September 8, 2020/in Croatia, Investment, Land Titles, Local Government, Policy, Slovenia, Taxation /by Goran Šaravanja
Image by jalandas0 from Pixabay
As someone who grew up in Australia, the concept of incomplete land titles records in Croatia and elsewhere in the region was something that cried out for reform and still does, despite evident progress in recent decades.
Many cultural factors complicate matters
There are many reasons land titles remain unresolved in Croatia and the region. The first is that the process is complex and therefore slow and expensive. Many times, especially in rural areas, the cost of land title registration can exceed the value of the property. As possession is nine tenths of the law, all registering a land title would do is leave you out of pocket. And what if I want to move? Although Croatia has only been independent for 30-odd years, especially in non-urban areas, families have lived in continuity for generations, changing up to six of seven countries (political entities) without moving. Static populations consider these issue differently to mobile ones. Croatia being relatively poorly urbanised, that is a factor any informed policy maker or talented politician will respect. Also, people here rarely borrow off the value of real estate to finance spending.
When time is not a factor and people don’t borrow money to build
If you need to borrow to build or buy real estate, it is important to note that for decades, a clean land title has been a condition for getting a loan. With legislation enabling the legalisation of illegally constructed buildings, a legalised building is another condition borrowers (or hopefuls for receiving EU structural funds) need to fulfil. There are now relatively few unlegalized buildings, contributing to land titles clarity.
However, many people do not take out loans to construct houses, especially outside the major cities. Often, they have inherited the land they are building on, which can make this a financially rewarding enterprise. Time for them is not a factor. They use family and neighbours to help out and return the favour in turn. Travelling through Croatia you will see many such houses with incomplete facades, or a new storey being put up. If you were wondering why, that is the major factor.
Reasons to define land titles
Defined property rights reduce uncertainty and increase the scope for successful business initiatives. As such, they reduce the perception of, and scope for, corruption and inconsistent implementation of procedures. They are a basis for allowing people to put assets to their best use, thus improving economic opportunities for the country. Yet, land titles reform remains a difficult issue.
So, are we approaching the issue of land titles reform the wrong way? Given how complex the process of land titles registration is, should we perhaps levy a land/property tax first? A property tax would do away with most of the complexities of the current registration system. There are other benefits too. As the cost of holding a property is low in Croatia many apartments and houses are not well maintained. This means the stock of available properties is lower than would otherwise be the case, pushing up the cost of housing. If we are interested in making the place more attractive for young families and to arrest adverse demographic trends, levying property taxes would be one aspect of that approach.
Significant political and structural challenges to a land tax
The cultural factors outlined above are significant barriers to introducing such a tax. In addition, we have a Constitutional Court ruling from 2007. That ruling declared the taxation of unused agricultural land, unimproved land zoned for building and unused company properties unconstitutional. This I find counterintuitive as the state provides infrastructure, defence and many other goods and services on all land. Yet, the ruling limits the ability of the state to motivate productive use that land and generate a return for society.
There is also the case of neighbouring Slovenia, which spent the better part of a decade preparing to introduce a new property tax, only to have it struck down by the Constitutional Court in 2014. Undefined property rights and valuation issues were the reasons. Authorities continue to work on introducing a new property tax (to replace a building land use levy, property tax and forest road fee). Yet, they have been unable to avoid delays .
It also bears keeping in mind that in the 1980s Croatia had a land tax which failed. There were three reasons according to a study by professor Jure Šimović in 1989[1] behind this failure. The first was an inability to realistically value the tax base, the second was incomplete land titles and the third was an under capacitated tax administration. I would argue the tax administration is today much better, but the remaining issues are still relevant, especially valuation.
Any land tax should be net neutral and shift some of the burden onto non-resident owners
Clearly, the government would have to fully fund or provide a grant to people to register their properties. In particular, this applies to rural areas where the cost often exceeds the value of the property in question. Politically, some if not most of the tax burden would have to be transferred from residents to non-resident owners. That happens all over the world – residents, through other taxes, ultimately pay for some of the benefits non-resident owners enjoy. The Constitutional Court ruling of 2007 does allow taxation of holiday homes, of which non-residents own many. And the national government would ideally lower some taxes to ensure the overall tax burden falls, as land taxes would logically be local government taxes. Each of these conditions, as a minimum, would have to be fulfilled for a land tax to survive politically.
I also think that working with Slovenia on the issues of land titles reform and land taxation would be beneficial. We both have many common issues to iron out on these policy areas.
A fair, well thought out process combined with political will is necessary
As unpopular as the concept of a land/property tax has been for the cultural and structural factors outlined in this text, we do need to ask ourselves a couple of questions. Can we realistically simplify land titles registration procedures without a land tax? And perhaps more importantly, even if we had a defined land titles register, would we be able to keep it that way without the burden of a land tax? Also, most EU member states have land taxes as do most OECD members, which is to say the most successful economies on earth. Deep down (on this and many other issues), do we really want to be more like them?
The challenges of implementing land titles reform are significant. This text only scratches the surface of many issues which would need to be thought through. Done correctly, clearing up land titles would support regional development, increase the quality and quantity of the housing stock and motivate better use of assets in the economy.
[1] Šimović, J., 1989. Porezni sistem i porezna politika općina u Jugoslaviji. Zagreb: Institut za javne financije.
