Recurrent property taxes can aid in reducing the volatility of house prices over time, according to a new paper from the Central Bank of Ireland.
The Economic Letter stated that the introduction of a property tax can provide the Government with a stable source of revenue as it is less likely to be impacted by economic fluctuations.
The paper, which was based on a cross-country analysis, found that as a proportion of national income, revenue from recurrent property taxes in Ireland is significantly below the average for OECD countries.
In Ireland, recurrent property taxes include the Local Property Tax (LPT) and the Residential Zoned Land Tax.
LPT made up 0.6% of tax revenue in 2020.
Since LPT was implemented in 2013, Irish property prices have more than doubled, yet revenue gathered from LPT has remained constant.
The Economic Letter stated that this was due to the exemption of owner-occupied houses built since 2013 from the LPT, as well as property valuations remaining at the same level since 1st May 2013.
The findings from the paper also stated that there was a relationship between a higher incidence of recurrent property tax and a decrease in downside risks to property prices.
The results from the cross-country analysis also suggested that recurrent property taxes can be beneficial in fostering more stable growth in house prices over time.
In the paper, the economists state that recurrent property taxes can complement the role of macroprudential policy and promote a greater level of financial stability.
The stability of recurrent property taxes is ensured through their design in most countries, allowing the revenue gather from this tax to remain stable.
This is partially due to the frequency of revaluation of properties and the use of valuation bands for determining tax liability.
The Economic Letter also stated that unlike cyclical taxes, such as individual or corporate income tax, revenue from a recurrent property tax is less likely to be affected by the economic cycle.
This suggests that recurrent property taxes can provide a stable source of revenue for the Government.