Latest post from Paul Krugman commenting on the mess in California.
“The seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure that placed the state’s budget in a straitjacket. Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.
The result was a tax system that is both inequitable and unstable. It’s inequitable because older homeowners often pay far less property tax than their younger neighbors. It’s unstable because limits on property taxation have forced California to rely more heavily than other states on income taxes, which fall steeply during recessions.”
Of course Ireland went further than California; capping property taxes was not enough for us, we abolished them entirely!
The Irish government did increase transaction taxes on property such as stamp duty, which fell even more steeply than income taxes in our recession. What is generally not known is that the extreme drop in transactions receipts also affects local government which has become very reliant on development levies paid by builders and developers for infrastructure benefits. In the good times, development levies were payable when development commenced or sometimes with negotiation, when sales were made. Now local authorities are demanding full payment of levies on receipt of Planning Permission (permits) because some authorities are finding it hard to pay their staff from their central allocation. The unthinkable – part-time pay for part time-working by public servants is being seriously contemplated!
Developers are pulling back from submitting viable schemes and even (it is whispered) appealing their own successful permissions to an Bord Pleannala (higher planning authority) to stave off the evil day when levies are due.
Annual Land Value Taxes, replacing all transaction taxes such as Stamp duty and Development Levies as described on the Feasta and Smart Taxes submissions to the Commission on Taxation, is the solution to this crisis.
The new environmental pillar of social partnership broadly supports land value tax as a fairer and more sustainable than an old fashioned property tax. See the extract below and link to their submission to the Commission on Taxation.
“Transaction taxes such as stamp duties, VAT and sales taxes inhibit proper market functioning; are an inducement to the grey economy and should be phased out and replaced with annual land taxes.
LVT could immediately raise desperately needed revenue for local authorities to provide energy, waste, educational and transport infrastructure for local communities. It would also reduce pressure on elected representatives to over-zone or rezone prematurely for development.
LVT is based on the value of land, depending on parameters such as type, zoning, location, and connectivity. Thus the LVT on a Dublin 4 detached house would be high and that applied to a rural dwelling with no services would be low. Owner-occupants of a multi-story residence in a town or city would divide the LVT between them. In this way increased residential densities are encouraged whilst rural dwellers are not penalised.”
The Construction Industry Council broadly supports an annual Land Value Tax as LVT would support sustainable new construction and building refurbishment in a way that a tax on building size or value could not.
Why are the Unions and other social parties and commentators still demanding a crude property tax on second homes and ‘trophy houses’. What is a trophy house anyway – tiny partments were fetchign fantastic multiples of rental value in the bubble. How do you value a dwelling with all their variety in a transparent way in this free-falling property market? Estate agents have resisted publically reporting accurate rental and sale prices of homes on the basis that it breached the confidentiality of their clients. There is no database of home prices linked to size, quality, condition and location that would form the basis of a comprehensive objective property tax in Ireland.
If ‘trophyness’ is based on high capital value, it will hit urban dwellers harder than rural dwellers. Self-declared property values as a basis of a tax was tried in Ireland. It was seen as a tax on Dubliners whose homes were worth more than the rest of the country (and who are perhaps, more tax compliant than their rural brethern) – and it failed miserably.
If ‘trophyness’ is judged on the basis of square footage, rural dwellers will be hard hit as they have built themsleves humungously large McMansions all over the countryside over the last fifteen years.
Let us hope it is the latter definition that is adopted as an interim measure. It won’t take long before the Soldiers of Destiny get the message from their provincial heartland that a more intelligent local tax is needed, and by that time we might have our land registration and land valuation for the country completed.
