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?
How much?
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.
Stamp Duty
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.
Private Renting
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.
9 comments:
Private Renting -
It would be nice if a tenant could insist that a landlord provide a property as unfurnished (the state provide a limited amount of free storage for the landlord's junk).
Most rental properties are furnished with largish beds in each bedroom to maximise rental income. Difficult to fit a cot, or decorate appropriately for children.
Many householders (in the UK at least) are sitting on unearned equity. This is were a lot of the "easy money" lending has gone.
I imagine most would tolerate a one-off capital gains tax on re-sale of their property rather than in iniquitous cuts. The cuts fall disproportionally upon those who did not make this capital gain in the good-times.
For me, is money I never had, and never earned. It might have a side effect of making housing more affordable.
Valuing property can be difficult, so I would be in favour of the tax being paid when the property is sold, and some interest rate (eg ECB rate) used to back date the valuation. Then when the asset is sold the whole amount is paid together. Also people would be allowed offset this against liabilities. Liabilities such as mortgages, loans etc are easy to value.
Another aspect that should be looked at is inheritance tax. In Ireland it is 25%, while in the US the marginal rate is 55%. I consider a high inheritance tax to be a basic principle for a Republic, as it helps reduce privilege by birth.
Rory,
"I would be in favour of the tax being paid when the property is sold"
The advantage of an annual property tax is that it gives the State a more reliable flow of income and avoids the peaks and troughs we saw in stamp duty, which works as you describe.
The stamp duty model would not provide steady income for local authorities for example. Indeed, ideally people would have the option of paying monthly, rather than having an annual bill. Like for private companies, the State would benefit from the steady flow of cash, and it would be easier to manage for many households than an annual lump sum.
"people would be allowed offset this against liabilities."
I'm really not sure about the full implications of this. It looks like State support to ownership (similar to Mortgage Interest Relief). But why should the State subsidise middle income people to gain assets, when people on lower incomes won't be able to acquire property in the first place?
@ Nat
Regarding the steady income, how about the value of the asset be estimated, and people make a payment each year based on the estimate. Then when the asset is sold any discrepancy would be paid/refunded (plus interest). This way you wouldn't have to worry so much about the bureaucracy of valuation (as if people underestimate they will just end up with a bigger amount to pay when the asset is sold) plus you would get the fairly steady income stream.
RE offsetting liabilities:
Do we want to tax assets/property or wealth? Should someone with net assets of zero (eg someone with a €400k property and €400k mortgage) be treated the same as someone who was lucky, bought a property for €50k, paid off the mortgage, and now has an asset worth €400k?
Rory,
I'm thinking property tax should be like motor tax where you pay on the basis of the car you have and it doesn't matter if you bought it outright or owe money on it. Otherwise you penalise people who save up before buying property, and reward people who take out 100 per cent plus mortgages!
It's true that people don't always pay the same yet end up with equal assets. For mortgage holders in huge debt, I'd allow interest free deferral of some or all of the property tax until the point of sale, much like what you propose.
@ Nat
In principle I'm in favour of taxing all property the same, whether it is the cash that someone is saving up or whether it is a house someone owns. So if someone changes €400k cash into a €400k house I think they should continue to pay the same wealth tax.
Of course it could be difficult to implement this, but I'm sure mechanisms could be found to overcome any difficulties.
How about a property tax based on outstanding mortgage amount or some variant with negative equity thrown in? Just a thought.
'Hit those struggling' is not a good policy. Put some safety checks and balances in so that e.g. pensioners on low incomes but no mortgage don't get unfairly treated.
Joseph, that's another tax break (on top of mortgage interest rate relief) for mortgage holders. Levy the tax on the value of the land using a progressive scale. That way you encourage the most efficient use of the land and can exclude the most vulnerable entirely..
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