Tax cuts for landlords are a terrible idea

We need to make it easier and cheaper to build new housing instead

I haven’t had a chance to write anything for this newsletter yet between teaching starting, moving house and my daughter starting crèche, all (inevitably) within a fortnight. But what better place to start than on the terrible idea that is tax cuts for landlords, something currently being floated by a combination of politicians and lobby groups.

Below is a piece that also appears in the Irish Times today outlining why this is such a terrible idea (in short, it would be ineffective and expensive), arguing that the focus should instead be on making it easier and cheaper for both the public and private sectors to build new housing (a topic I want to return to soon).

I’ll try follow this up with some thoughts on the Budget next week, and do share this post with others if you thought it was interesting.

Tax cuts for landlords are a terrible idea

Our failure to build enough homes over the past 15 years has left those in the private rental sector facing extremely high and unaffordable rents. But recent proposals to cut taxes for landlords in the Budget would be an ineffective and expensive response to this affordability crisis.

Ineffective & expensive

The rationale given for these tax cuts is to stop a supposed “exodus” of landlords leaving the private rental sector, particularly those with 1 or 2 rental properties. While there likely are some small-scale landlords leaving the market, the true extent of such exits is unknown.

This is because landlords have only been required to register annually with the Residential Tenancies Board since last year, making data from earlier registrations unreliable. Indeed, data from other sources suggests the overall size of the private rental sector has grown, with the inflow of new larger-scale landlords offsetting any exits by smaller-scale ones.

That is not to say all is fine. Far from it. We have a chronic shortage of housing, with too few homes for our growing population.

But cutting taxes on rental income would benefit landlords whether or not they had ever thought about leaving the market. And the evidence we have suggests that tax does not weigh heavily on the minds of those that are considering leaving.

Rather, those small-scale landlords that are leaving the market appear to be doing so because they became landlords during the Celtic Tiger, have a different primary occupation and are now approaching retirement. There is little reason to think that tax cuts will be effective in substantially altering the decisions of these ageing, accidental landlords.

Furthermore, even if tax cuts were effective at deterring the exit of some landlords who would otherwise have left, they would be an incredibly expensive way of trying to maintain existing levels of rental accommodation.

Consider the proposal to introduce a new €14,000 tax-free allowance for landlords, which would cost around €400 million per year were all 160,000 who report residential rental income to Revenue to be eligible. This means that even if the measure implausibly deterred, say, 10,000 landlords from leaving the market, it would effectively be at a cost of €40,000 per year for each landlord retained. Such deadweight makes cutting taxes for landlords an incredibly expensive as well as ineffective response to our affordability crisis.

There is a better way

Instead, policy should focus on making it easier and cheaper for housing to be built, whether by the public or private sector. This includes things like more active land management by the state as well as reducing development levies which fund the cost of improvements to local facilities and amenities. Such levies act to reduce housing output and are likely borne by the occupants of newly built homes rather than all those who benefit. A better approach would be to finance these improvements through a higher local property tax paid by all residents.

Delivering more housing will also require reform of the planning system, which all too often is used to defend the interests of existing homeowners against those of potential future residents. In addition to ensuring Local Authorities zone sufficient land to meet realistic demand forecasts and limiting the ability of local residents to take judicial review proceedings against new housing, reform here should try to expand the scope of exempted developments.

For example, a proposal featured in the Science Gallery’s Housing Unlocked exhibition earlier this year suggested exempting mews housing from planning permission could facilitate building up to 20,000 units inside the Dublin M50 alone. This would make use of now largely obsolete laneways built to provide access to the rear of dwellings in high-demand, low-density suburbs.

Reforms like these – not expensive and ineffective tax cuts for landlords – are what is required if we are to have any hope of building the 40,000 to 60,000 units per year that we need to address the decade-long affordability crisis.

Barra Roantree is an Assistant Professor of Economics and Programme Director of the MSc in Economic Policy at Trinity College Dublin.