Linking services and property tax is a mistake

It would be hard to create a more perfect muddle than that around the household charge, which has been a fiasco for the Government and for the Department of the Environment in particular.

It will be a godsend to the hard left, to whom any form of property tax — apart from a tax on “the rich” we must guess — is anathema.

It will be an albatross around the neck of Labour, who will find themselves fining and taking to court possibly a million people, hardly the best thing to do if you want them to ever vote for you again.

It has also had the unfortunate effect of forever muddying in the minds of the Irish public the separate concepts of charges for local authorities and the taxation of property.

It will lead to a thief’s charter if the proposal to have council staff door-to- door to inform/enforce the tax is put in place, as every skanger this side of the dawn will descend on the elderly and vulnerable.

It bears all the hallmarks of a botched, rushed job, for that is what it is. We would have thought that we had enough experience of the messes that botched, rushed policymaking leaves behind, with the bank guarantee, to have made the system immune but it appears not.

Two elements should have been separated but were not the charging for local services and the taxation of property. As part of the troika agreement, there is a requirement that we move to the norm of the OECD and put in place a sustainable system for taxing property. However, the most recent statement on the property tax was in the memorandum of understanding of Nov 2011, in which the Government committed to bringing one in by the end 2011. They didn’t. The world didn’t end, and, as such, they can delay it long enough to get it right.

There are compelling economic and social reasons to consider a land or site value tax, and these have been spelled out recently by Ronan Lyons and Constantin Gurdgiev in a series of research and policy papers.

In essence, a properly structured land or site value tax can provide smoother revenues. Such a tax incentivises high quality land use, and can be adjusted to penalise wasteful use — such as hoarding or dereliction.

More critically, we already have the bones of one to hand, calculated at a fine grained level, namely the Electoral Divisions and Census Enumerator areas, some 4,500 of them round the country.

To implement such a tax requires knowledge of the desired amount of tax to be raised and the surface area to be taxed, with each of the 4,500 discrete areas then being allocated a charge reflecting the characteristics of the housing in its area, with the tax increasing exponentially the more valuable the land on which it is levied.

The proposal at hand is to use the flat household charge to defray part of the lost revenue accruing to local authorities from central sources. Local authority funding in Ireland is a mess, and has been since the Fianna Fáil government abolished domestic rates in 1977.

The point of raising tax locally is to provide local services. During the boom, councils were funded from motor tax, development levies and businesses were compliant with the ever-increasing business rates.

Now the levies have dried up and the increased rates are part of the burden crushing business. The most startling thing is that the household charge will not even make up the reduced central government revenue. We are poor adopters of technology for government in this country but that should not stop us trying.

Every PAYE deduction, every VAT transaction, every tax head in the country is associated with a taxpayer and they have an address. There is no reason whatsoever why the appropriate percentage of tax cannot be taken from central taxes and diverted at source to the relevant local authority.

In 2011, close to €160m of central government funding was distributed to local government. Some €14bn was raised in tax under the main headings.

So why can say 1.25% of all PAYE taken from me not be sent to Kildare County Council, in whose area I live? We could get more refined, to ensure for example minimum levels of per capita allocation across areas or other sharing arrangements, but this would begin to link earnings and local government expenditure.

As time goes on, more and more refinements could be imagined, but this would be a painless and effective way to start funding local authorities.

* Brian Lucey is professor of finance at Trinity College Dublin

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