OPINION:People who paid stamp duty may be taxed on their homes for a second time

IF THE thought of having to start paying property tax does not make you angry, then you have not been paying attention.

The assistant director general of the Central Bank, Tom O’Connell, chose his words carefully last week when he broached the subject of a €1,000 annual tax on the 1.7 million properties in the State.

“Ireland is an outlier internationally in not applying annual charges to residential property holdings,” he observed on foot of the bank’s first economic bulletin of the new year.

Note the use of the word annual – it is critical. The fact is that we already have a property tax in Ireland and it’s a very hefty one. It’s called stamp duty.

Stamp duty long ago ceased to be a small levy on property transactions and became a tax on property ownership.

Despite relentless fiddling with rates and bands by the Government over the years, it still amounts to a tax of between 7 and 9 per cent on the cost of typical second-hand houses, investment properties and holiday homes.

At its zenith, stamp duty also applied to new homes and involved a baffling array of bands and rates.

During the property boom, the stamp duty paid on even the most modest of properties often ran into double-digit thousands.

Put another way, paying stamp duty at the rates applicable in Ireland – another outlier internationally – was more than equivalent to paying €1,000 a year for 10 years or more in the form of a property tax.

When you look at it this way, we probably raise more money through property tax per household than pretty much any country in Europe. Or at least we did.

In effect, what the Government has done is front load property tax at the point of purchase. You pay it once – when you buy the house – and that is it. In most other countries, you pay a much smaller fee upfront because stamp duty is substantially less, but you must then pay some sort of annual rate.

The approach adopted in Ireland would be fine if it had been coupled with some sort of mechanism to smooth the revenues out over 10 years or some other period that reflected the fact that most properties only change hands once or twice in a generation. Some sort of fund similar to the National Pension Reserve Fund springs to mind.

Instead, the money was spent as it came in and funded the explosion in public expenditure over the past five years, which has now come home to roost so cruelly.

Don’t for a minute fall for the line that Irish homeowners have been enjoying a free lunch as far as property tax goes for years and now must pay the bill.

If you have bought a house at any stage over the past 10 years and paid stamp duty, you have paid a lifetime’s worth of property tax. The problem is that the Government has blown the money and now it wants to tax you a second time.

It’s analogous to the sort of Ponzi scheme operated by Bernie Madoff. As long as the property market was booming, the Government could collect future years’ property taxes and spend it today. To quote Breffni O’Brien: “It was easy to pull suckers in when the economy was booming.”

The difference is that when economic reality caught up, Madoff and O’Brien were either arrested or sued. When economic reality catches up with governments, they just keep on taxing you.

It’s tempting to fulminate against this latest example of the economic incompetence and political cowardice that is set to be the true hallmark of the last decade.

Tempting, but futile. We are where we are. If the State is to avoid bankruptcy, expenditure will have to be cut back and taxes will have to rise.

And property tax is as good an option as any other. It has the attraction of not being a direct tax on work and also one that can be structured in a progressive fashion whereby those with the most valuable properties pay the most tax.

Its introduction seems unavoidable and will probably be linked to some further reduction in stamp duty to try to stimulate activity in the property market.

The real losers will be anyone who has bought a property in the past few years. Not only will they have in effect pre-payed their property tax for the next 10 to 15 years in the form of stamp duty, they will now have to pay on the double in the form of the new property tax. However, their troubles in this regard are probably dwarfed by the fall in the value of their house anyway.

What would be fair and worthy of consideration is some sort of transition mechanism whereby people who have bought property recently would be allowed to offset the stamp duty they paid against their new property tax bill. But this seems unlikely, given the extent to the problems facing the exchequer.