Local governments will be given the right to opt out of the land tax exemption on residential properties in their territory and hike the general land tax rate by more than 10 percent annually in the future, incoming finance minister Mart Võrklaev (Reform) said.
Võrklaev said that one part of the coalition's aim to increase local governments' financial autonomy is to allow them to abolish the residential property land tax exemption in their territory and hike land tax by more than the 10-percent annual cap currently allows.
He said that local governments have the administrative capacity to make such decisions and need to be trusted more.
"We have the framework, while it was my wish and proposal to hash out the details in cooperation with local governments," he added.
Legislation to enter into force next year will see land tax hikes capped at 10 percent per year to make sure the suddenly much higher value of land (following a recent round of land valuation) would not translate into excessive expenses for landowners.
Võrklaev said that municipalities are best positioned to gauge that tolerance, talking to local residents and businesses. "While this requires a measure of courage from local governments, it is one way to agree on things and get them done," Võrklaev remarked.
Local politicians might not be bold enough
Kiili Municipality Mayor Aimur Liiva told ERR that while the new coalition's plan is noble and calls to boost the financial autonomy of local governments have been around for a long time, local rulers are seldom bold enough to hike their residents' taxes.
"It would not be a popular call. Introducing the residential land tax exemption was a mistake to begin with. It was the first step in a series of populist decisions that included free public transport in Tallinn and rendering the second pension pillar voluntary. One fool turn followed another as the central government was looking to woo people, while what it really did was meddle in local affairs and rob municipalities of revenue. Reversing all that will not be easy – making those decisions on the local level," Liiva said.
The municipality mayor said that local governments aren't even charging the maximum allowed kindergarten fee of 20 percent of minimum salary. "Only two local governments dare do it, Kiili and Saue. The rest are voluntarily giving up a way to legally generate revenue. The courage needed to lay down local taxes requires consensus in councils, which I do not perceive as realistic. While it makes for a nice topic for the coalition, I'm afraid it will not work," Liiva said.
He also explained that allowing local governments to hike land tax by more than 10 percent would not be helpful either.
"It would work in old democracies – Sweden, Norway where you can agree on the level of communities to pay higher taxes for a set period in order to get something done. There would still be pushback, but at least it would be feasible there. The Estonian society is not there yet, nor do we have that level of prosperity. What we're seeing instead of local governments finding the courage to charge the full kindergarten fee are promises to abolish the fee altogether as local elections roll around," Liiva suggested.
"It would amount to political suicide, while individual initiatives would quickly get quashed by colleagues," he said, adding that even Kiili Municipality would not be ready to do something like that.
Center of Tallinn worth as much in 2022 as all Estonian land was in 2001
The Land Board's 2022 land valuation saw the value of land in Estonia grow by leaps and bounds. The average value of land grew by more than eight times (compared to the previous regular valuation – ed.). While the 2001 valuation put the total value of land in Estonia at €3.945 billion, this had grown to €32.5 billion by 2022. The central part of Tallinn alone is worth €3.673 billion as of 2022.
Growth has been even faster in some parts of Estonia, with the value of land having grown 33.6 times in Järveküla, Rae Municipality, 56.7 times in Kulna, Lääne-Harju Municipality, 44.8 times in Kärdla-Nõmme, Hiiumaa and 44.1 times in Tammemäe, Saku Municipality.
To keep land tax from growing too quickly in the wake of the valuation, hikes were capped at 10 percent, while the recent maximum taxation rate of 2.5 percent of the value of land was lowered to 1 percent. Now, the incoming coalition wants to allow local governments to hike land tax by more than 10 percent annually.
To give an example by the Estonian Tax and Customs Board, residential land currently valued at €2,400 would run the owner €60 at the rate of 2.5 percent of land value. Starting from 2024, the value of the land in question jumps to €20,000, which would put land tax at €100 if the rate was 0.5 percent, coming down to €66 in reality as the hike from one year to the next cannot exceed 10 percent.
The results of the 2022 valuation will enter into force from January 1, 2024. Local governments need to lay down new land tax rates by July 1 this year.
To avoid such abrupt changes in the value of land, regular land valuations will be carried out every four years moving forward.
Editor: Marcus Turovski