The problem with property tax | Journalist
Even before Covid-19, Trinidad and Tobago was in serious financial difficulty.
A declining energy sector and persistent growth in public spending fueled by reckless spending and incompetence explain the large budget gaps. Reduced fiscal capacity, the limited possibility of additional government borrowing, and increased debt service payments have brought us into an environment where options are limited. The government is now borrowing to service the public debt and savings are running out. There is little left of valuable public goods to sell.
Loud calls for increased public sector wages in the face of rising costs of living have placed the current administration in a dilemma. The decision to introduce the controversial property tax amid a pandemic that has all but destroyed the economy and raised unemployment and poverty to historic levels is an indication of the level of desperation.
One of the main premises of tax is that the citizens of this country do not pay their fair share of taxes. It’s always a good political narrative when governments fail to curb unnecessary spending, waste money on ill-conceived projects, and subtly use state funds to bolster political positions.
Tax revenues as a proportion of GDP do not say everything about the incidence of tax pressure. Certainly, there are people who evade taxes and use expensive lawyers and accountants to exploit every loophole in the tax code to reduce their tax liability. But this does not extend to everyone.
People in the PAYE watershed pay their taxes in advance. From this taxed income, they service their loans and mortgages and pay for transportation. If they buy a property, they pay stamp duty. If they decide to build a house, they pay VAT on building materials on their taxable income. When they spend what’s left, they pay VAT on a whole range of items, including food and utility bills. Rich and poor pay the same price. If you buy a car, you pay taxes. If you sell a car, the buyer pays a transfer tax. A new car would cost you more than double the value in the country of origin.
The unemployed cannot escape indirect taxes. The self-employed also pay VAT and other taxes, whether or not their income is below the exemption threshold. There is a driver’s license renewal tax, as well as an online tax. Incidentally, an online invoice normally shows multiple VAT payments on a single package, given the variety of services involved. There is a fee to obtain a passport. Travel tickets are also subject to a tax. There is a health supplement and a road tax. The list of taxable goods and services is endless. There is logic in the argument that when you tax too much, economic activity dries up and income decreases.
Can barely pay the mortgage
The property tax has a pernicious effect in the way it is designed and planned to be administered. First, the authorities must obtain what is called the monthly or annual rental value which is the key concept and the basis of the tax. They choose their own opaque guidelines and criteria for doing this. There is a small adjustment to arrive at the annual assessed value, and the tax is calculated as a percentage of it. So if you live in your own home which you may have inherited or built with your taxable income or resources, you are billed on the satisfaction or invisible utility you get from living in your own home.
It is assumed that you are renting to yourself and paying yourself. The lack of any visible income is apparently not an obstacle. It is a surreal form of taxation. People who rent out their property for money are in a different category.
There are people who live in houses where they can barely pay the mortgage. There are others who have been given a refuge by their parents or husbands. Some live in block-by-block dwellings for many years with the help of friends and family.
The government provided no assistance. Government furnished homes offer a better case for a property tax. There are other questions. For example, how would the tax be adjusted to reflect changes in property values and rental income in a dynamic situation? Houses cost money to maintain. Can the homeowner adjust their tax liability against this expense? If the roof explodes in a hurricane, is there a property tax fund the homeowner can turn to for help? To demand income from an asset to which you have made no contribution is daring of the first order. In the case of utilities, people pay for something they use. We can discuss the terms of payment.
The Distributed Assessment Division form is intrusive and reflects the mindset of the aristocrats behind this particular form of property tax that was passed. What a deal for anyone who is the type of tile, flooring or ceiling used by a home owner. Why should the government care if you have a drop ceiling or porcelain tiles?
A house for many people represents their savings. They may have held multiple jobs, every day of the week, forgoing vacations and depriving themselves of a range of luxuries. They may have placed a higher priority on a place to live than having a car or going on a trip abroad. They may have taken this approach rather than being on a Housing Development Corporation list and are dependent on a lottery system subject to political manipulation.
A tax on a house is a tax on actual savings. A house is the only long-term savings that many people have. They don’t know anything about stocks, stocks and bonds. Yet the government’s main concern is running people everywhere by dropping forms in mailboxes and threatening the population with massive fines.
In this country, many people do not know where their next meal will come from. In some households, no one works. Some barely live off pensions and NIS payments. The highways are filled with roadside vendors plying their trade in the sun and rain. With a barely functioning public health system, families have to beg and borrow to care for their sick.
People with no income or who barely survive on a pension or an annuity have a real problem. Having a house is not an indication of the ability to pay. Deferring payments would result in higher liability down the road for heirs who might even have difficulty selling the property, which would involve other taxes such as stamp duty.
Whether the government would seize a property for nonpayment of property taxes is an interesting question. By passing a law, the state created an interest in a property to which it made no contribution. I am curious about the challenge posed to property rights. The government has no idea of the sacrifices many families have made to own their home, which is their castle, no matter how small or insignificant.
If the goal is to instill fear in the population, the government has succeeded. Some people have stopped renovating their property. Others are busy removing structures that they believe may impact the value of their property.
A property tax today would not only be destabilizing, but would increase the cost of living as well as the cost of doing business in an already depressed situation. Those who rent houses, apartments and business premises would immediately be thrown under the bus. Any tax measure that increases unemployment and reduces business activity would likely have a negative impact on fiscal capacity. Tax formulation must be a finely balanced act.
The author is a retired professor emeritus, UWI