Saturday 21 September 2019

Can Local Property Tax be sidelined for much longer?

Politicians of all kinds decry the residential tax, but we simply can't ignore its importance, writes Ronan Lyons

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Ronan Lyons

There can be no free lunch when it comes to Local Property Tax (LPT).

Property tax has - after something of a hiatus of a couple of years - suddenly become a political hot potato. Since the end of summer, a string of politicians have been on the airwaves and in newspapers saying they will protect homeowners from higher LPT bills.

There has long been a split between civil servants - who want to protect their sources of revenue - and politicians, who would happily promise both higher spending and lower taxation if they could square the numbers.

Still, the speed which with politicians have moved to distance themselves from what is in most other high-income countries a major source of revenue, is somewhat surprising.

It is even more surprising that this is something on which both left and right agree.

To the bewilderment of their peers in the rest of Europe, Ireland's left-wing politicians have been at the forefront of campaigning against LPT.

What is confusing about this is that residential property is the single largest chunk of wealth in the country.

Therefore it is effectively impossible to be in favour of a wealth tax but against a property tax.

There is roughly €500 billion of wealth in Irish housing. If - as with many of our high-income peers - we had a tax of 1pc per year, this would provide Irish local authorities with €5bn in funding every year.

This could be used to fund social housing. In fact this is more or less a description of what Irish local authorities did before property tax was abolished in 1977.

On the face of it, it is easy to see why politicians are saying what they are saying: they have to get re-elected. Property prices have - according to the latest Daft.ie report, covered elsewhere in today's paper - risen by an average of almost 50pc since they bottomed out a few years ago.

Indeed, it is perhaps typical of the luck of the Irish policymaker that they fixed the valuation date at May 1, 2013 - as close to the bottom of the market nationally as makes no difference.

As the figure accom­pany­ing this article shows, there's quite a bit of difference around the country in terms of how much prices have changed since then.

In Dublin 1, prices have risen by almost 80pc from their lowest point. In Ballyfermot (Dublin 10) and Crumlin (Dublin 12), prices have risen by roughly 70pc.

Meanwhile, prices in Tipperary and Limerick (outside the city) have risen by just 20pc. In Donegal, Sligo and Mayo, prices have risen by only 15pc.

The debate now about revaluations echoes a debate had by policy analysts such as myself when the tax was first being designed in 2011 and 2012.

It is best practice that property tax valuations are updated regularly. Instead, Ireland chose the opposite: a frozen valuation with an option to renew that freeze.

This is, for want of a better name, the British option. There, no politician has had the guts to update the valuation since 1991. A cottage industry has since arisen where valuers come up with a hypothetical valuation of what a newly-built property now would have been worth if it existed in over a generation ago.

The obvious reaction by homeowners to this is that it will be very difficult for Dublin households to deal with a 70pc or 80pc increase in the property tax bill.

As a homeowner in Dublin, I find it easy to agree. But that is a far cry from saying we should not revalue LPT.

Firstly, imagine this attitude applied to other taxes, like VAT. When was the last time you heard a Minister for Finance stand up at the Budget and say: "Look, the general price level has gone up by 10pc in the last few years, so we're going to cut VAT by the same to balance things out."

If this seems an odd counter-example, it is worth bearing in mind that VAT is very regressive - it hits poorer households much harder than richer households. LPT, on the other hand, is an incredibly progressive tax: most of Ireland's poorest households own no property. Ireland's richest households own a lot. The argument is perhaps more about an ability to pay. But there, homeowners - and politicians - want to have their cake and also eat it. The reason that LPT is supposed to be going up in 2019 is because they will be wealthier then than in 2013.

Fine, you may say, but property wealth and income or ability to pay are not the same thing. That is true.

In some countries, this argument will gain you little ground, as it is seen as a good thing for people to downsize once their nests empty out. I am not so naive to think that such an argument would win the day here, though.

Nonetheless, if a homeowner makes the argument that he shouldn't have to pay a higher LPT, based on a lack of income, this can't be the end of it.

Instead, government should offer those paying LPT the option to pay the higher LPT up front, or else to roll it up and pay (with interest) when they crystallise the wealth. This is, as it happens, similar to the system that operates in some countries, where those below a certain income can opt to defer all property tax payments until the property is sold.

Otherwise you are just offering people free wealth from owning their own home. If this sounds reasonable, we have short memories indeed.

No other asset is so tax-exempt as the family home. The OECD concluded in 2006 that this extraordinarily generous tax treatment was one of the principal factors behind our housing bubble.

Barely a decade on, our politicians have a test to see how much they've learned. Will they pass the test?

Sunday Independent

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