Property Tax: ESRI Conference Paper

 

A conference paper  provides evidence relevant to some key choices in the design of a new property tax.  While the paper does not recommend a specific blueprint, it draws on evidence from other countries as to “what works” and analyses the impact of different forms of property tax on a nationally representative sample of households.

Ronan Lyons post yesterday contained three main comments on the paper.  Because some of these appear to have drawn primarily on an Irish Independent report that contained inaccuracies, rather than on the paper itself, it seemed best to issue this as a new post.

1.        The first comment is that “there should be no exemptions from a property tax, only deferrals”.  The  SWITCH model is set up to analyse policy choices.  As I see it, the level of an income exemption limit is a choice variable, and in this context, zero would be Ronan’s preferred option.  Our research found a range of positive values in evidence in many countries. For example, the UK Council Tax Benefit effectively exempts those with incomes close to minimum social security levels. In Northern Ireland, they have set a higher income limit than in the rest of the UK. In our analysis we report income distribution impacts for the zero case, and also for levels at the State Contributory Pension and State Pension+25%. Our work points out the implications of the different choices. Making such a choice is a matter for public debate and government decision. Our paper aims to inform that choice.

2.       The second comment is that “a property tax should most certainly not be related back to income”.  I’m not sure what he has in mind here but it is important not to misunderstand our analysis. Apart from income exemption limits and some marginal relief above this (necessary to prevent 100%+ tax  rates), the property tax bill we consider is simply a flat percentage of market value. We analyse what the outcome is in terms of how the burden is spread across the income distribution – this depends on how, in practice, property values and incomes are related, as well as on the effects of exemption limit provisions. These are questions of legitimate interest for research and policy.

3.       Thirdly, it is stated that our paper asserts that Ireland has “no database on site values”: This is not what we said – it reflects an inaccuracy in the Irish Independent’s report. What we said is that “to our knowledge, there is no data source which combines information on site characteristics (location and size) and household incomes, so that it is not possible to provide a clear picture of how a Site Value Tax relates to ability to pay or its impact on the distribution of income”. If there is such a source, we would be glad to hear of it.

 

36 thoughts on “Property Tax: ESRI Conference Paper”

  1. On point 3, it should not take much ingenuity, or a very large amount of work, to look at a significant and representative sample of properties for which market values are available, and to estimate the value of improvements on each, leaving site value as the residual. One would get a distribution on the relationship between property value and site value from this with no need for information on site location or size. It shouldn’t be beyond the ability of ESRI economists to combine this with their existing analysis to estimate “how a Site Value Tax relates to ability to pay or its impact on the distribution of income”.

  2. @Richard, a number of houses have been built in Ireland since the NSHQ survey in 2002. Does this mean the NSHQ could actually be used for the practically used?

  3. @JMK
    NSHQ is the only data available that connects property value and incomes. It’s for 2002. We know how incomes have evolved since, and we know how property values have evolved since. 1+1+1=3

  4. With the range of additional taxes due, what level of income is required to make working more attractive than living on the dole in social welfare housing? (not sure how you’d do it, but some adjustment would need to be made to reflect costs of working – travel, clothing etc. And some adjustment for time spent working).

    It seems that we may need to make the unemployed poorer to incentivise lower paid work. If so, how and when should this happen?

  5. @Richard. We do indeed know how incomes have evolved since 2002 in aggregate, but not for those individual households that were surveyed in 2002, and certainly not for occupants of new houses built since 2002.

  6. @Richard

    let me put it another way. There were 500,268 housing unit completions since 2002. That’s rather a large proportion of the housing stock. So I’m simply asking whether the NSHQ survey could be any help in forming a workable property tax.

    I suspect the answer is no, based on

    i) the lack of corresponding income data at the individual household level for those houshold’s that were surveyed in 2002,

    ii) that the 2002 clearly did not cover quite a large proportion of housing stock

  7. @ RT

    Doesn’t the value of the hedonic regression analysis outputs depend on a premise that consumers behaved rationally in 2002? (i am being slightly facetious on that point!)

  8. @Tim
    I’m not sure I understand:
    “Apart from income exemption limits and some marginal relief above this (necessary to prevent 100%+ tax rates), the property tax bill we consider is simply a flat percentage of market value.”

    Paragraph 2 of the abstract seems pretty clearly to say that the exemptions are a “powerful tool for shaping the income distribution consequences of the tax”.

    This is a little bit “how was the play Mrs. Lincoln”?

    Council tax in the UK is not really an appropriate comparison unless you are suggesting that renters, including those in social housing, should also pay the property tax? Council tax is a tax on occupancy, not on ownership. It is not really a property tax, property is used as a useful administrative grouping. (Indeed, the conference paper covers this point, so I’m not sure it is worth bringing up here).

  9. Two tangential points that might be of interest to people:

    1) The Henry George Theorem – http://en.wikipedia.org/wiki/Henry_George_Theorem

    2) We could get people to value their homes truthfully if we passed a law that said the government/any county council has the right to purchase any property at the value stated by the owner + 50%. People would be less inclined to under-report then!

  10. @hoganmayhew
    “Council tax in the UK is not really an appropriate comparison unless you are suggesting that renters, including those in social housing, should also pay the property tax?”

    For the household charge which we are told is for services – what exactly was the reasoning behind exempting those in social housing?
    Is this proposal and purely a tax on property and not for services? If so what will then pay for the services? Should there not then be a separate tax for services which would in fairness include contributions from those in social housing?

  11. The complete dominance of mechanisms & methods to extract tax on a declining money supply rather then solve physical problems is a curious feature of the Irish economic debate.

  12. @Amac
    I can’t argue with that.

    I didn’t like the council tax in England when I was paying it, but it did sharpen attitudes of local councillors and not just in the “cut and be damned” sense.

    By the way, there don’t appear to be income exemptions for the council tax. There is council tax benefit and there are reductions based on the number of qualifying adults.

  13. @ AM: “…what level of income is required to make working more attractive than living on the dole in social welfare housing?”.

    Living on a state (ie. a taxpayer funded) welfare payment is not attractive – unless you are a zombie personality. It extracts a high psychological cost. With long-term unemployment, a deep psychosis sets in. The external costs are horrific. In essence, you become un-employable. So, even if you are offered a waged job, the differential between your welfare income and your nett (take-home pay) has to be double. And the likelihood of you retaining that job for more than a few months is pretty dim – absent a strong, resiliant personality.

    Better to pay the un-employable a basic to keep them un-employed. They will spend almost 95% of it back into their community. Future prospect for a lot of our folk.

  14. @ Enda H

    The best way of assessing the value of a home is to make a comparison with the price a similar property has achieved in the open market. As many urban houses in Ireland are identical, the comparison is not open to question in the majority of cases

    The information to enable this to be done has been in the hands of the Revenue Commissioners in respect of all house sales since the last government applied a Stamp Duty to all such sales, if I am not mistaken.

    But releasing this information would be far too simple and would deprive many experts of gainful employment.

  15. If you want to know where the euro money supply is flowing to…..

    http://www.rail.co/2012/…/19/barton-willmore-to-advise-on-17bn-french-r...

    http://www.thetransportpolitic.com/…/paris-region-moves-ahead-with-125-...

    The european elite must strip the periphery to keep the dream alive.

    We are all Euro Shock troops now.
    The equilivent of WW 1 Corsicans flung against those MGs

    Oh the Horror the Horror.
    When we get 15 million quid we spend it on roads of course.

    We have these dead concrete dreams that we just cannot shake off I guess ….. no matter how much money leaks out.

  16. re Property Tax:
    My view is that the Ronan Lyons site tax has a lot of merit on may fronts.
    As I understand it should be simple to operate. The calculation as I understand it simply is:
    Site Value = Sale Value of property less the standardised national cost of constructing the size of residence thereon. The only database required for such a tax is the sale value of various properties county wide.
    If such a database it not there, then it should be there. Indeed the banks should be able to provide sufficient data via their mortgage books to establish a reliable databank on which to base county wide prices.

    Equally, I agree with him that there should be no exemptions even if householders have to be subsidised through the welfare system to pay it.

    A property tax is needed to steer capital away from property into more entrepreneurial activities. It is also needed as a critical tool in getting rid of ribbon development and fostering village and town communities.
    I would hold that view even though I would insist on the finishing of semi complete properties throughout the country.

  17. @Ahura Mazda

    “It seems that we may need to make the unemployed poorer to incentivise lower paid work..”

    I would not be proud of making that statement even though it encapsulates perfectly the thought process of ‘free market’ societies. And it is fair to say that is exactly what has been happening in Ireland since 2009 at least.

    The “we” that need to make the ‘unemployed poorer’ are usually the far better off in society who wish to preserve their own gains and positions, often gains and positions held at the expense of the public purse.

  18. Ok –
    What is the average total tax paid on property in Europe over 30 years?
    What is this figure less average stamp duty in Ireland bought in the boom?
    This figure would be your normal “dead money” in a normal economy and let’s call it b
    We can start with that and then work out negative equity interest rates etc

  19. @Dork of Cork
    Do we have to hear about the money supply and/or central banks on almost every thread regardless of what it is about?

  20. Sorry Dread but that post was meant for another thread.

    But it is always about the money supply ……. you cannot tax non money.

    We are stuck in a supremely absurd monetary envoirment.

    Its these tax discussions that are even more absurd then my pointless pleas for rationality.

    You must issue and tax………..if you are sovergin………. you are merely someones agent when you tax.

  21. @Dork of Cork
    “But it is always about the money supply ……. you cannot tax non money.”

    No worries 🙂
    But to some it isn’t always and everywhere about money supply.

  22. @Ahura Mazda

    “It seems that we may need to make the unemployed poorer to incentivise lower paid work. If so, how and when should this happen?”

    Whilst ensuring that prices don’t come down to affordable levels for the low paid and unemployed (mostly through no choice of their own especially those losing their jobs in the past five years) and let’s make sure inflation keeps rocking along over 2% too. God forbid they should live in anything resembling dignity.

  23. I think there are lots of positive in favour of Ronan suggestions of a site value tax.

    But one of the main goals of a property tax is to tax wealth. A site value tax is a less efficient form of wealth tax than a tax based on the market value of the property.

    I would also agree with Ronan that there should be no exemptions on low incomes. But I would an exemption for those on low incomes for the cash payment with the tax being add as a lien/charge on the property.

  24. @PR Guy

    So right!

    Bring down pay but not the costs. Who is benefiting, not the ordinary person trying to make ends meet, thats for sure.

  25. Its interesting to reflect on the consensual nature of the household charge brought in last December’s budget. LB/FG were elected on a mandate to tackle Ireland’s debt and eg burn bondholders. About turn on that canard.
    No one has bought their property apart from the relatively few since April 1 who’ve bought property, the rest of us have had it foisted on us out of the blue presumably to help local authorities pay for services the money for which is no longer available because taxes are now redirected, once again against the consent of the public, to eg pay the IBRC casino and the rest of the banks, including the high salaries of the public representatives who represent the banks, but who try to pin the blame on the whole debacle on the previous lot. Reflection over 🙂 Vote no.

  26. @Tim Callan

    Who is the wealthier person-a person on the dole living in a 2 million euro house with no mortgage or his next door neighbour who is a professional earning 100,000 euro p.a. and renting a similar valued house?.

  27. @ Joseph Ryan,
    I thought being blunt/provocative was appropriate. I could say labour reactivation incentives or some other fluff, but call a spade a spade. Given our spectacular economic collapse, everyone is going to be poorer. There is debate/spin about protecting certain sectors. But in the end (regaining competitiveness etc) this means paying workers less. Lower paid workers expect greater disposable income than welfare recipients. So it’s not too big of a leap to ask how and when this may be addressed.

    @ Brian Woods Snr,
    It would be noble to agree with you. If I lose my job, there a plenty of low paid jobs I wouldn’t want. Or at least I would hold off until they started to look relatively attractive. I have no doubt that those who have lost their jobs in recent times want to work. Though I’m not so sure they’d be willing to work any job at any price.

    @ PR Guy,
    You’re addressing a wider issue, which is independent of the relative rewards* that I raised. (relative rewards in the sense that low paid workers expect to be better off than those not working.) Reducing the cost of living is a no-brainer, but little seems to be done. I’ve raised it in the past and felt like doing so again on the recent Fr Sean Healy thread but I didn’t get around to it. Any time prices of goods or services is raised it’s like a game of pass the parcel. Or a squid shooting ink out its butt. For example, dole in Northern Ireland seems to be much lower, but the ink gets squirted out to justify the difference.

  28. @DOCM

    “…The best way of assessing the value of a home is to make a comparison with the price a similar property has achieved in the open market. As many urban houses in Ireland are identical, the comparison is not open to question in the majority of cases..”

    Wrong, wrong and wrong again.

    That’s sort of woolly analysis is exactly why we’re in the mess we are in.

    If you’ve been reading any of John Corcorans posts over the past year you’ll begin to realise how flawed your statement is and the error it seems is repeated ad nauseam on almost every media outlet with nobody brave enough to put an end to the claptrap.

    By the way its closely related cousin is Pat Kennys beauty ‘sure a house is only worth what someone is willing to pay for it’ – again more nonsense.

    Why? You may rightly ask.

    Simply put the housing/property is not a cash market its a credit market (in 98% of cases in a ‘normal’ property market transactions simply do not happen unless a 3rd party lending institution allows the transaction to complete). And this matters hugely. Cash markets are equivalent to buying vegatables in the market, nearly all retail purchases and except for leverage trades most share and bond markets, the property market is none of these.

    The ability of the 3rd party lender to price the house correctly is all that matters in property markets – they normally get their lead from auctioneers/estate agents – but the valuation decision ultimately rests with the banks. In a credit driven market those in control of the credit control the prices. Property markets 101.

    If the bank in your example screwed up in valuing #1 Ordinary Street then its virtually guaranteed that numbers #2,#3 and #4 etc using the same flawed methodology would also be ‘wrong’ in terms of price – QED Irelands property disaster.

    The ‘open market’ you refer to is nothing of the sort- its a closed market in normal times and utterly dependant on mortgage credit to oil the so called ‘open market’. So please desist from working on the flawed assumption the price in property markets is anything but fair – its nothing of the sort – property prices are ultimately a reflection of the strength of lenders’ balance sheets and we know to our cost that in the RoI these are not good – hey presto the property market is in the toilet.

    The only long term method which works in valuing a property is to look to the cash price in the market. The cash price in property is rent – normally people don’t borrow to pay their rent (rent allowances aside) so rent/cash earnings based transactions tend to be best guide to price any asset off – northing at all to do with the balance sheet strength of a 3rd party lender.

    When looking at rents versus prices the long run net yield in the RoI excluding the madness of the years 2001 to 2011, saw net yields converge to about 7% to 7.5% in balanced supply/demand markets (not the 6% as noted by Ronan because the 6% includes the bubble years where prices at the peak in D4/D6 traded below 1% net yield – incredible but sadly true – and generally between 2.5% to 3% at the peak – so it makes sense to exclude these crazy periods as they are not representative of long run net yield trends particularly as supply was oustripping demand for the majority of the time.

    All 3rd party lenders continue on the error driven path in looking for borrowers ability to repay metrics to price the property from. This is flawed. The financing decision and the valuation decision are two very separate beasts. Over the past decade banks have assumed that they are one and the same i.e. borrower can afford a mortgage repayement of x based on some LTV mortgage and house repayments are normally a percentage of income y so providing x/y is within the banks safety parameters the price of house must be sound. Complete horseshit. But this is the sort of stuff that has bankrupted the country.

    As we know banks around the world use this model and hence the ongoing housing disasters that nearly every country experinces from time to time so
    using one dire comparison based pricing model and applying same across an industry or even within an estate is a receipe for disaster.

  29. The valuation error;
    Lehttp://www.independent.ie/opinion/letters/bubble-values-3034584.html

    The analysis may be simplistic but unfortunately it is not flawed. Banks
    ask valuers to tell them what the market value/exchange price is at a
    point in time and then lend vast amounts over time based on that simple
    number. The surveyor gives them that simple number and do not think it
    is their job to tell the banks that the question they have been asked is
    stupid on its own and what they should have asked for is the underlying
    value. It was obvious in 2005 and 2006 that prices in the property
    market were higher than could be sustained by any rational cash flow
    analysis. But in a culture that rewards individuals for short term
    performance rather than longer term perspective, it was in neither the
    bankers’ nor the valuers’ interests to stop it. I cannot see anything in
    what the UK regulatory authorities have proposed that makes me think
    they understand the role of property valuation in driving asset bubbles
    and will prevent it all happening again sometime in the 2020s.

    Neil C, Property Academic, UK
    Professor of Real Estate and Planning
    Reading University.

    There was no online response from any Irish academic,surveyor or auctioneer.

  30. Sorry the valuation error;
    An asset/property has two values, the price you can get for it,or the net present value of it’s future cash flows. If somebody auctioneed a 5 euro note on Grafton Street and an unwise person bidded it up to 20 euro, then a surveyor would value all 5 euro notes as 20 euro notes. Now we know the net present value of a 5 euro note is 5 euro. Likewise if an unwise person paid 2 million euro for a house whose net present value was 0.5 million euro ,then a surveyor would value all other similar houses in that housing estate at 2 million euro.

    The commercial property market was similar. If an unwise tenant on Grafton Street paid a world record rent for a shop, then all the other shops on the street would be obliged to pay this rent, and surveyors would value all shops on Grafton Street accordingly.

    Almost all of the Irish banks reckless lending was done using surveyors/auctioneers valuations. These valuations were as good as money. This is the valuation error than created the property bubble and bankrupted the country.

    John Corcoran

  31. @Ahura Mazda.

    “I thought being blunt/provocative was appropriate. I could say labour reactivation incentives or some other fluff, but call a spade a spade. ”

    Blunt maybe but as you say more honest that the usual fluff.
    But one could also approach the problem from the point of view that many workers in Ireland, particularly at the upper and not so upper echelons are grossly overpaid.
    But for some reason nobody want to start there!
    Not seriously at any rate.

    @all
    On a separate topic I heard on the radio today that the government had awarded themselves a 96% rating in tacking the jobs crisis. Could it be true, I ask?
    Well the second annual dip into private pensions funds for another ~€500 million is just coming up, to be spent on jobs initiatives!!
    After giving themselves a 96% rating maybe the government are thinking of making it a cool billion.
    It beats the hell out of property taxes or water charges.

  32. @ YOB

    Ouch! Permit me to suggest, however, that you are basing your analysis on what I would describe as the Anglo-Saxon approach to housing which relates the value of the property to a borrower’s capacity to pay rather than its intrinsic value. Taking this as the point of departure, your analysis is correct.

    My assumption is that the situation in Ireland has changed drastically and that a genuine market for property now exists and the market is at the point at which it will begin to clear i.e. people with cash will start to buy property which is now at between 30 and 40 per cent of the valuation under the old “ability to pay” system.

    We will see which if the two assumptions is correct!

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