TAXING PROPERTY IN CROATIA’S ULTIMATE HOME REALITY SHOW

I’m a fan of property taxes. They are common throughout the United States and generate about a third of the revenues that come into local governments. The money is used to fund local services, such as schools, police, and street maintenance. And the idea of generating needed government revenue from the luxuries known as holiday homes doesn’t send me into convulsions.

But when property taxes are mentioned in Croatia—and the Finance Ministry seems determined to levy one in April—I think of the reality TV show “Extreme Makeover: Home Edition” and the Llane family of New Jersey.

“Extreme Makeover: Home Edition” has been running in the United States for years. In each episode, the producers pick a deserving family with a home that’s too small, too run down, or too old. They bring in carpenters, plumbers, roofers, and others and renovate the house into a dream home, often tricked out with the latest electronics. Tears flow when the family is reintroduced to their home.

(This shouldn’t be confused with “Extreme Makeover,” another US show in which a deserving, but dowdy, individual is given plastic surgery, a new wardrobe, and make-up tips. Tears flow here, as well, when the re-creation is reintroduced to friends and family.)

In 2006, the “Extreme Makeover: Home Edition” came to help the Llane family. The father and two daughters are blind, one son deaf, and the mother suffered from thyroid cancer. The crew took a week to renovate and expand the family’s home. In the process, a home bought for $232,000 in 2002 became a showcase valued at about $450,000. Unfortunately, the family’s property tax bill also soared, from $6,488 a year to more than $13,000. By 2012, the sold the house and moved in with relatives.

Some other benefactors of the show have suffered similar hardships, but not at a scale to affect the national economy. But in Croatia, with the introduction of a property tax, it’s as though a mass of people came out of “Extreme Makeover: Home Edition” with properties they can no longer afford, at least not without generous allowances from the government.

These homeowners got their apartments and houses at bargain-basement prices through tenants’ rights after the fall of socialism. Because of a significant market disruption, they live in homes across the country that they probably couldn’t afford on the open market. As a result, the prospect of paying taxes based on market prices is understandably scary.

For the property tax, this is a relatively easy and necessary fix. The government says it will offer waivers to shield owners of homes they occupy, as well as owners of rental property and holiday homes. What’s left to tax fully, I wonder, except uninhabitable ruins (which would have a very low assessment value)?

But other problems with the tax are much more troublesome. A while back, my wife and I looked at property on the coast and more recently in Zagreb. As we looked around, we were shown places without papers, saw extensions that weren’t on the books, and searched property records that were fragmented and unclear. Being legalistic, careful, and picky—we were constantly told foreigners faced greater scrutiny—our choices ended up being quite limited.

How can the government clear this fog in just six months? It will need to assess value fairly and uniformly, but based on what? Asking prices are all across the board, and I’m told selling prices aren’t always registered correctly. The market is also relatively illiquid. In the US, where buyers crowd your doorway as soon as a property hits the market, recent recorded sale prices in the neighborhood serve as the baseline for market value. Here, real sales prices are rarer.

The solution, it seems, is to set an arbitrary value per square meter based on location. But then the government must hire and train the cadre of professional property assessors needed to verify the size and condition of all that real estate. These assessors could potentially generate far more value than their costs, but enlarging the public sector at a time when state employees risk losing benefits and other cutbacks demanded will be difficult to sell politically.

And of course, the assessors must have credibility. No one likes paying taxes, but most people accept taxes as the price of government. What’s unacceptable, however, is suspecting that your neighbor is paying less than you. Houses that haven’t been legalized, improvements made off the books, or friendly relations with the right people all damage the system, forcing everyone to try to find an artful escape. In a climate punctuated by a former prime minister convicted of corruption, credibility takes time to build.

I suspect the government’s generous waivers of most of the tax burden on almost every category of property is an attempt to lessen the sting while these difficulties are being solved. Once the tax is on the books, tweaking the waivers or base rates will be much less controversial. No one likes tax increases, but they are more palatable than new taxes altogether. It’s the thin edge of the wedge.

The great pity will be if the property tax becomes instead an honesty tax. If a disproportionate burden is carried by owners who followed the law—filed true contracts, obtained the needed permits, and accepted their fair share of the new tax—then the incentives to cheat only increase. The Croatian government needs to raise more revenues and lower expenses to solve its deficit crisis, but it also must be careful not to encourage more people to duck under the system. With a property tax, this is only possible with high transparency on land and assessment records, an aggressive push to untangle the country’s property records, and honest collectors … altogether, a tall order.

(Orginally published in Croatian in 21. Stoljece, Dec. 7, 2012.)