Both China and Ireland are looking at the idea of introducing property taxes, but for very different reasons

What do China and Ireland have in common? There is obviously a divergence between the relative strengths of the two economies but both are thinking of introducing a property tax – for different reasons.

China’s need is to stifle property speculation which it fears is feeding a bubble. Our bubble has already burst and with the State finances now in deep trouble a way has to be found to broaden the tax base.

Environment Minister John Gormley is making all the running on a new property tax but with Fianna Fáil shaken by its latest poll ratings and well aware of the unpopularity of a residential property tax, (the last one was abolished in 1996), it is questionable whether we will see a new housing tax introduced in the next budget – or the one after that.

Successive governments have relied heavily on property to bridge the gap in the public finances. Just look at the rapid growth in tax revenues during the boom and the sharp fall since. Stamp duty from the residential market rose from under €300 million in 2000 to €1,300 million in 2006. And last year? In 2009 it did not even reach €200 million. Hence the apparent urgency to replace the stamp duty formula by a broadly based annual property tax which would bring in about €1 billion. Conveniently, the Commission on Taxation has already proposed a property tax with separate valuation bands, a self-assessment system and exemptions and waivers for those on low incomes.

Presumably the Commission will have learned much from the shortcomings of the previous residential property tax which was divisive and unpopular and failed to deliver the desired results. It brought in a mere £9.5 million in 1995 before it was abolished.

Much of the criticism centred around the fact that it was primarily a Dublin tax as the capital accounted for almost two-thirds of the revenue collected. The average payment by Dublin homeowners was £585 compared to £488 in the rest of the country. The tax was payable on houses valued at over £101,000 where the household income exceeded £30,100. The final push against the tax was mounted by the Progressive Democrats who described it as “a left-wing ideological wealth tax on the family home”.

Should the tax be reintroduced, it will be more broadly based and extend to more of the country’s 1.7 million housing stock. In Northern Ireland about 20 per cent of the population have their property tax bill paid under the housing benefit scheme. A further significant proportion gets rebates under the low-income relief scheme. An ESRI study looking at various models in the Republic suggests that an income limit of €12,000 a year would imply that about 8 per cent of people would get full relief. A higher limit of €15,000 would imply that almost double this would get full relief – 15 per cent of owner occupiers would have zero liability. A substantial proportion of local authority tenants would also be likely to qualify for income related relief if the tax were applicable to the rental sector.

It is not certain the Government will stick to the terms suggested by the Commission on Taxation. The odds are that most people on low incomes will escape while those who paid stamp duty in recent years will be exempt for up to seven years. On the positive side, the Government is likely to stress that the replacement of stamp duty by a property tax would encourage greater mobility among those wanting to trade up and down. It also carries the risk of depressing house prices.

Back in China, the government is concerned about the number of empty flats in big cities. Most have been bought by investors who don’t use them. With no taxes to be paid for holding property, they keep them empty, to be “flipped” at the right moment. Dublin also has empty new apartments but they won’t be “flipped”, instead they will probably have to be sold at a loss.