Attitudes to property taxes here could be described as hostile and therefore introducing a Site Value Tax will not be straightforward. The proposal has merit however, and it's worth looking at in more detail
We Irish are not unique in our negative attitude to property taxes, which are widely seen as being unfair and discriminatory. One of the main reasons for this unpopularity relates to property taxes being seen as a tax on wealth rather than on cash flow. Another reason is that such taxes appear unrelated to ability to pay, particularly for pensioners who have benefited from historical price increases.
Assessment methodologies which are often not readily understood by electorates nor by the politicians they elect also cause problems. Sometimes property taxes are poorly administered and the systems and procedures used are not kept up to date, as doing so results in winners and losers and the latter will vent their anger at any tax increases inflicted on them at the next electoral opportunity.
Nonetheless, nearly all developed western countries levy property taxes as a means of funding local government. While many countries have experimented with site value taxes they remain uncommon. In places, the original site value tax has been modified with the passage of time and more traditional approaches to property taxes adopted later in response to changing circumstances.
There is a question about introducing site value taxes to a developed economy where historical patterns of property ownership grew up in the absence of such a tax. Considerable redistribution effects could be experienced over a short time if such a system were to be introduced.
Site value taxation rests on the premise that property value is made up of two elements: the value of the site or land, and the value of the improvements to the land. The idea is the tax falls on the value of the land element of the property only and not on the value of the improvements to land in the form of buildings or other development works. The logic here is taxes on land do not affect its supply and nor can land be moved out of the jurisdiction to avoid the tax, a reality that is of particular importance for local government taxation. Moreover, improvements to a property do not give rise to increased taxes, a key deficiency with traditional property taxes based on market value.
To bring the tax into operation requires the value of the site to be assessed on the assumption that it is free and clear of existing buildings and available for development. In most instances this would roughly be the market value of the property less the cost of constructing the existing building. Where there is development potential the site value might exceed the market value of the property in its existing use. Where there are no buildings, for example in the case of agricultural land zoned for development, the tax would be based on the value of the land, assuming it is to be sold on the market for development.
A fundamental requirement for fairness is an accurate assessment of the value of the site, separate from the value of the buildings on the site. This poses a considerable valuation challenge unlikely to be met by self assessment, necessitating the creation of a specialised valuation office.
Once all sites have been valued the expenditure of a local authority would be spread across all property owners on the basis of their relative site values. In a local authority area the formula for determining the levels of tax for each property owner is straightforward. The relevant expenditure of the local authority is determined by elected representatives and is then divided by the total of the site values in the local authority's area, giving a figure per euro of site value. All a property owner has to do to work out their tax liability is multiply that figure by the site value of their property.
For the process outlined above to work it would be necessary to provide for the public availability of credible and statistically sound evidence of property transactions to allow taxpayers to make comparative judgements about their site values and to allow for accurate valuation. The proposal in the programme for government to amend the Data Protection Act and maintain a House Price Database is useful here but it is the ability of the public to check property values at a very local level that is needed to build acceptance of site value taxes.
The second requirement is the creation of an accessible and publicly available system for defining and identifying individual property interests. This would be needed to be able to identify sites with sufficient accuracy to value them and, perhaps even more importantly to allow taxpayers to determine the fairness of their assessment by comparison with other properties.
The third requirement is a need for local authority boundaries that relate in a realistic way to the spatial dispersion of economic activity and the coherence of settlement patterns now prevailing in Ireland. It is entirely unlikely that the existing county system would be suitable as a basis for local government if real fiscal responsibility is to be achieved at local level.
If such a tax were to be brought into operation the implications for planning are considerable. It is likely the pressure for rezoning would be reduced as, once zoned, a tax liability would arise on the land. The planning system is likely to work more satisfactorily if the pressure for speculative rezoning is eliminated.
All in all a site value tax has the potential to improve the planning system, reduce property speculation, lead to the more sustainable use of the existing stock of property and provide for local fiscal responsibility.
These are important gains but they would only be achievable if a properly resourced administrative structure was put in place and backed by appropriate legislation and reform of local authority boundaries. This is a big undertaking likely to take some years to bring to fruition.
Tom Dunne is head of the School of Real Estate and Construction Economics at DIT Bolton Street