How Ireland nearly achieved LVT An
Example of a nearly-there policy in Ireland.
There could never have been a better time than 2012 in Ireland for the introduction of LVT or Site Value Tax as they prefer to call it. Back in 1978 there had been the hurried decision to abolish domestic rates following a rash promise during an election (!).
It was soon realized
that this was a mistake and a form of property tax needed to be re-introduced.
The result of the 2007 Irish General Election was a coalition, with the Green
Party as one of the junior partners.
All agreed that there should be a property tax, but it was the Greens who specifically advocated Site Value Taxation (SVT). By 2009 a Commission on Tax had reported which saw merit in SVT, but opted for Property Market Value as the basis for the new tax.
In early 2010 a new coalition government made its proposal in its Renewed Programme for Government. This time, under pressure from all parties, SVT was the preferred option.
Then in late 2010 the Great Financial Crash exploded on
Ireland. The economy shrank by 8%, revenue from property taxes, mostly Stamp
Duty on sales, collapsed. Government finances looked dire.
This is the classic Shock Doctrine territory made famous by Naomi Klein. This is when, in the wake of the crash, the neo-cons move in to pick over the stricken economy, advising governments to privatise utilities, reduce taxes on the rich, crush the power of the trade unions. When, in post-crash Ireland a high powered outside group (which became known as The Troika) started issuing edicts, they included the ill-fated introduction of water charging through a privatized company.
More promising was
the Troika’s requirement to introduce a property tax.
Conditions in 2011 then, could not have been more
promising for SVT/LVT. There was a crisis, and more tax revenue was desperately
needed. The two previous coalition governments had plumped for a property tax
based on SVT. A big bad external group (The Troika) was pressing the government
to introduce some form of property tax, so could be blamed if anything went
wrong.
So what happened next?
Has Ireland adopted LVT? No. Instead in July 2013 a ‘Local Property Tax’ was introduced at 0.18% of the property’s value, payable to central government.
In some ways this is an attractive alternative. Taxing the value of the house plus the land captures the land element. Clearly where land is the major value-factor in highly sought-after locations, most of the tax accrues to the land or plot price.
The fact that, unlike the UK Council Tax it
is charged at the same rate, whatever the house value. That the tax is
collected by central government will appeal to many LVT advocates. Indeed there
is a campaign afoot[1]
to introduce something similar in the UK.
But what had happened to the Irish coalition government’s enthusiasm for SVT? The design practicalities of the new tax were handed to an ad-hoc Inter-Departmental Group of Civil Servants.
They produced a Report Design of a local property tax for
the Irish Government 2012. They were well aware of the political impetus
behind SVT, yet in their wisdom and experience they produced the following
rebuttal of SVT. I reproduce here in full, because I think every land-taxer and
Georgist should know what hurdles especially administrative must be overcome
before a proper SVT/LVT can be implemented.
Comment: If we cannot overcome these objections at such a propitious time then the project that we hold dear — Land Value Taxation — is a Dead Duck. So why did Ireland flunk the introduction of LVT/SVT and bring in a property-value(price)-based tax instead?
Read how the Administrators
steered the Government onto a flat-rate national Property Tax..
Here verbatim and in full[2]
is the case against SVT (and in favour of a market value/price tax). Read it
and maybe weep; how do we overcome these perfectly rational arguments?
“3.3 Site value versus market value
3.3.1 Both residential market value and SVT meet a
number of important policy criteria. The arguments for SVT are outweighed by
the likely difficulties in ensuring acceptance by taxpayers, i.e., arriving at
values that are evidence based, understandable and acceptable to the public in
addition to complexities and uncertainties in the valuation effort necessary to
put an SVT in place.
3.3.2 In contrast, under a market value approach
applied to housing, the market value of a residential property is related to
the characteristics of the building itself, the site on which it is located and
the characteristics and amenities of the neighbourhood. There will be a
relationship between the market value of a house and benefits to the owners in
terms of enjoyment of the amenity value of the properties. The question – “what
is the value of my or our house or apartment?” - is a relatively simple and
well understood concept.
3.3.3 The 2009 Commission on Taxation considered
both approaches. They concluded that “while seeing the economic rationale for
land value tax...” that “it may not be a pragmatic approach to the
restructuring of our property tax system”. The Commission recommended in favour
of market value of residential properties (housing unit and site) as the basis
of assessment.
Simplicity and transparency
3.3.4 Any tax needs to be kept as simple as
possible for both the taxpayer and the tax administration. Full market value is
a tried and tested basis of assessment that is internationally accepted, and by
implication, readily understood by taxpayers all over the world. At any point
in time, most home owners will have a reasonable sense of the market value of
the home in which they live by reference to recent sales and to officially and
privately published data on house price movements. Where there is doubt in
individual cases, estimates can be obtained from professional auctioneers or
valuers.
3.3.5 In the case of SVT, property owners would
have great difficulty in dealing with a valuation exercise which conceptually
separates the buildings on the site from the site (for tax purposes) in
circumstances where their predominant understanding and interest lies in the
market (or resale) value of their residence. Similar challenges would arise for
auctioneers and valuers. The SVT system would not be as transparent or
meaningful to taxpayers as market value.
3.3.6 It has been suggested to the Group that one
approach to determining site value might be to use information on transactions
in residential property (market value) and, by applying econometric techniques,
identify the implicit value of sites. This approach would fail
the simplicity and transparency test. Site values would be opaque to
taxpayers, leading to high volumes of contested valuations and appeals. This
would undermine significantly the acceptability of the tax. It would also be
somewhat paradoxical to use a basis of assessment (site value) that is
mathematically derived from the alternative basis of assessment (residential
property value).
3.3.7 In terms of administrative simplicity, both
SVT and market value present similar challenges as well as requirements for
comprehensive registers of market/site values. A comprehensive mapped register
of all properties, including details of ownership, precise location, and value
would be required for both. SVT would have the added mapping requirement of
site size. The practical challenges in establishing and populating such a land
register for either SVT or market value purposes would be substantial. However,
it would be much easier and transparent to put in place and update a register
of market values based on the ongoing flows of real time data derived from
house (market value) sales.
Equity
3.3.8 As regards the equity challenges, it is very
clear that the owners of more valuable properties would pay more under a market
value-based assessment scheme for either site values or residential properties.
Taxable values based on market valuations based on either sites or residences
would generally be higher in urban as compared to rural areas. This is
equitable to the extent that market value provides a measure of the value of a
residential property to the owner, particularly in terms of its proximity to
places of work and local amenities and facilities.
3.3.9 SVT does not meet the equity challenge nearly
as well. Taxpayers are likely to have profound difficulty accepting taxation
outcomes where, in directly comparable and neighbouring site situations, tax
liabilities would be identical even though one housing unit was larger and
could have a higher market value than the other.
3.3.10 There would be considerable difficulties in
communicating to home-owners and land-holders that such a situation was fair.
It would undermine the standing of the tax.
Efficiency
3.3.11 An efficient tax system encourages the
allocation of resources so that optimal economic output is achieved. Recurrent
taxes on immovable property are the most “growth friendly” of taxes. As both
bases of assessment deliver this outcome, they are both economically efficient.
3.3.12 According to its proponents, SVT offers many
additional potential economic benefits over and above that of a traditional
market value approach. These include:
• Encouraging the optimal productive use of land
and preventing dereliction;
• Providing for a stable revenue base (housing
prices are more volatile than land prices and land values tend to lag economic
activity);
• Reducing the incentive for premature and
excessive zoning of land, and would in effect be a tax on land hoarding and
speculation, which it is argued by its proponents, would reduce the incentives
for corruption;
• Encouraging the efficient use of existing
properties, including imposing a tax penalty on vacant zoned sites or derelict
properties; and
• Providing a means whereby communities, local
authorities and government can tax the benefits received by private landowners
as a result of local or community investments which enhance the value of their
lands.
3.3.13 While these additional benefits arguably
shade the efficiency argument in favour of SVT as a resource tax, the 2009
Commission on Taxation recommended against it on the basis that in their view
it would be very difficult to gain public acceptance. Despite the economic
arguments advanced by its proponents, SVT systems are not used extensively
internationally.
References for this section
T. Callan, C. Keane, M. Savage, J.R. Walsh, April 2012, Analysis of Property Tax
Options A report to the Interdepartmental Expert Group on Property TaxDublin; Economic
and Social Research Institute https://www.esri.ie/pubs/BKMNEXT229.pdf
Jim O’Leary September
2018 How (Not) To Do Public Policy: Water Charges and Local Property
Tax . Galway, NUI; Whitaker Institute for Innovation &
Societal Change
http://whitakerinstitute.ie/wp-content/uploads/2014/02/NUIG-Whitaker-Report-Water-Charges-LPT-Final.pdf
Ronan Lyons(Identify
Consulting For Smart Taxes Network), December 2011, Residential Site
Value Tax in Ireland An Analysis of Valuation, Implementation &
Fiscal Outcomes
http://smarttaxes.org/wp-content/uploads/2012/01/Site-Value-Tax-in-Ireland-Identify-Consulting-final-report.pdf
See also https://assets.gov.ie/7465/91ccbd3ddc97461898211710e2d7ec55.pdf
2019 Review of the workings of LPT
Afterword: In a Review in 2019 (Review of Local
Property Tax: The report of the Interdepartmental Group) the Irish
Government noted that no revaluations of property had taken place since LPT was
introduced in 2013. The amount collected thus remained almost constant, despite
property prices rising over 80%. At inception in 2014 LPT yielded 1.2% of
all Irish Government’s revenues; this declined to 0.8% by 2018. As for the
‘local’ element LPT amounted to a mere 9% of all revenues.
They did add some warm words about the
beneficial effects of ad-valorem property taxes quoting Blöchliger (2015)
“Property tax also offers a policy
instrument to support asset price stabilisation, through its role in dampening
house price volatility and overall property market boom-bust cycle dynamics.
Analysis by the OECD has found that lower levels of property tax, together with
less frequent property valuation updates tend to be associated with a higher degree
of property price fluctuations”. The ever-soaring Irish house prices are a
testimony to the inability of the stunted LPT to ‘dampen house price
volatility’!
The Irish Times on September 16, 2020
reports “Minister for Finance Paschal Donohoe has
again deferred the revaluation date for the local property tax (LPT), ……
Mr Donohoe has decided to defer the valuation date until November 1st
2021,”
My Comment: Oh
dear! Missed opportunity. How do we ensure that our proposals don’t fall into
the same political trap, putting off unpopular decisions until ‘next year’?
Houses will be revalued in November in line with the increase in property prices since 2013. This averages around 80 per cent plus although it varies from region to region.
To ensure that most homeowners do not face higher bills, the bands used to calculate what homeowners pay are being widened – by 75 per cent – and the rate at which the tax is charged is being cut . If this had not happened, the revaluation would have meant payments would have soared.
As it is, most current bills – about 53 per cent– will remain as they are. About 11 per cent will actually fall but 33 per cent will rise by €90 and three per cent will rise by more. This variation is due to different trends in house prices across the country.
Houses will be revalued later this year on a self-assessed basis and payment amounts will change next year. The impact will vary between regions and within regions because of the different rate of house price increases depending on location, type of property and so on,
