Study bases property tax on ability to pay

THE IMPLEMENTATION of a property tax is feasible if it is linked to the homeowner’s ability to pay, delegates at an economic conference will hear today.

The replacement of stamp duty with an annual property tax based on the value of the taxpayer’s home was recommended last month by the Commission on Taxation.

However, one of the main objectives to a recurring property tax is that it will be unfair because of the difficulties it would create for low-income homeowners.

In a paper on tax reform being presented at the Economic and Social Research Institute’s (ESRI) Foundation of Fiscal Studies Budget Perspectives conference today, three of the institute’s economists argue that a property tax would generate close to €1 billion each year even if relief was provided to the lowest-earning one-third of the population.

“The link between property tax and ability to pay is a crucial one for the acceptability of such a tax,” the report from Tim Callan, Claire Keane and John Walsh says.

In addition, a “more refined” transition relief may be necessary to ensure that the move from stamp duty to an annual property tax is equitable.

The commission recommended that homeowners who paid stamp duty would be exempt from the property tax for seven years from the time they bought their property.

However, the ESRI paper suggests that greater account should be taken of the stamp duty actually paid. For example, recent homebuyers may have paid considerably less stamp duty than someone who bought at the peak in late 2006/early 2007, as rates and house prices have since fallen.

Yet, under the commission’s transition proposals, more recent buyers would receive greater relief.

One alternative is to treat stamp duty paid as a “prepayment” of property tax, the paper suggests.

The commission also proposed that the annual property tax should be based on a system of self-assessment. However, this is not the only option.

“A property tax should not be seen as hinging on the use of self-assessment as a valuation mechanism,” the report says. A number of alternatives exist; for example, a valuation database could be developed relatively quickly.

The research also examined the regional distribution of the revenue that the proposed tax would generate, and found that more than 50 per cent of the tax take would be raised in the Dublin area.

This is disproportionately high when compared to the share of the population living in the capital. However, when the share of the property tax burden is compared to Dublin’s share of the country’s disposable income, the disparity is much smaller.

The report also analysed proposed changes to the child benefit system, and concluded that it would be more equitable to make the State payment taxable – as recommended by the Commission on Taxation – rather than simply cutting rates of payment, as proposed in the McCarthy report.

Both measures would generate similar savings for the exchequer, but bringing child benefit into the income tax net would provide much greater protection to those on lower incomes.