The International Monetary Fund (IMF), the World Bank and the Council of Europe recommend an update of the tax assessment of real estate in Bulgaria. The main reason is the significant discrepancy between the current tax assessments (last actually updated in 2007) and the current market values. This discrepancy leads to underestimated property values for tax purposes.
The main reason is that tax assessments are many times lower than market values.
Another factor is the need for additional resources for municipal budgets, caused by increasing costs, inflation and the need for capital expenditures.
In 2023, a legislative proposal was submitted, which was not approved at second reading, to index the basic tax assessment, using the NSI indices for housing prices. The planned update applies to cases of a total change of more than 10% over a two-year period.
The current formula in Bulgaria for determining the tax assessment is based on a basic tax value per 1 sq. m. and a number of correction coefficients (location, infrastructure, obsolescence, etc.). The potential update will mainly affect the tax base.
What does European experience show?
The update of the tax base of real estate is a practice in the member states of the European Union. In recent years, Ireland and Denmark have introduced a periodic update of the tax base. Croatia has also taken steps towards reforming real estate taxes. As a result of the reforms, a number of positive effects are achieved: increasing municipal revenues in a transparent manner, based on publicly available registers; automatic stabilization of the property market due to fair property values; improved accessibility to housing for the population, especially in periods of transition (e.g. joining the eurozone) and efficient use of resources, leading to economic stability and sustainability of city budgets.
Opportunities and risks for Bulgaria
In Bulgaria, the tax base was regularly updated until 2007, but after amendments to the regulatory framework this practice was discontinued. The update will lead to an increase in municipal revenues from real estate tax and transaction tax (on property acquisition), as it will limit the choice of tax assessment as a basis for transactions. Increasing the municipalities' own revenues is a factor that leads to greater fiscal autonomy, discipline and better management of resources.
The actualization of the tax base can also serve as a tool for cooling the real estate market and limiting mortgage financing.
The risks of the actualization are related to social intolerance -
growth of obligations to the municipal budget, which can lead to public disapproval. As a tool for neutralizing the social risk, it is recommended to reduce the amount/rate of the real estate tax. This will balance costs and achieve a smooth increase in the tax burden, consistent with the solvency of citizens.
The main benefits of such a reform are providing additional revenues to cover increasing current and maintenance costs, as well as providing a potential buffer for capital expenditures. It is also possible to identify a positive impact and reduction in the overall deficits that many municipalities in Bulgaria have been generating in recent years.
Comment by Dr. Desislava Kalcheva, member of the Fiscal Council