Narrow the gap, but not too fast

An additional move of cutting the tax ahead of the April 10 parliamentary elections can certainly worsen the health of the country’s public finance and the size of its tax revenue.

The government is dumping the campaign of the previous administration to match the declared property estate value with its market value. President Yoon Suk Yeol, during a townhouse meeting, declared that his government will scrap the previous administration’s “reckless plan of rationalizing the real estate value,” which has been unsettling many families. The Moon Jae-in government in 2020 announced a roadmap to incrementally raise the state-evaluated real estate prices up to 90 percent of their market value by 2035.

The plan, coupled with the spike in housing prices, exploded into tax bombardment for homeowners.

The average 4 to 5 percent increase in the appraised value of multi-residence homes jumped to 19.05 percent in 2021 and 17.2 percent in 2022. The past government turned to punitive taxes after housing prices soared from its flop in real estate policy, Yoon said.

The former government politicized housing policy through regulations and taxes instead of maneuvering it in the supply-demand context. However, entirely scrapping the rationalization scheme is also unsuitable. Rationalizing the appraised housing value to better reflect its market value is necessary regardless of ideology differences between conservative and liberal governments. The question was just in the pace.

The appraised value of property becomes the basis for 67 administrative social taxes, including property taxes and national insurance premiums. The gap between declared values of properties and their market values goes against the ability-to-pay taxation principle. According to the Korea Institute of Public Finance (KIPF), property tax can surge 61 percent according to the rationalization roadmap by 2035.

To ditch the rationalization plan, the Real Estate Appraisal Act must be revised. President Yoon said that the government will come up with administrative actions to ease the burden even without a revision of the law. The remark implies that the rise in appraised housing value would be capped at this year’s estimate gain of 1.52 percent.

The government has already cut the tax rate on comprehensive property ownership tax for the rich, and lowered the ratio of reflecting declared housing prices in the standards for taxation. Even with the easing in excessive taxes, the gap between the appraised and market rates should be narrowed, as recommended also by the KIPE.

The signal of easing taxes at a time when the housing market has been relatively stable can send another wave of unrest in the housing market. An additional move of cutting the tax ahead of the April 10 parliamentary elections can certainly worsen the health of the country’s public finance and the size of its tax revenue.