SA 75. A Note on Swedish Taxes, by Tony Vickers MScIS MRICS

Purpose.         This note was initially prepared for the UK Liberal Democrat Party’s  Tax Commission. The author had heard that Sweden incorporates an element of property taxation within its income tax system and also has a very modern, map-based property tax and local income tax (LIT). The Party currently favours LIT but also wishes to develop its longstanding policy of land value taxation (LVT) by modernising existing property taxes. The reason for studying Sweden is that both its Tax Board and Land Survey Department are internationally renowned for the efficiency and transparency with which their land information and property tax systems work together. This note is based on an earlier version specially prepared for the Tax Commission: a more technical and theoretical discussion of the subject can be found shortly at www.landvaluescape.org

Summary.      The Swedish tax system operates with a highly centralised administration. Direct taxation involves a single annual tax form each for individuals and companies but all taxes – including property taxes – can be paid off through earnings. Almost everyone pays local income tax (which averages 29%) whereas only people on above average earnings pay state income tax of around 20%.

Real estate tax is paid on all land and buildings not used for public purposes, agriculture or recreation, at between 0.5% and 1% of ‘tax value’ (75% of market capital value): most of the revenue comes from private homes. In addition, real property is taxed within a household wealth tax which is administered as part of income tax.

The cost of administering property taxes is very low compared to other taxes. Property tax is payable by owners not occupiers, with land and building elements of value distinguished. Assessments are updated every 3-6 years, are very rarely appealed, are in the public domain (via the internet in value maps and tables) and are used for other taxes (e.g. inheritance tax and capital gains tax) as well as by the property industry, insurers and lenders. Currently all property tax revenues go to the state but there are moves to share revenue with local authorities.

Property, Wealth and Local Income Taxes.  Since 1998 all taxes in Sweden have been consolidated into a single account for each tax entity (person or company), which includes taxes paid to local authorities. Although counties and municipalities can set their own rates of local income tax (LIT), all other taxes go to the state. LIT accounts for only about 30% of local government revenue and currently none of the real estate tax or wealth tax that taxpayers are assessed for on their single tax return forms goes to local government. This is said to be because there are very wide variations in land values in Sweden, being a large country with disparities between regions in their economic capacity: a single-family dwelling in Stockholm can sell at forty times the price the same building would fetch, with a similar-sized land plot, in a remote inland northern village, purely because of land values. Consequently without a very large equalisation payment from the state, poor areas would be unable to raise enough revenue from a property tax to pay for local services of equivalent quality to those in major cities. Even so, the richest municipalities (in suburban Stockholm) set the lowest rates of LIT, whereas the poorest authorities set the highest LIT rates – with most local revenue still coming from central government.

In some areas, such as southern islands and coastal regions, property values are inflated by demand from city dwellers – mostly Germans or Norwegians – for second homes. Proximity to water is throughout Sweden recognised as a major local boost to house prices but bears little relation to the spending requirements of local authorities: this is another reason why real estate taxes are generally seen best as state taxes.

There is no tax-free allowance for the property tax, which is set at 1% for single-family homes and ½% for blocks of flats. About 70% of flats are not owned by the occupiers, who therefore do not pay property tax but pay a controlled rent to their landlord who pays the lower rate of tax.

Local Involvement in Property Taxes. Although none of the revenue from property taxes in Sweden goes to local authorities, they have an important role in the system through the planning function. As in most countries, it is mainly local decisions by local councils that change site values, through the construction of roads and other public facilities and changes they authorise in land use designation[2]. Local offices of both the Tax Agency and the National Land Survey work closely with municipalities to maintain the land information system, including incorporation of new land parcels through sub-division and monitoring the changes in use and condition of properties.

Assessments of land and building values are mainly informed by actual property market transactions, which all have to be reported, but where the market has not been active these have to be supplemented by surveys of owners. The computerised assessment system relies on comprehensive information about every property: its history, building construction, situation within the land parcel and other attributes such as slope and soil.

Why value land separately?  Sweden has no land value tax (LVT), unlike Denmark. Nevertheless there are several reasons why land values are assessed separately from building values. In a computer assisted mass assessment (CAMA) calculation, the land value ‘drops out’ from the calculation of property tax values, as the residual when all other variables have been solved. That makes it almost a by-product, with no associated cost.

1. When a site has permission for development but has not yet been built on, its land value assessment is the same as if it already had a building on it. The result is an incentive for the owner to sell it or build on it, compared to paying tax for a bare site. There is also no tax on new buildings for the first five years after construction and a 50% reduction for the next five years.
2. There is a significant amount of leasehold property, where the owner of the buildings on a site is not the same as the owner of the land. In such cases, the land value element of the property tax is payable by the landowner. In cases of freehold property occupied by (a) tenant(s), the total bill is sent to the registered owner, who will of course pass the cost on to the tenants in their rent.
3. For some purposes, including company taxation, depreciation of the building value – but not the land value – can be offset against other taxes as a business cost. The assessed tax value is used as the basis where the building has been assessed in its existing use.
4. If a building is derelict and awaiting repair or reconstruction, perhaps in a new use class, the land element of property tax is still payable although the building element may not be.

Value Maps. The country is divided into over 8,000 ‘value zones’ where properties have reasonably uniform characteristics. The average value of each variable property attribute is calculated and published for each zone as part of the process of regular updating of the values of 3.2 million properties in Sweden[3]. Defining the boundaries of these zones requires close liaison with local authorities.

Within a zone, properties of a specific type (e.g. single-family homes) will be given a common tax value, moderated by certain factors whose value is also fixed for that zone. Value maps portray the zones in relation to topographic features but are not normally used to portray ‘landvaluescape’ in model form. However the entire Real Property Register is publicly available, free of charge, by inspection at local offices or – since 2003 – over the internet. Much of the database, including value zone constants, can be processed and displayed using software that is available to most businesses involved in property, so that many ways of analysing it graphically are possible. The range of possible uses has yet to be explored but insurers and investors are known to be interested.

Wealth Tax.  As an extra means of making the overall tax system progressive, in addition to the real estate tax, for households there is a tax on the net wealth of all persons. This is collected from each spouse (or co-habiting adult owner) as part of their personal income tax. It is designed so that only those living in large homes or owning other property (real estate or movable property including stocks and shares) should need to pay: since 2002, the first two million Swedish Krone (SEK 2m) of the family home has been exempt. None of the wealth tax goes to local government.

Certain non-profit entities also pay wealth tax, to prevent families transferring assets into trusts as a tax avoidance measure. The Tax Agency would like the non-real-estate part of wealth tax scrapped, because it is costly to administer (many families manage to avoid it) and would readily merge the remainder with the real estate tax, by creating a higher tax band for more valuable properties. Unlike movable property, real estate cannot be hidden and there is no need in Sweden to declare it separately for wealth tax since the details will already be known for real estate tax.

Land Value Tax. The Tax Agency is well aware of the benefits of LVT, as are some politicians and others. No political party in Sweden is currently actively seeking to introduce LVT but the authorities are monitoring developments in neighbouring countries which have it, such as Denmark, Estonia and Lithuania. The current Swedish property tax system could quite easily be reformed, as in parts of the US, to allow ‘split-rate’: higher tax on the land value element than on the building element. Similarly it would not be administratively difficult to share the revenue from property taxes between state and local governments, either at the same time as reforming the tax base or as a separate reform.

By having frequent property tax reassessments, Sweden captures much of the rise in land values which in countries with less frequent revaluations goes untaxed. The recent rise in land prices has led to reductions in the tax rate, nevertheless the amount paid by homeowners in prosperous areas has risen quite substantially while that paid in poor areas has fallen: this is what should happen under LVT but has not happened in Britain with the council tax because of failure to revalue. Although income-poor home-owners in rich areas complain, there is no widespread dissatisfaction with the system and very few property tax assessments are appealed: only about 1000 per year. Of course almost all the changes in property value are due to land: buildings do not generally increase in value over time.

[1] The note is based on discussions at the Swedish Tax Agency and National Land Survey of Sweden on 1^st November 2005 with Monica Haapaniemi and Henrik Roos respectively and additional source material provided by them, notably Taxes in Sweden 2004 (English language summary of the Tax Statistical Yearbook of Sweden) and a demonstration by Mathias Hofren of GIS support in the preparation for the Valuation Test.

[2] An interesting consequence of there being no local property tax is that there is no incentive for local authorities to award planning permission so as to receive ‘planning gain’. Any ‘gain’ goes to the state, which has no role in the assignment of a higher value of land use. In fact, the state temporarily foregoes much of the increase in property tax that results from planning permission, because there is exemption from property taxes for all new buildings. It is as though all local property taxes that exist in Britain – including ‘planning gain’ – were assigned to central government, with most income tax revenue assigned to councils in exchange!

[3] Of these, 2.3 million are single-family dwellings, so that some 3 million individual adults pay property tax to the state.