Section 23 benefits nobody.........Discuss.

[GeoffreyOD]

Been looking at various Section 23 like schemes over the last few months and talking to people involved in operating some of these schemes and I've begun to question the logic behind this tax break.

Rural Renewal Scheme seems to be bringing some really dodgy property to market that would never have been built but for the TAX relief.
e.g. Apartments in rural areas which flood and where the foundations aren't solid.
Apartments that you couldn't swing a mouse in much less a cat.
Developers pocket the TAX relief, rather than the investor through higher purchase prices
.
Town Renewal Scheme which increases the value of derelict property to such an extent that it is almost uneconomic to develop it and in order to compulsorily acquire the land under the derelict properties act the local Co. Co. must pay the owner a higher price because of the tax reliefs attached to the property which increase it's percieved worth.
TRS doesn't seem to be working in that the only villages that are being developed are the ones that have real potential as dormer towns, not the one horse towns out in the middle of nowhere with nothing going for them. The dormer towns which qualify for TRS would be developed without the tax reliefs anyhow.

I put it to the group that section 23 relief benefits
1) the owner who never bothered to improve their property or area
2) the developer
3) the auctioneer
and doesn't deliver the goods in that we don't get the appropriate type of development.

On top of that the scheme is inherently unfair in that only the asset rich can benefit from purchasing section 23 property.

 

[Tommy]

Section 23 has helped clean up large rundown areas in towns like Waterford, where developers had previously feared to tread. You only have to travel through rundown areas in similar towns in N. Ireland (where these sort of tax reliefs dont exist) to see the differnce S23 has made in our own State.

 

[GeoffreyOD]

derelict building act 1990

I'm of the opinion that the derelict building act of 1990 if enthusiastically exploited by local Co. Co. would be sufficent and costs the Government less in lost Tax revenue.
My observation is that the TRS is actually preventing some towns from developing because the cost of derelict property has spiralled thanks to the percieved tax breaks associated with the scheme.
The fact that the TRS has been extended twice already gives owners no incentive to redevelop or sell on as they feel the tax breaks will be there forever so property is only drip-fed on to the market.

 

[Tommy]

Re: derelict building act 1990

they feel the tax breaks will be there forever

In his Budget 2003 speech, Charlie McCreevy made an explicit and unequivocal committment that all such schemes (including the TRS) are to be abolished on 31/12/04. It was necessary to extend the length of some schemes to that date, in order that the 31/12/04 deadline would be seen as a uniform one, applying to all such schemes.

 

[darag]

Tax relief is a poor way to achieve urban renewal. In
fact, I believe in general, tax relief is almost always
a very bad way to encourage socially desirable
commercial investment. I think direct grant aid is far
superior.

First of all, with direct grant provision, the
government can budget precisely how much it is willing
to spend. This figure is then transparent and can be
publicly debated. Offering tax relief is akin to dodgy
accounting - it seems people don't view the lost tax
revenue as an expense which is what it is. The
government can not know the costs of offering tax
relief until people start availing of it.

What is worse about this is that many of the relief
schemes allow tax to be written off over a period in the
future. Thus the full costs to the government is
extremely opaque.

Also, direct grant aid is more equitable; it has equal
value to those with and those without huge incomes.
Offering tax relief means the only people who can
benefit are existing high earners.

Finally, policy regarding the conditions for the
awarding of grants can be more flexible. I don't think
that the initial intention of the seaside resort relief
was that large nasty housing estates be built at the
edge of traditional seaside villages and towns as
"holiday homes". When tax relief is offered, commercial
activity will gravitate toward exploiting the relief
(often in perverse ways) instead of toward fulfilling
the initial social goals which motivated the relief.
Thus the what is effectively government spending is
completely misdirected.

 

[MOB]

Re: derelict building act 1990

I must say, I'm with Tommy on this one. There has been a lot of inappropriate development in areas with tax incentives, but that is down to poor planning. In the absence of incentives, we would have had no development in many areas and on balance I think that would have been a worse scenario.

If I were to make a criticism of the tax incentives, it is that our approach to property generally is almost all carrot and no stick. There is in my view a real problem in this country with our tax system. The political culture (in which we all operate) is such that there is very strong resistance to any sort of substantial property taxes. I don't think the derelict sites legislation is the appropriate vehicle for encouraging rejuvenation of run down areas. However, if property in general was more highly taxed, it would not pay anyone to leave it sit idle, because there would be a much stronger incentive to make it pay its way. Also, a property tax is (in my admittedly ill researched view) a more local tax, and I much prefer local taxation as a way of paying for things. The common view that central government should fund almost everything from central funds is one with which I do not agree. The problem is, everybody wants transparency and accountability, but nobody wants to acknowledge that things have to be paid for by us; we seem to almost prefer that there be no directly apparent correlation between the taxes we pay and the services we receive, so that we can in some way con ourselves into believing that somebody else is paying.

 

[Tommy]

Hi Darag,

I agree with most of what you have to say, regarding the use of tax reliefs as an instrument of public policy. However, I really can't see any merit in the idea to give "direct grant aid" to owners of dilapidated properties to improve them. Surely this would just bump up asset prices proportionaltely?

Secondly, when Ruairi Quinn introduced the Seaside Resorts Scheme in a mid-90s Budget, the provision of so-called "holiday cottages" was explicitly stated as one of the objectives of the scheme. This was in order to allay a problem which had arisen with shortages of self-catering accommodation in certain resorts. Problem was that the scheme proved far more popular than originally envisaged and it really should have been scrapped before its time.

 

[darag]

Hi Tommy. The holiday homes thing is not an unusual
example of what happens when tax relief is used for this
sort of thing. Another example would be the relief
available for building city centre car parks even after
it's been recognised that they are not environmentally
or socially desirable. There may have been a case for
supporting some such development initially but using tax
relief as a subsidy mechanism means that the government
loses all control over the level of development. It is
just too crude an instrument.

I assumed you agreed with government subsidies for
certain sorts of development having read your comment
about Waterford; I'm just arguing that if the government
is going to subsidise such investment, then direct grant
aid is a far more transparent, fair and controlled way
of doing it.

The way I envisage a direct grant aid system working
would be along the lines of: an urban area is identified
as requiring a kick start for redevelopment. Using
professional planners the administrators of the system
could decide that, for example, the area needed a
supermarket, a number of apartments, a cinema, a pub,
two restaurants and a certain amount of office space.
Developers would apply for the grant aid available for
whatever aspects they were interested in undertaking.
Like IDA grants, the money would be recoverable if the
developments were not completed. There would be no
incentive to "sit" on derelict sites and nor would the
subsidies become attached to particular pieces of land.

 

[GeoffreyOD]

Did a quick google

Used google to search for 'urban renewal scheme' and it appears some other counties use subsidies for urban renewal schemes.

 

[Tommy]

Re: Did a quick google

Hi darag

Again while I don't necessarily disagree with the thrust of what you are saying, I would not agree with the following

...relief available for building city centre car parks even after it's been recognised that they are not environmentally or socially desirable.

Recognised as such by who? I think in most towns, the provision of sufficient car parking space is indeed recognised as a socially (and environmentally) desirable objective. Correct me if I am wrong, but I would be surprised if current govt policy is not to encourage more car parking spaces being available.

using tax relief as a subsidy mechanism means that the government loses all control over the level of development

This is simply incorrect. Surely it is through the planning system that the govt (including local authorities) controls the level and pace of development. Just because tax reliefs are provided doesn't mean that planning controls are thrown out the window.

Developers would apply for the grant aid available for
whatever aspects they were interested in undertaking.

As I have said earlier, I cannot see any scenario how this could work without bumping up asset prices, thus defeating the purpose of the exercise.

There would be no incentive to "sit" on derelict sites

Nor is there at the moment, as all Renewal Schemes have a finite and pre-defined lifespan.

nor would the subsidies become attached to particular pieces of land.

How then do you ensure that specific sites are properly cleaned up, like the Dock area in Waterford, to achieve urban regeneration? The absence of incentives to develop specific sites would merely mean that eyesore and "gap" sites in towns and cities would remain undeveloped, while alternative sites (possibly prettier and less risky to develop, and certain to be developed anyway) would be preferred by developers.

Incidenally, the "professionally planned" system you propose seems to me to be a replica of how the existing and recent urban renewal schemes were devised by the various local authorities, except of course on a looser (non-site specific)basis and with tax reliefs substituted by grant payments.

 

[darag]

Re: Did a quick google

Hi Tommy.

Regarding the first point concerning city centre car
parks, I was thinking of Dublin in particular where
encouraging people to drive into the city centre has
been recognised as being environmentally and
economically harmful. Perhaps this isn't the case
in other towns.

I disagree that the government maintains control of
the development through planning although I concede
that they don't lose ALL control. The problem is
that the subsidy (in the form of a tax break) is decoupled
from the planning. Because of this you can get disastrous
effects such as the holiday home scheme for example. I've
seen the effects in Bundoran, Courtown and Achill for
example. Effectively the government, through the huge
capital allowances, has paid for building eyesore suburban
style housing estates in scenic areas. With a grant
system the planning and the subsidy are tightly coupled
and I think such outcomes could not have happened.

Regarding your other points, I don't see how any of
your objections are specific to direct grant provision
versus offering tax relief. Neither instrument can force
a particular eyesore site to be developed and it is
impossible to offer subsidies regardless of the method
without causing some distortion to the market.

 

[Tommy]

Re: Did a quick google

Hi Darag

I take your point about the flaws of direct grant incentive schemes being also shared by tax relief schemes. One of the biggest drawbacks of the current tax schemes has been the fact (recognised by some leading tax experts) that up to 90% of the value of tax incentives (theoretically available to investors in rural or urban renewal properties) is pocketed as additional profits by the landowner/developer and simply passed on to the investor in the form of inflated prices.

This situation is not ideal, to say the least, and IMHO is at the heart of the current official thinking behind the idea of scrapping all incentive schemes on 31/12/04.

I cannot see how a grant-based scheme could correct this problem. In fact it could well make it worse, and would inevitably be more costly to the Exchequer, unless the grants were paid on a phased basis a la the current tax relief.

The problem is that the subsidy (in the form of a tax break) is decoupled from the planning.

Once again, I cannot see your point here. Any development (incentive area or not) is illegal in this country, unless it has prior planning permission. If a development fails to meet planning standards (as determined by the local authorities and An Bórd Pleanala), then planning permission will not be forthcoming. The planning permission system operates in exactly the same way no matter whether any tax reliefs attach to the development. If eyesores are being built in tax-incentive areas (or indeed other areas) that is surely a matter for the planning system.

There is no decoupling of tax breaks and planning. In the case of the Rural Renewal Scheme (and, I would imagine all other incentive schemes - perhaps someone can confirm??) applications for tax-break designation are refused unless the property concerned has been built or refurbished in full compliance with planning permission. For this purpose, it is necessary to file a copy of the relevant planning permission with each application.

In short, if there is no planning permission, there is no tax break.