We Need to Talk about Taxes: A Local Government Perspective
My presentation will not be about who gets to foot the bill but rather about who gets to tally it, collect it and spend the proceeds. It is connected however to the willingness to foot the bill, the part that belongs to the Greek people that is, as I hope I will be able to convince you.
More specifically I will talk to you about the property tax in Greece, which was universally applied for the first time two years ago when the Greek government, desperate to expand its tax base to meet its obligations to its creditors, introduced a property-linked tax paid through electricity bills. This fiscal measure has been one of the most hated in Greece and at the same time one of the most effective – and these two features are of course interdependent, to put it mildly. For 2014, and subject to the agreement with Troika representatives, this tax known by its initials as EETIDE, – or in the vernacular as haratsi, the Ottoman word for the tax imposed on all non-believers – will be replaced by a more complex property tax, the EFAP, which will be, however, nearly as universal as EETIDE, in the sense that the vast majority of property owners in Greece will have to pay it.
So the property tax in all its different guises has all the elements that are defining of Greece’s relationship with Troika. Necessary reforms if Greece is to acquire the capacity to finance a state worthy of the expectations of its people. Reforms which are, however, lacking in legitimacy due to their abrupt introduction at the instigation of an outside agent and in an extremely unfavourable economic environment, which compounds the pain that they cause for the vast majority of the Greek people. Last but not least, reforms that can be owned by the Greek political system if the latter acquired the courage to ‘own them’ by adjusting and channelling their thrust towards the specific circumstances that define the country.
I will proceed as follows. First, very briefly outline for the uninitiated among you, and I belonged to that category just a couple of months ago, what are the main characteristics of a local government property tax. Second, present to you some of the main features of local government financing in Greece and evaluate how these features were affected by the country’s fiscal crisis. Third, I will make the argument that turning the property tax to local government, possesses decisive benefits, for both the central and local government and for the country at large.
The Property Tax as a Local Government Tax
What is a property tax? What is a local government tax? And what are the characteristics of the property tax on its own right and as a local government tax? Answering these three questions will suffice for the purposes of this presentation.
Let’s take them one by one.
First, property taxes, as an IMF study defined them, ‘encompass a variety of levies on the use, ownership and transfer of property’.
Second, a local government tax – and in most jurisdictions property taxes are local government taxes – has, in its purest, most unqualified form, the following characteristics:
Local governments decide whether to levy the tax or not
Local governments can also determine the precise base of the tax
Local governments can decide the tax rate
Local governments administer – assess, collect, enforce – the tax
Local governments get to keep all the revenue of the tax they collect
In practice there are all sorts of types of revenues that belong to in-between categories. But the important fact for our purposes, as it will become clear when we talk about Greece, is that a tax is not a local government tax unless and until local government has responsibility for imposing this tax on local tax payers. By contrast local government revenues that are computed as a percentage of taxes determined, assessed and collected by the central government are considered as essentially central government transfers, as local governments neither ‘own’ them in the political sense nor are they in a position to stop the central government if the latter wishes to curtail them or eliminate them. A significant and highly relevant corollary is that local taxes tend to be a much more stable source of local government finance, as opposed to central government transfers that are the object of yearly negotiations and subject to the fiscal contingency of the day.
Third, the characteristics of property taxes in their own right and as local government taxes are as follows:
As local government taxes, they are the ultimate benefit tax as they finance public goods and services consumed by those who pay them – schools, roads etc
They can be politically unpopular as they are highly visible, often tax unrealised income and, unlike say income tax, are subjectively assessed. It has been said that this least popular tax should, to become politically viable, finance the most popular causes, as in schools.
Property taxes as local government taxes can be the effect, the cause being the desire for decentralisation, in many high income countries, that in turns needs to be financed by compatible fiscal arrangements.
Conversely, property taxes in developing and middle income countries are either minuscule or non-existent due, not least, to the unwillingness of local governments in many jurisdictions, to tax their own voters.
There is wide agreement that property taxes, as local government taxes, increase accountability of local government to local voters who are also local property tax payers.
Finally, the more developed a country is the higher the property tax intake in relation to GDP. The OECD group of countries average is 2.1 % of GDP, for middle-income countries it is 0.9 % of GDP and for developing countries it is 0.6 % of GDP.
Financing of Local Government in Greece and the Fiscal Crisis
The breakout of the crisis found the Greek local government as one of the most dependent in Europe on central government transfers – to the tune of 70 % of their total expenditure when the EU average is 44 %. Basically Greek local government is both one of the smallest in Europe in terms of the ratio of its expenditure to GDP and, at the same time, one of the most dependent on central government transfers for its financing. The main instrument of these transfers are the so called ‘Kentrikoi Autotelois Poroi (KAP) – which, by law, are tabulated as supposedly fixed percentages of income tax, value added tax and property tax.
Consistent with the findings of the literature, that would categorise KAP as a central government transfer that local government has no substantive control over, the Greek central government cut them by a cumulative 50 % since the outbreak of the crisis. The lack of political ownership of these revenues meant that local government was powerless to resist their drastic cutback nor did this cutback result in widespread popular opposition. A commitment by the central government, even one inscribed in law, to apportion x % of y tax source, to local government, no matter how rational and justified it might be, is at best an abstract notion to a resident and voter of a municipality, and, at the most common worst, something that he is completely ignorant of.
The other side of the crisis coin is that the central government, as I pointed out in my introduction, bit the bullet by introducing a universal property tax. This is something that it had conspicuously failed to do in the past when, instead, it would lower or raise or even eliminate taxes on the more valuable properties and rely instead on the non-recurrent, less substantial, property transfer tax, the equivalent of the UK stamp duty. According to media reports EFAP which is going to replace EETIDE in 2014, although far more complex, with approximately twenty payment scales determined by various criteria, will only exempt those who are unemployed and have small property holdings. Even rural plots of land will be taxed and to grasp the radicalism of this measure it is worth pondering Mark Mazower’s remark that Greek farmers, from being the backbone of both the Byzantine and Ottoman imperial tax systems, got a seemingly permanent tax exemption since Greece won its independence in 1821, being courted from then on by kings and dictators as much as by parliamentarians.
So this is the opportunity offered by Troika to the cause of Greek local government and decentralisation. The political cost of introducing a near-universal property tax has already been undertaken by the central government. The only thing that remains to be done is for the local government to shoulder the lesser cost of asking and receiving responsibility to determine, assess and collect a nearly universal property tax that by the time it gets to do so – say 2015 to be very optimistic – the central government would have already bedded down and collected for three years in a row. Essentially Greece’s fiscal crisis has, among other things, discredited the existing system of financing local government and exposed the central fact that fiscal dependence on the central state and local government autonomy are incompatible notions. At the same time, the crisis, by compelling the central government to introduce for the first time ever a nearly universal property tax, has created the foundations, in the near future, for a more autonomous, fiscally self-sufficient, local government.
In my last section I will argue that it is to the benefit of the local government, of the central government and ultimately of Greece itself that local government pursues and achieves the goal of converting the property tax into its most important revenue-raising instrument.
The Benefits of Turning the Property Tax to the Local Government
I would separate the benefits that can be attained by converting the property tax into a local government tax in three distinct categories, namely those relating to the central government, those to the local government and those to the Greek polity and economy at large.
For the central government this conversion can have the benefit of sharing the political costs of the property tax by transferring it to local government and, by thus increasing its legitimacy, enabling the property tax to make a permanent contribution to public finances. The conversion can replace central government transfers freeing up fiscal resources for other needs and/or financing further decentralisation by transferring public goods and services, to the local government, which can be funded by the property tax.
For the Greek local government the benefits are several. Being predominantly financed by local property taxes will mean greater funding stability for local government allowing for longer planning horizons as much as for the protection of vital public goods and services. Local property taxes will massively increase accountability and transparency due to the amount of ‘skin in the game’ that local residents will have in local government expenditure. It is an entirely plausible assumption to make that with the introduction of local property taxes accountability and transparency will be more powerful forces in local than in national government with beneficial results for the performance of the former. Local government can turn the tables on central government, win a reputation for greater competence and integrity than the central government and, on the back of such a reputation, fight for further decentralisation and power. Cumulatively, the conversion of the property tax into a local tax can be the catalyst for Greece acquiring the level of decentralisation that both its developmental stage, the crisis notwithstanding, and the increasing desire for local autonomy, necessitate.
From the perspective of the Greek polity and society turning the property tax into a local government tax will mean strengthening across Greece, and in each and every one of the 328 municipalities of the country, the mentality of the citizen as a tax payer, i.e. the mentality of the individual who cannot avoid paying taxes and thus cannot avoid being concerned, agitated or satisfied, by the extent to which his taxes provide commensurable benefits to him and his family. It will also mean having political contestation across Greece, in each and every municipality, being grounded on the issue of taxation, its assessment, collection, exemption from (and on what grounds) and conversion in public goods and services. This I believe cannot fail but contribute to the creation of the citizen as tax payer at the national level where the connection between taxation and public expenditure is necessarily more abstract as taxes are, by and large, not hypothecated and the goods and services they create might, or might not, have a geographical or any other explicit connection to the taxpayer.
Last but definitely not least from the perspective of the national economy, the property tax as a local government tax will vest all of Greece’s municipalities in the cultivation and expansion of this tax base through the boosting of local economic growth. Municipalities will thus gear themselves not towards accessing funding from the central government, or at least not exclusively in that direction, but in setting up local growth coalitions with other local stakeholders: chambers of commerce, universities, professional associations, ports, airports and hotels. These stakeholders in turn will be pressing for the deployment of their taxes towards public goods that can facilitate economic growth as opposed to being similarly focused to rent seeking from the central state as they have been apt to do. As with the bottom-up development of the citizen as taxpayer this dynamic, multiplied by 328 municipalities across the land, cannot but have a material and positive impact on the Greek economy and its international competitiveness. This way we come full circle: the universal property tax which, in Greece, is yet another outcome brought about by the catastrophic underperformance of the Greek economy, will be making a contribution to this economy’s renaissance.
To sum up, Greece had long been an outlier, within the EU and the OECD, in terms of its level of decentralisation and the degree of fiscal dependence of local government on central government, putting the country somewhere between the developing and middle-income cohorts.
Regardless of the fiscal crisis the next step in the agenda of decentralisation in Greece would have involved measures extending the fiscal autonomy of local government. The crisis, however, as with so many other features of the country’s public life, has brought this issue into sharp relief mainly because of the cut in half of central government transfers to local government.
Now the ball is in the local government’s court. Greek local government owes it to itself to ask for the burden and benefit of taxing the people it represents in order to advance their well-being and future prospects. And while this is not the only step in this direction, it is the next most logical and effective one, namely to convert the already instituted property tax into local government’s main revenue raising instrument.
Antonis Kamaras, Adviser to the Mayor of Thessaloniki
* (the views expressed in this presentation are personal)
For the Greek Public Policy Forum 2nd Annual Chania Forum 2013, 27-28 September 2013