Nat O'Connor: The Taoiseach has been talking about the introduction of property tax (Irish Independent, Irish Times).
A part of this is tax on people's residences, although it is important to remember that 'property' has a much wider meaning, in terms of financial assets, other material goods, etc. There is a real risk that discussion of any new tax will focus solely on people's homes and not on other assets.
In the UK, 5 per cent of people own 40 per cent of non-residential assets. The situation in Ireland seems likely to be similar. This is also property wealth and a legitimate question to ask from an equality perspective is what other assets will be taxed by any future property taxes? Given the scale of the gap in the national finances, there is no doubt that assets beyond housing will need to be taxed and could make a vital contribution.
Additionally, on the subject of residential property, there are four inter-related issues that ought to be tackled at the same time: the moral hazard of any mortgage rescue scheme, stamp duty, private renting and local authority funding. But first of all, how much money could property tax bring in?
One factor affecting property tax is how many housing units are there in Ireland? The 2006 Census reports 1.46 million occupied dwellings, of which c. 1.1 million are owner-occupied. I'm assuming social housing won't be included and landlords (and therefore tenants) are already meant to be paying the €200 per year charge on second or subsequent houses, so let's assume 1.1 million dwellings will be eligible for the tax.
If property tax was also €200 (on average), this would generate €220 million in a year (less operating costs and assuming full compliance). Not bad, but not on the scale of really dealing with the €8.3 billion non-cyclical gap between tax revenue and spending identified in an earlier blog. So, you'd really need to be talking €1,000 per year (on average) before making a real dent, which would bring in €1.1 billion. To put this in context, the projected tax take for 2010 is c. €32 billion.
The next question is how much can people afford to pay? Well, this varies a lot. However, many people on low incomes in rented accommodation won't be affected. A flat tax of whatever amount will be regressive; costing proportionately more to those on lower incomes. Hence, there needs to be a strong link between the tax and both the value of property and people's ability to pay. Wealthier people in bigger houses in nicer locations should pay multiples of what lower income people in small apartments in peripheral areas pay.
In terms of those who can afford to pay more, there is an opportuntiy to introduce something like the (now dropped) policy of the UK's Lib-Dems to introduce a 'mansion tax' of 0.5 per cent of the value of houses over ST£1 million (which was estimated to cost 250,000 householders over ST£4,000 per year)? Given that house prices grow steeply at the high end, it seems reasonable to expect that property tax will also be high for so-called 'trophy homes'.
Those reliant on the state pension who own their own homes will be the most vulnerable, as they may be 'asset rich but cash poor'. People in these situations could be allowed to defer the tax with no interest until their decease, whereon their estate could pay.
Yet, to return to the possible figure of €1.1 billion from property tax (at an average of €1,000), this would play a useful role in closing the €8.3 billion gap. However, the remaining €7.2 billion indicates the need to look beyond residential property. Hence, taxes on other non-housing assets may be a necessity.
The Moral Hazard of Any Mortgage Rescue Scheme
One of the real consequences of any residential property tax is that it may push householders struggling to pay their mortgages over the edge. Yet, any waiver for people with problems paying their mortgages must be seen as a type of mortgage rescue, which therefore invokes the question of moral hazard; that is, why should the State help people (who perhaps borrowed too much) to pay their debts so that they can own property, when other taxpayers did not put themselves in this situation. This question will need to be addressed. Either property tax will be allowed to be the final straw for thousands of mortgage-holders, or else (if there's a waiver) the moral hazard question arises. One solution would be to allow tax deferral, like for people with valuable housing but low incomes. This way everyone pays their fair share, but people with high mortgages are not pushed into default.
One suggestion of the 2009 Commission on Taxation report was that "homeowners who have paid stamp duty would be exempt from the annual property tax for seven years from the time they bought their property." (Irish Times report). This is a small compensation to those who paid tens of thousands in stamp duty. Yet, is the current proposal to eliminate stamp duty, or will property tax add to it? If we eliminate stamp duty (projected to provide just under €1 billion in 2010) residential property tax won't add much to tax revenue in the short-term, but it should stabilise revenue from this source (e.g. stamp duty collapsed from a height of €3.7 billion in 2006, and is unlikely to return to anything like that level). Given the crisis in the national finances, it makes sense to keep stamp duty in place as well as property tax.
Property tax will raise the cost of home ownership. Combined with everything else that's gone wrong in the economy, this factor is likely to lead more people to rent long-term. Yet another reason for the State to strengthen the protection of tenants to make renting a family-friendly option and an older age-friendly option.
Local Authority Funding
One possible role for property tax is to fund local authorities, which are set to spend a large chunk of the Department of the Environment's €2.2 billion allocation in 2010 (Revised Estimates 2010). On the local government scale, €1.1 billion in property tax could form the backbone of a coherent funding system (along with commercial rates, motor tax, waste charges and water charges). This would open up the possibility of local authorities varying the amount of property tax they charge, which might be more appropriate than a one-size-fits-all national formula, given how housing prices vary greatly across the country.
The original decision to abolish domestic rates undermined local government funding (followed by the legal case that removed agricultural rates also). The introduction of property tax is an opportunity to fix this system, above and beyond merely adding another patch to the national finances.
Dr Nat O'Connor @natpolicy
Nat O’Connor is a member of the Institute for Research in Social Sciences (IRiSS) and a Lecturer of Public Policy and Public Management in the School of Criminology, Politics and Social Policy at Ulster University.
Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.
Nat holds a PhD in Political Science from Trinity College Dublin (2008) and an MA in Political Science and Social Policy form the University of Dundee (1998). Nat’s primary research interest is in how research-informed public policy can achieve social justice and human wellbeing. Nat’s work has focused on economic inequality, housing and homelessness, democratic accountability and public policy analysis. His PhD focused on public access to information as part of democratic policy making.