OPINION:THE DESIGN of a new property tax involves a delicate balancing act and is the subject of much debate.
Ronan Lyons’s recent contribution (Irish Times, April 26th) argues the tax could avoid disincentives to work and/or invest in their property if it were based only on site value (rather than on the full value of property) and applied without exception to people at all income levels.
Incentives are important and both property value and site value taxes score well in this respect, but taxes must also pay attention to other desirable objectives. A well-designed property tax also needs to take account of ability to pay and transparency. Our recent research concludes that, when these broader concerns are taken into account, a property value tax is a better optIon for Ireland.
Lyons’s sole concession to the “ability to pay” principle is to allow for deferrals of tax; he rules out ongoing exemptions from a property tax. We argue instead that the choice regarding exemptions is a matter for public debate and government decision, not a technical economic issue.
Most countries exempt those on low incomes, as well as offering deferral options, to take account of ability to pay. In Britain, those with incomes close to minimum social security are exempted; a higher income limit applies in Northern Ireland. In our analysis we report the impact of a property tax with a range of possible low income cut-offs, so the debate can be well informed as to the consequences of choices.
Taking ability to pay into account through an income exemption limit does not turn a property tax into an income tax that reduces the incentive to work, contrary to Lyons’s claim.
In fact, for the overwhelming majority of taxpayers, marginal tax rates on income would be unchanged – even if the income exemption limit was at or somewhat above the level of the State contributory pension.
We agree with Lyons that a property tax is meant to be, in part, a tax on wealth. However, a site value tax does not follow through on this logic. A site value tax would be based only on the value of the land, and would exclude the value of the house itself, a major part of wealth.
A property value tax, by contrast, would include the full value of housing property and would therefore more accurately reflect wealth. That most developed countries – including Northern Ireland – implement taxes based on property values rather than site values indicates that practical issues of valuation can be managed successfully.
Why are property value taxes much more common than site value taxes in developed countries? One reason may be that house prices are well understood by homeowners, while site values would have to be calculated indirectly. However good the technical analysis, this means that site values would be less transparent to the taxpayer.
In the Irish context, there is a further and very serious concern about the proposals for a site value tax. No information has been provided by its proponents on how the burden of the tax would be distributed across households at different income levels. Given the furore about the household charge, and the keen interest in the fairness of a new tax, this issue is vital. It would be unwise to believe the consequences would be benign.
Finally, some other recent media reports have claimed that a property value tax would automatically mean that Dublin and other high-value property areas would be hit hardest. In fact, a property value tax can be designed to achieve regional balance between Dublin, other urban centres and rural areas.
Property tax rates can be set lower where house values are high, and vice versa, bringing tax bills for similar properties into line. A system with variation in rates of tax across areas would be sufficiently flexible to allow policy to strike a desired balance.
This is how many other countries deal with regional variation in housing prices.
Tim Callan is research professor at the Economic and Social Research Institute and co-author of Property Tax in Ireland: Key Choices, an ESRI renewal series paper