Efficiency, effectiveness and equity of housing taxation can be improved
21/07/2022 - Improving the efficiency, effectiveness and equity of housing taxation as part of an overall tax policy mix can help improve the functioning of housing markets, improve fairness and equity and help raise more revenue better, according to a new OECD report.
Housing Taxation in OECD Countries provides an assessment of the wide range of taxes governments levy on residential property. The report shows that while housing taxes play an important role in OECD countries, there is substantial room for reforms to enhance their equity, economic efficiency and revenues.
The report highlights that housing is the main asset for most households, and plays an even more important role for the middle class, with owner-occupied housing representing on average 60% of middle-class wealth. Nevertheless, high-income, high-wealth and older households hold a disproportionate share of overall housing wealth. Unprecedented growth in house prices over the last three decades has made access to the housing market increasingly difficult for younger generations.
"In the face of unprecedented housing market challenges, it is more important than ever to ensure that housing taxes are both fair and efficient," said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. "There is significant scope for countries to improve the design and functioning of housing taxes and this report provides a number of policy options to help countries implement reform."
The report provides a detailed comparison and assessment of housing taxes across OECD countries. It shows that many countries still levy recurrent property taxes on outdated property values, even though this reduces revenue and fairness. A number of countries continue to rely heavily on transaction taxes, despite their potential impact on residential and labour mobility. A majority of countries fully exempt capital gains on main residences, while other forms of tax relief for owner-occupied housing, in particular mortgage interest relief, are provided in many countries, even though they have been found to be regressive and ineffective at raising homeownership rates.
The report offers a number of policy options for governments to consider, while emphasising the importance of reforms being considered in the context of the overall tax policy mix. To increase efficiency in the housing market and improve equity, the report suggests that countries could strengthen the role of recurrent taxes on immovable property, notably by ensuring that they are based on regularly updated property values, while lowering housing transaction taxes.
Countries could also consider reducing or capping certain tax incentives, such as mortgage interest relief for owner-occupied housing, to strengthen progressivity, limit distortions and reduce upward pressure on house prices. In most cases, encouraging the supply of housing and promoting the more efficient use of existing housing stock is likely to have a greater impact on housing affordability.
With the residential sector accounting for 17% of energy-related CO2 emissions, the report suggests that the tax system has a role to play in reducing emissions, but recommends improved targeting of tax incentives for energy efficient housing renovations to ensure relief reaches low-income households.
The report emphasises that successful housing tax reforms require careful timing and may need to be adapted to macroeconomic developments, in particular in an environment of high inflation and rising interest rates.
To access the report, data, and summary, visit https://www.oecd.org/tax/housing-taxation-in-oecd-countries-03dfe007-en.htm