The cabinet considers a progressive property tax and greater fiscal decentralization

The government is preparing changes to the way residential properties are taxed, considering the introduction of a progressive tax based on the number of dwellings owned. According to Prime Minister Rumen Radev, current property tax valuations are "hopelessly outdated," and there is a need to modernize both the valuations and the taxation model.

The idea is for owners of more than one home to pay a higher rate. In order for such a reform to be realized, it is necessary to ensure connectivity between the information registries of the various municipalities so that it is clear how many properties each person holds at the national level.

The Prime Minister presented his vision during a meeting with the National Association of Municipalities in the Republic of Bulgaria, organized on the occasion of the association's 30th anniversary. He committed that the cabinet would also work on the issue of future decentralization of a portion of taxes in favor of local authorities.

"We must think about how to progressively tax the number of dwellings. The first primary residence should be at one value, but subsequent ones could be on an increasing scale," Radev gave as an example. He specified that work in this direction has already begun, but its actual implementation is impossible without connecting the tax systems of the individual municipalities.

The Prime Minister also warned about the potential risks. "We will help you so that this progressive taxation on the number of dwellings can be deployed. But we must be careful, because it could lead to rent increases," Radev said, pointing out that the burden on owners of multiple properties could be passed on to tenants.

Currently, residential properties are taxed based on their determined tax valuation, with municipalities having broad freedom to set the rate – in the range of 0.1 to 4.5 per 1000 of the valuation. The tax for a primary residence is reduced by 50%, but there is no such relief for other properties. There is also no progressive scale based on either the number or the value of the properties owned.

It is unclear what the exact financial effect of introducing progressive taxation would be, but the Prime Minister pointed out that similar models exist in a number of European countries, where the total value of citizens' property is taken into account. At the same time, the problem of controlling the discount for a primary residence was highlighted – currently, it is used mainly on the basis of a declaration by the owner, without a full link between municipal systems.

At this stage, the idea has not been detailed and it remains unclear whether and how it would be applied to residential properties owned by companies. Additional questions are being raised – for example, how ideal parts, co-ownership, and more complex forms of ownership will be accounted for, which could complicate the application of the progressive scale.

A similar concept for higher taxation of housing bought for investment purposes by individuals was already launched at the beginning of the term of Sofia Mayor Vasil Terziev. At that time, the idea was to distinguish the primary residence from properties intended for rent or resale. However, the initiative failed to materialize and remained at the proposal level.

In parallel with the discussion on changes to property tax, the government is also considering possibilities for deeper fiscal decentralization. Currently, personal income tax, corporate tax, and indirect taxes go entirely to the central budget. Over the years, it has been discussed many times that a portion of income and corporate taxes should return to the municipalities where they were generated.

Radev did not go into specifics regarding the current options but outlined the general direction. "Such decentralization will strengthen the sense of ownership among citizens over the money they contribute to the treasury and will increase civic participation. It will also stimulate municipalities to seek more investment and be more active," the Prime Minister commented.

At the same time, he warned that unilateral decentralization could deepen the disparities between rich and poor municipalities. Therefore, according to him, a "fair mechanism for equalization subsidies" must be developed, which would prevent an excessive widening of the "gap" between the individual regions.

The demand for more financial powers and a share of tax revenues is among the long-standing priorities of local authorities. Promises in this direction have been made many times by various governments, but real and sustainable solutions are currently lacking. The current initiative brings back to the agenda the question of how far fiscal decentralization can go without upsetting the balance in public finances.