May 2020 Time to rethink commercial rates?
Commercial rates are a vital source of income for local authorities to fund local public services. With many businesses temporarily closed or significantly curtailed due to the Covid-19 pandemic and the subsequent lockdown, revenue from commercial rates for Ireland’s 31 local councils will be significantly lower this year that the €1.6bn projected in the 2020 budgets. In March 2020, the national government announced that commercial ratepayers impacted by the shutdown could apply to their local authority for a three-month rates deferral. In all likelihood this would have resulted in some businesses ceasing their rates payments. By May, this temporary deferral of rates transitioned into a rates waiver for ratepayers that were forced to close due to public health requirements, with impacted businesses no longer liable for rates for the three months to end June. At an estimated cost of €260m to be borne by the central exchequer, this may have to be considered again, depending on the timing of the economy’s re-opening and the response of businesses and customers. In England, non-domestic business rates (similar to commercial rates as a tax on property used for business purposes but different in that the rate or multiplier is set centrally and revenues are not all retained locally) were waived for small businesses for the entire 2020/21 financial year. It is appropriate to compare to our neighbours in Britain as that is where our rating system originated, as rates predate the foundation of the State.
According to government sources, the legislation governing the levying and collection of commercial rates is spread across numerous enactments, many of which date from the 19th century. The primary legislation relating to rates is the Poor Relief (Ireland) Act 1838. With the exception of the Local Government (Financial Provisions) Act 1978 which removed domestic dwellings from rates liability, and the Supreme Court decision in 1984 which exempted agricultural land from rates, only minor adjustments have been made since 1838 to the operation of the rating system. In current times, local authorities are under a statutory obligation to levy rates on any property used for commercial purposes, in accordance with the details entered in the valuation lists prepared by the independent Commissioner of Valuation under the Valuation Act 2001.
Rates are a recurrent (annual) tax on business properties. Similar to the residential property tax, rates are a local tax, where the tax is assigned to local as opposed to central government, and with rate-setting powers i.e. the rate called the Annual Rate on Valuation (ARV) is determined by the local authority (as a reserved function, by the elected councillors). Currently, commercial rates (and the LPT) are one of three traditional sources of local government income; charges/user fees and central government grants are the other two revenue streams. Commercial rates account for about 30 per cent of annual local authority income. However, that is not the full story. There is a large variation across local authorities with respect to commercial rates. Here we report on four differences.
For one, the rates share of revenue income. There is considerable cross-council variation in the rates share of revenue, with urban city councils that have a large commercial base heavily dependent on rates income as against smaller rural councils that are more reliant on central government grants. In the three Dublin county local authorities, approximately half of their revenue income comes from commercial rates. In small rural councils such as Leitrim, Laois, Longford and Roscommon County Councils, less than one fifth of their revenue income is derived from rates. So although the shutdown will negatively affect all local authorities, the impact will not be uniform.
Two, the variation in the ARV. Although it is difficult to compare the ARV across the local government sector due to revaluations undertaken in some but not all councils, the difference is striking. For those councils that have undergone a rates revaluation, the ARV varies from a high of 0.2760 and 0.2680 in South Dublin County Council and Dublin City Council respectively to a low of 0.1796 and 0.1732 in Fingal and DLR County Councils respectively, with 19 other councils levying rates between 0.2677 and 0.1919. Of the eight councils yet to undertake a revaluation, Kerry County Council ‘strikes’ the highest rate at 79.25 whereas the lowest rate, at 66.59, is levied by Galway County Council. Of course, one of the explanations for these large cross-council differences in ARV is the variation in expenditure per capita, ranging from a high of over €1,500 to a low of less than €600 in local council spending per person. As local governments are required to balance their adopted revenue budgets, all current expenditures have to be financed from revenue income (i.e. no planned borrowing permitted to pay for day-to-day spending, unlike at central government level), with the ARV and commercial rates used as a balancing item.
Three, there are sizeable differences in collection rates. Defined as the ratio of commercial rates collected to total rates for collection, the national collection rate in 2018 was 88 per cent. Taking into account the commercial rates accrued, but also arrears, waivers, write-offs and reliefs for vacant properties, collection rates range from a high of 96 per cent (by Fingal County Council) to a low of 76 per cent (by Donegal and Laois County Councils). Many councils with relatively low collection rates established debt collection units to manage and improve collection rates, with varying degrees of success. The increase in unpaid rates bills associated with the economic contraction is likely to result in an increase in debt collection services, used internally or, more controversially, outsourced to third-party private debt collectors.
Four, the variation in vacancy rates. Using county data, GeoDirectory publishes quarterly estimates of commercial property vacancy rates. In Q2 2019, the national vacancy rate was 13.3 per cent (equivalent to over 28,000 vacant commercial properties), with a high of 18.9 per cent in Sligo and a low of 10.1 per cent in Meath. The highest vacancy rates were all in the west and north west of the country, corresponding with the most rural parts of the economy. Given the economic downturn and the short-term prospects for the business sector, the number of vacant commercial properties is expected to increase, with a knock-on effect for commercial rates and local authority income.
Aside from these (not unexpected) cross-council variations reflecting differences in local preferences, circumstances and choices, what does this brief analysis of commercial rates tell us? Given the current economic circumstances, and the inevitable competing calls on a new government from businesses (and especially SMEs) for assistance and enterprise supports, what is needed is a comprehensive and urgent review of commercial rates. Returning to our British counterparts, when announcing the abolition of business rates in 2020/21 for small businesses the UK Chancellor of the Exchequer Rishi Sunak in his March budget also announced a fundamental review of business rates by HM Treasury. In Scotland a similar review was published in 2017. Some of the 30 recommendations of the Barclay Review of Non-Domestic Rates that might be considered here include a redefinition of the rates base, more regular revaluations and a business growth accelerator that would provide for a one-year holiday on investment in new machinery or business expansion.
In the Irish context, similar reviews have taken place in the last 15 years, but arguably in very different conditions compared to present circumstances. To name but three, there was the Indecon Review of Local Government Financing in 2005, in 2009 the Commission on Taxation Report and in 2018 the Local Government Audit Service Overview of Commercial Rates. Interestingly, in the two earlier reports there was a recommendation to widen the rates base to include certain properties, including Government buildings, educational and professional institutions with commercial outlets/activities and certain non-State properties exempt from commercial rates.
Aside from an overall review of local government funding (which may not be the best option as unlikely to recommend anything other than the need for the three sources – local taxes, charges and grants – outlined above), what would be more useful is a root and branch review of one of these sources, namely local taxes. This time-limited review should incorporate a review of the LPT (not just the date of revaluations, but also the method of valuation, the base rate and the local adjustment factor, the 80/20 split and the equalisation fund, and more substantive issues like alternatives to the LPT such as, for example, a site value tax) and a review of commercial rates, with a broad terms of reference to include not only the operation of the rating system and its overall burden on businesses and impact on ratepayers but also other business tax alternatives, of a local nature.
Among others, consideration might be given to, for example, a local business tax with a base other than property, reassignment of motor vehicle taxes (where, in future, the revenue is shared between central and local government) or a congestion tax/charge in our main urban centres. Whatever the recommendations of such a review of local taxes, the present crisis presents a new government with an opportunity to rethink commercial rates, with a view to identifying, based on theory but also international best practice, the most desirable – or least harmful – local taxes, levied by local councils and imposed on local taxpayers.
April 2020 How will the 2020 economic downturn affect local councils’ budgets?
The coronavirus disease pandemic and the self-imposed shutdown of the economy in Ireland and worldwide will result in a significant contraction in economic activity and a permanent loss to national output. Unlike the Great Recession of 2008/09 and the economic crisis that followed, the hope is that this contraction will be short-lived. This short opinion piece addresses the impact of the economic downturn on local authority spending and income, and, ultimately, local public services to residents of local councils throughout Ireland.
Using data from the adopted local authority budgets for 2020 and the www.localauthorityfinances.com interactive website we know that local council spending in 2020 was budgeted to be 10 per cent higher than the 2019 figure, which, in turn, was 8 per cent higher than the 2018 amount. At €5.6bn in current prices, the budgeted figure for 2020 was the largest euro amount for local authority day-to-day spending in Ireland, ever. It was over 40 per cent above the 2015 trough figure of €4bn, and exceeded the previous peak figure of €5.2bn in 2009. So despite local authorities having less functions now than before (with water services the primary responsibility of Irish Water and educational support grants provided by SUSI) the revenue budget of the local government sector in Ireland for 2020 was at an all-time high.
What effect will this crisis have on the local authority finances? In many local governments throughout Europe it will have a devastating impact as municipalities elsewhere often have responsibility for the delivery of significant public and social services, including health and welfare. In the Irish case, the immediate effect will be on the revenue side of the budget, with a fall in commercial rates (given the 3 month deferral of rates payments for those businesses impacted by the Covid-19 pandemic and the inevitable loss of rates revenue as some of these businesses may not re-open) and income from fees and charges on local public goods and services. Together, rates and charges account for about 60 per cent of total revenue income for local authorities.
Although a very different crisis, what can we learn from the 2008 financial crash, and the impact on local government finances? Initially, in the first couple of years there was a lag as local government budgets are not as sensitive to economic activity as are central government finances. However, by 2010 we began to see a deterioration in local government finances, with, in particular, central government cutting grants to local authorities in its attempt to manage the escalating problem in the exchequer’s public finances. By 2012, central government grants to pay for local government current spending were 25 per cent lower, with general purpose grants down by almost 30 per cent, compared to levels in 2008.
Although local government sources of revenue have changed (with the general purpose grant in the Local Government Fund replaced by the Local Property Tax and the top-up equalisation grant), local councils throughout the country are likely to see a fall in revenue from central government grants, in conjunction with a reduction in own-source revenues. As local authorities are required to balance their adopted revenue budgets, this will result in a reduction in local authority services. Although hopefully not as drastic as in the years of austerity, Council management and elected councillors will have to decide on which local services to cut, in the areas of social housing and homeless services, local and regional roads, traffic management, street cleaning, fire services, planning, environmental management, enterprise supports, community development, tourism promotion, libraries, leisure facilities, Arts programmes, parks and playgrounds, etc. Furthermore, the impact on local government finances is unlikely to be uniform, given differences in local authority revenue bases but also spending needs. Unfortunately for local councils, but also residents and users of local authority services, what is certain is that the budgets of local councils for 2021 will look very different and altogether much more challenging compared to the benign and ample budgets of 2020.
For details of the 2020 local council budgets, check out www.localauthorityfinances.com
March 2020 Should we decentralise more powers to local councils?
Now that we all have more free time (albeit in many cases enforced due to the Great Lockdown) we can reflect on one of the big economic issues, namely government spending and taxation. Whereas most of the focus before the 2020 election was on central government expenditure and national taxes, an analysis of local authority income and spending is also warranted. After all, it is local issues that can often decide the outcome of elections.
Compared to local governments in the rest of the EU, local councils in Ireland have very limited functions, with little or no responsibility for education, health or social care. As a percentage of total public expenditure, local government expenditure in Ireland is only 8 per cent, as against an EU average of 23 per cent. Using an index that measures local autonomy, Ireland ranks the second lowest of 39 European countries. Local councils in Ireland are also very large, as measured by the average number of inhabitants per municipality (150,000 persons in Ireland vs. an average of less than 6,000 persons across EU countries), making local government in Ireland less relevant and more removed from its citizens, compared to elsewhere. This also impacts on other current public policy issues. Three such examples are the rural/urban divide, regional development and urban planning, and land use, price of land and property prices and rents.
If a new programme for government is to make meaningful reforms in this area, one such change would be for a local government system that has greater remit and more powers. Unlike previous relocation plans of the early 2000s (remember Minister for Finance Charlie McCreevy’s last minute budgetary plans for decentralisation!), such a programme could make real and positive differences to people’s lives. A long term ambitious decentralisation programme could involve local councils having a role in state-funded primary and secondary schools, and in the delivery of other local services in the area of transport and social care, funded by an increase in local property taxes. If, as it is often said, all politics is local and if, as economic theory tells us, efficiency gains can be achieved by local authority service delivery rather than the uniform provision by central government, then many public services should be delivered by local government but, equally so, funded by local taxes (as well as local charges and central government grants). Given the scale of reforms needed, a Citizens’ Assembly or Commission on Local Government is called for, to ensure that the public consultation and the necessary informed evidence-based debate can take place. With the next local elections due in 2024, we have time to consider what type of local government system is best for the Ireland of the 21st century.
We finish with a more immediate concern, namely the list of promises for local government reform as outlined in the 2020 general election manifestos of the two political parties currently involved in coalition talks. Now that the election is over, attention turns to the formation of a new government and what plans it might have for a renewal of local councils. Whatever combination of parties make up the next government, the programme for government will have to compromise on the different promises listed below (and the local authority reform plans of other smaller parties involved in coalition discussions), but also reflect the realities and constraints of an Ireland post Covid-19 shutdown.
We can only wait and see. In the meantime, if you want to find out how your local council planned to raise and spend your money in 2020, check out www.localauthorityfinances.com
Local government reforms as per the 2020 general election manifestos of FF, FG and the Green Party.
Fianna Fáil. As a first tier for a new local government structure, the creation of a new community council model, with clear roles outlined in legislation. Establish 72 town councils, nationwide. A vote on a directly elected Dublin Mayor. On funding, localised rates to replace the central 0.18% current rate. Ensure that homeowners do not face significant increases in property taxes. Allow LPT to be a deductible expense against rental income. As for commercial rates, relief for start-ups and small rural businesses, and an ‘inability to pay’ clause for struggling businesses. In the longer term, a reform of commercial rates on a revenue neutral basis. Reform and increase the Vacant Site Levy to 14%.
Fine Gael. A stronger and more accountable local government, with powers transferred from city and county chief executives to directly elected mayors. Committed to a directly-elected mayor for Dublin, following the work of a Dublin Citizens’ Assembly. First directly elected mayor for Limerick no later than May 2021. On funding, committed to a fair LPT. More discretion for councillors to change the LPT rate for their own area. Most homeowners will face no increase. New homes will be liable for LPT. On commercial rates and revaluations, examine if such changes can be introduced on a phased basis. Examine further ways to streamline the system and to ensure that appeals are processed quickly.
Green Party. Hold a Citizens’ Assembly on a directly-elected executive mayor of a new regional authority for Dublin, followed by a plebiscite within the four Dublin local authorities. Hold a Citizens’ Assembly on local government arrangements in Cork City Council. Review of the role of the chief executive in local authorities. Full reinstatement of the five borough councils. The powers of local government should be enhanced. Public spending at local level should be increased (in line with EU counterparts) and local authorities should have greater fiscal autonomy. Undertake a review of the specific functions assigned to local government. A recurring annual Site Value Tax (SVT), measured on the basis of the market value of the land under the property. Conduct a root and branch review of the current scheme for the setting and collection of both property tax and commercial rates. Legislate to grant local government the powers to raise and collect a bed levy on tourists. Enable local authorities to raise municipal bonds to help fund long term infrastructure projects.