The property transfer tax places a hefty price tag on the reallocation of real estate that limits people’s ability to make changes in their living and working spaces. Close to 80 percent of the Portuguese live in households that own their home rather than rent it. For these households, the property transfer tax makes it harder to relocate for better job opportunities while keeping elderly people in homes that are too large for them. For businesses, transfer taxes also make it harder to adjust the size of their operations based on their spatial requirements.
Research also finds that high transaction tax rates reduce capital investment in buildings and structures as the transaction costs reduce the value of a building over its lifetime. The decrease in property values translates into reductions in new developments, driving up rental prices and decreasing housing affordability. A recent study on transfer tax rates in German states finds that the volume of new residential construction lost due to an increase in transfer taxes from 3.5 percent to rates between 5.5 and 6 percent is higher than the revenue raised by higher rates.
Given these outsized efficiency costs, Portugal should eliminate its property transfer tax and instead levy VAT on new buildings and structures. This would improve the incentives for the development of housing and structures to align with those for other goods and services, allow homeowners to make the most of their living space, and help people relocate to better jobs.
In 2021, revenues from the transfer tax stood at EUR 1.3 billion. Municipalities can compensate for the revenue loss through a mix of higher property tax rates and lower government spending on housing development, which constituted EUR 400 million in 2021. The central government could also support municipalities by apportioning a share of VAT revenue back to its source jurisdictions.
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Source link : https://taxfoundation.org/blog/portugal-property-tax-transfer-tax-reform/
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Publish date : 2024-03-14 07:00:00
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