John FitzGerald: Nitty gritty of property tax reform

Levies on housing are hard to evade and avoid hitting those not on property ladder

If property tax is used to fund the expansion of public services over the coming decade, especially investment in housing, it might be desirable to change the base to exclude mortgage debt.

If property tax is used to fund the expansion of public services over the coming decade, especially investment in housing, it might be desirable to change the base to exclude mortgage debt.

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The experience of the current Covid crisis has highlighted the need for long-term investment in improving our public services, in particular our health service. To fund Sláintecare, provide for an ageing population, pay for major housing investment, retrofit the housing stock and tackle climate change, taxes will have to rise over the coming years.

Already the Republic’s income tax and universal social charge system is among the most redistributive within the European Union. The Economic and Social Research Institute has shown that this has gradually helped Ireland become a more equitable society over recent decades.

The Government’s decision this week to revamp property tax will make our overall tax system fairer, but without the negative consequences for labour supply that could result if we were to further increase tax rates on income instead.

As the property valuations on which this tax is based have become steadily more out of date since 2013, the likelihood has grown of inequity in treatment between people whose properties today are worth the same but where values eight years ago were different. Such inequities would only get worse, the more out of date were valuations. Our rateable valuations on commercial properties are still tied to notional 1860s values. The change in the rate of tax announced by the Government means that, while from next year the property valuations on dwellings will be brought into line with reality, there will be little immediate change in the amount of tax paid by most people.

Many advantages

An exception will be the owners of housing built since 2013, which up to now has been exempt from property taxes. This was a serious inequity in the current system. As half of these recently built properties were rented out, this exemption was of particular benefit to landlords (including cuckoo funds), who are already profiting from a major increase in rents.

Property taxes, when closely related to actual property values, have important advantages.

They are very difficult to escape. Experience worldwide shows that taxes on other forms of wealth, especially financial wealth, are easy to evade, but houses and apartments cannot be moved to tax havens.

In 2018, 50 per cent of the personal wealth in the State was held by the richest 10 per cent of the population. The family home constitutes 60 per cent of personal wealth, with another 30 per cent being held in other forms of property. Thus, a progressive tax on property is a very effective tax on the wealthiest in Irish society.

A further benefit of a property tax is that it is paid by people who are already housed and by landlords. It is not paid by the rising proportion of the adult population who cannot afford to buy a house. As we need to raise substantial additional funds to invest in social housing, it would seem only fair that those who are already housed should pay part of the bill through property taxes.

Public services

In relating the tax bill to actual property values, the reform leaves open the possibility that the tax rate could be raised in the future to fund necessary public services.

A recent study by Barra Roantree of the ESRI concluded that higher rates of property tax “would be likely to dampen the growth of house prices, particularly that linked to credit growth and purchases driven by the anticipation of capital gains”.

If property tax is used to fund the expansion of public services over the coming decade, especially investment in housing, it might be desirable to change the base to exclude mortgage debt. This would allow a substantial increase in the rate of property tax without placing an undue burden on indebted households. However at current rates, the tax burden is relatively low.

Until now, about 20 per cent of the revenue from property tax has been siphoned off into a fund that is redistributed to poorer local authorities. This has essentially been a transfer from Dublin, the richest region, to the rest of the country, especially poorer counties. This seems to be fair, but it has been used by some to justify the lower rate of tax levied by Dublin local authorities.

In the latest reform, this redistributive role becomes a task for central government, with Dublin keeping its revenue. It will be important that central government exercises this responsibility by ensuring poorer local authorities are adequately funded.

As the property tax revenue is tied directly to local services, more of the responsibility for funding those services should be devolved to local authorities, with individual authorities being able to choose lower tax rates and lower services, or the converse where, for example, they place greater urgency on tackling the housing crisis.

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