Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

A €4bn Budget day suggestion – just how much could an Irish property tax raise?

Yesterday, the latest report was released. More details here, but the overall gist is that asking prices fell 4.2% in the first few months of the year. Coupled with the falls in 2007 and 2008, this means that asking prices are now down 18% in two years. On the face of it, this may not have much to do the Budget being released today, which has to deal with more pressing issues of the public finances, unemployment and the banking crisis. However, to say that Ireland’s stock of wealth tied up in residential property should have no role in plugging Ireland’s E25bn public finances gap is myopic in the extreme, particularly given Irish wealth-holding tendencies. Even if we rule out a property tax, we should at least know how much we’re throwing away in potential tax revenues, and this blog post hopes to establish approximately this potential is.

No harm, first, to recap the fiscal crisis Ireland faces, outlined in the chart below. In 2007, the Irish government expected that in 2009, tax receipts would be in the region of €56bn. By last week, the expected revenues for the year had slid down to €34bn. This €22bn gaping hole is staggering, as it represents a collapse of 40% in revenues. Any organisation with a 40% collapse in revenues has to re-examine its entire business model and Ireland is no different. Fixing the €20bn-plus gap between income and expenditure will require taking more money in and spending less. My contribution on the debate about spending less is for another day – you can probably get some inkling of what I think here – but on raising more, we have to look again at property. Property taxes in Ireland are based on transactions – we now know, and probably deep down knew all along, that the huge amounts the government was taking in over the past few years were totally unsustainable.

Government estimates of Ireland's 2009 tax take over time
Government estimates of Ireland's 2009 tax take over time

If we don’t tax property transactions, how will we tax property? And what contribution to plugging our €20bn gap can property make? Recent articles by the Sunday Independent and the Irish News of the World have discussed the scale of how much has been wiped off Ireland’s property market, while the combined report by stockbrokers Davy, Goodbody and NCB mentioned the potential revenues that could be earned by introducing a property tax in Ireland. So just how big is Ireland’s property market? The answer is about €460bn, as is shown in the graph below. The graph uses 2006 Census data on the number of households in each county, Dept of the Environment figures on new houses built in each county since 2006 and quarterly average house prices by county.

The value of Ireland's residential property, 2007-2009
The value of Ireland's residential property, 2007-2009

The graph also shows that the total value of Ireland’s residential property is about E100bn less than what it would be were no crash to have occurred. A similar amount has also been wiped off Ireland’s stock exchange, which is plotted on the same scale to allow comparison but whose remaining value is €30bn, compared to the €460bn still in Ireland’s homes.

Supposing the housing crash continues so that Ireland’s 1.6 million homes are worth perhaps E400bn by the time they bottom out. While well below the €600bn or so that it “could” have been, this still represents a huge potential stock of wealth that is largely untaxed. Simple maths says that a property tax that averages 1% could raise €4bn per annum. Assuming that the government will be aiming for a three-year correction to 2012 that lifts tax receipts by €10bn a year, while it cuts spending by €10bn a year over the same period, a property tax could solve 40% of Ireland’s tax woes. The average household’s annual tax bill would be less than €3,000 – or about €50 a week.

How would a property tax work? There are of course some significant issues that Ireland would have to iron out first, before a property tax could come in. For example:

  • Politically, older citizens have proved sensitive to the idea that the government might have access to some of the wealth stored in their homes, even if it’s to pay for their healthcare. The illiquidity of houses raises the prospect of retirees having to downsize to avoid tax bills. While this is normal in many places, particularly in the US, it would require a change in mindset here. Put more bluntly, the idea that people should be entitled to have any wealth stored away in property, as opposed to other forms of wealth, untouched by the government is out of date.
  • Recent purchasers would have to be given property tax credits, so that double-taxation through stamp duty and then the property tax would be avoided. Those who made particular purchases based on stamp duty arrangements that existed at the time may also feel hard done by.
  • Measurement of house prices would become even more important, as it would have tax implications. In this day and age, though, accurately measuring house prices should not be an arcane task. Measures such as the and ESRI/ptsb series are both based on well established hedonic price methods, which could easily be adapted to official Revenue Commissioners data, if these data were made available as they are in most other countries.
  • An instant extra tax burden is probably not what the economy needs now. Phasing it in gradually over the coming 3/4 years would be advisable as it would allow adjustment to a new system, while also showing medium-term planning on the part of the government.

Nonetheless, there are significant advantages to a property tax:

  • It gives the government a steady generally acyclical revenue stream and has an automatic stabilizer effect – i.e. the tax burden households face goes down when prices slump and more than likely their confidence slumps too.
  • There is lots of potential in a property tax to achieve other goals as well as revenue-raising. (Indeed, for the purists, taxes should only be introduced when other aims will be served.) For example, the average of 1% could hide differences, if the government wanted to incentivize, for example, energy efficiency. Houses achieving carbon neutrality or some top level of energy efficiency could be exempt from property tax, or perhaps pay a minimal rate of 0.25%, while homes that incur a significant burden on the rest of society might have to pay signficantly more. (This would require significantly more planning and guidelines for consistent rating than the recent BER scheme.)

Given that we’re talking billions – perhaps even twice as much as the joint report by the main stockbrokers suggested – this should definitely be explored in more detail over the coming months.

  • barratree ,

    why not base the tax on land values- easier to determine for “chunks” of areas (could be set by local authorities if we find a way of trusting them) and actually taxes based on the contribution of government to the property. Road maintenance and other council services benefit most households relatively equally?

    Furthermore, it could be used as a way of preventing destructive land speculation?

    • Graham ,

      Thanks to Ronan for bringing this important issue to light. The lack of a use tax on residential property is indeed an anomalous feature of the Irish tax system.

      I should add that among its many other omissions, this system has contributed to the poor use of land in Ireland over the construction boom period.

      Which brings me to what I think is property tax’s great attribute: It brings property to its highest and best use, by punishing vacancy and rewarding tenancy.

      Another point is that if revenue collection is devolved to local government (as is the practice in many countries, such as France or the US), property tax can provide a vital stream of autonomous revenue for LAs. Such a move would help to restore meaning to the current system of LG in Ireland, which has become a sleepy breeding ground for future TDs.

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            • Robert Browne ,

              If this government, the one now in power without the consent of the people do not stop this monocultural, arrant madness of squeezing more and more taxes out of the economy it will not be long before the economy itself is pushed into terminal decline.

              What about the reverse multiplier effect of taking disposable income out of peoples hands? The government is not doing anything productive with this money. It is using it instead to service a growing national debt currently approaching 62bn, using it to recapitalise dead banks, which are still not lending, either for job creation or job preservation. Also of course, it is being used to pay for the spiraling unemployment rates (11% +). All of the above, are current expenditures, which the government are trying to fund from a shrinking tax base. Bodies that are bled and bled some more, turn white then they die! Mr. Paul Krugman says we are faced with 5 years of ‘suffering”. How polite he is! This government is not for turning on NAMA on Anglo or on the impropriety of bleeding more taxation from an anemic economy. Have I ideas? Yes, Of course! Stimulus ideas not perdition of the economy. 30 years ago, dare I say, I was getting 98% in Economics exams from one of the best economics lecturers this country has ever had, who later went on to become president of the European Parliament. All the time, these politicians were developing their “economic policies” of traipsing around Galway tents and trying to curry favour with developers. It is only since February 2008 that our great Irish economists our great economic quango’s and economic lecturers bar one (Morgen Kelly) started to acquaint themselves with sup-prime, securitization, CD’s and even the simple notion of “credit squeeze” none of these will ever suggest “reality therapy.” Why? Because, they work for the government and 98% of them inhabit the parallel universe of the Public Service. If you want the painful truth you must first and foremost go outside of the quango’s and outside of the Public Service then you will be told in the plain simple unembellished language what has to be done. The laugh of it all, is, that none of them will be receiving any pensions down the line anyway when we have had the necessary truth commission.

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                • Dankoozy ,

                  If its energy efficiency you’re after tax the fuel, not the value of the house.

                  in the US many older people live basically in poverty, trailer parks. you don’t want to see that happening here – there is no need for it either, these people have earned their homes and should be allowed to continue living in them without having to pay each year.

                  • charlberg ,

                    “Put more bluntly, the idea that people should be entitled to have any wealth stored away in property, as opposed to other forms of wealth, untouched by the government is out of date.”
                    Do you come from North Korea? Old people have paid tax on income to buy that property asset in the first place and for the vast majority of taxpayers, the home has always been their main pension resource because they couldn’t trust the state. Capital gains tax is not applied on the share portfolios of young people until a profit is crystalized, so why put on a tax on property which is basically a tax on the old people? Why not just gas them and steal their assets for the state..
                    Such solutions are great for the public sector who don’t take any cuts and has the taxpayer treating them to gold plated pension plans. If a property tax is applied, the public sector should have no problem to extend the extraoordinarily generous pension terms available to the public sector to the taxpayers who toiled over the past four decades to support them and now face a ruinous old age.
                    Gassing granny is not the solution..

                    • Ronan Lyons ,

                      I’m not if you’ve ever done college debating. If you have, you may be familiar with the lowest trick in the book, known as the Hitler trick, i.e. when stuck, contort the opposing argument into something comparable to Hitler/North Korea/gassing grannies, because every sensible thinking person couldn’t possible support those things. As you can imagine, I don’t have a lot of time for those kind of arguments.
                      Plus, if you had taken the time to look a little wider around the site, you might have found that this is not exactly a haven for arguments in favour of expanding public sector expenditure/wage/pension levels.

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