Time for a Site Value Tax to replace Ireland’s LPT

Ireland’s Local Property Tax (LPT) is increasingly not fit for purpose. It is time for Government to acknowledge this and implement a Site Value Tax in its place.

Before the implementation of the troika-mandated LPT in 2013, Ireland was one of few European countries with no property tax. While that was not a good thing in itself - property taxes, when administered correctly, are progressive, redistributive, and a key part of a broad stable tax-base - it did present Ireland with an opportunity: Government could choose, design and implement the best possible property tax to suit our needs without care for sunk costs or the consideration of issues like measuring winners and losers with comparison to any previous system.

Naturally, they still managed to get it wrong.

The current LPT has created a more than necessarily complicated system that disincentivises investment and allows socially damaging practices such as landhoarding.

It is also a system that homeowners can easily game (and have a significant incentive to do so). Designing a property tax involving valuation bands (the LPT bill is calculated based on a midpoint of a relevant value band, e.g. €200,000 to €250,000; €250,000 to €300,000 and so on) has created a motivation for people to undervalue their homes, as small movements in value can result in significant movements in the final bill if it involves moving into another band. Indeed most economists will tell you that Ireland's LPT is one of the worst designs for a property tax.

The fact that Ireland’s LPT valuation bands haven’t changed since 2013 heaps further ridicule on the system. Don’t be surprised if we end up, as in the United Kingdom, with the ludicrous situation of no revaluations for several decades. Such situations can come about because if property prices rise (or fall) considerably - as seems almost inevitable in the country which has seen some of the world’s most significant property price fluctuations in the last couple of decades - the political will to update bands greatly decreases. 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.

Site Value Tax

Site Value Tax (SVT) is a charge on the value of land (i.e. the value of the site), not taking into account any of the physical capital built on the land. Another way of saying this is that it is a charge on the ‘unimproved value of the land’. In this way, the charge is related to the value of the location. It is calculated as a percentage of the value of the site.

SVT is the fairest form of property tax. It is also simpler than most people first imagine. Essentially the value of any property has two components:

• (A) the land, and
• (B) what’s on the land.

Subtract (B) from (A), and you have the value of the site, and thus the base for the SVT. The arguments in favour of SVT are numerous:

SVT is fair

Everyone knows that land is worth more in some places than in others. This rarely has anything to do with what the owner of that land has done, but is more often due to natural features, proximity to population centres or other economic benefits, or public investment in infrastructure in the area.

If land is in an area of outstanding natural beauty or close to natural amenities like beaches, it is more valuable than otherwise.

If land is surrounded by social or cultural amenities, it is more valuable than otherwise.

If land is well serviced by water, sewage and telecommunications, or by roads or public transport or other public infrastructure, it will be more valuable than if it is without these features.

People are usually willing to pay more for such land and none of these things have anything to do with private investments made, or work done, by the owner of that land. If public goods create private value, the fairest way of paying for their maintenance is to recoup some of that value from those who benefit. A tax based on the value of the land is therefore reasonable given the benefit the landowner is getting from social investment, paid for by all taxpayers.

SVT does not punish private investment, but instead encourages ‘good behaviour’

As it is the value of the land itself that is taxed under SVT, it is not important what is on actually on the land. So while SVT acknowledges that increased land value is a function of public investment and that it is fair to retrieve a portion of that increased value for the taxpayer, it also ensures that landowners, whether households, developers, or other landowners, are not punished for productive investments they themselves make in what is on the land. This is in contrast to the effects of the current LPT.

For example, as part of Ireland’s recently published Climate Change Mitigation Plan, Government wants to encourage households to retrofit their homes to improve energy efficiency. Under the current LPT, investment in retrofitting would increase a house's value, and therefore increase the household's property tax bill. This is a clear disincentive to make the necessary investment.

Similarly, under an SVT developers don’t have to worry about paying a higher property tax bill as a result of developing a site. This is of particular importance when it comes to motivating developers and landowners to redevelop derelict sites. Under the current LPT, developers would receive higher property tax bills for developing their land, while individuals and households would also be hit with a higher bill if they chose to build an extension to their home, convert an attic, insulate their premises, or build a ‘granny flat’. Under the current system, pretty much anything that involves a person using scarce land in more socially beneficial ways is punished. The last thing Government should be doing is punishing those who use a scarce resource well, but policy coherence, particularly within the tax system, has long been an issue for Ireland.

SVTs encourage good behaviour, based on the principle of “use it or lose it”. Those hoarding undeveloped or underdeveloped land in valuable places will face a high SVT, so either the State will receive additional revenue for doing nothing, or those hoarding the land will be encouraged to develop it or sell it to someone who will make better use.

SVT is flexible and broad-based

SVT can be applied to all types of land, whether residential, commercial, public or agricultural.

Are there problems?

Some have claimed that an SVT “would throw up anomalies” such as a rundown property and a modern property on similar sites having the same property tax bill.

That is not an anomaly!

That is the tax system encouraging people to use a scarce and valuable resource in the most efficient and productive way possible. As noted already, those in possession of very valuable land will be incentivised by the SVT to use the land in a productive way or sell it someone else who will do so. SVT therefore acts as a tax on hoarding land and speculating.

Would Ireland be the only one?

Many cities and countries, in locations as diverse as the United States, Australia, Hong Kong and Taiwan use SVTs. Denmark, a small open economy with a similar population to Ireland, uses an SVT successfully, as does Estonia which uses the money raised to help fund local government.

Time for a Site Value Tax to replace Ireland’s LPT

The basic economic rationale for property taxes is that they are the least distortionary of the main tax types. The supply of land is fixed and cannot be withdrawn from supply (though it can lie idle). Property taxes are also progressive, redistributive, and generally stable. Social Justice Ireland therefore believes that property-based taxes should form a much higher proportion of Ireland's overall tax-take than it currently does.

The idea that an SVT is too complicated or that we don’t have the mechanism by which to implement it is erroneous and indeed there have been severable workable proposals put forward by various economists and institutions. It is time for a Site Value Tax to replace Ireland’s Local Property Tax.