Owners of properties worth more than about $182,000 will soon pay a new graduated tax, the first major fiscal reform since President Oscar Arias took office in May 2006.
Approved by lawmakers earlier this month and expected to be signed by Arias,
the tax will raise an estimated $17.6 million per year to revitalize dilapidated neighborhoods.
The annual property tax ranges from 0.25 percent to 0.55 percent on the homes’ value and will expire in 10 years.
Despite this new tax, property taxes are still much lower in Costa Rica than in the United States, including in popular retirement states such as Florida and California, said Tim Kopatich, vice president of Crystal Clear Properties in Jacó, on the central Pacific coast.
But, he said, raising taxes during a global financial downturn could steer investors away from Costa Rica and toward Panama and Nicaragua.
“We need to be careful about the perception we give,” he said. “$182,000 can easily go elsewhere.”
Residents currently pay a flat 0.25 percent tax on the value of properties worth more than about $18,600. So once Arias signs the new bill, a person owning a $200,000 house would pay a total of $1,000 a year in property taxes, $500 more than they pay under the current tax.
The new tax, which must be paid within the first 15 days of the year, will likely take effect early next year. Properties belonging to the government, public institutions, churches and non-profit organizations are exempt.
The money will fund the Arias administration’s efforts to give adequate homes to squatters and destitute families living in shacks with dirt floors and tin walls.
Over the past 31 months, the Housing Ministry has approved funding for development projects in 25 extremely poor neighborhoods.
The project’s budget for 2009 would increase by 50 percent to $52 million under the new tax.
“This is a very positive law,” said Ennio Rodríguez, executive director of the National Housing Mortgage Bank (BANHVI), the financial arm of the Housing Ministry. “The richest should help those who have the least.”
Last week’s vote marks a victory for Arias, who proposed the bill and has sought to make anti-poverty programs a cornerstone of his administration.
Still, Costa Rica’s taxation system remains regressive and inadequate, according to the recent State of the Nation report. In 2007, tax revenue was 15 percent of gross domestic product, low compared to the rest of Latin America.
Arias promised early in his term to push for sweeping fiscal reform. But as a vitriolic debate over free trade consumed the Legislative Assembly, Arias limited his wishlist to the property tax.
Ken Silverman, a U.S. citizen who lives in Costa Rica for half the year, applauded efforts to help the poor, but he said the tax should be levied on income. A property tax, he said, hurts retirees on fixed incomes who pour their savings into a home.
“Suddenly, they are going to find themselves with one-, two-, three-thousand-dollar tax holes, when they’re only making pensions of about $12,000 to $15,000 dollars a year,” he said. “Property tax is like paying rent to live in your own house.”
The new tax has already dissuaded Silverman from expanding his home in Quepos, a port town on the Central Pacific coast.
Manuel Vega, a legislative aid for the Social Christian Unity Party (PUSC), acknowledged that the tax could discourage some investment.
“But it’s important to tell investors that if they want to come to our country to enjoy its democracy and its natural resources, they have to collaborate in helping poor families,” he said.
Taxing Your Abode
Home Value Tax Rate
$182,000 – $455,000* 0.25 %
$455,000 – $909,000 0.30
$909,000 – $1.36 million 0.35
$1.36 million – $1.82 million 0.40
$1.82 million – $2.27 million 0.45
$2.27 million – $2.73 million 0.50
$2.73 million and above 0.55
* Values converted from colones this week but will change with currency fluctuations.