Site Value Tax should form part of next Programme for Government

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Ireland’s Local Property Tax is not fit for purpose. The next Programme for Government should acknowledge this, and inlcude the goal of implementing a Site Value Tax in its place.

Why do we need a property tax?

Economists love property taxes, mainly because of all the main types of tax, property taxes are the least distortionary, meaning they have the best balance of raising money without interfering in the normal running of the economy. This is because the supply of land is fixed. As the saying goes, "they're not making any more of it", and likewise the supply can’t be decreased or withdrawn either (although it can be allowed to lie idle). So no amount of tax will affect the supply of land, unlike how tax can sometimes affect the supply of things like labour or normal consumer goods.

Property taxes are also progressive and redistributive - meaning they transfer wealth from those who have it to those who don’t - and they are generally stable. For these reasons Social Justice Ireland believes that property-related taxes should make up a bigger part of Ireland's overall tax-take than they currently do. This does not mean a return to the over-reliance on transaction-based property-type taxes that preceded the 2008 financial crash, but as a form of wealth tax. 

In Ireland, we do a generally poor job taxing land and property, and most economists in Ireland agree that in its current form, the Local Property Tax is badly designed and increasingly unfit for purpose. Social Justice Ireland has been critical of the Local Property Tax from the beginning, and we believe it is long past time for Government to get rid of it, and replace it with a Site Value Tax.

What is a Site Value Tax?

Simply put, Site Value Tax is  a tax charged on the value of land – or the value of the “site” – not taking into account anything built on the land. Another way of saying this is that it is a charge on the ‘unimproved value of the land’.

It is calculated as a percentage of the value of the site at the time the site entered into economic activity, and before any building or other works were done to it. We believe Site Value tax is the fairest and most economically efficient form of property tax. It is also simpler than most people first imagine. The value of any property has two components:

• the land
• and what’s on the land

Normally when we’re valuing property, we’re taking account of the whole thing: the land, and whatever is built on it. But for a Site Value Tax, you’re taxing based only on the value of the land. In this way, the charge is more related to the value of the location than anything on it.

Why are Site Value Taxes preferable?

There are a number of arguments in favour of a Site Value Tax over other forms of property tax.

Firstly Site Value Taxes are fair. Everyone knows that land is worth more in some places than in others. But this rarely has anything to do with what the owner of that land has done. More often it’s because of natural geographic features, or location, or public investment - in infrastructure like roads, schools, shops and so on - in the area around the land.

So if land is in an area of outstanding natural beauty or close to a natural amenity like a beach, it will probably be more valuable than if it was far away from those things. If land is surrounded by social or cultural amenities, or close to population centres or has other economic benefits, it is more valuable than if not.  So land in the middle of the city or town centre is more valuable than land on the outskirts. If land is well-serviced by water, sewage and telecommunications, or by roads or public transport or other public infrastructure, again it will be more valuable than if it is without these things.

Clearly none of these factors has anything to do with anything the owner of the land might have done. They are either the result of chance, or the fact that public investment, funded by all taxpayers, has made the land more valuable.

A basic principle of property taxation is that if public investment creates a gain in private value or private wealth, it is fair to pay for the maintenance of that investment from the private gain of those who have benefited from it. As a simple example, if someone owns a piece of land in Dublin city, and the government builds an extension of the Luas past that site, causing the value to increase, is it fair that that person should retain all of that gain? They haven’t done anything to deserve the increased value. In fact, the increased value is solely the result of investment, paid for by all taxpayers. It is only fair that some of that gain should be returned to the Exchequer through the property tax, based on the increased value of the land.

With this simple principle in mind, a tax based on the value of the land seems reasonable given the benefit the landowner is getting from investment paid for by all taxpayers. Land values are strongly influenced by nearby infrastructure; things like water, sewage and broadband, roads, public transport and so on, as already mentioned. If land has some or all of these things it will likely be quite valuable. If it has none, it’ll likely be less valuable, but all of these things are paid for by the taxpayer, not the landowner.

So while it’s important to emphasise that land values are generally not influenced by any private investment a landowner might make in the land, the great thing about a Site Value Tax is that it doesn’t punish that private investment if the landowner does decide to build on the site or make any improvements on it. You might even say it encourages ‘good behaviour’

As it’s the value of the land itself that is taxed under a Site Value Tax, it is not important what is on actually on the land. So if the landowner – whether they are a developer or an individual – does make productive investment on the land - usually by building on it - they are not punished for it. This is the actually the opposite of the effect of the current Local Property Tax system.

As an example, let's consider retrofitting. This is a move to make houses more energy efficient, cheaper to heat and better for the environment, and is encouraged by Government under its Climate Change Mitigation Plan. Under the current Local Property Tax,  a householder who spends money retrofitting their home makes it more energy efficient and increases the value of the property.  An increase in the value of the property may then result in an increase in the Local Property Tax due by that household. That’s a clear dis-incentive, encouraging people not to make this much-needed investment.

Under a Site Value Tax, which only looks at the value of the land rather than the value of what’s on it, retrofitting has no effect on the property tax bill. Similarly, under a Site Value Tax, developers don’t have to worry about paying a higher property tax bill as a result of developing a site. No matter what they build, under a Site Value Tax the tax bill remains the same because the value of the actual land doesn’t change. But that does mean that those who own particularly valuable sites are encouraged to make the most productive investments possible – build much-needed housing for example, or else sell the site on as they will be charged higher taxes.

This is particularly important when it comes to motivating developers and landowners to redevelop derelict sites in Ireland’s cities and towns where the site has real value and homes are needed. Under the current Local Property Tax, developers would receive higher property tax bills for developing their land as they are increasing its value. Ordinary individuals and households would also be hit with a higher property tax bill if they, say, built an extension to their home, converted an attic, insulated the building, or built a ‘granny flat’. All these things increase the taxable value under the Local Property Tax, but would have no impact under a Site Value Tax.

In fact under the current system, pretty much anything that involves a person using scarce land in more productive or socially beneficial ways is punished. The last thing Government should be doing is punishing people for making the best use out of a scarce resource.

Site Value Taxes discourage land hoarding

As already implied, Site Value Taxes encourage 'good behaviour'. The can be summed up simply as “use it or lose it”. Those hoarding undeveloped or underdeveloped land in valuable places will face a high Site Value Tax, so either the Government will receive additional tax revenue for doing nothing, or those hoarding the land will be encouraged to develop it into something productive, or sell it to someone who will make better use of it.

Site Value Taxes can be applied to all types of land, whether that’s residential, commercial, public, or agricultural, but of course certain exemptions can and should be made, according to whatever goals policymakers wish to achieve.

Some critics have claimed that a Site Value Tax “would throw up anomalies” like a rundown property and a well-kept property on similar sites having the same property tax bill. That is not an anomaly!  This is exactly what it’s meant to do. Because by doing this, the tax system is encouraging people to use a scarce and valuable resource in the most efficient and productive way possible. In that example, the owner of the rundown site will be encouraged to develop it, or to sell it on. Site Value Tax is therefore also a tax on hoarding land and speculating.  Issues which have plagued our ability to provide adequate housing in Ireland.

Site Value Taxes in other countries

Many cities and countries, in locations as diverse as the United States, Australia, Hong Kong and Taiwan use Site Value Taxes. Denmark, which is a small open economy with a similar population to Ireland, uses a Site Value Tax successfully, as does Estonia which uses the money raised to help fund local government. Ring-fencing property taxes collected at local level provides much-needed revenue for local councils, giving them more freedom to develop community-based projects that will really benefit their local area.

So why didn’t Ireland bring in this kind of tax, instead of the current Local Property Tax we have? We had opportunity to. Before the current system was brought in in 2013, Ireland was one of few European countries with no property tax. That was not a good thing in itself. Property taxes, when done right, are progressive, redistributive, and a key part of a broad stable tax-base. Basically, they’re fair.  But lack of a property tax system did present Ireland with an opportunity: Government could choose, design and implement the best possible property tax to suit our needs without comparison to any previous system. Somehow, we didn’t manage this.

The current Local Property Tax has created a more complicated system than was necessary: One that disincentivises investment and allows socially damaging practices like land-hoarding to go largely unpunished. It is also a system that can easily be “gamed”, because theLocal Property Tax has a number of different valuation bands, with the tax bill calculated based on a midpoint of a relevant value band. So for example, if your home is valued between €200,000 to €250,000; your tax is based on the midpoint of that band, or €225,000. This creates a big motivation for people to under-value their homes, because small movements in value can result in sizable reductions in the final bill if it involves moving into another band.

In fact most economists will tell you that Ireland's Local Property Tax is one of the worst designs for a property tax. The fact that Ireland’s Local Property Tax valuation bands haven’t changed since 2013 makes the system worse, particularly when you consider that property prices have risen significantly since the low point in 2013.

This kind of inertia could eventually lead us to end up with a property tax system like the one in the UK, where there have been no revaluations since the 1990s. Situations like that can come about because if property prices rise considerably (like they have here), politicians know that re-valuing property tax bands will increase the property tax bills of many homeowners, making those politicians very unpopular come election time. Admittedly no one back in 2012, when the current system was being designed, expected property prices to rise at the pace that they have in Ireland, but it is a situation we should never have been in to begin with.

Fortunately, there is a better option available: One that is fairer, more efficient, and creates better incentives for the use of land, which is a scarce and socially important resource.

It’s time for a Site Value Tax to replace Ireland’s Local Property Tax