It would be appealing to think that the government is pro-actively taking advantage of recent economic instability to push through critical reforms. In reality, the recent flurry of activity is simply a reaction to recent events and an attempt to maintain the solvency of the state. Well, whatever the reasons, at least things are getting done.

Progress is already being made by cracking down on tax evasion such as fraudulent mortgage interest relief claims. Other positive moves include reduced relief on mortgages for rented residential property and the obolition of the special 20% tax rate applicable to companies dealing in or developing residential development land. Another important, and as yet overlooked, element of reform is the introduction of property tax.

Property tax would help to:

• moderate speculative property investment
• smooth out the wild cycles in the property market
• broaden the tax base by creating an additional source of revenue
• provide more stable tax revenue

Compared to stamp duty which can be very volatile, property tax is much more stable, dependable and predictable which are desirable traits for a source of government finance. I sincerely hope that this does not fall foul of political and public resistence. Following previous failed attempts at implementing a system of property taxation in the past, this time the government is likely to tread carefully.

The state sponsored Commission on Taxation, with inputs from the Foundation for Fiscal Studies (among others), is currently examining the possibility of introducing property tax as part of a general broadening of the tax base in Ireland. The government explicitly stated that it was to consider options for the future financing of local government. Current policy recommendations in John Gormley’s Green Paper (pdf, html) concerning local government finance defer to the conclusions that will be determined by the Commission on Taxation no later than 30 September 2009.

To ensure a fair system, means-tested measures should be included to avoid taxing residents out of their homes and excessive gentrification. Properties valued below a certain threshold should be exempt. While a change in mindset would be needed to adapt to property tax, the prospect of retirees on modest pensions having to downsize to avoid tax bills need not be the case. A Valuations and Appraisals Register would need to be established and administered by local government. This would detail property values from the obligatory registration of final agreed prices of all property sales, and would form the basis of how much tax to charge.

It would also provide the added benefit of improving the transparency of the property market in Ireland, where property values are, at best, heavily biased guesstimates thanks to the lack of public data on property transactions. Estate agents and auctioneers would no longer be able to misguide people with impunity. Considering that the main house price index available to statisticians, policy makers and house buyers, is compiled with data from a minor commercial mortgage provider in conjunction with the ESRI, an economic think-tank, much remains to be done to improve matters.

Ideally, property tax should be controlled and directly received by local government. This would provide them with an independent means of raising funds. As the structure of government in Ireland is extremely centralised, however, I’ve no doubt that central government will be the beneficiary of revenue raised from the tax. A strong mandate, not to mention political leadership with vision, would be required to implement such an important first stage of structural reform of government in Ireland. Alas, neither the people of Ireland, nor Irish politicians have any desire to support such reforms.

Also from the Local Government Finance chapter of Gormley’s Green Paper:

The Indecon Review of Local Government Financing (March 2006) also makes numerous references to the implementation of a property tax.

The institutional underpinnings of local government, along with the whole area of urban planning, would need to be reformed, of course. Tax raising powers without adequate transparency would be a dangerous combination in the already murky and opaque world of local government and planning in Ireland.