Factors contributing to gaps in municipal property-tax revenues

Municipal property-tax revenue gaps are determined by three main factors: tax rates, tax reliefs and the tax base. Municipalities can adjust tax rates and reliefs to increase their revenue-raising potential, but they cannot directly affect the value of the tax base.

Tax base

The tax base comprises the total value of land and real estate from which revenues are actually collected into the municipal budget.
To assess the tax-base gap, a municipal indicator is calculated as the tax-base amount per hectare of land-tax base or per square metre of built-up area subject to real-estate tax. This indicator is compared with the cluster average and, additionally, with the national average. If the municipal indicator is below the cluster or national average, a gap is identified as the difference between the relevant average and the municipal value. Multiplying this difference by the municipality’s land-tax base area or built-up real-estate area, and by the average cluster tax rate, yields the revenue gap attributable to the tax base.

Tax rates

Tax rates indicate the percentage of taxable land or real-estate value that must be paid.
To assess the rate gap, the weighted average of actual municipal tax rates is calculated and compared with the cluster average and, additionally, with the national average rate. If the weighted-average municipal rate is below the cluster or national average, the gap is defined as the difference between the relevant average and the municipal value. Multiplying this difference by the value of the municipal land-tax base yields the revenue gap attributable to tax rates.

Tax reliefs

Tax reliefs are various reductions or exemptions that municipalities may grant.
To assess the relief gap, a municipal indicator is calculated as the value of tax reliefs per hectare of land-tax base or per square metre of built-up real-estate area. This indicator is compared with the cluster average and, additionally, with the national average. If the municipal indicator is below the cluster or national average, the gap is defined as the difference between the relevant average and the municipal value. Multiplying this difference by the municipality’s land-tax base area or built-up real-estate area yields the revenue gap attributable to tax reliefs. In this assessment, the tax-relief indicator is shown as a negative value: the larger the amount of reliefs granted by a municipality, the lower (more negative) the indicator.

The gap in municipal property-tax revenues is calculated by comparing municipal property-tax rates, tax reliefs and the tax base with cluster or national averages. The gap is derived from deviations of actual rates, the value of reliefs and tax-base indicators from those averages. If tax rates are below average, reliefs are higher than average, or the tax base is below average, these differences are used to quantify the revenue gap and to assess each municipality’s potential to increase property-tax revenues.

Weighted rates and the standardisation of tax-relief and tax-base indicators are important for assessing municipal property-tax gaps. They allow gaps to be compared across municipalities on a comparable per-unit basis, regardless of municipal size, enabling a more accurate evaluation of revenue gaps and revenue-increase potential.