Property tax - understanding cause and effect
This post was written by Ronan Lyons
This is my first post on Irisheconomy.ie, having served my time as apprentice in the Keyboard Warrior army with my own blog, so hopefully it’s useful to set out how I envisage using this site. My research interests are urban economics (including property markets) and economic history. When it comes to the Irish economy, my interests are probably best categorised as follows (in no particular order):
- Irish government finances
- the property market
- Ireland’s international competitiveness
I had thought that maybe my best option to open my account on this site would be to do a post on each and start a conversation. Fortunately, the Irish policy debate is far too exciting and so this morning we have a story (see for example Charlie Weston’s article in the Independent) that covers all three areas: the property tax.
Deferrals and incomes
The paper by Claire Keane, John R. Walsh, Tim Callan & Michael Savage [hereinafter KWCS] of the ESRI recommends an annual tax based on the value of the property, with exemptions for those below certain income thresholds. To me, this is definitely not the way the Government should be going. I have no issue with KWCS’s claim that their system would be fairer than the current household charge - to me, that is a very low benchmark. But aside from that, there is little I could recommend about KWCS’s system. In fact, there are three main flaws in relation to their proposal.
Firstly, there should be no exemptions from a property tax, only deferrals. If you are land-wealthy (and remember real estate made up three quarters of wealth in Ireland last time we checked) but income-poor, the State can wait until you ultimately sell it and then, through a lien or charge on the property, take the fair amount.
Secondly, a property tax should most certainly not be related back to income. If you want to punish people for having an income, then do that through an income tax. A property tax is somewhere between a wealth tax and a tool for making sure land is used efficiently. It is not supposed to be an indiscriminate revenue-raiser, as income and consumption taxes are - if you look internationally, property taxes are used to fund local services.
The data needed
Thirdly, as an expert of sorts in this area, I have to take issue with the following claim (as reported in the Independent):
Basing the tax on site size would be complicated because there is no database on site values. In contrast, a national register of property prices is being compiled.
It is most unfortunate that this appears to be what KWCS believe. In fact, particularly in a market as illiquid as the one we now have, the opposite is the case. I have already estimated the contours of land value in Ireland - see the map below, which is based on 1.5 million property listings from 2006 to 2011, and which controls for market conditions over time and for the fact that property types differ by location [more here]. (As before, I’m happy to share for free this and the underlying data with any Government body and to apply the model to any dataset they may have.)
This is because it is far easier to calculate land value consistently around the country than it is to calculate the value of each and every property. Put at its simplest, the land value of the property you live in depends on two things: the site size (known from the Land Registry) and the amenities nearby, which we can measure relatively easily through what applied economists call “fixed effects”.
On the other hand, the full value of the property you live in depends not just on site size and nearby amenities, but also on dozens of other mostly difficult-to-measure factors, such as building size, the number and size of bedrooms, of bathrooms and other rooms, outhouses, ratio of front garden to back garden, energy efficiency, all the way down to whether the attic has a Stira and whether the landing has a skylight. The value of all of these things may also vary by property type, by region and over time. And when someone does something useful like insulate their homes, convert their attic or extend into the back garden, they are then landed with a larger property tax bill. Do we really want to tax people for making their homes more energy efficient?
The register of house prices will give us none of this information - the country will be depending on people like me to estimate hundreds of things like the effect of double-glazing on apartment values in Connacht-Ulster since 2009. Certainly we could ask for 101 details to be recorded in the stamp duty record (the French do that, incidentally) - but wouldn’t it be much easier to ask for just one additional detail (site value)?
As for KWCS’s point that a full-value tax is easier for the public to understand than a site-value tax, the household charge was pretty easy to understand but that didn’t make it popular! Ultimately, I do not think it is beyond the grasp of people who have done something as financially complex as take out a mortgage to see that their property’s entire value consists of two components: the site + the building.
Cause and effect
Ultimately, if there is one point I could embed in the discussion of property tax in Ireland, particularly as we are designing one from scratch, it would be what you might call “understanding cause and effect”. In other words, why do we want a property tax and what effect will it have?
Clearly the ‘why’ is about raising revenue - but if that’s all it is, sure let’s just increase income tax. A property tax can, nay should, be used to finance local amenities which ultimately drive differences in land values around the country.
A full-value property tax with income exemptions is just income tax in another form, an indiscriminate form of revenue raising that will damage Ireland’s competitiveness and punish socially useful activities like building on a derelict site. A site-value tax, with deferrals for those who have the wealth but don’t have the income, will generate the same revenue but also encourage Irish households to use land, a scarce commodity, in socially beneficial ways.