Popular Taxation

The introduction of IMI (Imposto Municipal sobre Imóveis) in 2004 was a great step forward in balancing the taxation of property ownership in Portugal and stopping evasion on property transfers, now subject to IMT (previously SISA). The basic rule was that all transactions would be assumed to have been carried out at a price based on area, location and year of construction. Thus under-declaring transaction values to avoid transfer tax became pointless and practically died out since assessed values were very close to real values.

Property was thereafter taxed annually based on this same value, making property ownership a rather painful pastime, particularly for well-off people with large and new houses.

However, the property crash has caused a glitch in the system. Owners are now being taxed annually based on values that they cannot hope to achieve in the open market.

So what was the government's reaction? Tweak the tax rate downwards! That has a number of political benefits, such as benefitting the middle classes directly, while the reduction in tax revenue is hidden from the deficit calculation as the tax income was allocated to local authorities, not to central government. Of course, the underlying principle is wrong: there was nothing wrong with the tax rate, only with the property valuations, but since when has logic applied when votes are at stake?

I wonder what they will tweak next, as elections approach. Perhaps they should have left this one to next year, as there isn't much room for manoeuvre anywhere else...