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Thomas Molloy: Being both fair and effective is the challenge for property tax legislators

FEW issues have divided the country quite like the Government's plans to introduce a new property tax. While the topic has been discussed in the Dail and around the kitchen table for months now, we still know very little about Environment Minister Phil Hogan's plans.

While many people talk about the introduction of a property tax because homeowners have not paid any annual charge for years, the reality is that Ireland already has property taxes and gathers roughly the same amount of national income from property as most other countries; we just do it differently.

This year, the Government will be collecting property taxes in four different ways; rates, stamp duty, the €100 flat tax and inheritance tax.

The OECD calculates that taxes on property as a percentage of gross domestic product were 1.6pc in Ireland in 2009 compared to 0.9pc in Germany and 1.9pc in Denmark. We are already much closer to the rest of Europe than is often claimed.

What is frequently ignored is that Ireland's property tax is unusually unfair, effectively amounting to a tax on young couples who paid the lion's share of the stamp duty shelled out in recent years.

The reasons for this type of taxation have much more to do with politics than economics -- just as they explain other governments' failures to reform unfair and antiquated property taxes in their jurisdictions.

Late last month, Mr Hogan fleshed out some of the details for his proposed property tax but declined to say how much he wants to raise or what principles will apply.

What we do know is that a group of unnamed "experts" from the Revenue Commissioners and the Department of Finance is due to begin meeting this month and devise a system by late April or May so that the Government has the choice of introducing a real property tax next year.

"They're going to look at all the options. I'm only a politician, I wouldn't have the necessary expertise to evaluate that," Mr Hogan said last month in an uncharacteristically modest aside.

While details remain scant, Mr Hogan conceded the key elements would be the value of the property, household income, regional differences, the payment of stamp duty by first-time buyers during the property boom and waivers for council tenants.

Most taxes elsewhere in Europe focus almost exclusively on the value of the property, so Mr Hogan's comments suggest a much more complex system than is usual.

Taking household income into account would imply some sort of tax like Britain's community charge. A system to compensate those who paid stamp duty in the recent past would add an extra layer of complexity.

While the minister is staying quiet ahead of the recommendations from the civil servants, several lengthy reports have recently addressed most of these issues and give a good insight into what the expert group is likely to ultimately recommend.

The challenges are formidable: the Revenue Commissioners will have to develop an assessment, collection and accounting system, while the legislation will have to make provision for an appeals system along with penalties.

The boxes below on the British, French and Swedish models shows that there are significant differences even within Europe.

Outside Europe, penalties for non payment can be very severe. In British Colombia in Canada, for example, the authorities will sell a house if the tax is not paid although there are reductions for the over 65s and owner-occupiers.

Unfortunately for the Government, there is often a tension between how fair a system is and how easy it is to implement. The general experience is that simple systems are cheap to operate but often unfair, while complex systems with lots of exemptions to ensure equity are expensive.

Sweden manages to operate a property tax for around €15m a year, while the French system, which has three different property taxes, uses up a quarter of the finance ministry's workforce.

The first government body to call for a property tax since the collapse of the State's finances was the Commission on Taxation, which made detailed suggestions in a 2009 report. To make life easy, the Commission suggested a property tax should be self-assessed until the Government created an up-to-date valuation base for all property.

It also made suggestions, already approved by the Government, for exceptions for those living in local authority and social housing units.

Other proposals such as the complete abolition of stamp duty for people buying their own homes have yet to be adopted, along with proposals for a tax on windfall gains arising from rezoning decisions and a recurrent property tax on land zoned for development.

In two reports on property taxes, the ESRI has argued against the Commission's support for self-assessment.

The institute's economists argue there are so few sales these days that it is almost impossible for people to value their homes. The economists also argue, not unreasonably, that self assessment leaves "the door open to under-valuations and cheating on the part of home-owners".

Instead, the ESRI wants the Government to use a simple system that deploys a limited set of house characteristics to arrive at an approximate value. The institute suggests that valuations can be done cheaply using a formula that takes account of where a house is located within the country combined with the building's size.

While the difficulties of valuing houses are common to all property tax systems, Ireland has an unusual problem because we are effectively replacing one pre-paid property tax (stamp duty) with an another.

The Commission on Taxation suggests that owners who paid stamp duty during the boom should be exempted from paying the annual property tax for a seven-year period from the year they paid stamp duty to avoid the problem of double taxation.

The ESRI dislikes this idea, noting that it would favour people who bought houses recently over people who bought at the height of the boom.

Instead, the ESRI calls for a tax-credit system which would effectively treat stamp duty as a pre-payment of the new property charge. This seems like an elegant solution to the problem and one which could be implemented relatively easily.

Strangely, there is almost no comparative research on property taxes around the world despite the challenges encountered by many east European countries which have introduced such taxes since the collapse of the Soviet Union.

While the IMF is currently preparing a report on property taxes, there is no off-the-shelf tax system which would allow the expert panel to propose a system which has an international imprimatur.

This means the panel, Mr Hogan and the Government will have to offer an Irish solution to an Irish problem. That leaves the Government with a difficult balancing act between devising a system that is fair and one that is effective.

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