This week, Barry Cowen TD introduced a Bill to freeze property tax assessments from October 2016, when new assessments are due to take place. The idea is to stop property tax payments from increasing, so rising property prices will lead to higher tax charges. So this Bill would help limit that change.
But why have a property tax at all?
When the recession came, we needed money and our councils relied on government for 40% of their income (2011).[1] The property tax was brought in to help reduce the national deficit and to make councils self-financing. But now the recession is over, what do we do? Allow new valuations in late 2016? Reduce the rates below 0.018% of the value (up to €1m)? Or remove the tax completely?
Some say you shouldn’t tax property, that it’s unfair, that having a valuable house doesn’t mean you are wealthy, or that urban people are penalised because those areas are easier and cheaper to run but have more valuable houses. The effect of this Bill would be to help homeowners in urban areas where house prices are going up by over 10% year-on-year.
Other critics of property taxes generally say we shouldn’t tax an asset that just sits there, as we don’t gain until we sell it. But this ignores the value and gain you get from comfort, pride, and enjoyment. A property is an asset in more than a financial way, as you take profits in emotions. Here, the problem arises when prices go up as it means you are being taxed more for the same amount of enjoyment. So this Bill would help solve that.
However, what the Bill doesn’t solve is the Local Property Tax itself. It is supposed to be a tax on your assets to help fund local services and so is a mix of an asset tax and a council tax. But is it really a local property tax? No. The money goes into a central pot and then to local councils, with some lost along the way and with urban areas subsidising rural areas. So what we have is a tax based on property prices that doesn’t account for your ability to pay and which funds both local and non-local services. It doesn’t do what it says on the tin.
So are there alternative to the LPT?
The most well-known alternative is the Site Value Tax (STV), which exists in Denmark and parts of Australia and which was considered here when the LPT was being designed. The STV doesn’t tax the property, it taxes the site under the house: the part you haven’t improved. You pay a tax on the value of the site if it was rented out, minus the house, so the charge would be lower. It would mean you can renovate your house without paying higher tax and so it doesn’t discourage investment. But the STV was rejected when it was considered here for being too hard to implement,[2] and too hard to sell to the people.[3] It looks to have been a mistake: the STV is the fairest form of property tax.
This Bill would help homeowners by giving them leeway in a time of rising house prices. But the Bill wouldn’t solve the key problem: the Local Property Tax is the wrong way to tax property and doesn’t solve local funding needs. The best way to address local funding and asset value is to have two taxes: a tax on land as a proxy for a wealth tax and a charge for council services. This would solve the current urban-rural imbalance without asking people to pay more overall. Urban homeowners would pay more in an asset tax and less in council charges and rural homeowners would pay less in an asset tax and more in council charges.
But who is going to accept that? And, more importantly, who is going to propose it?
[1] Design of a Local Property Tax - Report of the Interdepartmental Group, 17
[2] Commission on Taxation 2009, 171
[3] Commission on Taxation, 2009, 158