Property tax must satisfy strict criteria

OPINION: ‘THE PEOPLE pay their taxes in sorrow, but their rates in anger” is an observation attributed to Seán Lemass, and judging…

OPINION:'THE PEOPLE pay their taxes in sorrow, but their rates in anger" is an observation attributed to Seán Lemass, and judging from the public reaction to suggestions about the introduction of a property tax, the observation is as valid today as it was 40 years ago.

The negative public reaction to property taxes is because previous taxes of this type failed many basic principles we look for in our tax system. The first principle is that the tax must raise reasonable revenues. Suggestions that a tax should be levied only on “trophy homes” mean a wealth tax, which rarely raises substantial revenues. Proposals for a tax of €1,000 per home, raising some €1.7 billion, overstate the potential. Ireland has about 1.5 million households. If we exclude social housing and exempt low-income households, a property tax may be levied on less than one million households.

That means an average of €1,700 per household per annum to achieve the suggested figure.

The second principle is the tax must be equitable. Comparisons with the residential property tax of the 1980s and 1990s are not relevant as the thresholds for that tax were so high that less than 5 per cent of households were liable. The issue with a new property tax is that if value is the basis, we may have a similar situation to the 1990s, when a four-bed semi-detached in a city incurred higher taxes than a substantial rural house on several acres. Floor area might appear more equitable, but should a 150sq m house worth €600,000 pay the same tax as a similar sized house in Dalkey that would have a higher value? It is difficult to see how a basis for the tax could be accepted as equitable.

READ MORE

The third principle is ability to pay. Generally, houses increase in value and with no change in tax rates, tax revenues should rise as property values increase.

However, from 2000 to 2007, house prices rose 50 per cent faster than average earnings. This means in 2000, a tax of €1,000 would be 4.2 per cent of the average earnings, but by 2007 it would have been 6.1 per cent.

The fourth principle is the tax must be easy to administer. Self-assessment would be practical, but the fifth principle is the tax must have certainty, which means when a return is made in good faith and the tax is paid, the taxpayer should be certain the liability has been met.

If values rise sharply, then returns made in previous years could be re-examined and more liabilities determined. In the current market, it is difficult to assess the value of a house.

The sixth principle is that the tax must promote efficiency. Some suggest that site values rather than house values be used as they would allow developments such as extensions to be built without increasing the liability – but should sites be valued at their actual or potential use?

The seventh principle is the tax base broadens. Here the issue is whether stamp duty is discontinued. People who bought houses in the past few years and paid stamp duty have seen their homes’ value fall substantially. They would be dismayed if they had to pay an annual tax.

The eighth principle is that the tax must be practical. This means it must be easy to understand. If the basis is unambiguous, this principle can be met readily.

The ninth principle is the tax must not be a disincentive. It is difficult to see how a tax based on market value or house size would not be a disincentive to those considering adding an extension.

The 10th principle is that it must be acceptable. The challenge is to design a tax that raises reasonable revenues; is equitable; gives certainty to compliant taxpayers; does not cause hardship; and is acceptable.

Irish people have an aversion to taxes levied on the family home. If we want to increase the tax take, perhaps we might consider the proposition put forward by the late Paul Tansey some years ago – that there should be a minimum tax charge of 15 per cent on taxable income.

Tony O’Brien is a business risk consultant with Grant Thornton