RIGA — Latvia’s ruling coalition parties reached a preliminary agreement to introduce a progressive property tax and raise the flat personal income tax Monday.

Implementing a progressive income tax is still off the table, though, Prime Minister Valdis Dombrovskis said after Monday’s coalition party cooperation council meeting despite the International Monetary Fund’s criticism that the residential property tax increase is “laughably low” and that  a progressive income tax must be introduced.

According to the latest agreement the base property tax would be 0.1 percent. Real estate with assessed value between 45,000 lats-75,000 lats (€64,000-€107,000) would be subjected to 0.2 percent tax. For property valued above 75,000 lats the tax rate would be 0.3 percent. Nonresidential property will continue to be taxed at a flat rate of 1.5 percent of cadastral value annually.

However, members of the People’s Party, the largest in the coalition, remain skeptical about tax’s increases benefits. One of the party leaders Vents Armands Krauklis told newspaper Neatkarīgā Rīta avīze that “there is no money in this tax.” Krauklis thinks that the new rates will bring in less than one million lats (€1.4 million) to the budget, and therefore it is doubtful if international lenders will agree to such minimal adjustments.

The People’s Party also wishes to verify if indeed the higher property tax rate would only apply to a small number of real estate property as stipulated by finance ministry. According to the data that Krauklis has, it would concern approximately 10,000 real estate properties. As for now, the party would ideally like to see higher property tax only for real estate with assessed value over  75,000 lats.

Economy minister Artis Kampars said Tuesday on the LNT television show “900 Minutes” that the coalition still has to work out some disagreements with People’s Party.

“There is still no 100 percent agreement. Some parties, especially the People’s Party, have a different opinion about the progressive property tax. Though we think that such taxation is in our minds correct, just and fit for implementation at this moment,” Kampars said.

Kamars said that People’s Party will eventually have to agree with the remaining four coalition parties on the progressive property tax matter.

The income tax would be raised from the current 23 percent to 25 percent. This will allow the government to keep the tax-exempt minimum income at the previous level or only reduce it slightly, Dombrovskis explained to the press. Previously the government planned to keep the income tax at 23 percent while lowering tax-exempt minimum from 35 to 25 lats a month (€50 to €35 monthly). This was criticized by Latvia’s international lenders as being de facto regressive tax, since it would take bigger part of income from those who earn less.

Additional emergency government meetings will be held during the coming weeks, before the 2010 state budget bill goes to Saeima for the final vote. The budget is one of the most contentious in recent history given the amount of austerity measures the Latvia is mandated to implement after accepting a bailout loan from the IMF, World Bank, European Union and Sweden in December 2008.