The complexity of introducing a property tax has increased in post-Celtic Tiger Ireland
IN THE abstract, the arguments in favour of a property tax are compelling. Ireland is one of the few western economies without such a tax. Our tax base is extremely narrow. The proportion of tax receipts flowing from the various sectors is distorted because of an over-reliance on income tax receipts. This distortion was one of the key factors that contributed to the massive gap in our public finances once the property boom collapsed.
Politics does not operate in the abstract, however. Putting in place a property tax in this country any time soon may be just too big an ask.
Once upon a time, Ireland had a widespread property tax. It was called domestic rates. They were famously abolished in 1977. The question of abolishing domestic rates was one of the central issues in the 1973 general election.
In their “14-point” joint manifesto for that election, Fine Gael and Labour, who were then in opposition, promised the “progressive abolition of domestic rates”. The then Fianna Fáil government initially argued that this promise was “nonsensical” until, in the last week of the campaign, taoiseach Jack Lynch, fearing accurately that his party was losing, suddenly announced that it would abolish rates after all.
Fine Gael and Labour did not keep their promise during their subsequent three-year term in government but repeated it for the 1977 election, as did Fianna Fáil. In government Fianna Fáil, unfortunately, proved true to its word and abolished rates in the 1978 budget.
Writing his memoirs several decades later, Pádraig Faulkner, a member of that government, defended the decision on the grounds that all the main parties supported it; the then existing valuation system was riddled with inequalities; and it would have taken years to revalue the whole country.
The real error made by Faulkner and his colleagues, however, was not the abolition of the rates system but the failure to replace it with a property-related alternative or at least some form of free-standing funding mechanism for local government.
In the four decades since, no government has proved capable of implementing a sustainable property tax system.
Some of the largest protest rallies ever held in this country were those by PAYE workers in 1979. More than 250,000 people took to the streets of Dublin and large towns demanding a fairer tax system and a shifting of the tax burden from work to property, but nothing changed.
Between 1983 and 1997 we had a residential property tax payable annually on houses in which the occupiers’ income was above a certain level. These thresholds were set very high, meaning the tax was imposed on only about 2 per cent of domestic properties and yielded insignificant revenue.
In the mid-1990s the Fine Gael and Labour government pulled back from proposals to broaden the scope of this tax because of trenchant, media-fuelled opposition, particularly from Dublin householders.
Even in good times, when the exchequer overflowed with tax receipts, successive governments failed to rebalance the system, contenting themselves with unsustainable revenue in income tax and VAT receipts from the construction bubble.
The only substantial property-related tax flows of the boom years were the bloated receipts from stamp duty. This was a once-off tax on a transaction rather than a property tax per se and receipts from it proved as unsustainable as the property boom itself.
Numerous expert reports clamoured for the introduction of an annual property tax only to be ignored. So wrapped up were our politicians and the electorate in their love affair with property and property speculation that not only did governments not dare to impose an appropriate annualised property tax but they extended property reliefs for much longer than necessary and most of the parties at election time promised reductions in stamp duty.
All of which means the Government is left trying to introduce a property tax not as a tax reform measure but crudely as additional taxation. To implement the requirements of the bailout deal and to close the enduringly large gap in the public finances, the introduction of a property tax has become a question of fiscal necessity rather than one of economic or political preference.
In seeking to introduce a property tax, the Government still has to contend with inherent opposition to such a tax, arising from modern Ireland’s peculiar attachment to home ownership (and in the boom years, for many, an attachment to second-home ownership). The Government now, however, must also contend with, for many, an inability to pay more tax irrespective of what form it takes.
The precise design of a property tax system had always been a politically sensitive issue but a number of further complexities have emerged in post-Celtic Tiger Ireland.
It is difficult to sell the concept of a tax based on property valuation at a time when there is no functioning property market. Property tax systems are supposed to be redistributive in that those with more asset wealth pay more. Nowadays, however, those who appear to have the largest assets are, in fact, those most laden with property debt and those left with negative equity. Added to that is the sense of injustice many who borrowed to pay large stamp duty bills when they bought their homes will now feel if they have to pay an annualised tax as well.
The argument that introducing a property tax would avoid further increases in income tax has no real merit to those who are going to face property tax bills on their homes which, in reality, they will have to meet from their after-tax income.
Introducing a property tax will prove one of this Government’s most difficult challenges. It may even prove intractable.