Cliff Taylor: Is the Government dealing a death-blow to the property tax?

Is the local property tax, like the water charge, set to be slowly killed off as a meaningful source of long-term revenue for the exchequer?

The Government has received a report on the future of the tax, which was introduced in 2013 as part of the bailout programme. It presumably points out that, to have any future, the local property tax must increase as house prices rise. Otherwise it becomes a kind of fixed annual charge and will gradually become less and less useful as a revenue source.

However, after the fuss about water charges, no party heading into a general election campaign is likely to say that people should pay more property tax.

This week the Government tried to get out ahead of the debate, saying no “nasty surprises” were on the way. But in the election rush, might the future of the property tax be fatally undermined?

We really don’t like new taxes. No sooner was the local property tax introduced than it was cut for many people. Fourteen of 31 local authorities availed of their power to reduce the tax by up to 15 per cent. Given that among the local authorities who reduced the charge by the maximum were the four around Dublin, while the two Cork authorities cut by 10 per cent, a significant portion of the population has received a big saving.

The value of your house, for the purpose of assessing the tax, is already fixed until the 2017 tax payment – even if you have doubled its size and stuck in a swimming pool. The question is now what happens after next year, when the current valuations are due to run out and houses are due to be revalued.

Remember that whatever the political temperature about the water charges, the local property tax costs most people a lot more. The maximum net cost of the water charges is €140, after a household claims back the €100 allowance. For a house valued at €300,000, the property tax costs at least €500 per annum; those in homes worth €600,000 or more will pay over €1,000.

Not everyone would face an immediate increase if the tax was allowed to rise along with house values. Back-of-the- envelope calculations suggest that up to 50 per cent would face no immediate rise.

Of the rest, if the tax was based on current house values, the majority might face going up one value band for the 2017 payment, costing roughly €75 more a year on average. A significant minority would jump two bands, at an extra annual cost of about €150. Those facing the bigger increases are largely in Dublin, where house price increases have outpaced those in the rest of the country.

Limiting the pain

The report on the local property tax, drawn up by former senior public servant

Don Thornhill

, outlines the options for the Government and looks at how tweaks in valuations and bands could help limit the pain in the next couple of years.

During the week we were given a strong indication of where this is going when Minister for Finance Michael Noonan said there would be no major increases and that he just wants to maintain the current yield from the tax. A few months away from a general election, this is no great surprise.

However, what happens next is important. If the valuations on which the tax is based don’t change along with the market, then the whole credibility of the tax will be gradually undermined. This happened with domestic rates before they were abolished in 1977, and it would quickly happen with the local property tax.

Think about it. What happens if your tax is held at is current level, but someone buys a house next door for 25 per cent more. Does the new buyer pay more than you? Or does everyone pay on a valuation which is way out of date, undermining the long-term potential of the tax to gradually return more to the exchequer? What about a house that has had a big extension and is now worth a lot more?

In the long term, higher house values must mean a higher tax; otherwise the tax will have no credibility.

But there in no political support for this. It’s quite ironic that even left-wing parties are opposed to the property tax, which is surely one of the most efficient way to tax “wealth”. Sinn Féin has called for its abolition.

Sustainable footing

There is a wider issue here as well. Property tax was to be part of a drive to put our tax system on a long-term sustainable footing after the economic collapse showed we had a narrow tax base, which was vulnerable because taxes such as stamp duty and capital gains were too volatile. Higher income tax, a new property tax and (whisper it) water charges were part of a move to put the national finances on a more solid footing.

It looks like higher income tax will be the only big survivor, with water charges yielding relatively little and a €450 million yield from the property tax representing just 1 per cent of annual tax revenue.

We are again slowly narrowing the tax base and underlining its reliance on taxes on income – and on the group of middle and higher-earning PAYE employees in particular. There is just no link in the public debate that says less paid on water charges and property tax means more must be paid on income tax and VAT. Instead all new general taxes are opposed. The only ones people support are the ones other people pay.

With no significant revenue coming from new tax sources, this means high taxes on incomes are here to stay.