Ireland’s struggle to introduce a property tax continues, as does the public’s fixation with it. A minor bullet point in this update to the IMF-EU “troika”, confirming what was already decided – that Ireland is going to bring in a value-based property tax – is (along with that other staple of Irish debate, abortion) leading the news this morning.
The on-going poor quality of information doing the rounds is a big frustration so I’ve decided to continue my crusade for good policymaking in Ireland and post (yet again for long-standing readers) about property tax.
Why a property tax at all?
The yawning gap between what the Irish government takes in and what it spends means that both spending cuts and new tax revenues are needed in coming years. Comparing Ireland’s tax structure with other countries, the country already has among the highest marginal rates of direct (income) and indirect (VAT) tax in the world. What’s missing? Well, the third type of tax, after direct and indirect, is wealth tax.
And real estate comprises the bulk of wealth – not just in Ireland, but everywhere. Ireland’s homes are collectively worth roughly €300bn – a huge chunk of our balance sheet. What’s missing, when you compare Ireland with other developed economies, is a property tax. Those who argue against property tax are not taking a principled stand against bank bailouts. They are arguing for even higher income or consumption taxes. And thus missing the chance to tax wealthy non-residents who own property in this country.
What is a value-based property tax?
Ultimately, I’m not sure why the Government is making a mountain out of a molehill. There are basically four types of property tax out there – flat charges, bands, full value and site value – and they are fairly easy to rank. The worst kind of property tax is the flat charge, what was introduced here earlier this year. It is obviously regressive and unfair and is also just a temporary measure so little more needs to be said about it.
The next worst type of property tax is the bands system. Under such a system, if your property falls under certain thresholds, it benefits from a lower tax rate than others. This is similar to how stamp duty used to work in Ireland. It is also how council tax works in the UK. Until this morning, I hadn’t heard anyone argue in favour of it, although there had been some mumblings in newspaper reports – this morning, though, Fergal O’Rourke of PWC actually called for a bands system.
What has happened in the UK should be a salutary lesson for Irish policymakers. Bands means trouble because in any given year people want to be under the threshold, thus distorting prices, while over time unless bands change every year, they become ridiculously outdated. So in England, your property tax is based on what the value was in 1991, not today, because no-one can agree on updating them. Even aside from our preferences having changed over the last generation, this is plainly bad policymaking. Why anyone, least of all a tax expert, could think is a runner at all is a mystery!
Should we pay relative to the market value?
An improvement on bands is a full value tax – you pay a percentage of what your property is worth every year. Those with more property wealth pay more in property tax. Straight away, some of the dodgy side-effects of a bands system are overcome. If property prices rise or fall, you don’t have to worry about political will to update bands. However, a moment’s thought should point out some pretty weird features of a full-value property tax.
For example, the Minister for the Environment is a big fan of regenerating town centres, which have fallen victim to edge-of-town retail centres in recent years. However, under a full-value tax, the owner of a derelict city-centre site has no incentive to redevelop it because if he does, he’s faced with a higher property tax bill. What sounds like an issue for developers also affects households. If you make your home more energy efficient, up goes your annual property tax bill. New extension? Up goes the bill. Anything at all that involves you using scarce land in socially more useful ways is punished.
This is the major theoretical problem with full value tax: the last thing you want is for your tax system to punish those who use a scarce resource well. And then in practice, there are huge issues of implementation. Is that extra room upstairs a bedroom or a study? (Each will have a different price.) Is that attic properly converted? Is that outhouse part of the main building? All of these are prices that have to be measured and updated, creating lots of work for people like me but ultimately very little use to the taxpayer.
What is “site value” and why should we tax it?
The fairest form of property tax is the site value tax. This is not as complicated as some try to make it out. The value of your property has two components: the land and what you put on the land. Subtract the latter from the total value and you have site value. How might we measure the value of land around the country? Happily, it’s already been done and is available free of charge from smarttaxes.org. There’s even a map outlining the contours of site values in the country. Pages 14-16 of that report also go through options in relation to those on low incomes and those in negative equity, as well as a number of other issues.
There are many arguments in favour of site value tax and few against. It rewards, rather than punishes, households that make their home more energy efficient. At a deep level, site value tax is inherently fair – after all, why is land worth more in some places than in others? It is because society and nature – not individuals – have created amenities that people value and pay for. Is it too much to ask people to pay back a small part of the benefit they are getting from society? Site value tax is also really handy because it can be applied to all types of land, residential, commercial, public and agricultural land, with huge beneficial side-effects in terms of land use and – dare we say it – economic recovery.
Site value tax is also a tax on hoarding land and speculating, as residential land banks on the edges of towns would incur the same as developed estates. This also removes the incentive for people to get their land banks zoned residential on the off chance they could become millionaires. If it’s zoned residential, use it as residential or pay the price!
According to media reports, the Government is currently of the opinion that a site value tax “would throw up anomalies” such as a rundown property and a modern property on similar sites having the same property tax bill. That is not an anomaly. That is the tax system encouraging us all to use as well as possible a scarce and valuable resource, i.e. land.
I agree that a property tax should be easy to understand. A range of bands and tax rates creates a complicated system that people want to game. That is only one consideration, however. After all, it is very easy to understand a €100 household charge but that was hardly publicly accepted. A simple flat site value tax rate is well within the grasp of a population that frequently votes in referenda on constitutional and foreign policy issues.
What do other countries do?
One of the oddest arguments I have heard yet against the site value tax is “no-one else is doing it”. Even if it were true, what an odd argument! In-built bias towards the status quo means that most countries are stuck with property taxes very similar to what they had fifty or a hundred years ago. Ireland – by dint of auction politics since the 1970s – is in the oddly lucky place of being able to choose the best system without the constraints of status quo.
But even then, it is not true to say that no-one uses site value tax. There are numerous states and cities around the world, from South-East Asia to North America, that have it. Two other small open economies in the EU – Denmark and Estonia – use site value tax consistently and successfully. Rather than ape the failed system of our nearest neighbour, perhaps we could take a leaf out of their book instead.
The lack of a property tax means we have the opportunity. With Land Registry records on who owns what site where, as well as existing research on the contours of land value around the country, we have the means. And with the positive side effects that only a site value tax can bring, we have plenty of motive. Hopefully our Government won’t let us down.
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The post above is based on an op-ed piece I wrote in the Sunday Business Post earlier in the month.
Frank ,
Which begs the question why are so many talking heads, and it looks like government parties and civil servants against it?
Angela ,
How on earth do you expect people who bought in the Dublin suburbs 30+ years when it was relatively cheap and are now retired on limited income to pay based on “site value”? According to your site value bands, these people will be paying the most. Property or site value does not give someone the resources to pay a huge property tax bill. Wake up to the real world.
Ronan Lyons ,
Hi Angela,
Firstly, I’m not sure how a market value tax would be any different: those in the country’s most valuable homes would – and should – be hardest hit under any property tax system. Regardless of their day-to-day income, they are wealthy – it is not the fault of the rest of society if people have chosen to keep huge chunks of their wealth in one property.
Secondly, it seems you read through some but not all of the report, if you came to that conclusion. As explained in the report (I even drew attention to it in the blog post), it is more than possible, if society so chooses, to accommodate those who are property-wealthy but income-poor. For example, a couple on a small annual pension of €20,000 but living on a site worth €500,000 may not be able to pay a 2% site value tax (which would mean a tax of €10,000 a year). Instead, the property tax bill could be rolled up and deducted when the property is ultimately sold.
We should note, though, that if we do this, we impose a cost on the rest of society – the children of that retired couple, among others, have to live further out as a consequence. In many countries, there is limited exemption on ability to pay grounds precisely to ensure that family homes are enjoyed by families. We don’t have to copy other countries on this – but we need to be aware that whatever actions we take, they have consequences. It is not just enough to criticise one course of action if the other is worse.
Thanks for commenting,
Ronan.
Clare ,
Excellent, well-argued post. Feasta have also done some research in this area. I would love to see Ireland follow the example of a well-managed society like Denmark on this issue. Here’s hoping…
owen ,
it’s so simple to see –
1. full value tax = discourage land utility
2. site value tax = encourage land utility
where land is the only finite resource in the equation.
why anyone would argue for the former is beyond belief.
Frank ,
Who looses from a site value tax vs full value tax.
-People who own derelict sites.
-If residential SVT is seen as the thin edge of the wedge for full SVT, then farmers and commercial landlords.
-If government agencies had to pay the commercial SVT, then central gov looses out to local.
I can’t think of anyone else, and I am stretching for the last two. So why all the opposition. Do land bankers have that much influence in our society?
The System 2 The Government 0 | Eamon Ryan ,
[…] Ronan Lyons and Feasta has set out a very simple way in which a property tax could be introduced. Is it too late to believe that, two nil down as they are, the Governement might come back and score at least one goal for real public service reform. ← Three questions on an Irish debt deal […]
Cullen ,
Hi Ronan,
Great article, but I’m wondering how the property tax would be calculated for appartments with a site value tax system? Would the site value tax system mean that appartments pay a very small property tax in comparison to houses?
Ronan Lyons ,
Hi Benny,
Suppose you have 100 apartments in a high density area sharing 2 acres, 1 acre of which is communal space, like green areas, car parking, sheds and so on. In the simplest case, where each apartment is equal size, each one of these apartments is adjudged to have a land footprint of 2% of an acre (so that the total is 2 acres, not one). Where sizes are not uniform, you would simply use Apartment A’s square meterage as a proportion of the total square meterage.
Apartments are likely to have a considerably smaller land footprint than houses. Against this, though, remember that apartments are typically built only where there is demand (under a healthy system, at any rate) so the system is set up to encourage density where land is most valuable.
Hope that helps,
Ronan.
Mark Doris ,
That’s a very good article and makes a lot of horse sense.
Now, how to get each TD in the Dáil to respond directly to its contents in a reasoned manner?
Bryan ,
Ronan,
My ‘problem’ is not so much with the ‘value based’ model but with it’s application which is non discriminatory – by which I mean that irrespective of the means or the circumstances of the property owner it is applied in the same way regardless. The affordability factor as in the ‘ability to pay’ doesn’t form any part of the analysis…that I find to be a critical omission in the overall discussion from the point of view of it’s ‘workability’ and given that the property being talked about is primarily where people – families and single home owners live. This relevant factor is ignored altogether.
But of course from a purely economic point of view a one size fits all model such as this is attractive due to it’s revenue generating potential and the apparent simplicity in implementing it…however…to take one example as per the earlier comments…
Pensioners will be badly hit as there’s no account taken of their income level (net of government taxes) situation. (I find it odd that typically people take an income of say €25k and regard it as what an individual actually gets whereas as a paye taxpayer with usc plus prsi plus tax deducted the net figure will be about 28% less than this ie €18k). Anyway, this will mean that if the market goes up as it will eventually, the tax goes up and of course the property tax could itself be increased. But the pensioner’s income may fall due to increased and new Government charges. This means that the pensioner who has to live somewhere, may find himself after living in the same house and area and built up local relationships and dependencies with neighbours over many decades may either have to trade down or sell and then rent. Is this right I wonder that the pensioner is forced to relocate most likely to where the services that he needs are not in place?. On the other hand should he feel guilty about trading down as by doing so (unwillingly) he’s avoiding the tax that he can’t afford to pay anyway?. All this is to do with the implications of the tax in the case of a vulnerable member of ‘society’ of which there are very many in Ireland.
Typically, a pensioner will have paid substantial taxes both indirect and direct over 40 plus years and regard himself as having ‘done his bit’. But that doesn’t seem to form part of the discussion. Shouldn’t he be spared all that’s involved in relocating perhaps to a new location miles away at that stage in life because of a tax on the family home that arises from factors over which he has no control ie a Government decision and property market movements?. Maybe the attitude is ‘ be that as it may the ‘greater (tax) good is best served by ignoring this aspect’.
To write as you do below that ‘those in the country’s most valuable homes…’should’ be hardest hit under any property tax system’ at first reading sounds ok especially to a socialist but when you think about it one needs to break that down.
If you are talking about places like Bono’s then fine – that without doubt is real wealth (but I don’t think that is what you mean)…he can afford to pay but if you are talking about your average standard three bed semi that happens to be more valuable in say Glenageary than in Grangegorman then that’s a different matter. The underlying but unmentioned assumption seems to be that the owner will always be able to pay whatever value the property has and whatever the charge is – the owner is always liable.
The circumstances of the household may be very different between locations such that the Grangegorman household may well be much better off financially but will pay less tax due to the lower value of the property whereas the reverse situation may apply in Glenageary. So the householder in Grangegorman can relax in the knowledge that he’ll always be able to pay whereas the householder in Glenageary is fretting because he is seen as being ‘wealthy’ and therefore may be forced to beg, steal or borrow to pay or else sell out and trade down or indeed rent. And of course the cost of servicing Glenageary with local services versus that in Grangegorman will be very different ie lower in suburban setting due to economies of scale than in rural setting hence costs for services will be higher but yet the tax burden (we’re told the tax is needed for local services) will be the reverse of this. Isn’t this counter to economic logic?.
If fairness/reality ‘population profile’ data rather than pure and simple revenue generation / economic objectives were to apply then provisions would be incorporated into the model to allow for these in the implementation phase. I would suggest that there is a need for inbuilt protection for those who are vulnerable…in the extreme people should not be forced to sell their houses to pay such a tax. People’s houses grow in value not because of ‘wealth’ they put into it’ but the ‘wealth’ arises due to external market drivers over which they have no control…and this is now seen as a legitimate basis for taxation! – this doesn’t seem, right to me as one doesn’t follow the other.
The other point is of course people buy what they need and can afford and take out a mortgage to do so over several decades using ‘wealth’ borrowed from the ‘financial institution’…apart from savings (made from already taxed income) used to secure the mortgage. It’s mainly borrowed ‘wealth’ that they put in to buy the house. What happens house prices subsequently is not something that they can control. Again movements in house prices do not correlate with peoples net income. A further point is that the ‘wealth’ in this context doesn’t generate an income in the same way as interest on savings – if it did then the taxing if it, would become more acceptable.
You write that “Regardless of their day-to-day income, they are wealthy – it is not the fault of the rest of society if people have chosen to keep huge chunks of their wealth in one property.” This bit concerns me.
The ‘wealth’ here is a house which is where they live – a basic family need for shelter – the most basic need for survival – and yes it has economic value – ‘wealth’. They do have to live somewhere. It is not the fault of humans that they need shelter and that the means of getting shelter is a house whose value may change over time. It’s almost as if you are saying that house owners should feel guilty about having a house (which will always have value), have an obligation to ‘society’ and the way to deal with this is to compensate ‘society’ by way of an ongoing tax charge regardless. Otherwise they should sell their house and rent and then they wouldn’t be a problem to ‘society’ or not buy in the first instance or perhaps sign up for a local authority house which shouldn’t please ‘society’. People in the main purchase property not so much to become ‘wealthy’ but to satisfy a basic human need…again it just turns out that a house has economic value and so constitutes ‘wealth’ in a somewhat narrow sense and so can be treated as taxable.
The suggestion that the property tax should be collectible by the Government on sale of the property wouldn’t meet the Government’s need for ‘now money’ and so wouldn’t be acceptable to the Government. Any imposed non discretionary tax should be both fair, reasonable and collectable. As well as this there should exist an appeal procedure for those simply unable to pay due to the scale of the charges. I don’t see the property tax legislation as passed by the Dail meeting these criteria.
At the end of the day it is of course the Government rather than ‘society’ that makes decisions in this matter.
The property tax in it’s present form is in my opinion a blunt instrument as the people scenarios one of which I’ve outlined above are ignored other than an offer in the form of a ‘deferral’ which itself carries a charge.
Were it not for the banking collapse the need for a property tax wouldn’t arise – isn’t it the ‘Troika’ who ordered that this tax be introduced as a condition for the bailout.
What is missing in this country and was always missing is good governamce and costs control. We don’t need to copy what happens in other countries…our culture is different to theirs.
Regards
Bryan
PS A FF politician described the property tax as political dynamite – FG and Labour will discover the truth of that statement in a few years time I daresay.