Whichever tax they pick, a gigantic and toxic political firestorm is going to be unleashed

ON Sunday there were newspaper reports that the Government had decided to introduce a property tax based on the values of people’s homes rather than, say, based on their floor area.

Within hours, Minister Leo Varadkar denied those reports, saying that the Cabinet had yet to decide on how properties would be valued for the tax.

Yesterday, that position was confirmed by Finance Minister Michael Noonan.

The Government is committed to introducing the new property tax in its December Budget, now just over three months away.

That commitment results from the December 2010 agreement with the EU/ECB/IMF Troika.

When that agreement was drafted, the best part of two years ago, it was envisaged that a property tax would be introduced by December 2011. But the Government wasn’t ready then with detailed proposals for a full property tax.

So it announced instead the €100 household charge as a holding measure to bring in the required tax revenues while allowing more time for the Government to properly plan the new property tax.

Yet, one year on, we still don’t know what form the new property tax will take. So despite being formally committed to a property tax since 2010, and despite the Government’s Commission on Taxation recommending a property tax back in 2009, here we now are in the second half of 2012, just months away from launching this new property tax, and we still have no clear idea of the tax for which we will be liable from January 2013. Prudent householders seeking to budget ahead have nothing to work with beyond educated guesswork.

Toxic

This shambles of political prevarication is a case study in why the IMF is ‘helping’ us run our national finances.

Our political system runs scared of taking decisions which key decision-makers recognise are needed but which are politically unpopular. The end result is that we need outside agencies, such as the IMF, to force us to do our homework.

It is the IMF and the rest of the Troika which are forcing the pace on our property tax.

It is the EU which forces the pace on preserving our bogs as national politicians seek to protect the indigenous ‘culture’ of industrialised turf-cutting. And it is the EU which has forced upon us the proper inspection of septic tanks. Our national politicians would never have got around to adopting that measure even though it is in all our interests to preserve our water from the risk of poisoning.

An expert group of public servants has reported on the options facing the Government and has made recommendations.

Environment Minister Phil Hogan received the group’s report over the summer but the Cabinet, unbelievably, has still to discuss it. Yet, while the Government may have dodged discussing the property tax, its Troika commitment to introduce a new property tax still stands. It’s a shambles.

Indeed, it was the publication on Friday of the latest memo of understanding between Ireland and the Troika on the bailout programme which sparked the weekend’s property tax speculation. For Friday’s document refers to the introduction of a ‘value-based’ property tax. But Mr Varadkar reassures us that it has yet to be decided how ‘value’ will be measured! The problem now for this Irish Government – and indeed for any Irish government – is that any new property tax will be politically toxic.

We have already seen the storm of political opposition that the household charge has raised. The levy aims to raise just €100 each year from those households that must pay.

The new property tax will probably aim to raise annually an average of €500 to €1,000 from those households forced to pay. With families already under acute financial pressure, the probability is that the new property tax will unleash a gigantic political firestorm on TDs when its details are eventually revealed.

In choosing the mechanics of new tax, the Government essentially has three options. It can base the tax on the value of properties; on the value of the land on which properties are built (‘site value tax’); or on the floor area of the house (‘square footage tax’).

On top of that, the Government will have to decide what exemptions it wants in order to protect the less well-off.

Each option comes with plenty of both practical and political problems. The biggest problem with a tax on the value of properties is that it is entirely a matter of opinion what a property is worth.

Just ask the compilers of house price statistics in the Central Statistics Office, the daft.ie people and the my home. ie people how far residential property prices have fallen from their peak in 2007 and you will get three different answers.

And that’s considering the average value of about 2million properties. The scope for genuine differences of opinion only gets bigger when you delve down into micro-markets of particular housing classifications (stand-alone house, house in an estate, or an apartment, for example) in particular geographical areas.

Chicanery

And where there is scope for genuine differences in opinion, there is also scope for finagling and chicanery.

Even within one housing estate, there is capacity for substantial differences in value when one considers garden size, housing extensions and whether a house is located at a busy junction or in a quiet corner.

A big political problem with any tax on property values is that it would effectively be a tax on Dublin and other cities.

Relatively modest houses in our large cities can cost more than Southfork-style ranches in the countryside. I don’t think that is fair. That’s why I would favour a square footage tax with an allowance for each person normally resident in a dwelling.

Such a tax would protect those with large families and modest dwellings and force the burden of the new tax on the ostentatious few living in trophy houses. But this option appears to have been excluded in the Government’s deliberations. The IMF, it seems, has been promised a ‘value-based’ property tax.

Given the practical problems of a property value tax and given that a square footage tax appears to have been ruled out, I wouldn’t be surprised if the Government opts for a ‘ site value tax’. This would see households taxed on the land value of the property on which they are built. There would be two advantages to this approach for the Government.

Firstly, the Government could declare what i t considered building land to be worth in various parts of the country. That would take a big element of discretion (and thus of potential chicanery) out of the equation. Secondly, citizens would not be taxed for improving the land (as they would be with a property value tax).

So the beleaguered construction sector would be saved a potential blow, just when it doesn’t need one.

Whatever form of property tax the Government chooses, it is likely to be politically toxic.

Many Irish households are already in acute financial distress – last week, the Irish Daily Mail revealed that over 20 per cent of mortgages have either been financially restructured or are over 90 days in arrears.

If the Government thought it had problems trying to raise €100 from each household, wait until it tries to raise €500 to €1,000 from us.