Heated discussions around the proposed ‘full’ Property Tax are taking place around the country at the moment and as I prepare to return to Smurfit Business School for the second year of the Executive Masters of Business Administration (MBA), I find myself thinking back to the lessons learned from the Financial Valuations module last semester.
Any form of taxation is going to be unpopular with the public and the property tax is no different. However, it is clear that we need a more stable and recurring source of finance for local authorities as stamp duty receipts to the exchequer have plummeted from €1.3bn in 2006 to somewhere around €40m in the last year. While property tax is likely to feature in the upcoming budget, implementing a methodology that is fair and equitable for everyone is going to be a challenge for Government.
So far, the commentary has focussed around four main methodologies. The first is Site Value Tax (SVT), which was recommended in the Commission on Taxation Report 2009 and values the site (and not the property). While this is a relatively equitable way of levying a tax, it is difficult to assess. For example how do you value the site of one unit in a large apartment block? The second is an area- based tax, which levies the tax based on the size of the property.
This is a relatively transparent method and is easy to assess but doesn’t take into account benefits of access to local government services. A tax based on the market value of the property is being reported as the methodology that will be used but it remains to be seen what method the Minister decides upon. In the current market basing the tax on the market value of the property will be challenging for non-standard properties due to the lack of available transactional data. However the Property Price Register, due later this year which will make actual property selling prices publicly available, should assist with this process.
Another option being mooted includes basing the tax on the rental value of the property. This would appear to be a relatively straight forward method for self-assessment and could be implemented with a multiplier set by each local authority, in a way similar to how commercial rates are levied.
In the context of the MBA, the concept of financing is one of the central issues facing all organisations and businesses, both in the public and private sector. One of my favourite subjects last semester was Financial Valuations and this course was all about making the right financial decisions and optimising the capital structure of the company through a combination of debt and/or equity. We learned about the cost of capital, the challenges of cash-flow and the various methods of evaluating projects for investment based on return. We also learned about the primary danger facing all organisations and businesses in the current economic climate – running out of cash.
The local authorities, who were significant beneficiaries of the property boom and became flush with funding through a mixture of stamp duty receipts, local development levies now find themselves starved of cash to fund local services. They do not have the financing options available to them that other organisations and businesses have in the private sector. For example, they cannot go to the bank or the markets for extra funding and as such rely on Government and other contributions such as the Non Principal Residence Charge (NPPR) for funding. Finding a way to broaden the tax base and finance the services through a property tax would seem inevitable, if somewhat unpalatable for homeowners.
As someone who bought a property in 2006 and has seen values plummet by over 50 per cent and counting, the thoughts of a ‘full’ property tax next year are hard to digest, particularly when a service charge from the management company will also be due.
However, having lived in London for a number of years, the Council Tax system of property taxation does seem to be accepted as a fact of life and appears to be a good way of financing local authorities. The council tax is levied on a banded system by the local authority and is paid by the occupier (who is deemed to benefit from the services) and not the owner which is the opposite to what is happening here with the household charge.
The local authorities will also need to demonstrate transparency and value for money to the tax paying public. In the US, social media technology is enabling local government to highlight the services being offered and to communicate recent works completed in local neighbourhoods on a real-time basis, as well as facilitating online interaction with the public. This two-way communication goes a long way to improving transparency and highlighting the delivery of services to the public, so at least they can see what they are paying for.
One of the key points our Financial Valuations lecturer made last semester was that investors and the markets do not like surprises and that any material issues should be declared well in advance.
Similarly, we need more certainty and concrete information around the implications and methodology of the property tax in advance of next year, if it is going to be introduced. At least this way, we can try to plan our finances for the future without too many suprises, both as individuals and as a nation.
– Conor O’Donovan, EMBA Yr 2