the charge to tax.

Given the current pattern of fiscal deficits and in light of the Santos and Bain Study, it appears to us that T&T should implement one comprehensive system of tax on real property and not revert to the LBTA and MCA systems with outdated valuations. In the circumstances, the Government should consider the enforcement of the Property Tax Act or some similar singular system with necessary amendments.

To address the populations natural concerns around the financial impact of such a tax the rates of such a tax could be phased in over a period of years. Say for example, the tax on residential property could be levied at the rate of 1 per cent in year one (FY13), 2 per cent in year two (FY14) and 3 per cent in year three (FY15).

Further, in conjunction with the introduction of property taxes the Government could simultaneously look at incrementally reducing the high incidence of stamp duties on property transfers. This could be achieved either by adjusting the thresholds after which the tax becomes payable or reducing the maximum rate, which for residential property now stands at 7.5 per cent of the value of the property conveyed.

This move to reduce stamp duty could have the desirable effect of increasing the volume of real estate transactions, whilst lowering the overall fiscal burden of taxes on real estate. For commercial and industrial properties maximum caps should be considered, so as not to unduly burden high value commercial or heavy manufacturing investments.

For many people the reintroduction of a form of real estate tax would not be a welcomed imposition. No tax generally is. Nonetheless, a fair and transparent tax on real estate is widely accepted as an impost that is administratively easy to collect and equitable, once structured based upon ability to pay. In the context of an unsustainable trend of fiscal deficits, Government should implement a single system of property tax, regardless of the political ramifications, because it’s simply the right thing to do.—Courtesy Ernst&Young