In Armenia, a new property tax prompts debate about social justice
Armenia’s reform government recently introduced a flat income tax. Critics say a new property tax could hit people on low incomes hard.
After introducing a flat income tax in 2019, the Armenian government now plans to levy an increased property tax with the aim of bolstering local budgets
Critics warn that this increased tax could become a social burden for people on low incomes, and that the gentrification of the Armenian capital Yerevan might accelerate - as poorer residents could move away
This month, the Armenian parliament gave the green light to a government project to increase property taxes.
Prime Minister Nikol Pashinyan, who came to power as a result of the “Velvet Revolution” in 2018, characterised the introduction of a progressive property tax as one of the most important economic reforms in Armenia.
“Last year we were criticised for violating the principles of social justice by introducing a flat income tax. We then said that we would solve the issue with reforms, with a progressive property tax,” Pashinyan said.
While many inside government and ruling coalition MPs see these tax changes as a social justice reform - their emphasis being on taxing visible wealth - the project has sparked another wave of criticism towards Pashinyan’s economic policies. These planned tax amendments come a year after the Armenian government introduced a controversial flat income tax, which was criticised by various groups at the time.
Much of the current criticism about the planned amendments has focused on how people on low incomes who live in downtown Yerevan and other expensive neighbourhoods will pay increased property tax - an annual tax on property owners. Many of these people either inherited their apartments or received them through state programmes during the Soviet era, and some fear the new property tax will result in severe gentrification of the Armenian capital.
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“The poor receive welfare payments from the government and taxing them more during a pandemic is unreasonable. It is like giving them help and then taking it back”
In an interview to openDemocracy, economist Suren Parsyan, who is head of economic research at Armenian Revolutionary Federation Bureau, commented that the proposed property tax cannot be considered a social justice reform as it could impact poverty-stricken communities in Armenia. “The poor receive welfare payments from the government and taxing them more during a pandemic is unreasonable,” Parsyan said. “It is like giving them help and then taking it back.”
According to official data, the average monthly salary in Armenia is 135,000 drams ($280), while the median salary is even lower. Those same statistics state that 23.5% of the population lives below the national poverty line.
Responding to the risk of low-income households not being able to pay the property tax, Deputy Finance Minister Arman Poghosyan said that paying the taxes will be manageable for the majority of people on low incomes, mentioning that a gradual four-year implementation plan had been designed.
Tsovinar Vardanyan, an MP in Armenia’s ruling My Step coalition, justified the government’s rationale, saying that “when we introduced flat income tax, it was already announced that the logic of our tax policy would not be taxing income, but taxing property and expenses”. Vardanyan claimed Armenia’s opposition is manipulating the issue by calling it “a project to increase taxes”.
Hovik Aghazaryan, another MP from the ruling coalition, said in an interview he thinks people living in downtown Yerevan who are unable to pay the property tax should sell their apartments and “move to more humble apartments somewhere else and enjoy the saved money”.
In Armenia, a lot of real estate is not taxed at all and most is under-taxed. The reason is that property tax is collected according to the land registry value of real estate, which is, as a rule, much lower than its market value.
To counter this - and, in its words, bolster local budgets, the Armenian government is planning to introduce a six-step tax system, under which the greater a property’s land registry value, the more the tax has to be paid. The tax rates will be different for apartments and houses.
In 2019, Armenia’s State Committee of Real Estate initiated a process of reassessment (the last time land registry values were assessed was in 2002), with the goal of equalising registry and market values of real estate. The process is ongoing. The committee sets land registry values according to a special zoning system. Recent updates introduced 20 new zones (instead of the previous 17), 10 of which are in Yerevan.
In order to make the change as smooth as possible, the Armenian government says the changes will be introduced gradually, starting from December 2021. The four-year plan implies levying only 25% of the tax for the first year, 50% for the second, 75% for the third and 100% for the fourth year.
The government is also planning to remove a 3,000,000 dram ($7,000) non-taxable threshold - properties valued under this amount are currently exempt from property tax. In a recent cabinet meeting, Prime Minister Pashinyan said the non-taxable threshold should be cancelled partly because there’s a need to change public attitudes towards the state budget.
“We should care about our state budget the same way we care about our family budget,” said Pashinyan. “The non-taxable threshold should be eliminated. If a person’s yearly property tax is as low as 100 drams [$0.20], and our calculations show there will be such cases, let them pay it anyway. Fiscally, this means nothing, but psychologically, politically and in terms of civic attitude, this is of great importance.”
What are the numbers
According to figures recently presented by the Ministry of Finance, there are roughly 432,000 apartments in Armenia. Sixty three percent of these apartments (275,000) fall under the current non-taxable threshold, with 107,000 of these apartments located in Yerevan.
Under current land registry values, most apartments are undertaxed. For instance, the annual property tax for around 135,000 apartments is 1,800 drams only ($3.73) and there are just 6,000 apartments which generate a property tax of around 42,000 drams ($87).
The Finance Ministry says it has conducted research on international practices of applying property tax, comparing Armenia to countries with similar economies. For Armenia, the annual property tax revenue comes to 0.2% of GDP, while for Georgia it’s 1% and Russia it’s 1.2%.
The yearly six-step-taxing system is the following:
|Real estate value (drams)||Annual tax to be levied (drams)|
|Band 1||up to 10,000,000 ($20,000)||5,000 max. ($11)|
|Band 2||10,000,000 - 25,000,000 ($21,000 - $52,000)||20,000 ($41)|
|Band 3||25,000,000 - 47,000,000 ($52,000 - $97,000)||64,000 ($132)|
|Band 4||47,000,000 - 75,000,000 ($97,000 - $155,000)||176,000 ($364)|
|Band 5||75,000,000 - 100,000,000 ($155,000-$207,000)||326,000 ($675)|
|Band 6||100,000,000 or more ($207,000)||326,000 + 1% of the sum exceeding 100,000,000|
A similar six-step system, but with slightly higher taxation, works for houses.
Local municipalities are responsible for tax collection and all of the collected money will go to local budgets. The government says so far it has no plans to cut funding to local municipalities and sees property tax as an investment in improving public services.
How was the project received
ARF Bureau economist Suren Parsyan told openDemocracy that local municipalities will likely have trouble collecting the new property tax because of bad management practices. He suspects the government could decide to cut funds to municipalities in the future, likely by claiming that local budgets will receive increased property tax revenues instead.
Parsyan said the government should not have eliminated non-taxable thresholds both for income and property tax.
Former Deputy Prime Minister Armen Gevorgyan recently criticised the proposed reform in a column, calling claims that the new property tax is a social justice reform “nonsense” after the government “abandoned the rich should pay more” approach by introducing a flat income tax last year.
Leader of opposition party Bright Armenia Edmon Marukyan called on his followers to hold an online protest against the property tax changes.
Despite criticism, it is likely that Armenia’s ruling My Step alliance is eventually going to pass the proposed amendments in the second sitting - a move that will provoke further discussions about social justice and criticism of new economic policies in Armenia.
29 July: article updated to note Armen Gevorgyan's correct former position as Deputy Prime Minister, rather than Prime Minister.
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