Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

site value tax

Property tax – it’s not rocket science!

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.

The post above is based on an op-ed piece I wrote in the Sunday Business Post earlier in the month.

Would you rather tax gardens or jobs? The Site Value Tax debate

Recently, reading the Irish Independent has been a bit of a rollercoaster for me – one day I’m practically doing the government’s job for it for free, the next I’m guilty of elder abuse. By way of context, in late January, I presented at the Dublin Economics Workshop Conference on Irish Economic Policy. Specifically, I presented on how a Site Value Tax might be introduced in this country, both on an interim basis and on a full-time basis – a podcast of the entire property market session is over on the irisheconomy.ie website.

My proposal – full report here – was relatively straightforward: use the best information we have currently (1.3 million sales and lettings ads posted on daft.ie between 2006 and 2011), and the best methods available for establishing the components of house prices (hedonic price regressions) to implement the best known form of taxation (Site Value Tax) on an interim basis, in an area where Ireland desperately needs new revenues: residential property. And when better information becomes available – in particular the Revenue Commissioners register of transactions – then that can be used for a full Site Value Tax. My map outlining relative land values in 4,500 districts across the country is reproduced below.

4,500 districts of Ireland put into one of ten land value bands, for the purposes of an interim SVT

SVT: the sales pitch

A Site Value Tax (SVT) is an annual tax that is paid on the value of the land that you own. If you own a four-bed semi-detached in suburban Dublin worth €400,000, you can think of that €400,000 as being the value of the building (say €300,000) added to the value of the land (say €100,000). Your tax bill would be something like 2% of the €100,000.

Why do I say SVT is the best known form of taxation? Ultimately, because it’s fair and efficient. It’s that rarest of taxes, popular with not only both left- and right-wings but also with environmentalists. Left-wingers like Site Value Tax because ultimately real estate is the single biggest form of wealth – and what left-winger worth their salt doesn’t like a wealth tax? Right-wingers like Site Value Tax because it does not distort economic outcomes: land can’t go anywhere, unlike pretty much every other input you can think of, so just because it’s taxed doesn’t mean that rents have to go up or that business has to move elsewhere. And environmentalists like Site Value Tax because it encourages the best use of land, which is a scarce resource. Why would you keep a site derelict if you’re getting taxed as much as the same the guy next door making that land work?

A Site Value Tax is particularly appealing when viewed in the context of local government. Think back to why any land you own is worth more than agricultural land. It’s because of a range of amenities to which your land offers access – from public services like education, health and public safety, through environmental amenities like urban green space, coastline or lakes, to more intangible services, such as access to thick labour or consumer markets. Unlike, say, the value associated with shares in a firm, no one person or group of people creates the value associated with land – society does and thus SVT is the return that society gets for creating the amenities we enjoy.

SVT: glitches and hitches

The Irish property-owner, however, may not be as impressed with such lofty talk. What about those who bought in the boom and who are now stuck in negative equity? What about those, such as elderly couples, who are land-rich but cash-poor? What about those who live on rural sites that might be ten, fifty or even a hundred times the size of those in urban homes?

A Site Value Tax fundamentalist would say that none of this matters. Those who bought during the boom are not going to un-buy because this tax is brought in and besides the SVT reflects current land values, not bubble-era values. They would argue that those who are land-rich but cash-poor should be encouraged to move on, as a country where every set of parents who refuse to downsize on retirement push their own children’s homes further out. And a country of large rural sites imposes greater costs on urban dwellers subsidising their scattered neighbours – thus a site value tax should – and would – reflect this, they would argue.

A Site Value Tax realist knows that these things matter. Hence I prepared a series of FAQs in the full report prepared for Smart Taxes and the Department of the Environment, available here. Bubble-era buyers, for example, could be given a graduated tax credit from introduction of SVT for a five-year period (similar to mortgage interest relief). After this, 2004-2008 buyers would be liable for the same amount of tax as their neighbours on similar plots.

Those with large plots of land but little income – in particular pensioners – could easily be accommodated with the use of lien on the property, where the tax bill is postponed until the property is ultimately sold. And rural dwellers will almost certainly pay less than their urban counterparts anyway, with such a large differential between urban land values and residential ones. Allowing rural landowners to decide once and for all which of their land is residential and which agricultural would also assuage fears that rural life would be irrevocably destroyed.

In truth, any lobby group can be accommodated – we just need to be clear that this is what we’re doing. We’re shifting the burden from one group on to the rest of society. We may have good reasons for doing this but we shouldn’t fall for emotive arguments that try and disguise that.

One lobby group I think we should pander to is people, as opposed to empty land. What do I mean by this? Suppose we have two adjacent 1-acre city centre site. One owner leaves theirs empty (Case A) while the other builds 100 apartments, each worth €200,000, and rents them out (Case B). In case A, the site is worth €5m and in case B the block is worth €20m, of which the site is worth €5m.

Under a full property value tax, the empty site has a liability of €25,000 while the apartment block pays €100,000. It seems very unfair, though, that the site being used productively, from society’s point of view, has to pay the burden of the tax. Under a 1% SVT, both sites would pay a tax of €50,000 – already the person leaving their site empty is being encouraged to use their site to generate a return.

Now, suppose there were a 2% site value tax but with a per-person “green space” tax credit of €250 (roughly 1% of an acre per person, at a nationwide average per-acre value of €25,000). If the 100 apartments housed 250 people, that would mean the apartment block receives tax credits of €62,500, off their bill of €100,000, while the empty site is hit with a full tax bill €100,000. This modified SVT would shift the burden of taxation on to zoned-but-undeveloped land.

SVT: making us rich?

How much could SVT raise? The tax I proposed worked off an assumption that the Goverment would like to emulate best practice in this area and generate about €2bn in residential property tax annually – this is where the €625 per household figure from the press came from. If applied to commercial property also, a full SVT which replaced commercial rates, stamp duties and the 80% windfall tax, would constitute about €1bn in new revenue streams.

The natural response of anyone to the suggestion of a new taxation averaging €625 a year is “No thanks” (or possibly worse). To argue this, though, is effectively an argument for higher income tax and higher VAT. This is because everyone agrees that Ireland needs to raise about €4.5bn in new tax revenues over the coming years (€4.65bn by 2015, according to the 2011 Medium-Term Fiscal Statement) and even if organic growth delivers, as the Department of Finance expects, €1.4bn, that’s €3.25bn needed through fresh taxation measures.

Ultimately, there are only three types of taxes: those on incomes (which hurt competitiveness), those on consumption (which are bad for equity) and those on wealth, including property. So those who argue out of hand against a property tax such as SVT are arguing for the €3.3bn in new revenue streams to come entirely from some combination of income taxes or consumption taxes, both of which hurt jobs. And with Ireland’s VAT rate the highest in the world outside the Nordic countries and Ireland’s income tax rates among the highest in the world, the scope in these areas is limited.

For me, the key point is that when a full property tax is proposed, it needs to be done as part of an array of alternatives. The Minister cannot simply say, in the context of needing to raise €2bn: “Here’s our idea for a property tax. Do you like it?” No matter how nice the tax is on paper, the answer is going to be overwhelmingly “NO!”. Any property tax needs to be proposed as one of two (or three) options: “We can either introduce this property tax, or else we will need to raise the lower rate of income tax from 20% to 25%. Both harm disposable incomes but only one harms the creation of jobs. Which one do you want?”

A bold postcript

Note that the €625 average figure above was an input of the research (we need this to raise €2bn), not an outcome. The tax could be introduced at any level. At €100 a household, it could merely replace the household charge – but that’s not going to fund too many local amenities.

Alternatively, and much more boldly, the introduction of a 10% SVT on residential and commercial property – which would raise perhaps close to €10bn – could be done in conjunction with a reduction in VAT and a reduction in income taxes. This would help close the deficit, boost Ireland’s competitiveness, improve the fairness of the tax system and encourage efficient use of land. What’s not to like?

On Hogan’s Stand – or how to introduce an interim property charge fairly

The imminent introduction of water and property charges has sparked anger among most Irish people, not least because as flat charges, or poll taxes, they are unfair. This post outlines a better way of introducing an interim property charge, namely by breaking down the country into ten different bands based on land value, and then presents a map of the bands, based on 200,000 daft.ie ads in 2009 and 2010. Such an interim system would be significantly fairer and could be tailored to bring in €1.5bn when fully running. Read more

Ideas for building Property Market 3.0

This post looks at what foundation stones the Government should put in place to build the next generation of Ireland’s property market. It briefly reviews two that I’ve discussed before – the importance of a national house price register and a land value tax – before outlining two further proposals in more detail. A set-in-stone minimum deposit would greatly reduce the potential for policy to amplify bubbles, while banning variable rate mortgages would not only protect vulnerable households but also reduce the degree to which the economy is subject to ECB-induced recessions. Read more

The MC Hammer approach: Ireland’s new Programme for Government

This post reviews the Programme for Government agreed by Ireland’s new coalition partners, across three headings. The first is the urgent problem of Ireland’s debt burden, the second is the more medium-term issue of the deficit, while the final heading covers the long-term issues of mortgage arrears and unemployment. While there are many things to be welcomed in the new Programme for Government, on these headings at least, there is an alarming lack of coherence and detail. Read more