OPINION:A property tax needs to be extensive to offset the administration and political costs, writes KEVIN RAFTER.
THE EXPERIENCE of property taxation in Ireland has been deeply controversial. Just ask Bertie Ahern. He was minister for finance in 1994 when a relatively minor change in Residential Property Tax (RPT) provoked huge political and public anger. During Ahern’s budget speech Martin Cullen – then a PD deputy on the opposition benches – shouted at his future boss that the proposal was “outrageous”.
According to Ivan Yates, who was Fine Gael’s finance spokesman, the changes were an unprecedented attack on middle-class house owners.
But the campaign against extending the reach of RPT had little to do with the merits or demerits of property taxation.
Much comment was instinctive and emotional while there was a great deal of speculation about the consequences in future years of possible changes. Ahern swiftly backed down, and such was the controversy generated that within three years RPT was abolished altogether.
If Brian Cowen’s Government is serious about introducing a new property tax it would do well to recall past experiences. The small proportion of Irish tax revenue gained from property tax is not so hugely different from other countries. Where Ireland stands apart is the low amount of tax generated from domestic property. Various forms of property taxation have existed in the Irish tax code but one was abolished.
Owner-occupied residential property was assessed in relation to income tax up to 1969. But it was a minor tax. Most people paid rates – a levy applied almost universally on all property. Domestic rates were unpopular.
The valuation system was out of date, and this gave rise to inconsistencies and substantial differences in the rates paid on similar houses in comparable locations. Rather than deal with these problems, Jack Lynch’s Fianna Fáil government, in a populist gesture, ended domestic rates in 1978. Rates on agricultural land were declared unconstitutional in 1983 and subsequently abolished.
Today only rates on industrial and commercial property remain in place. Following the abolition of domestic rates, private houses were totally removed from the tax base until 1983 when Alan Dukes as minister for finance in the Fine Gael-Labour coalition introduced RPT.
The circumstances were very similar to today with a government desperately in need of tax revenue and an urgent requirement to cut public expenditure. The new tax was an attempt to generate revenue from valuable domestic properties occupied by those with relatively high incomes. But it was never a great revenue earner – £2 million in 1983 peaking at £14 million in 1994 – and it was costly to administer. Fianna Fáil considered replacing RPT with a local property tax in 1987 but the political implications jettisoned the idea. In reality, RPT was a very minor tax. Most houses were outside the tax net.
To be liable for the tax, an individual must have owned and occupied a residential property and have had an income above a defined level. The market value of the property must also have exceeded a specified limit.
In its final year of existence in 1996-97 a person was liable for RPT when the total household income exceeded £30,100 and the property’s value exceeded £101,000. One of the obvious problems with RPT was that it was anti-urban and, in particular, anti-Dublin. Identical households with identical homes located in different parts of the country paid different RPT bills. In 1994 there were 36,434 house owners liable for RPT. They paid a total of almost £14 million. Just over 64 per cent of RPT taxpayers were located in the Dublin region and they contributed nearly 75 per cent of the total tax paid.
Interestingly, there were substantial variations within the Dublin region. Almost 20 per cent of all RPT taxpayers were based in either Dublin 2 or Dublin 4.
How the good people of these postal districts would respond to a new property tax is a political calculation the Government will have to consider seriously.
The late John Kelly was one of the strongest opponents of RPT. The Fine Gael TD argued that it was “unfair to single out this form of wealth and leave untouched all other forms”. Kelly’s argument still holds. Reacting to speculation about an extension of the tax in the late 1980s, Proinsias De Rossa argued that “other property such as land, horses, jewellery, works of art, expensive cars, and yachts were not to be taxed, but these were the optional luxuries for the rich, while the family home was an essential facility”.
Kelly and De Rossa also argued that a comprehensive property tax should include agricultural property. The wealth of the farming community is not in bricks and mortar above their heads but in the acres of land around them. In recent speculation about the introduction of a new property tax there has been no debate about a tax on land.
For over 20 years now, the efficiency and equity arguments in favour of a comprehensive property tax have been rehearsed in dozens of reports. The Culliton Report (1992) and bodies such as the Commission on Taxation, in 1985, the NESC and the ESRI have exhaustively backed the merits of a comprehensive property tax. But these calls were in the context of embarking upon a process of serious tax reform. Property taxation was not about increasing the overall tax burden – its introduction would coincide with an offsetting reduction in total income tax. There is little prospect of this outcome now due to the current budgetary position. The real pity is that a property tax was not introduced during the boom years.
If the Government is serious about a new tax on property it should be possible to avoid past failings. One of the biggest weaknesses of RPT was the inadequate statistical knowledge of the Revenue Commissioners.
When the tax was first introduced it was admitted that a lack of data on properties in different price brackets rendered impossible an estimate of the numbers likely to have to pay the tax. The use of an annual property appreciation index would help keep valuations up to date.
Monitored self-assessment would also be an inexpensive and effective method of valuation.
A rebate system would be important for those on low incomes while payment by instalment would ensure lump-sum bills were avoided. The tax would also have to take account of mortgage debts outstanding on residential properties, otherwise people would in effect be taxed on their debt. But most of all, it would have to be extensive in its coverage so as to raise enough money to offset not just the administration but also the political costs of its introduction.
Kevin Rafter is head of the department of media and film at the national film school, IADT, Dún Laoghaire. He completed postgraduate research on property taxation at UCD