I move: "That the Bill be now read a Second Time."
The introduction of the local property tax will deliver significant economic and fiscal reform through broadening the revenue base to pay for vital public services in a manner that does not directly impact on employment. It will be fair and progressive, with the owners of the most valuable properties paying the most property tax.
The Government also sees the necessary introduction of this tax as an opportunity for very real political reform at local government level. The local property tax will provide a stable funding base for the local authority sector, incorporating appropriate elements of local authority responsibility. This will strongly reinforce local democratic decision-making and encourage greater efficiency by local authorities on behalf of their electorates.
A notable feature of Irish taxation in recent decades has been the almost complete absence of an annual or recurring tax on residential property. Rates on domestic properties were abolished in 1978 and the funding shortfall was met by direct Exchequer transfers to local authorities and other means of funding, primarily through the use of fees and charges for local authority services. Domestic rates were partially replaced by the introduction of a residential property tax in 1983. However, residential property tax proved ineffective because of its narrow base, the perceptions of unfairness, complicated administration and low yields. It was effectively abolished in 1996.
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.
Liable persons can choose from a variety of payment arrangements, including paying the tax directly or having it deducted at source from salary or State payments. Deduction at source will be the default method of payment if another method is not chosen. Owner-occupiers with incomes below specified limits will be able to defer payment of the tax. Amounts deferred under these provisions will, however, remain a charge on the property.
Before going through the main elements of the Bill, I will discuss briefly why the market value of properties was chosen as the basis of assessment. The Thornhill group did consider other possibilities, such as site or land value, floor area, and a combination or matrix of other possibilities. These other options were rejected on the basis that market value was the most easily understood and ascertainable concept, and one which best reflected the rationale for the tax. The site value option can lead to serious inequalities with the same rate being applied to two very different properties on similar sites. Also, its international use is very low due to the high level of litigation associated with its usage. The market value of a property will reflect its proximity to services and amenities, which is why such values are usually higher in urban areas than rural areas. The local adjustment factor, which I will outline in more detail, will give local authorities the power to vary the amount of tax they collect so as to better align the tax to local needs.
Part 1 which comprises sections 1 and 2 contains the Short Title, commencement provisions and interpretation sections.
Part 2, comprising sections 3 to 10, provides for definitions of "relevant residential property", on which the tax will be chargeable and that certain properties will be regarded as not relevant residential properties and, therefore, exempt from the tax. These include properties fully subject to municipal rates; properties which have been vacated by the owner for at least 12 months due to mental or physical infirmity, certified by a registered medical practitioner; properties which have been vacated by the owner for less than 12 months, where a registered medical practitioner is satisfied that the owner is unlikely at any stage to resume occupation of the property and where the property remains unoccupied; registered nursing homes; newly constructed but unsold and unoccupied residential property; properties, the ownership of which is vested in a public body or an approved charitable body and which are used to provide accommodation to people with special housing needs such as the elderly or people with disabilities; property purchased by a first-time buyer as a sole or main residence between 1 January 2013 and 31 December 2013. These will be exempt until the end of 2016; new and previously unused properties that are purchased from a builder or developer between 1 January 2013 and the end of 2016, will also be exempt until the end of 2016; and, properties in certain unfinished developments, or 'ghost estates', as prescribed by law by the Minister for the Environment, Community and Local Government.
The Government is conscious of the very real costs and difficulties faced by people whose homes have been affected by pyrite. My colleague, the Minister for the Environment, Community and local Government has indicated that he considers that houses demonstrated to be subject to a certifiable level of pyritic heave should receive a waiver from the local property tax. I propose to address this issue in the context of the Finance Bill. In addition, the tax will not be charged on mobile homes, vessels or vehicles. If one lives in a yacht one will not pay property tax.