The purpose of this report is to assess the local tax reform accompanying the abolition of the residential/local housing tax (TH) on main residences. This abolition represents a loss of tax revenue amounting to 21.6 billion euros for local authorities and inter-municipal bodies. The law provides for compensating local authorities for this loss by transferring to them the rate of the tax on built property (TFPB) from the departments. In the event of over-compensation or under-compensation, the law provides for a neutralisation mechanism (with over-compensated local authorities required to transfer their surplus to under-compensated local authorities). EPCIs and departments, for their part, would be compensated through a share of VAT.
This study focuses on the transfer of TFPB to local authorities. This transfer results in varying degrees of compensation, insofar as the amount of TFPB transferred to each local authority does not necessarily correspond to the amount of its lost TH. This report analyses this heterogeneity using recent data on local taxation. We also analyse the impact of two alternative scenarios regarding the distribution of the departmental TFPB between municipalities and inter-municipal bodies, before concluding with a more general discussion of the structure of this reform.
Abolition of the residential/local housing tax and reallocation of local tax revenue
The purpose of this study is to evaluate the reform relating to the reallocation of local taxation following the abolition of the Residential/local housing tax (TH) on main residences.
Reference IPP Report No. 27
Presentation
Key Results
- The reform entails significant variation in the levels of compensation between local authorities. To neutralise this variation, 9 per cent of TFPB revenue must be allocated to a territory other than the one in which the tax is actually levied.
- As the reform stipulates that these neutralisation flows should track changes in the tax bases, this constitutes a genuine horizontal transfer of tax revenue, resulting in a structural reduction in the territorial nature of the TFPB.
- Over-compensated local authorities are, on average, sparsely populated and have residents with low incomes. Under-compensated local authorities, by contrast, are, on average, more densely populated, with residents whose purchasing power is generally higher.
- Sharing the TFPB between municipalities and inter-municipal bodies may, under certain conditions, reduce compensation disparities, without however resolving the issue of neutralisation.
- Overall, the devolution of the TFPB to the local authority level, as envisaged by the reform, aims simultaneously to alter the allocation of tax revenue between the various levels of government and to neutralise compensation differences; this cannot be achieved by fiscal measures alone.
- Tax transfers between levels must be guided by broader considerations regarding the structure of the decentralisation system, and must not refer to a situation prior to a given reform.
- The neutralisation, for its part, must be the subject of a separate, transitional mechanism in the form of a grant, so as to gradually make way for the new allocation of local tax instruments between territorial levels.
- Finally, the abolition of the TH significantly reduces the tax burden on residents who do not own property, even though they participate in local public decision-making. This may have significant implications for local public policy and may also reduce fiscal transparency, opening the door to the property tax being passed on to tenants to a greater extent.
Brice Fabre
Partners
This study received funding from the Assembly of French Communities (AdCF) and the Caisse des Dépôts Research Institute as part of a research partnership with the IPP.