Wednesday 26 September 2018

Economic uncertainty means we must look more closely at property tax

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Ailish O'Hora

Ailish O'Hora

Like the buds of May, which we are finally seeing signs of, there was good news on the economic front last week. At face value, at least, the outlook is looking rosy, although we need to keep a firm eye on our taxation heads, particularly our growing reliance on multinationals and corporation tax.

Following on from strong Exchequer return figures, the European Commission upgraded its GDP growth estimate for Ireland to 5.7pc this year in its spring forecast, up from 4.4pc in the winter one. Its growth prediction for 2019 has also been increased to 4.1pc to 3.1pc in a February forecast.

Other forecasts have also been upgraded, with Ireland ranked the second-fastest growing economy in Europe for 2018 - just behind Malta.

However, there are growing signs that our small, flexible economy on the edge of Europe is now largely dependent on multinationals and their contribution. The EU made a point of warning about this dependence in its recent report on Ireland.

While the domestic economy is expected to remain robust, it said, supported by a strong labour market and investments in construction, "volatility in the headline national accounts figures is likely to continue in the near term because of the role of multinational companies".

Of course, the biggest uncertainty in the Irish economic outlook centres on Brexit and the outcome of negotiations between the EU and the UK, but there are other external influences - including double-whammy knock-on effects on us of taxation reform in both the US and the EU.

Over the past three years, takings from corporation tax have doubled from €4bn to €8bn and this money is being used by the Government for its day-to-day spending. This is reminiscent of our reliance on property-dependent takes like stamp duty in the run-up to 2007 and the crash.

In addition, not withstanding strong growth figures, the most recent Exchequer return figures showed a record cumulative €1bn Irish payment into the EU budget was a significant factor in a deterioration in the State's financial position. This is a timely reminder that Ireland is now also a net contributor - a long way away from the heady days of billions in cohesion and regional funding. We are now not only a mature member of the club but one of the richest economies in it - and that comes at a cost.

This is just the beginning of the process and as we continue to negotiate the choppy waters of Brexit we are also involved in a different level of talks with Europe about its budget and our contribution to it. This is against the backdrop of the future loss of income following the UK's exit and the potential of a smaller Common Agricultural Policy, one of the cornerstones of the EU. The estimated total cost of our membership for 2018 is €2.6bn and this sum is still being negotiated and could grow.

So with external pressures on our economic growth growing and an increasing reliance on corporation tax, is it time for a fresh look at how we fund the economy and time to revisit such unsavoury topics as property tax and water charges given that the Government has more or less ruled out any hikes in income tax? A back of the envelope calculation shows when you look at the estimated €250m a year that water charges would have generated from 2015 to 2018, and subtract the €300m in deductions, that's a healthy estimated €700m in revenues for Government coffers.

The property tax is slightly more difficult to get a handle on, given that it is difficult to get a figure for the exact number of new-builds a year.

We do know that there were 12,000 new-builds in 2013 that were exempt from the property tax.

So, if we take an average property tax charge of €350 a house, although arguably this is a crude figure, we're talking another big chunk of lost change that could be used to help fix the housing crisis, for example. Given that new homeowners are not due to start paying property tax until 2019, this gives this, or any new government, plenty of time to relook at the property tax model and, indeed, our overall system.

Business group Ibec has proposed a Commission on Taxation that would measure the taxation system's fitness for purpose, assess tax heads and risks in the system. We haven't had a Commission since 2009, when we were in the pits of economic despair, and it certainly seems far more sensible to have the conversation now when the economy is in a healthier place.

When it comes to the property market, Ibec is also proposing a site valuation tax. The tax would cover both commercial and residential and would be a more equitable system than currently exists, with the burden of tax currently on the former.

In addition, site valuation taxes would be ringfenced and channelled through local government which would go towards funding the likes of housing, roads and schools.

The tax would also help eliminate volatility in the market as it discourages the wasteful use of and hoarding of land.

One thing is certain, any dependence on one form of tax revenues has proven foolish and we have seen the results of this in the past when we became overdependent on stamp duty.

But our reliance now on corporation tax should be a concern ahead of Budget 2019. Now that we have a bit of wiggle room, let's use the time sensibly to discuss a more balanced taxation system so we can avoid the sins of the past.

Whatever the appetite at Government level for a reform of the property tax regime, a reintroduction of water charges will be a bridge too far anytime soon, even if it is an issue that still needs airing and one that Europe, quite rightly, also wants addressed.

Sunday Indo Business

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