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Finance (Local Property Tax) Bill 2012: Second Stage (Continued)

Friday, 14 December 2012

Dáil Éireann Debate
Vol. 786 No. 4

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(Speaker Continuing)

[Deputy Michael Noonan: Information on Michael Noonan Zoom on Michael Noonan] All of the available evidence suggests that the taxation of property through a recurring annual tax is economically less distortionary than the imposition of tax on income or capital. This is supported by economic literature and recent OECD analysis. The OECD has highlighted that annual taxes on land and buildings have a relatively small adverse impact on economic performance. A policy note prepared by the OECD economics department in 2012, What are the Best Policy Instruments for Fiscal Consolidation?, argued that "less distortive and corrective taxes should be given priority". The paper concluded that increasing taxation on property is less harmful to growth than increasing the burden on more elastic tax bases such as labour.

Apart from the absence of a property tax, the OECD has reported that Ireland "has some of the most generous tax provisions for owner-occupied housing". Ireland is the only country to allow tax relief on rent, on mortgage interest payments, on capital gains through the principal private residence relief and on capital acquisitions by means of the dwelling house relief. In that context, it should be noted that we had relatively high rates - up to 9% - of stamp duty on property transactions. The over-reliance on revenue from transaction-based taxes - stamp duty and, to a lesser extent, capital gains tax and capital acquisitions tax - led to a significant fall in tax revenue when the number and value of transactions decreased sharply from 2007 onwards. That created sizeable problems for Ireland's fiscal policy. The local property tax is being introduced against this background. The aim is to provide an alternative to transaction-based taxes. International experience has shown that an annual recurring property tax can be a stable source of funding, particularly for local government.

The overall budgetary position is another part of the context for the introduction of the local property tax. Moving towards a balanced budget is a necessary pre­condition for restoring the economy to sustainable growth and job creation and securing our objective of re-entering the international bond markets. We are moving in the right direction in that regard. It is clear that the deficit remains very high, which means that a challenging road lies ahead. Ireland's deficit, which is estimated to be 8.2% of GDP this year, or just under €13.5 billion, will be one of, if not the highest, in the EU. We cannot continue to run such deficits into the future. It is important that the gap between our revenue and expenditure is closed further in the coming years. This will require the implementation of further budgetary consolidation measures. Budget 2013 marks the latest step on our road to renewed public finance sustainability. For 2013, a general Government deficit limit of 7.5% of GDP applies under the EU-IMF programme. Budget 2013 outlined the revenue-raising measures consistent with the €3.5 billion consolidation package which will assist the State in achieving its fiscal targets. The local property tax is one such revenue-raising measure. As I have indicated, it is a tax on assets, not employment, and therefore will not adversely affect job creation.

The introduction of a value-based property tax is part of our obligation under the EU-IMF programme. In the latest memorandum of understanding between the Government and the troika, a commitment was given to introduce the tax in budget 2013. The introduction of a property tax has been a condition of the programme since it was first negotiated in November 2010, under the previous Fianna Fáil Government. It has remained a condition of the programme following subsequent reviews which are agreed by all programme partners. These measures are deemed necessary to reduce further the deficit in the public finances and ensure continued adherence to fiscal targets set as part of the EU-IMF programme. It is true that the Government has some scope within the programme to use alternative methods to achieve programme targets. However, the yield anticipated from the local property tax could not otherwise have been achieved without significantly reducing overall expenditure on vital public services or increasing taxation on incomes and spending. The Government did not want to add to the already necessary cuts in public expenditure or place additional costs on job creation. In light of the complex issues involved in a full property tax, the Government decided to introduce the household charge in 2012 as an interim measure. I thank the Minister for the Environment, Community and Local Government and the officials in that Department and the Local Government Management Agency for their work on the household charge and their assistance with the design of the local property tax.

The Minister, Deputy Hogan, established an interdepartmental group in February 2012 under the chairmanship of Dr. Don Thornhill to consider the structures and modalities for a full property tax. The Thornhill group's terms of reference were to consider the design of a property tax to replace the household charge and to ensure such a tax is equitable and informed by previous work and international experience. I thank the group for its work. I also thank the bodies and individuals who made submissions for the group's consideration. The group's report has been published by the Minister for the Environment, Community and Local Government. I am pleased to say the Government has accepted most of the 18 core recommendations made by the group that deal with policy and the administration of the tax, albeit with some exceptions and variations. Residential properties owned by local authorities are exempt from the household charge. The Thornhill group recommended a similar exemption for local authorities from the local property tax, but the Government has concluded that there could be issues of proportionality in the differing treatment of owners and local authority tenants. The Government therefore did not accept the recommendation. Local authorities will therefore be liable for the local property tax as owners of residential properties.

The Thornhill group proposed that a local decision factor be applied to enable local authorities to vary the central rate by between 5% and 15% above the national rate. This provision is referred to as the "local adjustment factor" in the Bill before the House. Like the Thornhill group, I consider that the exercise of local discretion in setting the tax rate in a local authority area is essential to the credibility of the tax. If we give local authorities significant responsibility for raising local revenue, it will increase the level of oversight of local authority operations by the electors and thereby strengthen democracy at local level. It will also facilitate a level of local decision-making that can be used to address urban-rural variations in value. Therefore, the Government considers that a wider range - up to 15% above or below the central rate - would more closely match the expenditure needs and commitments in the local authority area in which the tax is collected. The Thornhill group proposed that a substantially greater part - in the order of 65% - of the revenues arising from the taxation of properties should be assigned to the local authority in which the taxable properties are situated. The allocation and redistribution of revenues will be considered and determined by my colleagues, the Ministers for the Environment, Community and Local Government and Public Expenditure and Reform. The possibility of giving local authorities wider scope to vary from the central local property tax rate than that envisaged in the Thornhill report will be a factor in their consideration. The Thornhill group recommended that the non-principal private residence charge should be absorbed into the local property tax as a separate supplemental tax in addition to the local property tax at the existing level applying to non-principal private residences. However, the Government has decided that while the non-principal private residence charge will be collected in 2013, when a half-year local property tax will apply, it should be discontinued thereafter.

I wish to summarise the key elements of the local property tax. Owners of residential properties will be liable for payment of the tax. The market value of relevant properties, as assessed by the owner, will be the basis of the level of tax to be paid. Valuation guidance will be provided by the Revenue Commissioners. The rate of the tax will be 0.18% of market value up to €1 million, with properties worth over €1 million being taxed at 0.18% of the first €1 million and at 0.25% of the balance. A property owner, on a self-assessment basis, will declare that his or her property is in a particular valuation band. Where the property is valued below €1 million, the charge that is applicable to that band will be applied to the property. Properties valued over €1 million will be assessed at their actual value, with no banding applied. Certainty will be provided for property owners. The initial valuation will be valid for three years, up to and including 2016. The central national rate will not vary for the lifetime of this Government. The tax will be collected by the Revenue Commissioners.

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