It took the collapse of the property market for many in the Government to properly understand the scale of the exchequer’s reliance on stamp duty as a source of income. In 2007, at the height of the housing market, a full 14% of all exchequer receipts each month came solely from the transaction of commercial and residential property. A collapse in house prices coupled with a sudden halt in the number of transactions meant that by 2012, stamp duty had fallen to less than 2% of all monthly tax receipts. Since the collapse of the property market, a debate has raged about how the ownership of property can contribute to exchequer recovery through an annual tax.
The Society (and before the merger, both the SCS and IAVI) long warned Government that a reliance on the transaction of property rather than an ongoing levy on property ownership was causing significant distortions to the property market. The Society argued that a more sustainable way of ensuring that property could provide a reliable, sustainable and predictable revenue stream, which was not dependent on rising house prices and transaction volumes, was an annual property tax.
Principles of a good property tax
In making our approaches to Government on this topic, the Society recognised that while most countries levy some form of annual tax on residential property, there is no example of international best practice for Ireland to adopt. Rather, there are broad principles of fairness, transparency and predictability, which the Irish Government should follow when deciding the details of the new tax. The Society’s submission focused on the need for clarity about how the tax would be levied, what it would be for, how it would fit into the existing taxation regime, and who should be liable.
The Society’s submission, which formed the basis of our later pre-Budget submission, asked the Government a series of questions and made a series of statements about the principles of good property taxation. It is the Government’s prerogative to make policy, and the Society’s prerogative to bring expertise and evidence to that policymaking process. Opinions within the surveying profession on the technicalities of the taxation varied, but there was agreement that a well-defined and accountable property tax should be used to help finance discretionary local and regional services without damaging the market. A poorly thought out property tax (such as the current annual flat rate tax) could run the risk of being unpopular, unsustainable and expensive to run, but not actually yield much income. The Poll Tax riots in London in the late 1980s starkly show the societal and political consequences of trying to implement a poorly designed and unpopular tax.
Transparency and fairness are key to a good property tax. One of the main questions we asked Government was the purpose of the tax. Would it fill the gap in the national exchequer left by the decline in stamp duty, or would it be collected at local level to fund discretionary spending by local authorities, similar to the British council tax mechanism? This is an important question because it raises the issue of who should pay the charge. While a general tax on the ownership of property would suggest that the owner would be levied, a charge to fund local services would suggest that the occupier of the property would be responsible for its payment. In our submission, this was the first issue we asked Government – which branch of the State will benefit from the tax income and who will be charged? The Society recommended that 80-90% of all tax received should be held by the local authority in which the property is situated, while 10-20% is pooled at a regional level to fund inter-county and regional infrastructure, and to support areas with small population levels. The second question posed by the Society was the basis of the collection of the charge, given that the movement away from a flat rate is desired. There are essentially three mechanisms that can form the basis of tax: the market value of the property; the notional rental value; and, the site value. When assessed against the principles of fairness, transparency and predictability, each of these mechanisms have their benefits and their drawbacks. The Society’s submission, based on the expertise of our residential agency members, set out these benefits and drawbacks in an impartial and fair way.
The benefit of using the market value of property to calculate the levy is the relative ease and transparency with which the market value of a property can be estimated. In normal economic conditions, property prices do not change significantly each year, making it easy for Government to predict the total income from property taxes based on the open market value over the medium term. The main drawback of this methodology is that it disincentivises investment in property, as any work done to a property that increases its market value also increases the tax liability.
Removing the value of the property from the equation, and levying a tax on the value of the site on which the property is situated is perceived as a way of removing some of the drawbacks of market value assessments. By levying a fee on all land, irrespective of what is on it, land banking and under-efficient use of land can be prevented.
However, valuing sites may be difficult and could fail the transparency test, especially where a number of properties (such as apartments) are built on the site, and in many cases at the moment, sites could have a negative value.
The third option is to levy the property tax on the estimated rental value of the property. Rents tend to fluctuate less than market values, supporting the aim of having a predictable income stream, but this also raises problems with assessing the rental value of property, and simply works as a rough proxy for market value.
The Society recommended that if market value is the preferred methodology, then values should be banded along the English council tax model, with the maximum and minimum charge for each band set at a national level. Each local authority could then select the actual charge based on a calculation of its own budgetary need. This would allow each local authority to make a levy based on the property mix in its area.
The Society believes that if local authorities are given responsibility for collecting the property tax, they should be responsible for how it is spent. The submission recommended that each property tax bill should be accompanied by information on what services will be funded through the payment of that bill, to ensure maximum transparency and accountability.
It is the responsibility and right of Government to levy taxes to pay for public services, and it is the responsibility of professions such as Chartered Surveyors to point out best practice to Government. In our submission, the Society used its mandate to work in the public interest through advising on the principles of good property taxation.