Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Value capture and grasping the nettle on property tax

Value capture is the latest buzzword for city officials around the world. The term refers to the idea that social investment – from maintaining urban parks, national monuments and Blue Flag beaches to putting brand new transport infrastructure – creates value and this value can be captured.

The most obvious – and in most countries, the easiest – way to capture some of the value of social investments is through an annual property tax.

Think about the Phoenix Park. In work undertaken by ESRI researchers a few years ago, they found that the park adds significant value to properties nearby. Indeed, they found that all urban green space has this effect – but that the Phoenix Park, probably due to its size, has an even bigger effect than a regular park.

The Office of Public Works is responsible for the Park. To them, or indeed to any of the City or County Councils that run their own parks and green spaces, this finding is incredibly valuable. Why? Because it helps to quantify, in monetary terms, the minimum social benefits due to the park.

Imagine being an official in the Parks Service of the OPW or a local authority and being constantly told that they are a cost centre. Deep down, though, everyone knows that parks create value. And the housing market tells us the minimum value created.

With a system where property taxes reflect market values, it is possible to go one step further and create a link between that value and the running costs of those parks. In other words, cities can set aside a fraction of property tax revenues that reflects the value of, for example, an amenity like parks, in order to pay for the cost of maintaining those parks.

For some Irish people, admittedly, this would be an about-turn in how to think about property tax and their local authorities. Recently, I came across someone on Twitter wondering out loud what property tax is for, given they pay for their own bin service and given Irish Water is a separate body.

But this is to miss the point entirely: property taxes are rarely used to cover the cost of household-by-household utilities like water and waste. They are instead used for the general amenities. Those general amenities are, ultimately, where the value of the land under a dwelling comes from.

So far, so good. We could apply the ESRI research to the Irish housing market, work out what fraction of the value of housing in our cities comes from urban green space, and give that fraction to the people responsible for maintaining those parks.

But what happens when the amenities provided by society change? Once that happens, it is critical that the property tax change too. And this is why Ireland’s Local Property Tax, as currently set up, is far from ideal.

LPT is based on market values five years ago. Much of the focus has been on the overall change in property values since then. As the Report out a week ago shows, values in Dublin have risen by 50% in those same five years.

One of the main advantages of a sizeable property tax – say a tax of 1% of the value per year, as is common elsewhere, rather than less than one fifth of that – is to moderate swings in property values. Thus, it is likely that if the property tax had been bigger, and had been increased every 1 or 2 years, property prices would have risen by less than 50% over the last five years.

But, as the saying goes, we are where we are. And electorally, I can’t see anyone coming to power with the slogan “We’ll Triple Your Property Tax”. So the big upswing in values can be overcome by reverse engineering the rate of property tax, perhaps relative to a national minimum.

So, if Dublin City Council needs an annual budget of €1bn and 5% of that comes from LPT, then as the value of property within the DCC area goes up, the rate of LPT can go down to compensate.

But what about new amenities? A classic example is new transport infrastructure and Dublin is experiencing that at the moment. The cross-city Luas has changed the economic geography of Dublin for the rest of the century.

Cabra, largely ignored by many house-hunters, is now one of the hottest markets in the country, because of the cross-city Luas on its door. Across the north-west inner city, the cross-city Luas is having a huge impact on property values.

But is it fair for taxpayers in Roscommon and Kerry – and Tallaght – to pay for an investment that creates €100,000 in extra wealth for each homeowner in Cabra? (Lest there be any doubt, the exact same argument holds for earlier investments including in the Green Luas through Ranelagh and the DART to Howth and Killiney!)

A fair property tax system would adjust the relative values so that people who have seen their wealth boosted by public investments pay a small bit more each year. LPT is set-up backwards: the Minister for Finance effectively has to sanction a revaluation – and when is it in his interest, politically, to do that?

What we need instead is a revised LPT that automatically revalues every two years, no exceptions, so that no-one has to grasp the nettle and decide to revalue. If nothing else, it might get politicians more serious about restraining – and ultimately bringing back down – high property prices in this country.


An edited version of this post was originally published in my column in the Sunday Independent.

Leave a comment