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.