We need to design a viable property tax for the Irish property market
The 80% land tax will significantly delay the recovery of the land market, further reduce current market values, and act as a significant obstacle to Nama selling the land. In addition to this tax, the Green Party now has a proposal for a ‘site development tax’, whatever that means. I fully support the concept of a windfall tax on land value, but such a tax should be fair and practical in the way it works.
What is required in Ireland is carefully crafted comprehensive legislation to tax improvement (an increase in value) of land rather than ad-hoc changes to our current fragmented system. We need to step back and comprehensively figure out how to integrate a land tax system with our urban planning system and stop applying ad-hoc and timely plasters to what is a very complex issue. Over several decades, many countries have tried various approaches to capture this improvement with varying degrees of success. We should learn from their experiences and choose a system for Ireland that is appropriate and feasible.
The Dutch have a system whereby land is not rezoned unless it is first acquired by the planning authority. The upgrade is up to the planning authority and is used to pay for services and other infrastructure, including schools, etc. However, the Dutch have, in parallel with their planning system, an elaborate land management process to subdivide and maintain the land and then parcel it out to developers that includes CPO powers. Some US states have a system whereby the developer has to prepare an ‘economic impact analysis’ when proposing a development scheme and then has to pay all community costs related to his new scheme, including schools, surveillance , etc.
The British have had several attempts to capture improvements. The world-renowned bible for the theory of improvements is the British Uthwatt Report of 1942. This proposed that all improvements created by development would go to the state through taxes linked to the granting of planning permits. This proposal was incorporated into the UK Planning Act 1947, but was deemed unfeasible in practice and was withdrawn seven years later. The British reverted to the Uthwatt principles in 1967 and introduced a central land authority known as the ‘Land Commission’ which was supposed to acquire all development land at existing use value and then pass it on for development at a price that it included most of the improvements. . The theory was great, but the execution was terrible.
After three years, the plan was scrapped because it was creating a shortage of new homes. Several other attempts at imposing land taxes were tried in the 1970s (Development Gain Tax in 1974, Community Land Law in 1975, and Development Land Tax Law in 1976). The British now have an ad-hoc negotiated improvement system called Section 106, with agreements attached to the granting of planning permits whereby part of the ‘development gain’ is captured as long as it is related to ‘infrastructure’ and resources. affordable housing costs directly related to development. They are currently looking to modify and regularize this under a community infrastructure tax in the wake of the Barker Report proposals.
Our own Kenny Report from the 1970s proposed that all development lands would be purchased by local authorities at the existing use value plus 25%. This was again wonderful in theory, but it was recognized that it was not practical. Kenny’s concept was reexamined in 2005 by a Dail select committee, which reconfirmed its impracticality. The committee accepted the argument for value recovery / enhancement, but no mechanism was decided. Part of the detail of any new comprehensive tax system is that it must be integrated with our development tax system currently in operation under our planning laws.
Levies are a form of tax on improvements, but their sole purpose is to recover the actual costs of providing services. These work and work well. We currently have a second tax on improvements in the form of Part V of our Planning Act that requires developers to surrender up to 20% of their land for social housing at the existing use value. This is now becoming a monster, requiring the state to buy houses from developers above market value.
I am advocating that, instead of introducing a CGT tax of 80%, which would simply stop the land market and aggravate the Nama problem, a comprehensive and properly structured improvement tax system be introduced. A properly structured improvements tax of 30% to 50% on the increase in land value and integrated with or replacing a tax system would be a reasonable balance that would achieve the following:
* Secure a supply of land but do not stop the market from operating.
* Capture not only improvement on land that is rezoned, but also land that may already be zoned.
* Ensure that funds guaranteed by this tax are used to provide local services, including schools and other social infrastructure.
* Create a system that is accepted as fair by landowners, developers, politicians, and the public and that will stand the test of time.
However, the detailed design of a system will require extensive research. My suggestion is that the 80% tax proposal be suspended and that a Peter Bacon-type report be commissioned and then quickly implemented on the options, permutations and combinations for a viable development land tax system. Now is the time to do it as land speculation is at an all-time low and minds are open to fundamental change.