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Provisions on standard rateable values for assessing property tax are unconstitutional
Press Release No. 21/2018 of 10 April 2018
Judgment of 10 April 2018
1 BvL 11/14, 1 BvR 889/12, 1 BvR 639/11, 1 BvL 1/15, 1 BvL 12/14
The provisions of the Valuation Act (Bewertungsgesetz – BewG) regarding the standard rateable valuation (Einheitsbewertung) of property in the former West German Laender are incompatible with the general guarantee of the right to equality, at least since the beginning of 2002. With regard to the valuation of property, the legislature continues to draw on the general assessment date (Hauptfeststellungszeitpunkt) of 1964. This results in serious and extensive unequal treatment, which is not sufficiently justified. Based on these reasons, the First Senate of the Federal Constitutional Court has declared the provisions unconstitutional in its judgment pronounced today, ordering that the legislature must enact new provisions by 31 December 2019. Until that date, the unconstitutional provisions may continue to be applied. After the new provisions have been promulgated, the old provisions may be applied for another five years from the date of promulgation, but not after 31 December 2024.
Facts of the case:
To this day, standard rateable values for property in the former West German Laender are determined based on the values of 1 January 1964 pursuant to the provisions of the Valuation Act; they form the basis for calculating the tax. Five proceedings – three referrals from the Federal Finance Court (Bundesfinanzhof) and two constitutional complaints – have led to this decision. The plaintiffs in the initial proceedings and the complainants are owners of developed land in various former West German Laender who challenged the standard rateable values set for their land before the finance courts. The Federal Finance Court suspended three appeal proceedings and referred to the Federal Constitutional Court the question whether the relevant provisions of the Valuation Act were unconstitutional due to a violation of the general guarantee of the right to equality. The constitutional complaints essentially also claim a violation of the general guarantee of the right to equality.
Key considerations of the Senate:
I. The provisions of the Valuation Act regarding the standard rateable valuation of property in the former West German Laender are incompatible with the general guarantee of the right to equality. Art. 3(1) of the Basic Law (Grundgesetz – GG) gives wide latitude to the legislature when it comes to setting out the details of valuation provisions regarding the tax base, but it requires a realistic valuation system as regards the relation of assets to each other. With regard to the valuation of property, the legislature continues to draw on the general assessment date of 1964. This results in serious and extensive unequal treatment, which is not sufficiently justified.
1. The principles regarding the application of the general guarantee of the right to equality in the context of tax law, developed in the case-law of the Federal Constitutional Court, require an equality-based set-up for valuation, also at the level of determining the basis of taxation. The principle of equal burdening (Lastengleichheit) constitutes the basis for equality considerations in the field of tax law. According to this principle, taxpayers must, de facto and de jure, be equally burdened by a tax law. The right to equality gives wide latitude to the legislature when selecting the taxable object and determining the tax rate. After an object of taxation has been chosen and thus a decision on a tax burden has been made, deviations from such a decision must, however, be in accordance with the right to equality. Accordingly, such deviations require a specific factual reason that can justify unequal treatment. In this context, the requirements for the reason justifying the deviation increase in line with the extent of the deviation and with its significance for the overall distribution of tax burdens.
2. For reasons inherent in the system, suspending a new general assessment of standard rateable values over a long period of time results in substantial unequal treatment due to unequal valuation results. As the values drawn on are those of 1 January 1964, the distorted values resulting from the overly long general assessment period are reflected in the individual valuation elements of both the rental value method (Ertragswertverfahren) and the capital value method (Sachwertverfahren).
The system of standard rateable valuation for property is characterised by universal valuations (general assessments) carried out at regular intervals. Pursuant to § 21(1) BewG, such a general assessment needs to be carried out every six years for developed and undeveloped land. The aim of the valuation rules is to determine standard rateable values that at least come close to the current market value of the land. When reviewing equality-based taxation, the point of reference in this system is the current market value against which the results of standard rateable valuation must be measured with respect to the nature and extent of possible divergences.
The cycle of general assessments was resumed pursuant to a law enacted in 1965; the legislature stipulated 1 January 1964 as the date of the general assessment for this cycle. It then suspended general assessments and has not resumed them since. In 1970, a law was enacted stipulating that an extra law would set the date of the subsequent general assessment of standard rateable values of property following the assessment in 1964. To this day, such a law has not been enacted. Since then, the required general assessment has continued to be suspended and has increasingly led to distorted values of property. This inevitably results from the applicable valuation system.
The periodic repetitions of general assessments as provided for by law are pivotal for the valuation system as designed by the legislature itself. The valuation system is based on the notion that the circumstances that determine the current market value of land are uniformly captured as realistically as possible at the time of the general assessment. As these circumstances are typically subject to change relevant to market value in the years following a general assessment period, new general assessments are required at regular intervals not too far apart.
The longer a general assessment period extends beyond the six years originally provided for, the bigger the individual and the more extensive the overall divergence between the actual market value of land and its standard rateable value at the time of the general assessment.
Yet a divergence between current market value and the standard rateable value assessed is not in itself objectionable under constitutional law. If standard rateable values lagged behind the rising market values evenly in all cases, it would not in itself result in unequal treatment relevant under constitutional law, since the level of standard rateable values in relation to each other, as compared to the current market value, would remain the same. However, there are no indications to suggest that the increasingly distorted values that necessarily result from dispensing with regular general assessments evenly reflect the development of current market values.
3. The overly long general assessment period results in extensive, numerous and substantial value distortions in standard rateable valuations of property. These lead to corresponding unequal treatment with regard to property taxation. Due to the extent of the distortions, the compatibility of this unequal treatment with Art. 3(1) GG is subject to strict equality requirements. Neither the goal of avoiding excessive administrative burdens in general terms nor typifications and generalisations can sufficiently justify such unequal treatment.
a) Dispensing with new general assessments serves to avoid particular administrative burdens. While the legislature has substantial latitude in this respect, this does not include accepting a dysfunctional valuation system.
The goal of administrative simplification does not justify the value distortions caused by the long-term suspension of general assessments, even if the resulting alleviation of administrative burdens is deemed especially significant. Dispensing with regular general assessments at recurrent six-year intervals is not the result of a conscious decision to simplify administrative procedures on the part of the legislature, where elements of standard rateable valuation are corrected to streamline the procedure and a lower level of details is accepted in return. Rather, by dispensing with them, the legislature removes from the system of standard rateable valuation a central element which is indispensable for obtaining valuations that are realistic in their relation to each other. If a legal provision generally violates the right to equality to a substantial degree, neither the highest level of administrative simplification nor the improved cost-benefit ratio between the tax collection effort and tax revenues can justify such a violation in the long run. The insight that unequal treatment structurally inherent in a tax law cannot be eliminated with reasonable administrative efforts must not lead to the unconstitutional situation being tolerated. It is irrelevant whether the legislature, when it suspended general assessments, knowingly accepted this shortcoming or if it has just not realised it. The decisive factor is that the remaining arrangement is objectively dysfunctional. Accordingly, it does not matter whether doing without a new date for general assessments is to be understood as just an ongoing waiting period within the system of repeated general assessments or as an implied manifestation of finally dispensing with further general assessments altogether.
b) Suspending general assessments and its consequences are also not justified for reasons of typification and generalisation. The legislature deciding on tax matters is allowed to typify for reasons of administrative simplification and, in this context, to disregard the particular circumstances of each case, if the advantages resulting from this are in adequate proportion to the inequality of tax burdens necessarily linked to typification, its decisions are realistically based on typical cases and there are valid and plausible reasons for it. However, the value distortions arising from the current system of standard rateable valuations do not satisfy these requirements. When dispensing with further general assessments, the system does not realistically reflect typical cases. The value distortions are not limited to atypical exceptions or negligible corrections in marginal areas. Rather, they affect the core of valuation, they have become the general rule in large parts, and their number and extent increase as the general assessment period lengthens.
c) Neither a general undervaluation of property as compared to its current market value nor the supposedly very low property tax burden can justify the value distortions. When reviewing violations of the right to equality under constitutional law in the context of standard rateable valuation, it is, in principle, also irrelevant that standard rateable values have considerably lost general significance as they are now largely limited to property tax law. Property tax is, also in substance, not a tax of negligible dimensions. Total revenue from property tax, which has continuously increased over the last few years, from EUR 12bn to just under EUR 14bn most recently, and its considerable significance for the municipalities contradict such a presumption. Due to the level of municipal leverage factors (Hebesätze) common today, property tax is not insignificant for many taxpayers, not least because it is payable annually and for an indefinite period. Contrary to the opinions of the Federal Government and several Laender representatives, the distorted values cannot be compensated for in a manner that would satisfy the constitutional requirements, neither by way of follow-up assessments (Nachfeststellungen) or value adjustments (Wertfortschreibungen), nor by adjusting the level of property tax through the leverage factors.
II. The Senate has ordered that the provisions that it found to be unconstitutional continue to apply in two stages. First, they continue to apply for standard rateable values assessed in the past and for property tax collection based thereon, and beyond that, they continue to apply in the future, initially until 31 December 2019. The legislature must enact new provisions by that date. Without ordering continued application, the administrative burden would have been enormous, given that, due to the large number of persons liable for property tax, a considerable number of notices of standard rateable values that are not yet definitive – and, as a consequence, the notices of property tax assessment based on them – would probably have had to be suspended or amended or at least partially reversed. The problems would have been exacerbated by the fact that these cases could only have been processed after the new provisions for valuation had entered into force and been implemented and hence, only many years after the pronouncement of this judgment. In light of the considerable financial significance of property tax for the municipalities, there would be a serious risk that, without their revenues from property tax, many municipalities would run into great budgetary problems in future. The persons concerned can reasonably be expected to accept the enforcement of such notices of standard rateable values, as the property tax burden is basically recognised as legitimate under the Constitution, has traditionally “always” been provided for and thus was, and is, to be anticipated by land owners. As soon as the legislature has enacted new provisions, the challenged valuation rules will continue to apply for another five years, but no longer than 31 December 2024. It is unusual to order continued application after the promulgation of new provisions, but it is required by particular rationales inherent in property tax, and thus justified as an exception. The nationwide revaluation of all land requires extraordinary implementation efforts in terms of time and staff. Accordingly, the Senate deems it necessary that the old legal situation continue to apply for another five years, but it also deems this period sufficient to implement the valuation rules established by new provisions and thus to avoid the budgetary problems that might otherwise occur during this time. For calendar years from 2025 onwards, the Senate has ruled out property tax burdens based exclusively on definitive notices of standard rateable values or of the property tax base (Grundsteuermessbescheid) from previous years.