Property taxes can promote a more stable house price environment while providing a reliable source of revenue for the government, a new study has indicated.
The economic letter, published by the Central Bank, examined the role property taxes — such as the Local Property Tax (LPT) and the Residential Zoned Land Tax here — can play in promoting more stable growth in house prices over time.
The research noted there were typically two forms of property taxes — transaction based and recurrent. Transaction-based property taxes such as stamp duty, are levied when a property is transferred from one party to another while recurrent ones are levied regularly on selected categories of properties.
While they are present in most OECD countries, recurrent property taxes account for differing degrees of the total revenue. Revenue from property taxes as a proportion of national income — a measure of the overall incidence of the tax — was significantly lower in Ireland (0.2 per cent) than in other OECD countries, it found.
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Last year, the Irish Government increased the scope of the LPT to include homes built after 2013 while tinkering with some of the bands, a move that was expected to increase receipts by more than €500 million.
The Central Bank study also found that house price growth in Ireland has been “somewhat higher on average” than other advanced economies. At the same time, the downside risks to house prices have been typically worse in Ireland.
Based on a cross-country analysis, it found that recurrent property taxes were associated “with a reduction in the severity of downside risks to house prices”.
And because property taxes “are generally less affected by changes in the economic cycle”, they can provide a more stable source of revenue for governments, the research indicated. Most tax categories are strongly cyclical, it said, but recurrent property taxes are the exception.
“This suggests that such taxes can provide a stable source of revenue and one that is less likely to be affected by the economic cycle,” the study said.
“The specific design and calibration of taxes at any particular point in time is a complex task for governments and legislators. In the course of doing so, policymakers have to consider a much wider set of costs and benefits than those considered within this Letter,” it said.
“However, this analysis and its findings on the potential benefits of recurrent property taxes can form part of that broader consideration,” it said.
