Hi °C | Lo °C
WHILE it may not seem like much progress is being made on property tax, the debate is steadily moving on.
Early debate focused on whether and why a property tax was needed. That phase has passed -- either because people accept that the yawning gap between spending and receipts has to be closed by multiple measures, or simply because the decision seems made.
The debate now is focusing on what type of property tax Ireland will introduce.
By and large, the debate moving along is a good thing -- with one important caveat. Pretty much every other developed country has a property tax. It's the obvious missing link in Ireland's fiscal chain.
It will also have a smaller burden on Ireland's citizens than any other measure raising the same revenue, as a proportion of Ireland's property is owned by non-residents, including tax exiles.
However, other countries also link their property tax to local services and amenities. There has been practically no discussion yet of how this property tax will tie in with reform of Ireland's abject local government structures.
This needs to happen and we should not be surprised if pretty fundamental reform is required of the relationship between local authorities and their residents.
Regardless of the exact type of property tax, there are also a number of issues that will need to be addressed, such as how people pay and what happens to those who are property-rich but income-poor, such as retired couples, and those who are in negative equity. We do not need to reinvent the wheel here: most other countries have dealt with these issues.
Paying a tax is easiest when done the same way as your other taxes. The obvious solution then is for the default payment method to be through at-source deductions on a regular payslip. If people want to opt out and pay in one lump sum the week between Christmas and New Year, they should be allowed, but the default should be the easiest payment method possible. For the self-employed, this will be via their annual tax returns.
On those with low incomes but owning valuable properties, they should be able to roll up the tax owed and pay when the property is ultimately sold.
And one-off extra tax credits could be given to those in negative equity. We must not forget though that any special treatment given to particular groups increases the burden on the rest of society -- we may be prepared to pay that cost but we must not ignore that this is what it is.
The main question on everyone's mind this week, however, is what form a property tax will take. The confirmation that the tax will be "value-based" means that we do not have to worry that Ireland will be stuck with a flat household charge.
Ultimately, the choice is between a full-value tax and a site-value tax (SVT). These two work in similar ways but use different bases and have contrasting effects.
Suppose the average home is currently worth €150,000. A full-value tax would typically be something like 0.5pc of that €150,000, or €750 a year.
The value of that property can be broken down into two components, though: the parcel of land and what is built on the land.
If the site is worth €30,000 and the site-value tax rate is 2.5pc, then the property's owner would face the same property tax bill of €750.
As this example suggests, the general incidence of both these taxes will be the same. There is no reason for any region to fear one over the other. Those living in large detached homes in somewhere like Killiney will be paying significantly more than those living in a small cottage in somewhere like Leitrim, regardless of the tax.
Where full-value and site-value taxes differ, though, is in the incentives they provide. Consider someone thinking about making their home more energy efficient. Recent research indicates that improving a property's building energy rating from C to B boosts its value by 3pc.
Under a full-value tax, their annual tax bill would increase by 3pc. Similar consequences apply to those who build on a derelict site or add an extension or just convert their attic. Do we really want our tax system to punish people for doing useful things like conserve energy?
In Ireland right now, site-value tax is easier to implement than full-value tax, which involves estimating the value of everything from balconies to fifth bathrooms. Who owns what site is known by the Land Registry.
Giving each site-owner a one-off tax credit in year one to have their land formally assessed generates the bottom-up additional information needed. And the top-down information needed for auditing is already in place, thanks to research done by the Smart Taxes network.
Ultimately, the key point is that full-value tax penalises those who use well their parcel of a scarce resource, land.
Site-value tax rewards those who use land well and punishes speculators and land-hoarders. This has obvious consequences for an issue close to Phil Hogan's heart, the rejuvenation of town centres.
Under a site-value tax, those sitting on derelict sites in Ireland's town centres will be made to use it, sell it on, or pay for the privilege of wasting land.
Full-value tax does the opposite.
Compared to the alternatives, then, site-value tax could help kick-start Ireland's economic recovery. And to Government ears, that is probably the most persuasive argument.
Ronan Lyons is an economist based at Balliol College, Oxford, specialising in urban economics
Irish Independent
