Tax Realities in the World’s Wealthiest Cities

Much of the millionaire movement that takes place is between major global cities.  While having a second or third residence or investment in a beach or countryside location may appeal for vacations, when it comes to full-time relocation, global citizens tend to favor large urban centers — cities that offer a rich mix of arts and culture, quality of life, and safety and security.

Needless to say, moving to any new place will always have tax implications — particularly for those who live in one place but earn income in another or hold investments across multiple jurisdictions.

Much of our work at Henley & Partners involves advising clients on national tax systems and how they treat worldwide income, capital gains, and investment returns. But there is also a city- level tax angle, which is more nuanced and highly dependent on the nature of an individual’s presence in the city. This is often more variable than would be expected and should not be underestimated when planning a relocation.

City taxes and public services

Broadly speaking, local public services are funded through a mix of user charges, local taxes, and allocations from central government. Where central government covers the majority of spending, cities have less fiscal autonomy. Conversely, cities with less central support may rely more on local taxation, resulting in greater variability between locations.

Property tax variations

Local taxes most commonly take the form of property taxes, usually levied on real estate owned or leased by individuals. These can be calculated in various ways, for instance, based on the size of the property, as in France, or on value bands, as in the UK, where the bands are now significantly out of step with market values as they were set when the tax was introduced over 30 years ago.   

In the USA, property tax is often a percentage of the assessed value and this can be significantly higher than its UK or French equivalent. Furthermore, sales tax in the USA is set at the state level, whereas in most other places VAT rates are country-wide.

The burden of local taxes is also something to watch out for as it can differ depending on whether you own or rent. In the UK, council tax is usually to the account of the tenant, whereas in Spain for example, it may be included in the rent. Some countries, such as China, don’t levy property taxes on residential real estate occupied by the owner, but do charge taxes to leased properties. Some taxes, like transfer taxes, are one-off charges on purchase or sale rather than annual charges. And taxes for commercial property may differ significantly from those for  residential property. Even the famously tax-free UAE imposes some charges on commercial property, although these are always referred to as fees rather than taxes.

Income taxes at the local level

Some countries extend their income tax systems down to state, cantonal, or municipal levels.  The USA has Federal and State income taxes and in 14 states, counties may also levy local  personal income taxes, although this is typically only charged on earned income. Conversely, eight states levy no state income taxes at all, which can significantly impact relocation decisions, given that rates can reach up to 13% in the highest tax states.

Switzerland has a similar model, with cantonal and municipal taxes also levied as part of the income tax process. Japan has an earmarked local government income tax allocated at prefectural and municipal level, which is 10% of income — on top of national income tax top rates of 40% to 45%.

Urban fees and hidden costs

As local governments look to deal with urban challenges such as congestion and air quality, cities may introduce additional levies such as road pricing or parking charges. These fees can then form a significant part of local government revenue, thus impacting the cost of living in global cities.

The bottom line

There is considerably more variation in city-level tax systems than at the country level. While national income and VAT rates tend to align within broad parameters, local taxes differ markedly in both structure and scale. Whether based on income, property, or consumption, local taxes and how they are applied can impact on quality of life and overall cost of living in the world’s leading cities. 

Excellent public services and spaces need to be funded somehow, but the different approaches to how resources are raised are very telling and vary sharply from city to city, and even within a city, depending on where individuals choose to live or spend.