The latest “outrage” in Hungary: Introduction of property taxes?

If I had to guess, between 80 and 90 percent of Hungarians are outraged at the very thought that anyone would tax their property. For a number of years the topic periodically surfaced as a possibility, but in the end nothing came of it. Governments were afraid of the political consequences of such a move although economists and tax experts admit that the introduction of property taxes in Hungary is long overdue. Tamás Bauer, professor of economics and former SZDSZ member of parliament, only yesterday said in an interview on József Orosz's Kontra that the government should have introduced this form of taxation at least two years ago. Finance ministers and economists might think so, but the Hungarian public is up in arms. In the last few days I heard from several sources that people who claim they had never voted for any party but MSZP will now change their allegiance. The introduction of such a tax is "the last straw," as one of the listeners said to György Bolgár. He swallowed the loss of a certain amount of his pension, but that anyone dares to tax his property is too much. Then in the course of the conversation it turned out that the poor pensioner in addition to his apartment also owns a piece of property at Lake Velence, near the Austrian border that the family uses for recreational purposes. Interestingly there he already pays property taxes but under a different name: communal tax. He didn't remember how much. His wife handles these things.

In Hungary 45% of properties are subject to communal tax. This tax is calculated only on the basis of the size of the dwelling, not its value. This seems to me an unfair practice. The owner of a fairly large house in bad shape and in a less than desirable neighborhood will pay as much as the owner of a spanky villa in the most expensive district of Buda. Admittedly, the communal tax rate is low. On a large downtown apartment in Pécs the owners currently pay 17,000 Ft. At today's exchange rate: a little over 56 euros.

One of the problems is that people in Hungary aren't used to paying taxes. After 1948 and before the change of regime Hungary had no personal income tax, property tax, or sales tax. Of course, the people paid plenty except they didn't know it. Employees received very low salaries while prices, with the exception of subsidized items, were very high. The sales tax was hidden in the price while the salary received was the net amount after the invisible tax was deducted. Therefore, the illusion was perpetuated that there were no taxes. The only deduction was for pension and for medical care but even that was combined.

Another problem is that an unusual property ownership structure developed in Hungary, especially after 1989. In the 1970s and 1980s monstrous Soviet-style apartment buildings were constructed in the outlying areas of larger cities. Local governments owned these apartment complexes and rented out the small and rather shabby apartments for ridiculously little money. Another subsidized benefit that complemented the low incomes. These "council apartments" (tanácsi lakások), as they were known, were a huge burden on the localities. After the change of regime the local governments didn't want to bother with them anymore. Instead, they offered them for sale to the inhabitants for practically peanuts. As a result a staggering 90% of Hungarian families own rather than rent. Thus a general property tax would be imposed on practically the entire population. Hungarians made peace with the value-added tax and the personal income tax, but property tax makes them see red.

The interesting thing is that property taxes are a much older form of taxation than either sales tax or personal income tax. In fact, personal income tax was introduced in the United States only in 1913 and in Hungary even later. Property taxes, on the other hand, already existed in the ancient world from Egypt to China. This was also the case in Hungary in the middle ages and beyond. All the Latin names attached to these property taxes have something to do with individual households. The first documentary evidence of such a property tax in Hungary was during the reign of Károly Róbert (1308-1342). It was called "lucrum camerae"–that is, gate tax. Every peasant household that had a gate through which a cart with hay could drive had to pay eighteen dinars a year. Later the documents talked about paying taxes by "porta," which also means gate in Latin. By the middle ages a "porta" meant a peasant dwelling and yard; in fact, even in today's Hungarian one can talk about a "porta" which means a peasant dwelling and yard with outbuildings and barns. At other times property tax was called "smoke money" (füstpénz). The smoke money's connection to the dwellings is clear. 

The Reform Alliance's plans included the introduction of property tax but only on houses or apartments worth more than 30 million forints or 104,254 euros. But in the last few days the media buzzed about figures that frightened everybody. According to rumors no tax would have to be paid on property valued at less than two million forints. Opinions about the very existence of such property vary. According to some there is simply no real estate whose value is less than 2 million forints. Others claim that in certain villages there are plenty of well kept and decent looking houses under that price. I personally don't think that there are too many of them. The tax rate would be 0.2% on houses worth between 2 and 10 million forints, 0.35% on property worth between 10 and 30 million, and 0.5% above that amount. Owners of garages and weekend houses would have to pay 1%. The tax would be introduced as of January 1, 2010, and the deadline to pay the taxes for the first six months of the year would be July 1. These rumors had Hungarians in a total twit.

Real estate agents claim that the Hungarian registers are in such bad shape that it would take a considerable length of time to set everything straight. This seems strange to me, but admittedly I live in a country where I could walk into town hall and trace the history of the house I lived in all the way back to the seventeenth century. Owners, assessments, amount of land were all neatly recorded in huge books. In Hungary even property ownership is not always clear. A few years ago it was an everyday affair for unscrupulous owners to sell their houses twice because the "földhivatal" (land office) was so sluggish that property titles were not transferred for months if not years. I remember reading somewhere more than ten years ago that the German government felt pity on the Hungarian land offices and gave a fair amount of money to bring some order into the chaos.

Whether the rumors of the draconian property taxes (at least by Hungarian standards) were well founded is unclear. If these were leaks of what the government actually intended, they created panic among the population and outrage within the socialist parliamentary caucus still shaken by Katalin Szili's defeat in Pécs. It now seems that the government is proposing something closer to the Reform Alliance's original plan of taxing only properties worth 30 million forints or more. The tax rate on property worth between 30 and 50 million forints will be between 0.2 and 0.5%; on real estate worth over 50 million forints over 0.5%. Individual localities can decide whether to tax property worth less than 30 million forints.

If I understand the plan correctly, the owner himself will have to declare the value of his property! I simply can't fathom how this is going to work. How many fools will claim that his house or apartment is worth more than 30 million? Few people would do that. And what about those people who own several apartments or houses: one was purchased for the son who is studying in Debrecen, another for the daughter who studies in Szeged. There are two more apartments they are renting out, and the family loves going down to Lake Balaton to spend time in a nice little house of their own. Let's say that none of these is worth more than 30 million forints. Then what? And this example is not an outrageous proposition. I know several families like that. I have the feeling that this whole plan will end up where  earlier attempts at taxing very expensive pieces of property ended up. In the garbage heap. It will be a failure, and all the hidden wealth that exists in Hungary will remain untaxed.

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Mark
Guest
I feel ambivalent about the wisdom of this reform. On the positive side a well-thought out system of property taxation would create a much more balanced taxation system. If it was part of a proper local government reform and was envisaged as the main source of revenue for local authorities I could see that it contribute to the modernization of the finances of that sector. Furthermore the rates proposed by the government suggest a cautious approach to reform, which could defuse the politically explosive potential of introducing such a tax. They are low – in the UK the tax payable to local authorities (a quasi property tax) equates to about 0.75% of the value of an average house per year (there are difficulties in calculation because of differences in tax levels and house prices between localities). On the downside, a nationally levied property tax is unusual in Europe, and resembles the mild wealth tax introduced in France by Mitterand in the early 1980s (something which was not widely emulated, and indeed, was considered as a sop to the radical left). The arguments made by Hungarian advocates of a property tax seemed to rest on a very serious logical inconsistency. The… Read more »
Jordan Jumpman
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Penny Sue Oswalt
Guest

In the USA we have property taxes, have been for a long time. If you do not pay your property taxes, they can foreclose on your property and you can become homeless. Even with the wealthiest of people it happens. I assume that if this passes and gets authenticated? Most people will be hurting more. When you buy a house here in the USA, you plan to pay for property taxes.

Member

@ Penny Sue Oswalt, Many countries have different taxes and different tax system. What works in one country may not work so well in others. In the USA you also do not pay 25% sales tax on goods you purchase, and you do not have general healthcare either. To compare to the two systems on a superficial level is just not fair.

Penny Sue Oswalt
Guest

@ Some1; Good heavens No! We do not have a 25% sales Tax!But our sales taxes usually rise anywhere from 6% to 7.75%. I did not know about paying 25% in taxes. I also want to point out is and for those who do not know this…we pay Federal, State, City taxes in addition to sales tax. And cigarette and alcohol taxes are almost double.You can say we are “Taxed to the Max”. The more we make, the more they take and I am not talking about the top 1%. I was talking about Hungarian taxes out of ignorance, Thank you for taking the time to share. One more thing based on my new findings,I have to agree with you! Have a good day!

Eva S. Balogh
Guest

Penny Sue: “I did not know about paying 25% in taxes.”
Actually Some1 forgot that today sales tax is 27 percent. The Orbán government jacked it up. And there is sales tax on absolutely everything.

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